Derivative Financial Instruments

3 Months Ended

Sep. 27, 2014

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

6.  DERIVATIVE FINANCIAL INSTRUMENTS 

Sysco manages its debt portfolio to achieve an overall desired position of fixed and floating rates and may employ interest rate swaps from time to time to achieve this position.  The company does not use derivative financial instruments for trading or speculative purposes. 

In fiscal 2014, the company entered into an interest rate swap agreement that effectively converted $500 million of fixed rate debt maturing in fiscal 2018 to floating rate debt.  The company entered into interest rate swap agreements that effectively converted $500 million of the new senior notes maturing in fiscal 2018 and $750 million of the new senior notes maturing in fiscal 2020 to floating rate debt.  See Note 7, Debt, for further discussion of the senior notes issuance.  These transactions were entered into with the goal of reducing overall borrowing cost and increasing floating interest rate exposure and were designated as fair value hedges against the changes in fair value of fixed rate debt resulting from changes in interest rates.

In January 2014, the company entered into two forward starting swap agreements with notional amounts totaling $2 billion.  The company designated these derivatives as cash flow hedges of the variability in the expected cash outflows of interest payments on then forecasted 10-year and 30-year debt due to changes in the benchmark interest rates.  In September 2014, in conjunction with the pricing of the $1.25 billion senior notes maturing in fiscal 2025 and $1 billion senior notes maturing in fiscal 2045, the company terminated these swaps, locking in the effective yields on the related debt.  Cash of $58.9 million was paid to settle the 10-year swap in September 2014, and cash of $129.9 million was paid to settle the 30-year swap in October 2014 subsequent to quarter-end.  The September 2014 cash payment is located within the line Cash paid for settlement of cash flow hedge within financing activities in the statement of consolidated cash flows.  The cumulative losses recorded in Accumulated other comprehensive (loss) income related to these swaps will be amortized through interest expense over the term of the issued debt. 

The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of September 27, 2014, June 28, 2014 and September 28, 2013 are as follows:

	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location		Fair Value
	(In thousands)
Interest rate swap agreements:
Sep. 27, 2014	Other assets	$	264	Other long-term liabilities	$	3,496
Jun. 28, 2014	Other assets		4,828	Accrued expenses		133,466
Sep. 28, 2013	Prepaid expenses and other current assets		2,015	N/A		N/A

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the first quarter of fiscal 2015 and 2014 presented on a pre-tax basis are as follows:

	Location of (Gain) or Loss Recognized in Comprehensive Income	Amount of (Gain) or Loss Recognized in Comprehensive Income
		13-Week Period Ended
		Sep. 27, 2014		Sep. 28, 2013
		(In thousands)
Fair Value Hedge Relationships:
Interest rate swap agreements	Interest expense	$	(3,269)	$	(3,175)
Cash Flow Hedge Relationships:
Interest rate swap agreements	Other comprehensive income		55,374		-
Interest rate contracts	Interest expense		205		156

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 rates.  Hedge ineffectiveness is recorded directly in earnings within interest expense and was immaterial for the first quarter of fiscal 2015 and 2014.  The interest rate swaps do not contain credit-risk-related contingent features.

Subsequent Event

In October 2014, subsequent to quarter-end, cash of $129.9 million was paid to settle the 30-year forward starting swap discussed above.  This swap was terminated in September 2014, but the cash payment did not occur until October 2014.