Derivative Financial Instruments

9 Months Ended

Jun. 23, 2012

Derivative Financial Instruments

Derivative Financial Instruments

10.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 and commodity price risk.  The Company uses interest rate swaps to mitigate interest rate risk associated with the Company’s variable-rate borrowings and 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.

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 (“OCI”).  Gains and losses on these instruments are reclassified 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 gains and losses will be reclassified into earnings upon determination.

Fair Value Hedges

The Company enters into foreign currency forward contracts to hedge certain recognized liabilities in currencies other than the Company’s functional currency.  The Company designates these contracts as fair value hedges and measures the effectiveness of these 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 are 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 June 23, 2012, the Company has a four year, $140.0 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.  Additional interest expense pursuant to the cross currency swap agreement for the thirteen and thirty-nine weeks ended June 23, 2012 was $0.4 million and $1.4 million, respectively.  Additional interest expense pursuant to the cross currency swap agreement for the thirteen and thirty-nine weeks ended June 25, 2011 was $0.6 million.

The Company occasionally enters into foreign currency forward contracts and coffee futures contracts which are not designated as hedging instruments for accounting purposes in addition to the foreign currency forward contracts and coffee futures contracts noted above.  Contracts that are not designated as hedging instruments 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 in the Consolidated Balance Sheets (in thousands):

	June 23, 2012			September 24, 2011			Balance Sheet Classification
Derivatives designated as hedges:
Cash Flow Hedges:
Interest rate swaps	$	(9,149	)	$	(10,269	)	Other current liabilities
Coffee futures	(612		)	(424		)	Other current liabilities
	$	(9,761	)	$	(10,693	)
Derivatives not designated as hedges:
Coffee futures	$	(149	)	$	—		Other current liabilities
Cross currency swap	$	(2,356	)	$	(2,324	)	Other current liabilities
Interest rate cap	—			34			Other current assets
	$	(2,505	)	$	(2,290	)
Total	$	(12,266	)	$	(12,983	)

The following table summarizes the amount of gain (loss), gross of tax, on financial instruments that qualify for hedge accounting included in other comprehensive income (in thousands):

	Thirteen weeks ended						Thirty-nine weeks ended
	June 23, 2012			June 25, 2011			June 23, 2012			June 25, 2011
Cash Flow Hedges:
Interest rate swaps	$	(366	)	$	(3,851	)	$	1,120		$	(5,284	)
Coffee futures	(538		)	(444		)	(2,754		)	(361		)
Total	$	(904	)	$	(4,295	)	$	(1,634	)	$	(5,645	)

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

	Thirteen weeks ended					Thirty-nine weeks ended
	June 23, 2012		June 25, 2011			June 23, 2012		June 25, 2011			Location of Gain or (Loss) Reclassified from OCI into Income
Interest rate cap	$	—	$	(392	)	$	—	$	(392	)	Gain (Loss) on Financial Instruments
Coffee Futures	440		—			106		—			Cost of Sales
Total	$	440	$	(392	)	$	106	$	(392	)

The Company expects to reclassify $1.4 million of net losses, net of tax, from other comprehensive income to earnings for coffee derivatives within the next twelve months.

The following table summarizes the amount of gain (loss), gross of tax, on fair value hedges and related hedged items for the thirteen and thirty-nine weeks ended June 23, 2012 and June 25, 2011 (in thousands):

	Thirteen weeks ended
	June 23, 2012					June 25, 2011
	Gain (loss) on hedging derivatives			Gain (loss) on hedged items		Gain (loss) on hedging derivatives		Gain (loss) on hedged items		Location of gain (loss) recognized in income on derivative
Foreign currency forwards contracts	$	(19	)	$	19	$	—	$	—	Gain on foreign currency, net

	Thirty-nine weeks ended
	June 23, 2012					June 25, 2011
	Gain (loss) on hedging derivatives			Gain (loss) on hedged items		Gain (loss) on hedging derivatives		Gain (loss) on hedged items		Location of gain (loss) recognized in income on derivative
Foreign currency forwards contracts	$	(48	)	$	48	$	—	$	—	Gain on foreign currency, net

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

	Thirteen weeks ended						Thirty-nine weeks ended
	June 23, 2012			June 25, 2011			June 23, 2012			June 25, 2011
Net gain (loss) on cross currency swap	$	3,181		$	970		$	(32	)	$	(7,861	)
Net loss on coffee futures	(148		)	—			(148		)	(250		)
Net loss on interest rate cap	(1		)	(592		)	(34		)	(592		)
Net gain (loss) on foreign currency option and forward contracts	—			104			—			(3,116		)
Total	$	3,032		$	482		$	(214	)	$	(11,819	)

The net loss on foreign currency contracts were primarily related to contracts entered into to mitigate the risk associated with the Canadian denominated purchase price of Van Houtte.