Starbucks 2007 Annual Report Download - page 38

recorded at fair value with unrealized gains and losses recognized in “Net interest and other income” in the
consolidated statements of earnings. The offsetting changes in the MDCP liability are recorded in “General and
administrative expenses.” The Company performed a sensitivity analysis based on a 10% change in the underlying
equity prices of its investments, as of the end of fiscal 2007, and determined that such a change would not have a
significant effect on the fair value of these instruments.
Interest Rate Risk
The Company utilizes short and long term financing and may use interest rate hedges to manage the effect of interest
rate changes on its existing debt as well as the anticipated issuance of new debt. At the end of fiscal years 2007 and
2006, the Company did not have any interest rate hedge agreements outstanding. During the fiscal fourth quarter of
2007, the Company had Treasury interest rate contracts in place to mitigate a portion of the interest rate risk
associated with the $550 million Senior Notes issued in August 2007. These contracts were dedesignated and settled
at closing of the debt offering.
The following table summarizes the impact of a change in interest rates on the fair value of the Company’s debt (in
millions):
September 30, 2007
Fair Value
100 Basis Point Increase in
Underlying Rate
100 Basis Point Decrease in
Underlying Rate
Change in Fair Value
Debt ........................ $1,269 (41) 41
The Company’s available-for-sale securities comprise a diversified portfolio consisting mainly of fixed income
instruments. The primary objectives of these investments are to preserve capital and liquidity. Available-for-sale
securities are investment grade and are recorded on the balance sheet at fair value with unrealized gains and losses
reported as a separate component of “Accumulated other comprehensive income.” The Company does not hedge the
interest rate exposure on its available-for-sale securities. The Company performed a sensitivity analysis based on a
100 basis point change in the underlying interest rate of its available-for-sale securities, as of the end of fiscal 2007,
and determined that such a change would not have a significant effect on the fair value of these instruments.
SEASONALITY AND QUARTERLY RESULTS
The Company’s business is subject to seasonal fluctuations, including fluctuations resulting from the holiday
season. The Company’s cash flows from operations are considerably higher in the fiscal first quarter than the
remainder of the year. This is largely driven by cash received as Starbucks Cards are purchased and loaded during
the holiday season. Since revenues from the Starbucks Card are recognized upon redemption and not when
purchased, seasonal fluctuations on the consolidated statements of earnings are much less pronounced. Quarterly
results are affected by the timing of the opening of new stores, and the Company’s growth may conceal the impact of
other seasonal influences. For these reasons, results for any quarter are not necessarily indicative of the results that
may be achieved for the full fiscal year.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that management believes are both most important to the portrayal of the
Company’s financial condition and results, and require management’s most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Judgments and uncertainties affecting the application of those policies may result in materially different amounts
being reported under different conditions or using different assumptions.
Starbucks considers its policies on impairment of long-lived assets, stock-based compensation, operating leases,
self insurance reserves and income taxes to be the most critical in understanding the judgments that are involved in
preparing its consolidated financial statements.
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