Derivative Financial Instruments

12 Months Ended

Sep. 27, 2014

Derivative Financial Instruments

Derivative Financial Instruments

11.   Derivative Financial Instruments

Cash Flow Hedges

The Company is exposed to certain risks relating to ongoing business operations. The primary risks that are mitigated by financial instruments are interest rate risk, commodity price risk and foreign currency exchange rate risk. The Company uses interest rate swaps to mitigate interest rate risk associated with the Company's variable-rate borrowings, enters into coffee futures contracts to hedge future coffee purchase commitments of green coffee with the objective of minimizing cost risk due to market fluctuations, and uses foreign currency forward contracts to hedge the purchase and payment of green coffee purchase commitments denominated in non-functional currencies.

The Company designates these contracts as cash flow hedges and measures the effectiveness of these derivative instruments at each balance sheet date. The changes in the fair value of these instruments are classified in accumulated other comprehensive income (loss). The gains or loss on these instruments is reclassified from OCI into earnings in the same period or periods during which the hedged transaction affects earnings. If it is determined that a derivative is not highly effective, the gain or loss is reclassified into earnings.

Fair Value Hedges

In prior fiscal years, the Company entered into foreign currency forward contracts to hedge certain recognized liabilities in currencies other than the Company's functional currency. The Company designated these contracts as fair value hedges and measured the effectiveness of the derivative instruments at each balance sheet date. The changes in the fair value of these instruments along with the changes in the fair value of the hedged liabilities were recognized in net gains or losses on foreign currency on the consolidated statements of operations.

Other Derivatives

The Company is also exposed to certain foreign currency and interest rate risks on an intercompany note with a foreign subsidiary denominated in Canadian currency. At September 27, 2014, the Company has approximately one year remaining on a CDN $90.0 million, Canadian cross currency swap to exchange interest payments and principal on the intercompany note. This cross currency swap is not designated as a hedging instrument for accounting purposes and is recorded at fair value, with the changes in fair value recognized in the Consolidated Statements of Operations. Gains and losses resulting from the change in fair value are largely offset by the financial impact of the re-measurement of the intercompany note. In accordance with the cross currency swap agreement, on a quarterly basis, the Company pays interest based on the three month Canadian Bankers Acceptance rate and receives interest based on the three month U.S. Libor rate. The Company incurred $1.3 million, $1.7 million, and $1.8 million in additional interest expense pursuant to the cross currency swap agreement during fiscal 2014, 2013, and 2012 respectively.

The Company also occasionally enters into certain foreign currency forward contracts to hedge certain exposures that are not designated as hedging instruments for accounting purposes. These contracts are recorded at fair value, with the changes in fair value recognized in the Consolidated Statements of Operations.

The Company does not hold or use derivative financial instruments for trading or speculative purposes.

The Company is exposed to credit loss in the event of nonperformance by the counterparties to these financial instruments, however, nonperformance is not anticipated.

The following table summarizes the fair value of the Company's derivatives included on the Consolidated Balance Sheets (in thousands) as of:

	September 27, 2014			September 28, 2013			Balance Sheet Classification
Derivatives designated as hedges:
Interest rate swaps	$	(3,371	)	$	(6,004	)	Other current liabilities
Coffee futures		3,437			—		Other current assets
Coffee futures		—			(3,809	)	Other current liabilities
Foreign currency forward contracts		—			(141	)	Other current liabilities
Foreign currency forward contracts		108			13		Other current assets
		174			(9,941	)
Derivatives not designated as hedges:
Cross currency swap		5,951			—		Other current assets
Cross currency swap		—			(1,253	)	Other current liabilities
		5,951			(1,253	)
Total	$	6,125		$	(11,194	)

Offsetting

Generally, all of the Company's derivative instruments are subject to a master netting arrangement under which either party may offset amounts if the payment amounts are for the same transaction and in the same currency. By election, parties may agree to net other transactions. In addition, the arrangements provide for the net settlement of all contracts through a single payment in a single currency in the event of default or termination of the contract. The Company's policy is to net all derivative assets and liabilities in the accompanying audited Consolidated Balance Sheets when allowable by GAAP.

Additionally, the Company has elected to include all derivative assets and liabilities, including those not subject to a master netting arrangement, in the following offsetting tables.

Offsetting of financial assets and derivative assets as of September 27, 2014 and September 28, 2013 is as follows (in thousands):

						Net amount of assets presented in the Consolidated Balance Sheet
			Gross amounts offset in the Consolidated Balance Sheet					Gross amounts not offset in the Consolidated Balance Sheet
	Gross amounts of recognized assets
								Financial instruments		Cash collateral received		Net amount
Derivative assets, as of September 27, 2014	$	9,830	$	(334	)	$	9,496	$	—	$	—	$	9,496
Derivative assets, as of September 28, 2013		13		—			13		—		—		13

Offsetting of financial liabilities and derivative liabilities as of September 27, 2014 and September 28, 2013 is as follows (in thousands):

						Net amount of assets presented in the Consolidated Balance Sheet
			Gross amounts offset in the Consolidated Balance Sheet					Gross amounts not offset in the Consolidated Balance Sheet
	Gross amounts of recognized assets
								Financial instruments		Cash collateral received		Net amount
Derivative liabilities, as of September 27, 2014	$	3,705	$	(334	)	$	3,371	$	—	$	—	$	3,371
Derivative liabilities, as of September 28, 2013		11,207		—			11,207		—		—		11,207

The following table summarizes the coffee futures contracts outstanding as of September 27, 2014 (in thousands, except for average contract price and "C" price):

Coffee Pounds		Average Contract Price		"C" Price		Maturity		Fair Value of Futures Contracts
	900	$	1.27	$	1.94		July 2015	$	602
	4,725	$	1.27	$	1.94		July 2015		3,169
	938	$	2.13	$	1.94		July 2015		(174	)
	937	$	2.12	$	1.95		September 2015		(160	)
	7,500							$	3,437

The following table summarizes the coffee futures contracts outstanding as of September 28, 2013 (in thousands, except for average contract price and "C" price):

Coffee Pounds		Average Contract Price		"C" Price		Maturity		Fair Value of Futures Contracts
	375	$	1.50	$	1.14		December 2013	$	(138	)
	5,887	$	1.39	$	1.17		March 2014		(1,308	)
	11,438	$	1.30	$	1.19		May 2014		(1,222	)
	10,875	$	1.32	$	1.21		July 2014		(1,141	)
	28,575							$	(3,809	)

The following table summarizes the amount of gain (loss), gross of tax, arising during the period on financial instruments that qualify for hedge accounting included in OCI (in thousands):

	Fiscal 2014		Fiscal 2013			Fiscal 2012
Cash Flow Hedges:
Interest rate swaps	$	2,634	$	3,014		$	1,250
Coffee futures		17,824		(6,617	)		(2,484	)
Foreign currency forward contracts		183		(129	)		—
Total	$	20,641	$	(3,732	)	$	(1,234	)

The following table summarizes the amount of gain (loss), gross of tax, reclassified from OCI to income (in thousands):

	Fiscal 2014			Fiscal 2013			Fiscal 2012			Location of Gain or (Loss) Reclassified from OCI into Income
Coffee futures		(6,387	)		(1,482	)		(1,359	)	Cost of sales
Foreign currency forward contracts		74			—			—		Cost of sales
Foreign currency forward contracts		(2	)		(2	)		—		(Loss) gain on foreign currency, net
Total	$	(6,315	)	$	(1,484	)	$	(1,359	)

The Company expects to reclassify $9.4 million of net gains, net of tax, from OCI to earnings on coffee derivatives within the next twelve months.

See note 14, Stockholders' Equity for a reconciliation of derivatives in beginning accumulated other comprehensive income (loss) to derivatives in ending accumulated other comprehensive income (loss).

The following table summarizes the amount of gain (loss), gross of tax, on fair value hedges and related hedged items (in thousands):

	Fiscal 2014		Fiscal 2013			Fiscal 2012			Location of gain (loss) recognized in income on derivative
Foreign currency forward contracts
Net loss on hedging derivatives	$	—	$	(10	)	$	(48	)	(Loss) gain on foreign currency, net
Net gain on hedged items	$	—	$	10		$	48		(Loss) gain on foreign currency, net

Net gains (losses) on financial instruments not designated as hedges for accounting purposes are as follows (in thousands):

	Fiscal 2014		Fiscal 2013		Fiscal 2012			Location of net gain (loss) in Consolidated Statements of Operations
Net gain (loss) on cross currency swap	$	8,307	$	5,513	$	(4,918	)	Gain (loss) on financial instruments, net
Net gain on coffee futures		7,005		—		—		Cost of sales
Net loss on interest rate cap		—		—		(34	)	Gain (loss) on financial instruments, net
Net gain on coffee futures		—		—		7		Gain (loss) on financial instruments, net
Total	$	15,312	$	5,513	$	(4,945	)

In addition, for fiscal year 2014, the Company recognized $1.7 million in net gains, as cost of sales, representing the ineffective portion on coffee futures designated as cash flow hedges. No amounts were recognized in fiscal 2013 and 2012 for ineffectiveness.