Derivative Financial Instruments

12 Months Ended

Jul. 02, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

DERIVATIVE FINANCIAL INSTRUMENTS

Sysco manages its debt portfolio with interest rate swaps from time to time to achieve an overall desired position of fixed and floating rates. The proposed Brakes Acquisition requires payment for the purchase price in pound sterling. Sysco chose to economically hedge this foreign currency exposure. The company does not use derivative financial instruments for trading or speculative purposes. 

Hedging of debt portfolio

In April 2016, Sysco issued senior notes totaling $2.5 billion in aggregate principal amount. Sysco used the net proceeds from the offering to fund the Brakes Acquisition. Concurrent with the offering of senior notes described above, the company entered into interest rate swap agreements that effectively converted $1.0 billion of senior notes maturing in fiscal 2019 and 2021 to floating rate debt. These transactions were designated as fair value hedges against the changes in fair value of fixed rate debt resulting from changes in interest rates.

In October 2015, Sysco issued senior notes totaling $2.0 billion to fund $1.5 billion in repurchases of outstanding shares of its common stock pursuant to its $1.5 billion accelerated share repurchase program, to repay approximately $500 million of its outstanding commercial paper and for general corporate purposes. Concurrent with the offering of these senior notes, the company entered into interest rate swap agreements that effectively converted $750 million of senior notes maturing in fiscal 2020 to floating rate debt. These transactions were designated as fair value hedges against the changes in fair value of fixed rate debt resulting from changes in interest rates.

In August 2015, the company entered into forward starting swap agreements with a notional amount totaling $500 million. The company designated these derivatives as cash flow hedges to reduce interest rate exposure on the forecasted 10-year debt due to changes in the benchmark interest rates on debt the company issued in October 2015. Concurrent with this debt offering, Sysco terminated the swaps and paid $6.1 million. The loss was recorded in accumulated other comprehensive income (loss) and will be amortized to interest expense over the term of the originally hedged fixed-rate interest rate payments.

In October 2014, Sysco obtained long-term financing for its proposed merger with US Foods, Inc. (US Foods) by completing a six-part senior notes offering totaling $5.0 billion. At the same time of this offering of notes, the company entered into interest rate swap agreements that effectively converted $500 million of senior notes maturing in fiscal 2018 and $750 million of senior notes maturing in fiscal 2020 to floating rate debt. These are collectively referred to as the 2015 swaps. These transactions were designated as fair value hedges against the changes in fair value of fixed rate debt resulting from changes in interest rates. In fiscal 2016, the company terminated the 2015 swaps for proceeds of $14.5 million in connection with the redemption of these senior notes.

In January 2014, the company entered into two forward starting swap agreements with notional amounts totaling $2 billion in contemplation of securing long-term financing for the proposed US Foods merger or for other long-term financing purposes in the event the merger did not occur. The company designated these derivatives as cash flow hedges to reduce interest rate exposure on forecasted 10-year and 30-year debt due to changes in the benchmark interest rates until the expected issuance of the debt. In September 2014, in conjunction with the pricing of the $1.25 billion senior notes maturing in fiscal 2025 and the $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. The cash payments are 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 continue to be amortized through interest expense over the term of the originally hedged fixed-rate interest rate payments, as those payments are anticipated to remain within Sysco's capital structure. The interest payments included in Sysco's originally hedged amount were 60 semiannual interest cash flows on $1.0 billion in aggregate principal amount of fixed rate debt and 20 semiannual interest cash flows on $1.0 billion in aggregate principal amount of fixed rate debt. Amortization commenced in October 2014 when those interest payments began affecting earnings.

In August 2013, 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.

Hedging of foreign currency exposure

The Brakes Acquisition required payment in pounds sterling, euro and Swedish kroner. The company developed a strategy to hedge the currency exposure related to these cash outlays. A portion of this strategy included foreign currency option contracts with maturities of less than three months to protect Sysco from an increase in the foreign exchange rate between the U.S. dollar and the pound sterling. This helped provide downside protection during the time frame the transaction was being reviewed for anti-trust approval and thereafter during the volatility around the referendum on June 23, 2016 in the United Kingdom to exit the European Union (the U.K. Referendum). Such contracts were considered economic hedges and did not qualify for hedge accounting. Sysco recognized net losses on these contracts within Other expense (income), net on its consolidated results of operations. In fiscal 2016, the total realized net loss on our economic hedge foreign exchange option contracts was $45.7 million. As these amounts did not qualify for hedge accounting, changes in the fair value were recorded directly to earnings. These contracts were terminated at or near the company's fiscal year end and did not have a material fair value as of July 2, 2016. A second part of Sysco's strategy was to accumulate the cash needed for the acquisition once anti-trust approval was received. The company did not use derivative instruments for this part of the strategy outside of the option contracts discussed above. This accumulation occurred over a period of time prior to, as well as after, the U.K. Referendum. During this period, the currency rates experienced large fluctuations, particularly with regard to the pound sterling. The company's approach allowed it to accumulate this cash at an average rate that was better than the target exchange rate established at the time the transaction was announced.

The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of July 2, 2016, June 27, 2015 and June 28, 2014 are as follows:

	Asset Derivatives
	Balance Sheet Location	Fair Value
	(In thousands)
Interest rate swap agreements:
Jul. 2, 2016	Other assets	$	36,805
Jun. 27, 2015	Other assets	12,597

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the fiscal periods ended July 2, 2016, June 27, 2015 and June 28, 2014 presented on a pretax basis are as follows:

	Location of (Gain) or Loss Recognized	Amount of (Gain) or Loss Recognized
		2016			2015			2014
		(In thousands)
Fair Value Hedge Relationships:
Interest rate swap agreements	Interest expense	$	(12,033	)	$	(21,960	)	$	(10,879	)
Cash Flow Hedge Relationships:
Forward starting interest rate swap agreements	Other comprehensive income	(6,134		)	(55,374		)	(133,466		)
Forward starting interest rate swap agreements (1)	Interest expense	11,543			8,305			625

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

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 fiscal 2016, 2015 and 2014. The interest rate swaps do not contain credit-risk-related contingent features.