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.

Hedging of foreign currency risk

Sysco enters into cross-currency swap contracts to hedge the foreign currency transaction risk of certain intercompany loans. There are no credit-risk related contingent features associated with these swaps, which have been designated as cash flow hedges. The company also uses cross-currency swap contracts and euro-bond denominated debt to hedge the foreign currency exposure of our net investment in certain foreign operations. Additionally, Sysco’s operations in Europe 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.

Hedging of fuel price risk

Sysco uses 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 the Company’s hedging instruments contain credit-risk-related contingent features. Details of outstanding hedging instruments as of September 29, 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⁾
Various (November 2018 to January 2019)	Swedish Krona	203
Various (October 2018 to June 2019)	U.S. Dollar	2
Various (November 2018 to October 2019)	British Pound Sterling	24
June 2021	U.S. Dollar	44
June 2021	Canadian Dollar	330
July 2021	British Pound Sterling	234
August 2021	British Pound Sterling	466
June 2023	Euro	500

Hedging of fuel risk
Various (September 30, 2018 to August 2019)	Gallons	49


⁽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 September 29, 2018 and June 30, 2018 are as follows:



		Derivative Fair Value
	Balance Sheet location	Sep. 29, 2018		Jun. 30, 2018
		(In thousands)
Fair Value Hedges:
Interest rate swaps	Other current liabilities	$	6,797	$	6,820
Interest rate swaps	Other long-term liabilities	57,263		49,734

Cash Flow Hedges:
Fuel Swaps	Other current assets	$	16,578	$	15,316
Foreign currency forwards	Other current assets	198		693
Cross currency swaps	Other current assets	—		4,284
Cross currency swaps	Other assets	—		3,454
Foreign currency forwards	Other current liabilities	589		71
Cross currency swaps	Other long-term liabilities	10,658		14,201

Net Investment Hedges:
Foreign currency swaps	Other assets	$	13,268	$	10,709
Foreign currency swaps	Other long-term liabilities	36,230		39,690

Gains or losses recognized in the consolidated results of operations for cash flow hedging relationships are immaterial 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 Sep. 29, 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	$	12,311,494	$	2,275,645	$	89,016
Gain or (loss) on fair value hedging relationships:
Interest rate swaps:
Hedged items ⁽¹⁾	$	—	$	—	$	(8,588	)
Derivatives designated as hedging instruments	—		—		(10,859		)


⁽¹⁾	The hedged total includes interest expense of $15.1 million and change in fair value of debt of $6.5 million.



	13-Week Period Ended Sep. 30, 2017
	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	$	11,856,756	$	2,174,303	$	80,884
Gain or (loss) on fair value hedging relationships:
Interest rate swaps:
Hedged items ⁽¹⁾	$	—	$	—	$	(15,230	)
Derivatives designated as hedging instruments	—		—		(1,047		)


⁽¹⁾	The hedged total includes interest expense of $17.1 million and change in fair value of debt of $1.8 million.

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 September 29, 2018, presented on a pretax basis, are as follows:



	13-Week Period Ended Sep. 29, 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	$	1,026		Operating expense	$	4,353
Foreign currency contracts	(4,803		)	Cost of goods sold	483
Total	$	(3,777	)		$	4,836

Derivatives in net investment hedging relationships:
Foreign currency contracts	$	7,228		N/A	$	—
Foreign denominated debt	3,950			N/A	—
Total	$	11,178			$	—

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 September 30, 2017, presented on a pretax basis, are as follows:



	13-Week Period Ended Sep. 30, 2017
	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	$	11,201		Operating expense	$	(156	)
Foreign currency contracts	(21,793		)	Cost of goods sold	309
Total	$	(10,592	)		$	153

Derivatives in net investment hedging relationships:
Foreign currency contracts	$	(15,894	)	N/A	$	—
Foreign denominated debt	(19,150		)	N/A	—
Total	$	(35,044	)		$	—

The location and carrying amount of hedged liabilities in the consolidated balance sheet as of September 29, 2018 are as follows:



	Sep. 29, 2018			Sep. 29, 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:
Current maturities of long-term debt	$	(499,739	)	$	3,609
Long-term debt	(1,744,043		)	55,569

The location and carrying amount of hedged liabilities in the consolidated balance sheet as of September 30, 2017, are as follows:



	Sep. 30, 2017			Sep. 30, 2017
	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:
Current maturities of long-term debt	$	(499,874	)	$	(223	)
Long-term debt	(1,746,904		)	22,259