Derivative Financial Instruments

3 Months Ended

Dec. 28, 2013

Derivative Financial Instruments

Derivative Financial Instruments

9. 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 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 occasionally 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 December 28, 2013, the Company has approximately two 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 weeks ended December 28, 2013 and December 29, 2012 was $0.4 million and $0.5 million, respectively.

The Company occasionally enters into foreign currency forward contracts and coffee futures contracts that qualify as derivatives, and 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):

	December 28, 2013			September 28, 2013			Balance Sheet Classification
Derivatives designated as cash flow hedges:
Interest rate swaps	$	(5,431	)	$	(6,004	)	Other current liabilities
Coffee futures	(886		)	—			Other current assets
Coffee futures	—			(3,809		)	Other current liabilities
Foreign currency forward contracts	—			(141		)	Other current liabilities
Foreign currency forward contracts	135			13			Other current assets
	$	(6,182	)	$	(9,941	)
Derivatives not designated as hedges:
Cross currency swap	$	3,308		$	—		Other current assets
Cross currency swap	—			(1,253		)	Other current liabilities
Coffee futures	2,476			—			Other current assets
	$	5,784		$	(1,253	)
Total	$	(398	)	$	(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 Unaudited 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 December 28, 2013 and September 28, 2013 is as follows (in thousands):

	Gross amounts		Gross amounts  offset in the			Net amount of  assets presented  in the		Gross amounts not offset in the  Consolidated Balance Sheet
	of recognized  assets		Consolidated  Balance Sheet			Consolidated  Balance Sheet		Financial  instruments		Cash collateral  received		Net amount
Derivative assets, as of December 28, 2013	$	6,321	$	(1,288	)	$	5,033	$	—	$	—	$	5,033
Derivative assets, as of September 28, 2013	13		—			13		—		—		13

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

	Gross amounts		Gross amounts  offset in the			Net amount of  liabilities  presented in the		Gross amounts not offset in the  Consolidated Balance Sheet
	of recognized  liabilities		Consolidated  Balance Sheet			Consolidated  Balance Sheet		Financial  instruments		Cash collateral  pledged		Net amount
Derivative liabilities, as of December 28, 2013	$	6,719	$	(1,288	)	$	5,431	$	—	$	—	$	5,431
Derivative liabilities, as of September 28, 2013	11,207		—			11,207		—		—		11,207

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):

	Thirteen weeks ended
	December 28, 2013			December 29, 2012
Cash Flow Hedges:
Interest rate swaps	$	574		$	1,032
Coffee futures	(1,400		)	(898		)
Foreign currency forward contracts	195			—
Total	$	(631	)	$	134

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

	Thirteen weeks ended
	December 28, 2013			December 29, 2012			Location of Losses Reclassified  from OCI into Income
Coffee futures	$	(206	)	$	(349	)	Cost of sales
Foreign currency forward contracts	(44		)	—			Cost of sales
Foreign currency forward contracts	(25		)	—			Loss on foreign currency, net
Total	$	(275	)	$	(349	)

The Company expects to reclassify $4.4 million of net losses, net of tax, from OCI to earnings for coffee derivatives within the next twelve months.

See Note 12, Stockholders’ Equity, for a reconciliation of derivatives in beginning accumulated other comprehensive income (loss) to derivatives in ending accumulated other comprehensive income (loss).

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

	Thirteen weeks ended				Location of net gain in
	December 28,  2013		December 29,  2012		Unaudited Consolidated  Statements of Operations
Net gain on cross currency swap	$	4,561	$	1,104	Gain on financial instruments, net
Net gain on coffee futures	2,125		—		Cost of sales
Total	$	6,686	$	1,104