Derivative Financial Instruments

12 Months Ended

Sep. 29, 2012

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 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 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 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.  As of September 29, 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.  The Company incurred $1.8 million and $1.2 million, in additional interest expense pursuant to the cross currency swap agreement during fiscal 2012 and 2011, respectively.

In conjunction with the repayment of the Company’s term loan B facility under the Credit Agreement (See Note 10, Long-Term Debt), the interest rate cap previously used to mitigate interest rate risk associated with the Company’s variable-rate borrowings on the term loan B no longer qualified for hedge accounting treatment.  As a result, a loss of $0.4 million, gross of tax, was reclassified from other comprehensive income to income during fiscal 2011.

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 on the Consolidated Balance Sheets (in thousands) as of:

	September 29, 2012			September 24, 2011			Balance Sheet Classification
Derivatives designated as hedges:
Interest rate swaps	$	(9,019	)	$	(10,269	)	Other current liabilities
Coffee futures	(342		)	(424		)	Other current liabilities
	(9,361		)	(10,693		)
Derivatives not designated as hedges:
Cross currency swap	(7,242		)	(2,324		)	Other current liabilities
Interest rate cap	—			34			Other current assets
	(7,242		)	(2,290		)
Total	$	(16,603	)	$	(12,983	)

The following table summarizes the coffee futures contracts outstanding as of September 29, 2012 (in thousands):

Coffee Pounds	Average Contract Price		“C” Price		Maturity	Fair Value of Futures Contracts
938	$	1.92	$	1.74	December 2012	$	(169	)
938	$	1.96	$	1.78	March 2013	(171		)
675	$	1.80	$	1.80	May 2013	(1		)
375	$	1.83	$	1.83	July 2013	(1		)
262	$	1.86	$	1.86	September 2013	—
3,188						$	(342	)

The following table summarizes the coffee futures contracts outstanding as of September 24, 2011 (in thousands):

Coffee Pounds	Average Contract Price		“C” Price		Maturity	Fair Value of Futures Contracts
750	$	2.65	$	2.36	May 2012	$	(218	)
450	$	2.58	$	2.36	May 2012	(98		)
1,875	$	2.41	$	2.35	July 2012	(108		)
3,075						$	(424	)

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):

	Fiscal 2012			Fiscal 2011			Fiscal 2010
Cash Flow Hedges:
Interest rate swaps	$	1,250		$	(7,928	)	$	524
Coffee futures	(2,484		)	407			66
Total	$	(1,234	)	$	(7,521	)	$	590

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

	Fiscal 2012			Fiscal 2011			Fiscal 2010
Interest rate cap	$	—		$	(392	)	$	—	Gain (Loss) on Financial Instruments
Coffee futures	(1,359		)	(27		)	188		Cost of Sales
Total	$	(1,359	)	$	(419	)	$	188

The Company expects to reclassify $0.4 million of losses, net of tax, from other comprehensive income 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 2012			Fiscal 2011		Fiscal 2010		Location of gain (loss) recognized in income on derivative
Foreign currency forward contracts
Net loss on hedging derivatives	$	(48	)	$	—	$	—	Gain on foreign currency, net
Net gain on hedged items	$	48		$	—	$	—	Gain on foreign currency, net

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

	Fiscal 2012			Fiscal 2011			Fiscal 2010
Net loss on cross currency swap	$	(4,918	)	$	(2,324	)	$	—
Net gain (loss) on coffee futures	7			(250		)	—
Net loss on interest rate cap	(34		)	(615		)	—
Net loss on foreign currency option and forward contracts	—			(3,056		)	(354		)
Total	$	(4,945	)	$	(6,245	)	$	(354	)

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 in fiscal 2011 and Timothy’s in fiscal 2010.