Derivative Financial Instruments

9 Months Ended

Apr. 01, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

DERIVATIVE FINANCIAL INSTRUMENTS

Sysco uses derivative financial instruments to enact hedging strategies for risk mitigation purposes; however, the company does not use derivative financial instruments for trading or speculative purposes.

Hedging of interest rate risk

Sysco manages its debt portfolio with interest rate swaps from time to time to achieve an overall desired position of fixed and floating rates. Details of outstanding swap agreements as of April 1, 2017 are below:

Maturity Date of Swap	Notional Value (in millions)		Fixed Coupon Rate on Hedged Debt		Floating Interest Rate on Swap	Floating Rate Reset Terms
February 12, 2018	$	500	5.25	%	Six-month LIBOR	Every six months in arrears
April 1, 2019	$	500	1.90	%	Three-month LIBOR	Every three months in advance
October 1, 2020	$	750	2.60	%	Three-month LIBOR	Every three months in advance
July 15, 2021	$	500	2.50	%	Three-month LIBOR	Every three months in advance

Hedging of foreign currency risk

In the first quarter of fiscal 2017, Sysco entered into cross-currency swap contracts to hedge the foreign currency transaction risk of certain pound sterling-denominated intercompany loans with a total notional value of £234.2 million. Gains and losses from these swaps offset the changes in value of interest and principal payments as a result of changes in foreign exchange rates, which are recorded in other expense (income), net in the consolidated results of operations. The company recognizes the difference between the U.S. dollar interest payments received from the swap counterparty and the U.S. dollar equivalent of the pound sterling interest payments made to the swap counterparty in other expense (income), net on the consolidated results of operations. This difference varies over time and is driven by a number of market factors, including relevant interest rate differentials and foreign exchange rates. These swaps have been designated as cash flow hedges and mature in July 2021, at the same time as the related loans. There are no credit-risk-related contingent features associated with these swaps.

The company entered into cross currency swap contracts to hedge the foreign currency exposure of our net investment in certain foreign operations. The effective portion of the derivative gain or loss is recorded in accumulated other comprehensive income and will be subsequently reclassified to earnings when the hedged net investment is either sold or substantially liquidated. Sysco designated its Euro-denominated debt of €500 million issued in June 2016 as a net investment hedge. Sysco also designated its cross currency swap contracts entered into in August 2016 as a net investment hedge, mitigating the risk in foreign operations, with a total notional value of €534 million. The remeasurement gain or loss is recorded in accumulated other comprehensive income and will be subsequently reclassified to net earnings when the hedged net investment is either sold or substantially liquidated.

Sysco's operations in the United Kingdom and Sweden have inventory purchases denominated in currencies other than their functional currency, such as Euro, U.S. dollar, Polish zloty and Danish krone. These inventory purchases give rise to foreign currency exposure between the functional currency of these entities and these currencies. The company enters into foreign currency forward swap contracts to sell the applicable entity's functional currency and buy currencies matching the inventory purchase, which operate as cash flow hedges of the company's foreign currency-denominated inventory purchases. These swap contracts are recorded at fair value on the balance sheet and within accumulated other comprehensive income. The amount of ineffectiveness, if any, is recorded in earnings. Amounts in accumulated other comprehensive income are reclassified into earnings in the same period during which the hedged forecasted transactions affect earnings, which is the period in which the company recognizes the sales associated with the specified foreign currency-denominated inventory purchases.

Hedging of fuel price risk

In the second quarter of fiscal 2017, Sysco began utilizing fuel commodity swaps to hedge against the risk of the change in the price of diesel on anticipated future purchases. These swaps, with a total notional value of $70 million, have maturity dates extending into June 2018 and have been designated as cash flow hedges. These swap contracts are recorded at fair value on the balance sheet and the effective portion of any derivative gain or loss is initially recorded in accumulated other comprehensive income. The amount of ineffectiveness, if any, is recorded in earnings. Amounts in accumulated other comprehensive income are reclassified into earnings in the same period during which the hedged forecasted transactions occur, which is when the fuel is consumed.

The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of April 1, 2017, July 2, 2016 and March 26, 2016 are as follows:

		Derivative Fair Value
	Balance Sheet location	Apr. 1, 2017		Jul. 2, 2016		Mar. 26, 2016
		(In thousands)
Fair Value Hedges:
Interest rate swaps	Other current assets	$	659	$	—	$	—
Interest rate swaps	Other assets			36,805		11,801
Interest rate swaps	Other long-term liabilities	28,062		—		—
Cash Flow Hedges:
Fuel swaps	Other assets	$	831	$	—	$	—
Cross currency swaps	Other assets	4,211		—		—
Foreign currency forwards	Other long-term liabilities	431		—		—
Net Investment Hedges:
Foreign currency swaps	Other assets	$	26,691	$	—	$	—
Foreign currency swaps	Other long-term liabilities	22,693		—		—

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-week periods ended April 1, 2017 and March 26, 2016, presented on a pretax basis, are as follows:

	Location of (Gain) or Loss Recognized	Amount of (Gain) or Loss Recognized
		13-Week Period Ended
		Apr. 1, 2017			Mar. 26, 2016
		(In thousands)
Fair Value Hedge Relationship:
Interest rate swaps	Interest expense	$	(1,661	)	$	—
Cash Flow Hedge Relationships:
Forward starting interest rate swaps (1)	Interest expense	$	2,873		$	2,872
Fuel swaps	Other comprehensive income	2,893			—
Foreign currency forwards	Other comprehensive income	(607		)	—
Cross currency swaps	Other comprehensive income	8,323			—
Net Investment Hedge Relationships:
Foreign currency swaps	Other comprehensive income	$	8,482		$	—

⁽¹⁾ Represents amortization of losses on forward starting interest rate swap agreements that were previously settled.

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 39-week periods ended April 1, 2017 and March 26, 2016 presented on a pretax basis are as follows:

	Location of (Gain) or Loss Recognized	Amount of (Gain) or Loss Recognized
		39-Week Period Ended
		Apr. 1, 2017			Mar. 26, 2016
		(In thousands)
Fair Value Hedge Relationships:
Interest rate swaps	Interest expense	$	(7,510	)	$	—
Cash Flow Hedge Relationships:
Forward starting interest rate swaps (1)	Interest expense	8,619			8,463
Fuel swaps	Other comprehensive income	831			—
Foreign currency forwards	Other comprehensive income	1,788			—
Cross currency swaps	Other comprehensive income	4,211			—
Net Investment Hedge Relationships:
Foreign currency swaps	Other comprehensive income	$	(3,998	)	$	—

⁽¹⁾ Represents amortization of losses on forward starting interest rate swap agreements that were previously settled.

For fair value hedges of interest rate risk, hedge ineffectiveness represents the difference between the changes in the fair value of the derivative instruments and the changes in fair value of the fixed rate debt attributable to changes in the benchmark interest rate. For cash flow hedges, hedge ineffectiveness is the lesser of the change in the fair value of the derivative compared to the change in the hedged transaction. Hedge ineffectiveness is recorded directly in earnings within interest expense for interest rate swaps, other income and expense, net for hedging of the foreign exchange risk on intercompany loans, cost of sales for foreign exchange risk on inventory purchases and operating expense for fuel hedging. All amounts were immaterial for the third quarter and first 39 weeks of fiscal 2017 and 2016. None of the instruments contain credit-risk-related contingent features.