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 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 March 2018, the company entered into an interest rate swap agreement that effectively converted $500.0 million of fixed rate debt maturing in 2025 to floating rate debt.

Hedging of foreign currency risk

In fiscal 2017, Sysco entered into cross-currency swap contracts to hedge the foreign currency transaction risk of certain pound sterling-denominated intercompany loans. There are no credit-risk related contingent features associated with these swaps, which have been designated as cash flow hedges. The company has also entered into cross-currency swap contracts and Euro-bond denominated debt that hedge the foreign currency exposure of our net investment in certain foreign operations. Additionally, Sysco’s operations in the U.K. and Sweden have inventory purchases denominated in currencies other than their functional currency, such as the Euro, U.S. dollar, 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 uses certain foreign currency contracts to hedge the effects of fluctuations in exchange rates on outstanding intercompany loans. The company does not formally designate and document such derivative instruments as hedging instruments; however, the instruments are an effective economic hedge of the underlying foreign currency exposure. Both the gain or loss on the derivative instrument and the offsetting gain or loss on the underlying intercompany loans are recognized in earnings immediately, thereby eliminating or reducing the impact of foreign currency exchange rate fluctuations on net earnings.

Hedging of fuel price risk

In fiscal 2017, Sysco began utilizing fuel commodity swap contracts to hedge against the risk of the change in the price of diesel on anticipated future purchases. These swaps have been designated as cash flow hedges.

None of these hedging instruments contain credit-risk-related contingent features. Details of outstanding hedging instruments as of March 31, 2018 are below:



Maturity Date of the Hedging Instrument	Currency / Unit of Measure	Notional Value
		(In millions)
Hedging of interest rate risk
April 2019	U.S. Dollar	500
October 2020	U.S. Dollar	750
July 2021	U.S. Dollar	500
March 2025	U.S. Dollar	500

Hedging of foreign currency risk ⁽¹⁾
July 2021	British Pound Sterling	234
August 2021	British Pound Sterling	466
June 2023	Euro	500

Hedging of fuel risk
Various (April 2018 to January 2019)	Gallons	41


⁽¹⁾	Foreign currency forward contracts used to hedge against foreign exchange exposures related to inventory purchases are not material to Sysco’s overall hedging portfolio.

The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of March 31, 2018, July 1, 2017 and April 1, 2017 are as follows:



		Derivative Fair Value
	Balance Sheet location	Mar. 31, 2018		Jul. 1, 2017		Apr. 1, 2017
		(In thousands)
Fair Value Hedges:
Interest rate swaps	Other current assets	$	—	$	707	$	659
Interest rate swaps	Other assets	1,800		—		—
Interest rate swaps	Other long-term liabilities	49,256		21,390		28,062

Cash Flow Hedges:
Fuel swaps	Other current assets	$	12,381	$	717	$	—
Foreign currency forwards	Other current assets	533		—		—
Fuel swaps	Other assets	—		—		831
Cross currency swaps	Other assets	—		—		4,211
Fuel swaps	Other current liabilities	—		6,160		—
Foreign currency forwards	Other current liabilities	88		154		—
Foreign currency forwards	Other long-term liabilities	—		—		431
Fuel swaps	Other long-term liabilities	—		160		—
Cross currency swaps	Other long-term liabilities	34,690		5,816		—

Net Investment Hedges:
Foreign currency swaps	Other assets	$	7,946	$	—	$	26,691
Foreign currency swaps	Other long-term liabilities	71,784		12,308		22,693
Foreign denominated debt	Long-term debt	616,450		571,450		532,750

The location and amount of gains or losses recognized in the consolidated results of operations for fair value and cash flow hedging relationships for each of the periods, presented on a pretax basis, are as follows:



	13-Week Period Ended Mar. 31, 2018
	Cost of Goods Sold		Operating Expense		Interest Expense
	(In thousands)
Total amounts of income and expense line items presented in the consolidated results of operations in which the effects of fair value or cash flow hedges are recorded	$	11,673,876	$	2,189,695	$	136,145
Gain or (loss) on fair value hedging relationships:
Interest rate swaps:
Hedged items ⁽¹⁾	$	—	$	—	$	419
Derivatives designated as hedging instruments	—		—		(15,740		)
Gain or (loss) on cash flow hedging relationships:
Fuel swaps:
Gain or (loss) reclassified from AOCI into income	$	—	$	4,438	$	—
Foreign currency contracts:
Gain or (loss) reclassified from AOCI into income	$	348	$	—	$	—
Interest rate swaps:
Gain or (loss) reclassified from AOCI into income⁽²⁾	$	—	$	—	$	(2,873	)


⁽¹⁾	The hedged total includes interest expense of $13.6 million and change in fair value of debt of $14.1 million.


⁽²⁾	Losses reclassified from AOCI into income represent amortization of losses on forward starting interest rate swap agreements that were previously settled.



	39-Week Period Ended Mar. 31, 2018
	Cost of Goods Sold		Operating Expense		Interest Expense
	(In thousands)
Total amounts of income and expense line items presented in the consolidated results of operations in which the effects of fair value or cash flow hedges are recorded	$	35,242,736	$	6,527,375	$	303,015
Gain or (loss) on fair value hedging relationships:
Interest contracts:
Hedged items ⁽¹⁾	$	—	$	—	$	(22,325	)
Derivatives designated as hedging instruments	—		—		(26,729		)
Gain or (loss) on cash flow hedging relationships:
Fuel swaps:
Gain or (loss) reclassified from AOCI into income	$	—	$	5,679	$	—
Foreign currency contracts:
Gain or (loss) reclassified from AOCI into income	$	1,178	$	—	$	—
Interest contracts:
Gain or (loss) reclassified from AOCI into income ⁽²⁾	$	—	$	—	$	(8,619	)


⁽¹⁾	The hedged total includes interest expense of $47.8 million and change in fair value of debt of $25.5 million.


⁽²⁾	Losses reclassified from AOCI into income represent amortization of losses on forward starting interest rate swap agreements that were previously settled.

The location and effect of derivatives not designated as hedging instruments on the consolidated results of operations for the 13-week period ended March 31, 2018, presented on a pretax basis, are as follows:



	13-Week Period Ended Mar. 31, 2018
	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivatives
Derivatives not designated as hedging instruments:	(In thousands)
Foreign currency contracts	Other expense (income)	$	(6,743	)

The location and effect of derivatives not designated as hedging instruments on the consolidated results of operations for the 39-week period ended March 31, 2018, presented on a pretax basis, are as follows:



	39-Week Period Ended Mar. 31, 2018
	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivatives
Derivatives not designated as hedging instruments:	(In thousands)
Foreign currency contracts	Other expense (income)	$	(8,859	)

The location and effect of cash flow and net investment hedge accounting on the consolidated statements of comprehensive income for the 13-week period ended March 31, 2018, presented on a pretax basis, are as follows:



	13-Week Period Ended Mar. 31, 2018
	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	$	(1,195	)	Operating income	$	4,438
Foreign currency contracts	(12,875		)	Cost of goods sold	348
Total	$	(14,070	)		$	4,786

Derivatives in net investment hedging relationships:
Foreign currency contracts	$	(24,420	)	Other expense (income)	$	—
Foreign denominated debt	(16,400		)	Other expense (income)	—
Total	$	(40,820	)		$	—

The location and effect of cash flow and net investment hedge accounting on the consolidated statements of comprehensive income for the 39-week period ended March 31, 2018, presented on a pretax basis, are as follows:



	39-Week Period Ended Mar. 31, 2018
	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	$	18,855		Operating income	$	5,679
Foreign currency contracts	(27,450		)	Cost of goods sold	1,178
Total	$	(8,595	)		$	6,857

Derivatives in net investment hedging relationships:
Foreign currency contracts	$	(56,580	)	Other expense (income)	$	—
Foreign denominated debt	(45,000		)	Other expense (income)	—
Total	$	(101,580	)		$	—

The location and carrying amount of hedged liabilities in the consolidated balance sheet as of March 31, 2018 are as follows:



	Mar. 31, 2018			Mar. 31, 2018
	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	$	(2,242,904	)	$	45,030

As of March 31, 2018, the total notional amount of Sysco’s pay-fixed/receivable-variable interest rate swaps was $2.3 billion.

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-week period ending March 31, 2018, presented on a pretax basis, are as follows:



	13-Week Period Ended Mar. 31, 2018
	Location of (Gain) or Loss Recognized ⁽¹⁾	Amount of (Gain) or Loss Recognized
		(In thousands)
Fair Value Hedge Relationships:
Interest rate swap agreements⁽¹⁾	Interest expense	$	1,690


⁽¹⁾	The effect of derivative instruments and related hedged items that are recorded in other comprehensive income (loss) are disclosed in Note 9, “Other Comprehensive Income.”

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 39-week period ending March 31, 2018, presented on a pretax basis, are as follows:



	39-Week Period Ended Mar. 31, 2018
	Location of (Gain) or Loss Recognized ⁽¹⁾	Amount of (Gain) or Loss Recognized
		(In thousands)
Fair Value Hedge Relationships:
Interest rate swap agreements⁽¹⁾	Interest expense	$	1,268


⁽¹⁾	The effect of derivative instruments and related hedged items that are recorded in other comprehensive income (loss) are disclosed in Note 9, “Other Comprehensive Income.”