Derivative Financial Instruments

3 Months Ended

Dec. 26, 2015

Derivative Financial Instruments

Derivative Financial Instruments

13.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.

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 26, 2015, the Company has approximately 1 week 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 weeks ended December 26, 2015 and December 26, 2014 was $0.1 million and $0.3 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):

	December 26, 2015		September 26, 2015		Balance Sheet Classification
Derivatives designated as cash flow hedges:
Foreign currency forward contracts	$	774	$	533	Other current assets
Derivatives not designated as hedges:
Cross currency swap	12,257		10,863		Other current assets
Total	$	13,031	$	11,396

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 December 26, 2015 and September 26, 2015 is as follows (in thousands):

	Gross		Gross amounts offset in the		Net amount of assets presented in the		Gross amounts not offset in the Unaudited Consolidated Balance Sheet
	amounts of recognized assets		Unaudited Consolidated Balance Sheet		Unaudited Consolidated Balance Sheet		Financial instruments		Cash collateral received		Net amount
Derivative assets, as of December 26,2015	$	13,031	$	—	$	13,031	$	—	$	—	$	13,031
Derivative assets, as of September 26, 2015	11,396		—		11,396		—		—		11,396

There were no derivative liabilities, either on a gross or net basis, as of December 26, 2015 and September 26, 2015.

The following table summarizes the amount of unrealized gain (loss), pre-tax, arising during the period on financial instruments that qualify for hedge accounting included in OCI (in thousands):

	Thirteen weeks ended
	December 26, 2015		December 27, 2014
Cash Flow Hedges:
Interest rate swaps	$	—	$	689
Coffee futures	—		(1,172		)
Foreign currency forward contracts	599		77
Total	$	599	$	(406	)

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

	Thirteen weeks ended					Location of Gains
	December 26,		December 27,			(Losses) Reclassified
	2015		2014			from OCI into Income
Coffee futures	$	540	$	624		Cost of sales
Foreign currency forward contracts	321		(59		)	Cost of sales
Total	$	861	$	565

The Company expects to reclassify $0.0 million of net gains, after tax, from OCI to earnings for coffee derivatives within the next twelve months.

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

	Thirteen weeks ended				Location of Net Gains (losses) in
	December 26, 2015		December 27, 2014		Unaudited Consolidated  Statements of Operations
Coffee futures	$	—	$	94	Cost of sales

See Note 16, 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				Location of Net Gain in
	December 26, 2015		December 27, 2014		Unaudited Consolidated Statements of Operations
Net gain on cross currency swap	$	1,395	$	3,345	Gain on financial instruments, net
Total	$	1,395	$	3,345