Derivative Financial Instruments

9 Months Ended

Jun. 25, 2011

Derivative Financial Instruments

Derivative Financial Instruments

12. 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 and caps 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 the interest rate swap agreements and certain coffee futures 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.

The Company is using interest rate swaps to hedge its exposure to interest rate risk associated with variable-rate borrowing through December 2015.

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. The Company has entered into a five year, $150.0 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 remeasurement 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. For the thirteen and thirty-nine weeks ended June 25, 2011 the Company paid $0.6 million in additional interest expense pursuant to the cross currency swap agreement.

In conjunction with the acquisition of Van Houtte (see Note 4, Acquisitions), the Company assumed certain derivative financial instruments entered into by Van Houtte prior to the acquisition. These derivatives include foreign currency forward contracts and coffee futures contracts and were established to mitigate certain foreign currency and commodity risks. These derivatives were not designated as hedging instruments for accounting purposes and are recorded at fair value, with the changes in fair value recognized in the Consolidated Statements of Operations.

In conjunction with the repayment of the Company's term loan B facility under the Credit Agreement (See Note 10, Long-Term Debt), during the third quarter of fiscal 2011, 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 qualifies 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 the thirteen weeks ended June 25, 2011.

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 in the Consolidated Balance Sheets (in thousands).

	June 25, 2011			September 25, 2010			Balance Sheet Classification
Derivatives designated as hedges:
Interest rate swaps	$	(8,018	)	$	(2,733	)	Other short-term liabilities
		(8,018	)		(2,733	)
Derivatives not designated as hedges:
Cross currency swap		(7,861	)		—		Other short-term liabilities
Interest rate cap		57			—		Other current assets
Foreign currency forwards		(60	)		73		(Other short-term liabilities) Other current assets
		(7,864	)		73
Total	$	(15,882	)	$	(2,660	)

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).

	Thirteen weeks ended June 25, 2011			Thirteen weeks ended June 26, 2010		Thirty-nine weeks ended June 25, 2011			Thirty-nine weeks ended June 26, 2010
Interest rate swaps	$	(3,851	)	$	11	$	(5,284	)	$	743
Coffee futures		(444	)		—		(361	)		66
Total	$	(4,295	)	$	11	$	(5,645	)	$	809

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

	Thirteen weeks ended June 25, 2011			Thirteen weeks ended June 26, 2010		Thirty-nine weeks ended June 25, 2011			Thirty-nine weeks ended June 26, 2010		Location of Gain or (Loss) Reclassified from OCI into Income
Interest rate swaps	$	—		$	—	$	—		$	—	Interest Expense
Interest rate cap		(392	)		—		(392	)		—	Gain (Loss) on Financial Instruments
Coffee futures		—			—		—			188	Cost of Sales
Total	$	(392	)	$	—	$	(392	)	$	188

The following table is a reconciliation of derivatives in beginning accumulated other comprehensive income (loss) to derivatives in ending accumulated other comprehensive income (loss), net of tax (in thousands).

	Thirteen weeks ended June 25, 2011			Thirteen weeks ended June 26, 2010			Thirty-nine weeks ended June 25, 2011			Thirty-nine weeks ended June 26, 2010
Beginning accumulated OCI	$	(2,669	)	$	(1,506	)	$	(1,630	)	$	(1,870	)
Additions to OCI:
Interest Rate Swaps		(2,297	)		6			(3,152	)		443
Interest Rate Cap		—			—			(234	)		—
Coffee Futures		(265	)		—			(215	)		39
		(2,562	)		6			(3,601	)		482
Reclassifications to income:
Interest Rate Swaps		—			—			—			—
Interest Rate Cap		234			—			234			—
Coffee Futures		—			—			—			(112	)
		234			—			234			(112	)
Ending accumulated OCI	$	(4,997	)	$	(1,500	)	$	(4,997	)	$	(1,500	)

The Company expects to reclassify $215,000 from coffee derivatives net of tax, to earnings within the next twelve months.

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

	Thirteen weeks ended June 25, 2011			Thirteen weeks ended June 26, 2010		Thirty-nine weeks ended June 25, 2011			Thirty-nine weeks ended June 26, 2010
Net gain (loss) on cross currency swap	$	970		$	—	$	(7,861	)	$	—
Net loss on coffee futures		—			—		(250	)		—
Net loss on interest rate cap		(592	)				(592	)
Net gain (loss) on foreign currency option and forward contracts		104			—		(3,116	)		(354	)
Total	$	482		$	—	$	(11,819	)	$	(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.