Starbucks 2006 Annual Report Download - page 37

due in 2014. 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 October 1, 2006,
the maximum amount of the guarantees was approximately $6.0 million. Since there has been no modification of these
loan guarantees subsequent to the Company’s adoption of Financial Accounting Standards Board (“FASB”) Interpre-
tation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indebtedness of
Others,” Starbucks has applied the disclosure provisions only and has not recorded the guarantees on its balance sheet.
PRODUCT WARRANTIES
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 to 24 months. Effective fiscal 2006, the Company elected to
discontinue repairing brewing machines and instead offer an exchange to customers as a general right of return for any of
its products. As a result, Starbucks maintains a sales return allowance based on historical patterns to reduce related
revenues for estimated future product returns. Prior to fiscal 2006, the Company established an accrual for estimated
warranty costs at the time of sale, also based on historical experience. Product warranty costs and changes to the related
accrual were not significant for the periods ended October 1, 2006 and October 2, 2005.
COMMODITY PRICES, AVAILABILITY AND GENERAL RISK CONDITIONS
The Company manages its exposure to various risks within the consolidated financial statements according to an
umbrella risk management policy. Under this policy, market-based risks, including commodity costs and foreign currency
exchange rates, are quantified and evaluated for potential mitigation strategies, such as entering into hedging transactions.
Additionally, this policy restricts, among other things, the amount of market-based risk the Company will tolerate before
implementing approved hedging strategies and prohibits speculative trading activity.
The Company purchases significant amounts of coffee and dairy products to support the needs of its Company-operated
retail stores. The price and availability of these commodities directly impacts the Company’s results of operations and can
be expected to impact its future results of operations. For additional details see “Product Supply” in Item 1, as well as
“Risk Factors” in Item 1A of this Form 10-K.
FINANCIAL RISK MANAGEMENT
The Company is exposed to market risk related to foreign currency exchange rates, equity security prices and changes in
interest rates.
FOREIGN CURRENCY EXCHANGE RISK
The majority of the Company’s revenue, expense and capital purchasing activities are transacted in U.S. dollars. However,
because a portion of the Company’s operations consists of activities outside of the United States, the Company has
transactions in other currencies, primarily the Canadian dollar, British pound sterling, euro and Japanese yen. Under the
Company’s umbrella risk management policy, the Company frequently evaluates its foreign currency exchange risk by
monitoring market data and external factors that may influence exchange rate fluctuations. As a result, Starbucks may
engage in transactions involving various derivative instruments, with maturities generally not exceeding five years, to
hedge assets, liabilities, revenues and purchases denominated in foreign currencies.
As of October 1, 2006, the Company had forward foreign exchange contracts that qualify as cash flow hedges under
Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” to hedge a portion of anticipated international revenue and product purchases. In addition, Starbucks had
forward foreign exchange contracts that qualify as hedges of its net investment in Starbucks Japan, an equity method
investment, as well as the Company’s net investments in its Canadian and U.K. subsidiaries. These contracts expire within
33 months.
STARBUCKS CORPORATION, FORM 10-K 33