Derivative Financial Instruments

6 Months Ended

Mar. 30, 2013

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 (loss).  The gain or loss on these instruments is reclassified from other comprehensive income (“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

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 Unaudited 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 March 30, 2013, the Company has approximately 3 years remaining on a CDN $120.0 million 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 Unaudited 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 twenty-six weeks ended March 30, 2013 was $0.4 million and $0.9 million, respectively.  Additional interest expense pursuant to the cross currency swap agreement for the thirteen and twenty-six weeks ended March 24, 2012 was $0.4 million and $0.9 million, respectively.

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 Unaudited 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 Unaudited Consolidated Balance Sheets (in thousands):

	March 30, 2013			September 29, 2012			Balance Sheet Classification
Derivatives designated as hedges:
Cash Flow Hedges:
Interest rate swaps	$	(7,349	)	$	(9,019	)	Other current liabilities
Coffee futures	(114		)	(342		)	Other current liabilities
	$	(7,463	)	$	(9,361	)
Derivatives not designated as hedges:
Cross currency swap	$	(2,667	)	$	(7,242	)	Other current liabilities
	$	(2,667	)	$	(7,242	)
Total	$	(10,130	)	$	(16,603	)

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

	Thirteen weeks ended						Twenty-six weeks ended
	March 30, 2013			March 24, 2012			March 30, 2013			March 24, 2012
Cash Flow Hedges:
Interest rate swaps	$	638		$	(80	)	$	1,670		$	1,486
Coffee futures	(50		)	(1,779		)	(948		)	(2,216		)
Total	$	588		$	(1,859	)	$	722		$	(730	)

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

	Thirteen weeks ended						Twenty-six weeks ended
	March 30, 2013			March 24, 2012			March 30, 2013			March 24, 2012			Location of Losses Reclassified from OCI into Income
Coffee Futures	$	(379	)	$	(85	)	$	(728	)	$	(334	)	Cost of sales
Total	$	(379	)	$	(85	)	$	(728	)	$	(334	)

The Company expects to reclassify $0.5 million of net losses, net of tax, from OCI 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 weeks ended March 30, 2013 and March 24, 2012 (in thousands):

	Thirteen weeks ended
	March 30, 2013					March 24, 2012
	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	$	(10	)	$	10	$	—	$	—	(Loss) gain on foreign currency, net

The following table summarizes the amount of gain (loss), gross of tax, on fair value hedges and related hedged items for the twenty-six weeks ended March 30, 2013 and March 24, 2012 (in thousands):

	Twenty-six weeks ended
	March 30, 2013					March 24, 2012
	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	$	(10	)	$	10	$	(29	)	$	29	(Loss) gain on foreign currency, net

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

	Thirteen weeks ended					Twenty-six weeks ended
	March 30, 2013		March 24, 2012			March 30, 2013		March 24, 2012
Net gain (loss) on cross currency swap	$	3,471	$	(2,076	)	$	4,575	$	(3,213	)
Net gain on interest rate cap	—		(36		)	—		(33		)
Total	$	3,471	$	(2,112	)	$	4,575	$	(3,246	)