Derivative Financial Instruments

9 Months Ended

Jun. 27, 2015

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, 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 effective portion of the derivatives’ gains or losses, resulting from changes in the fair value of these instruments is classified in accumulated other comprehensive income (loss), net of related tax effects and is reclassified from other comprehensive income (“OCI”) into earnings in the same period or periods during which the hedged transaction affects earnings.  Any ineffective portion of the derivatives’ gains or losses is recognized in earnings in the period such ineffectiveness occurs.  If it is determined that a derivative is not highly effective, the gain or loss is reclassified into earnings.  In the third quarter of fiscal 2015, the Company reclassified a loss of $1.8 million from OCI into earnings due to the discontinuance of hedge accounting for interest rate swaps related to the prior Amended and Restated Credit Agreement (“Former Credit Agreement”).  See Note 17, Subsequent Events for additional information.

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 June 27, 2015, the Company had approximately 6 months remaining on a CDN $50.0 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 thirty-nine weeks ended June 27, 2015 was $0.1 million and $0.5 million, respectively, and for the thirteen and thirty-nine weeks ended June 28, 2014 was $0.3 million and $1.0 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 is exposed to credit loss in the event of nonperformance by the counterparties to these financial instruments, however nonperformance is not anticipated.

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

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

	June 27, 2015			September 27, 2014			Balance Sheet Classification
Derivatives designated as cash flow hedges:
Interest rate swaps	—			(3,371		)	Other current liabilities
Coffee futures	—			3,437			Other current assets
Foreign currency forward contracts	(117		)	$	—		Other current liabilities
Foreign currency forward contracts	—			108			Other current assets
	$	(117	)	$	174
Derivatives not designated as hedges:
Interest rate swaps	(1,267		)	—			Other current liabilities
Cross currency swap	7,896			5,951			Other current assets
	$	6,629		$	5,951
Total	$	6,512		$	6,125

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, the 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 U.S. 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 June 27, 2015 and September 27, 2014 is as follows (in thousands):

			Gross			Net amount of		Gross amounts not offset in the
			amounts offset			assets presented		Unaudited Consolidated
	Gross		in the			in the		Balance Sheet
	amounts of		Unaudited			Unaudited				Cash
	recognized		Consolidated			Consolidated		Financial		collateral
	assets		Balance Sheet			Balance Sheet		instruments		received		Net amount
Derivative assets, as of June 27, 2015	$	7,896	$	—		$	7,896	$	—	$	—	$	7,896
Derivative assets, as of September 27, 2014	9,830		(334		)	9,496		—		—		9,496

Offsetting of financial liabilities and derivative liabilities as of June 27, 2015 and September 27, 2014 is as follows (in thousands):

			Gross			Net amount of		Gross amounts not offset in
			amounts offset			liabilities		the Unaudited Consolidated
	Gross		in the			presented in the		Balance Sheet
	amounts of		Unaudited			Unaudited				Cash
	recognized		Consolidated			Consolidated		Financial		collateral
	liabilities		Balance Sheet			Balance Sheet		instruments		pledged		Net amount
Derivative liabilities, as of June 27, 2015	$	1,384	$	—		$	1,384	$	—	$	—	$	1,384
Derivative liabilities, as of September 27, 2014	3,705		(334		)	3,371		—		—		3,371

The following table summarizes the amount of unrealized 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						Thirty-nine weeks ended
	June 27, 2015			June 28, 2014			June 27, 2015			June 28, 2014
Cash Flow Hedges:
Interest rate swaps	$	242		$	613		$	1,587		$	1,819
Coffee futures	—			(787		)	(1,288		)	15,998
Foreign currency forward contracts	(335		)	(419		)	(90		)	(154		)
Total	$	(93	)	$	(593	)	$	209		$	17,663

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

	Thirteen weeks ended						Thirty-nine weeks ended						Location of Gains
	June 27,			June 28,			June 27,			June 28,			(Losses) Reclassified
	2015			2014			2015			2014			from OCI into Income
Coffee futures	$	5,239		$	(2,626	)	$	12,798		$	(4,067	)	Cost of sales
Foreign currency forward contracts	60			135			119			136			Cost of sales
Foreign currency forward contracts	(75		)	—			(75		)	(2		)	Gain (loss) on foreign currency, net
Interest rate swap	(1,783		)	—			(1,783		)	—			(Loss) gain on financial instruments, net
Total	$	3,441		$	(2,491	)	$	11,059		$	(3,933	)

The Company expects to reclassify $2.6 million of net gains, net of tax, from OCI to earnings for coffee derivatives within the next twelve months.

The following table summarizes the amount of net gains (losses), gross of tax, representing ineffectiveness on cash flow hedges recorded in income (in thousands):

	Thirteen weeks ended					Thirty-nine weeks ended					Location of Net Gains (losses) in
			June 28,						June 28,		Unaudited Consolidated
	June 27, 2015		2014			June 27, 2015			2014		Statements of Operations
Coffee futures	$	—	$	(16	)	$	(94	)	$	1,306	Cost of sales

See Note 13, Stockholders’ Equity, for a reconciliation of derivatives in beginning accumulated other comprehensive income (loss) to derivatives in ending accumulated other comprehensive income (loss).

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

	Thirteen weeks ended						Thirty-nine weeks ended				Location of Net Gain in
	June 27,			June 28,			June 27,		June 28,		Unaudited Consolidated
	2015			2014			2015		2014		Statements of Operations
Net (loss) gain on cross currency swap	$	(547	)	$	(2,843	)	$	6,377	$	4,618	(Loss) gain on financial instruments, net
Net gain on interest rate swaps	516			—			516		—		(Loss) gain on financial instruments, net
Net gain on coffee futures	—			829			—		7,005		Cost of sales
Total	$	(31	)	$	(2,014	)	$	6,893	$	11,623