DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Dec. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 strategies are used to manage interest rate risk, foreign currency risk and fuel price risk.

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. In the second quarter of fiscal 2024, we entered into forward swap agreements to trade the fixed interest rate on $500 million of 6.00% senior notes with variable rates, starting in November 2024. The interest rate swap agreements are designated as fair value hedges and valued based on an income approach using observable market inputs including Secured Overnight Financing Rate (SOFR) yield curves. The company has incorporated credit valuation adjustments to appropriately reflect the risk of default in the fair value measurements. Changes in the fair value of the hedge and the carrying value of the hedged item attributable to changes in the benchmark interest rates being hedged are recognized in interest expense.

Hedging of foreign currency risk

Sysco’s operations in Europe have inventory purchases denominated in currencies other than their functional currency, such as the euro, U.S. dollar, British pound sterling, Polish zloty and Danish krone. These inventory purchases give rise to foreign currency exposure between the functional currency of each entity 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.

Sysco has cross-currency swaps designated as fair value hedges for the purpose of hedging foreign currency risk associated with changes in spot rates on foreign denominated intercompany loans. Sysco has elected to exclude the changes in fair value of the forward points from the assessments of hedge effectiveness. Gains or losses from fair value hedges impact the same category on the consolidated statements of income as the item being hedged, including the earnings impact of the excluded components. Unrealized gains or losses on components excluded from hedge effectiveness are recorded as a component of accumulated other comprehensive income (loss) and recognized into earnings over the life of the hedged instrument. Except for the excluded components, changes in the fair value of the hedge are offset against changes in the fair value of the hedged assets or liabilities through earnings.

In the second quarter of fiscal 2024, Sysco entered into a cross-currency swap to hedge the foreign currency exposure of our net investment in certain foreign operations. This cross-currency swap is designated as a net investment hedge with gains and losses recognized within accumulated other comprehensive income (loss).

Cross-currency swaps are valued based on an income approach using observable market inputs including foreign currency rates and interest rates in both countries subject to the swap.

Hedging of fuel price risk

Sysco uses fuel commodity swap contracts to hedge against the risk of the change in the price of diesel fuel on anticipated future purchases. These swaps have been designated as cash flow hedges.

None of our hedging instruments contain credit-risk-related contingent features. Details of outstanding hedging instruments as of December 30, 2023 are presented below:

Maturity Date of the Hedging Instrument

Currency / Unit of Measure

Notional Value

(In millions)

Hedging of interest rate risk

January 2034

U.S. Dollar

500

Hedging of foreign currency risk

Various (January 2024)

Swedish Krona

101

Various (January 2024 to April 2024)

British Pound Sterling

May 2024

Mexican Peso

439

April 2025

Canadian Dollar

180

January 2029

Euro

470

Hedging of fuel risk

Various (January 2024 to March 2026)

Gallons

The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of December 30, 2023 and July 1, 2023 are as follows:


		Derivative Fair Value
	Balance Sheet location	Dec. 30, 2023		Jul. 1, 2023
		(In thousands)
Fair Value Hedges:

Cross currency swaps	Other assets	$	1,198	$	—
Interest rate swaps	Other assets	24,557		—


Cross currency swaps	Other current liabilities	1,497		1,262


Cash Flow Hedges:
Fuel swaps	Other current assets	$	168	$	102
Foreign currency forwards	Other current assets	74		624

Fuel swaps	Other assets	136		40

Fuel swaps	Other current liabilities	10,372		17,932
Foreign currency forwards	Other current liabilities	642		404
Fuel swaps	Other long-term liabilities	2,794		5,637

Net Investment Hedges:
Cross currency swaps	Other current assets	$	3,377	$	—
Cross currency swaps	Other long-term liabilities	25,738		—

Gains or losses recognized in the consolidated results of operations for cash flow hedging relationships are not significant for each of the periods presented. The location and amount of gains or losses recognized in the consolidated results of operations for fair value hedging relationships for each of the periods, presented on a pretax basis, are as follows:


	13-Week Period Ended				26-Week Period Ended
	Dec. 30, 2023		Dec. 31, 2022		Dec. 30, 2023		Dec. 31, 2022
	(In thousands)
Total amounts of income and expense line items presented in the consolidated results of operations in which the effects of fair value hedges are recorded	$	154,925	$	132,042	$	295,899	$	256,192
Gain or (loss) on fair value hedging relationships:
Interest rate swaps:
Hedged items	$	(30,298)	$	(2,685)	$	(30,298)	$	(309)
Derivatives designated as hedging instruments	22,066		742		22,066		(5,501)
Cross currency swaps:
Hedged items	$	(2,711)	$	—	$	285	$	—
Derivatives designated as hedging instruments	2,711		—		(285)		—

The gains and losses on the fair value hedging relationships associated with the hedged items as disclosed in the table above consist of the following components for each of the periods presented:


	13-Week Period Ended				26-Week Period Ended
	Dec. 30, 2023		Dec. 31, 2022		Dec. 30, 2023		Dec. 31, 2022
	(In thousands)
Interest expense	$	(3,250)	$	(1,940)	$	(3,250)	$	(3,879)
Decrease in fair value of debt	27,048		745		27,048		(3,570)
Foreign currency gain (loss)	(2,711)		—		285		—
Hedged items	$	(33,009)	$	(2,685)	$	(30,013)	$	(309)

The location and effect of cash flow, net investment, and excluded components of fair value hedges on the consolidated statements of comprehensive income for the 13-week periods ended December 30, 2023 and December 31, 2022, presented on a pretax basis, are as follows:


	13-Week Period Ended Dec. 30, 2023
	Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives		Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income	Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
	(In thousands)			(In thousands)
Derivatives in cash flow hedging relationships:
Fuel swaps	$	(24,524)	Operating expense	$	669
Foreign currency contracts	(507)		Cost of sales / Other income	—

Total	$	(25,031)		$	669

Derivatives in net investment hedging relationships:
Cross currency contracts	$	(22,361)	N/A	$	—




Derivatives in fair value hedging relationships:
Change in excluded component of fair value hedge	$	210	Other expense (income)	$	—

	13-Week Period Ended Dec. 31, 2022
	Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives		Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income	Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
	(In thousands)			(In thousands)
Derivatives in cash flow hedging relationships:
Fuel swaps	$	1,140	Operating expense	$	12,377
Foreign currency contracts	49		Cost of sales / Other income	—

Total	$	1,189		$	12,377

Derivatives in net investment hedging relationships:

Foreign denominated debt	$	(44,999)	N/A	$	—

The location and effect of cash flow, net investment, and excluded components of fair value hedges on the consolidated statements of comprehensive income for the 26-week periods ended December 30, 2023 and December 31, 2022, presented on a pretax basis, are as follows:


	26-Week Period Ended Dec. 30, 2023
	Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives		Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income	Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
	(In thousands)			(In thousands)
Derivatives in cash flow hedging relationships:
Fuel swaps	$	9,975	Operating expense	$	3,003
Foreign currency contracts	(791)		Cost of sales / Other income	—

Total	$	9,184		$	3,003

Derivatives in net investment hedging relationships:
Cross currency contracts	$	(22,361)	N/A	$	—




Derivatives in fair value hedging relationships:
Change in excluded component of fair value hedge	$	184	Other expense (income)	$	—

	26-Week Period Ended Dec. 31, 2022
	Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives		Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income	Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
	(In thousands)			(In thousands)
Derivatives in cash flow hedging relationships:
Fuel swaps	$	(35,155)	Operating expense	$	25,362
Foreign currency contracts	335		Cost of sales / Other income	—

Total	$	(34,820)		$	25,362

Derivatives in net investment hedging relationships:

Foreign denominated debt	$	(13,653)	N/A	$	—

The location and carrying amount of hedged liabilities in the consolidated balance sheet as of December 30, 2023 are as follows:


	Dec. 30, 2023
	Carrying Amount of Hedged Assets (Liabilities)		Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Assets (Liabilities)
	(In thousands)
Balance sheet location:

Long-term debt	$	(518,622)	$	(27,048)

The carrying amount of hedged liabilities in the consolidated balance sheet as of July 1, 2023 is zero.