Starbucks 2003 Annual Report Download - page 9

20฀ Fiscal฀2003฀Annual฀Report
Fiscal฀2003฀Annual฀Report฀ 21
Unallocated฀Corporate฀
Unallocated฀ corporate฀ expenses฀ pertain฀ to฀ functions,฀ such฀
as฀executive฀ management,฀administration,฀tax,฀ treasury฀and฀
information฀technology฀infrastructure,฀that฀are฀not฀specifically฀
attributable฀to฀the฀Company’s฀operating฀segments฀and฀include฀
related฀depreciation฀and฀amortization฀expenses.฀Unallocated฀
general฀ and฀ administrative฀ expenses฀ increased฀ to฀ $165.6฀
million฀ in฀ fiscal฀ 2002,฀ from฀ $116.4฀ million฀ in฀ fiscal฀ 2001,฀
primarily฀due฀to฀an฀$18.0฀million฀litigation฀settlement฀charge฀
for฀ two฀ California฀ class฀ action฀ lawsuits฀ and฀ higher฀ payroll-
related฀expenditures.฀Depreciation฀and฀amortization฀expenses฀
increased฀to฀$28.7฀million฀in฀fiscal฀2002,฀from฀$25.4฀million฀
in฀fiscal฀2001,฀primarily฀due฀to฀leasehold฀improvements฀and฀
expanded฀space฀at฀the฀Company’s฀corporate฀offices.฀
LIQUIDITY฀AND฀CAPITAL฀RESOURCES
The฀Company฀had฀$350.0฀million฀in฀cash฀and฀cash฀equivalents฀
and฀short-term฀investments฀at฀the฀end฀of฀fiscal฀2003.฀Working฀
capital฀ as฀ of฀ September฀ 28,฀ 2003,฀ totaled฀ $315.3฀ million฀
compared฀to฀$310.0฀million฀as฀of฀September฀29,฀2002.฀Total฀
cash฀ and฀ cash฀ equivalents฀ and฀ liquid฀ investments฀ increased฀
by฀$158.8฀million฀during฀fiscal฀2003฀to฀$486.2฀million.฀The฀
Company฀intends฀to฀use฀its฀available฀cash฀resources฀to฀invest฀in฀
its฀core฀businesses฀and฀other฀new฀business฀opportunities฀related฀
to฀its฀core฀businesses.฀The฀Company฀may฀use฀its฀available฀cash฀
resources฀ to฀ make฀ proportionate฀ capital฀ contributions฀ to฀ its฀
equity฀method฀and฀cost฀method฀investees,฀depending฀on฀the฀
operating฀conditions฀of฀these฀entities.฀Depending฀on฀market฀
conditions,฀ Starbucks฀ may฀ acquire฀ additional฀ shares฀ of฀ its฀
common฀stock.฀
Cash฀ provided฀ by฀ operating฀ activities฀ in฀ fiscal฀ 2003฀ totaled฀
$566.4฀million฀and฀was฀generated฀primarily฀by฀net฀earnings฀of฀
$268.3฀million฀and฀non-cash฀depreciation฀and฀amortization฀
expenses฀of฀$259.3฀million.฀
Cash฀used฀by฀investing฀activities฀in฀fiscal฀2003฀totaled฀$499.3฀
million.฀This฀included฀net฀capital฀additions฀to฀property,฀plant฀
and฀equipment฀of฀$357.3฀million฀mainly฀related฀to฀opening฀
602฀new฀Company-operated฀retail฀stores,฀remodeling฀certain฀
existing฀ stores฀ and฀ purchasing฀ land฀ and฀ constructing฀ the฀
Company’s฀ new฀roasting฀and฀ distribution฀facility฀ in฀Carson฀
Valley,฀ Nevada.฀ The฀ Company฀ used฀ $69.9฀ million฀ of฀ cash฀
for฀the฀acquisition฀of฀the฀Seattle฀Coffee฀Company.฀The฀net฀
activity฀ in฀ the฀ Company’s฀ marketable฀ securities฀ portfolio฀
during฀fiscal฀2003฀used฀$53.8฀million฀of฀cash.฀Excess฀cash฀was฀
invested฀ primarily฀ in฀ investment-grade฀ securities.฀ During฀
fiscal฀2003,฀the฀Company฀made฀equity฀investments฀of฀$47.3฀
million฀ in฀ its฀ international฀ investees,฀ excluding฀ the฀ effects฀
of฀ foreign฀ currency฀ f luctuations,฀ as฀ Starbucks฀ increased฀ its฀
ownership฀stake฀in฀several฀international฀markets.
Cash฀ provided฀ by฀ financing฀ activities฀ in฀ fiscal฀ 2003฀ totaled฀
$30.8฀million.฀This฀included฀$107.2฀million฀generated฀from฀
the฀ exercise฀ of฀ employee฀ stock฀ options฀ and฀ the฀ sale฀ of฀ the฀
Company’s฀ common฀ stock฀ from฀ employee฀ stock฀ purchase฀
plans.฀ As฀ options฀ granted฀ under฀ the฀ Company’s฀ stock฀ plans฀
are฀exercised,฀the฀Company฀will฀continue฀to฀receive฀proceeds฀
and฀a฀tax฀ deduction;฀however,฀neither฀the฀amounts฀nor฀the฀
timing฀ thereof฀ can฀ be฀ predicted.฀ During฀ fiscal฀ 2003,฀ the฀
Company฀used฀$75.7฀million฀to฀purchase฀3.3฀million฀shares฀of฀
its฀common฀stock฀in฀accordance฀with฀authorized฀repurchase฀
plans.฀Share฀repurchases฀are฀at฀the฀discretion฀of฀management฀
and฀depend฀ on฀market฀conditions,฀ capital฀ requirements฀ and฀
such฀ other฀ factors฀ as฀ the฀ Company฀ may฀ consider฀ relevant.฀
As฀ of฀ September฀ 28,฀ 2003,฀ there฀ were฀ approximately฀ 14.6฀
million฀additional฀shares฀authorized฀for฀repurchase.
Cash฀ requirements฀ in฀ fiscal฀ 2004,฀ other฀ than฀ normal฀
operating฀ expenses,฀ are฀ expected฀ to฀ consist฀ primarily฀
of฀ capital฀ expenditures฀ related฀ to฀ the฀ addition฀ of฀ new฀
Company-operated฀ retail฀ stores฀ as฀ Starbucks฀ plans฀ to฀ open฀
approximately฀ 625฀ Company-operated฀ stores,฀ remodel฀
certain฀ existing฀ stores฀ and฀ enhance฀ its฀ production฀ capacity฀
and฀ information฀ systems.฀ While฀ there฀ can฀ be฀ no฀ assurance฀
that฀ current฀ expectations฀ will฀ be฀ realized,฀ management฀
expects฀capital฀expenditures฀in฀fiscal฀2004฀to฀be฀in฀the฀range฀
of฀$450฀million฀to฀$475฀million.
Management฀ believes฀ that฀ existing฀ cash฀ and฀ investments฀ as฀
well฀as฀cash฀generated฀from฀operations฀should฀be฀sufficient฀to฀
finance฀ capital฀ requirements฀ for฀ its฀ core฀ businesses฀ through฀
2004.฀New฀joint฀ventures,฀other฀new฀business฀opportunities฀
or฀ store฀ expansion฀ rates฀ substantially฀ in฀ excess฀ of฀ those฀
presently฀planned฀may฀require฀outside฀funding.฀
The฀ following฀ table฀ summarizes฀ the฀ Company’s฀ contractual฀ obligations฀ and฀ borrowings฀ as฀ of฀ September฀ 28,฀ 2003,฀ and฀ the฀
timing฀and฀effect฀that฀such฀commitments฀are฀expected฀to฀have฀on฀the฀Company’s฀liquidity฀and฀capital฀requirements฀in฀future฀
periods฀(in฀thousands):
฀ Payments฀due฀by฀Period฀
฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀Less฀than ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀1-3 ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ 3-5฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ More฀than฀5
Contractual฀obligations ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ Total฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ 1฀year ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀years ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ years฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀years
Long-term฀debt฀obligations ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ $ ฀฀฀฀฀฀฀ 5,076 ฀฀฀฀฀฀฀ $ ฀฀฀฀฀฀฀฀฀ 722฀฀฀฀฀฀฀ $ ฀฀฀฀฀฀฀ 1,483฀฀฀฀฀฀฀ $ ฀฀฀฀฀฀฀ 1,538฀฀฀฀฀฀฀ $ ฀฀฀฀฀฀฀ 1,333
Operating฀lease฀obligations ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀2,259,434 ฀฀฀฀฀฀฀฀฀฀฀฀฀ 293,912฀฀฀฀฀฀฀฀฀฀฀฀฀฀ 554,662฀฀฀฀฀฀฀฀฀฀฀฀฀฀486,657 ฀฀฀฀฀฀฀฀฀฀฀฀฀฀924,203
Purchase฀obligations฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ 319,430 ฀฀฀฀฀฀฀฀฀฀฀฀฀ 211,884฀฀฀฀฀฀฀฀฀฀฀฀฀฀ 104,831฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ 2,715฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ –฀ ฀
Total ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ $ ฀2,583,940 ฀฀฀฀฀฀฀ $ ฀฀฀ 506,518฀฀฀฀฀฀฀ $ ฀฀฀฀660,976฀฀฀฀฀฀฀ $ ฀฀฀฀490,910 ฀฀฀฀฀฀฀ $ ฀฀฀฀ 925,536
Starbucks฀ expects฀ to฀ fund฀ these฀ commitments฀ primarily฀ with฀
operating฀cash฀flows฀generated฀in฀the฀normal฀course฀of฀business.
Guarantees฀of฀Indebtedness฀of฀Others
In฀November฀2002,฀the฀Financial฀Accounting฀Standards฀Board฀
(“FASB”)฀issued฀FASB฀Interpretation฀No.฀45฀(“FIN฀No.฀45”),฀
“Guarantor’s฀ Accounting฀ and฀ Disclosure฀ Requirements฀ for฀
Guarantees,฀ Including฀ Indirect฀ Guarantees฀ of฀ Indebtedness฀
of฀Others,”฀which฀elaborates฀ on฀ existing฀ disclosure฀ of฀most฀
guarantees฀ and฀ clarifies฀ when฀ a฀ company฀ must฀ recognize฀
an฀initial฀liability฀for฀the฀fair฀value฀of฀obligations฀it฀assumes฀
under฀ guarantee฀ agreements.฀ The฀ initial฀ recognition฀ and฀
measurement฀ provisions฀ apply฀ on฀ a฀ prospective฀ basis฀ to฀
guarantees฀issued฀or฀modified฀after฀December฀31,฀2002.฀The฀
Company฀adopted฀FIN฀No.฀45฀on฀September฀30,฀2002.฀
The฀Company฀has฀unconditionally฀guaranteed฀the฀repayment฀
of฀ certain฀ yen-denominated฀ bank฀ loans฀ and฀ related฀ interest฀
and฀ fees฀ of฀ an฀ unconsolidated฀ equity฀ investee,฀ Starbucks฀
Coffee฀ Japan,฀ Ltd.฀ There฀ have฀ been฀ no฀ modifications฀
or฀ additions฀ to฀ the฀ loan฀ guarantee฀ agreements฀ since฀ the฀
Company’s฀adoption฀of฀FIN฀No.฀45.฀The฀guarantees฀continue฀
until฀the฀loans,฀including฀accrued฀interest฀and฀fees,฀have฀been฀
paid฀in฀full.฀The฀maximum฀amount฀is฀limited฀to฀the฀sum฀of฀
unpaid฀principal฀and฀interest฀amounts,฀as฀well฀as฀other฀related฀
expenses.฀These฀amounts฀will฀vary฀based฀on฀fluctuations฀in฀
the฀ yen฀ foreign฀ exchange฀ rate.฀ As฀ of฀ September฀ 28,฀ 2003,฀
the฀maximum฀amount฀of฀the฀guarantees฀was฀approximately฀
$11.8฀million.
Coffee฀ brewing฀ and฀ espresso฀ equipment฀ sold฀ to฀ customers฀
through฀ Company-operated฀ and฀ licensed฀ retail฀ stores,฀ as฀
well฀ as฀ equipment฀ sold฀ to฀ the฀ Company’s฀ licensees฀ for฀ use฀
in฀retail฀licensing฀ operations฀are฀under฀ warranty฀for฀defects฀
in฀ materials฀ and฀ workmanship฀ for฀ a฀ period฀ ranging฀ from฀
12฀months฀to฀24฀months.฀The฀Company฀establishes฀a฀reserve฀
for฀ estimated฀ warranty฀ costs฀ at฀ the฀ time฀ of฀ sale,฀ based฀ on฀
historical฀ experience.฀ The฀ following฀ table฀ summarizes฀ the฀
activity฀ related฀ to฀ product฀ warranty฀ reserves฀ during฀ fiscal฀
2003฀and฀2002฀(in฀thousands):
฀ Sept฀28,฀ Sept฀29,฀
Fiscal฀year฀ended฀ 2003฀ 2002
Balance฀at฀beginning฀of฀fiscal฀year฀ $฀ 1,842฀ $฀ 1,090
Provision฀for฀warranties฀issued฀ ฀ 2,895฀ ฀ 3,128
Warranty฀claims฀ ฀ (2,510฀)฀ ฀ (2,376฀)
Balance฀at฀end฀of฀fiscal฀year฀ $฀ 2,227฀ $฀ 1,842