8. 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 May 2012, the company entered into a treasury lock agreement with a notional amount of $200.0 million. The company designated this derivative as a cash flow hedge of the variability in the cash outflows of interest payments on a portion of the then forecasted June 2012 debt issuance due to changes in the benchmark interest rate. In June 2012, in conjunction with the issuance of the $450.0 million senior notes maturing in fiscal 2022, the company settled the treasury lock, locking in the effective yields on the related debt. Upon settlement, the company received cash of $0.7 million, which represented the fair value of the swap agreement at the time of settlement. This amount is being amortized as an offset to interest expense over the 10-year term of the debt, and the unamortized balance is reflected as a gain, net of tax, in accumulated other comprehensive loss.
In fiscal 2010, the company entered into two interest rate swap agreements that effectively converted $250.0 million of fixed rate debt maturing in fiscal 2013 and $200.0 million of fixed rate debt maturing in fiscal 2014 to floating rate debt. These transactions were entered into with the goal of reducing overall borrowing cost and increasing floating interest rate exposure. These transactions were designated as fair value hedges since the swaps hedge against the changes in fair value of fixed rate debt resulting from changes in interest rates. The swap agreement related to the fiscal 2013 debt was settled upon maturity of the senior notes in February 2013, leaving one remaining outstanding swap agreement as of June 29, 2013.
The location and the fair value of derivative instruments in the consolidated balance sheet as of each fiscal year-end are as follows:
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Asset Derivatives |
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Liability Derivatives |
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Balance Sheet Location |
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Fair Value |
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Balance Sheet Location |
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Fair Value |
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(In thousands) |
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Fair Value Hedge Relationships: |
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Interest rate swap agreements |
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June 29, 2013 |
Prepaid expenses and other current assets |
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$ |
2,988 |
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N/A |
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N/A |
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June 30, 2012 |
Prepaid expenses and other current assets |
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2,475 |
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N/A |
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N/A |
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June 30, 2012 |
Other assets |
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6,219 |
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N/A |
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N/A |
The location and effect of derivative instruments and related hedged items on consolidated comprehensive income for each fiscal year presented on a pre-tax basis are as follows:
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Amount of (Gain) or Loss |
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Recognized in Income |
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Location of (Gain) or Loss Recognized in Income |
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2013 |
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2012 |
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2011 |
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(In thousands) |
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Fair Value Hedge Relationships: |
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Interest rate swap agreements |
Interest expense |
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$ |
(4,492) |
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$ |
(7,900) |
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$ |
(9,026) |
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Cash Flow Hedge Relationships: |
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Treasury lock agreement |
Other comprehensive income |
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N/A |
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(722) |
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N/A |
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Interest rate contracts |
Interest expense |
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626 |
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692 |
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696 |
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 rate. Hedge ineffectiveness is recorded directly in earnings within interest expense and was immaterial for fiscal 2013, fiscal 2012 and fiscal 2011. The interest rate swaps do not contain credit-risk-related contingent features.