Starbucks 2008 Annual Report Download - page 42

The Company’s credit facility contains provisions requiring Starbucks to maintain compliance with certain
covenants, including a minimum fixed charge coverage ratio. As of September 28, 2008 and September 30,
2007, the Company was in compliance with each of these covenants. On October 31, 2008, the Company entered
into an amendment to the credit facility to exclude up to $130 million of lease termination expenses and lease exit
costs incurred during the period beginning on June 30, 2008 and ending September 27, 2009 from the agreement’s
“Operating Lease and Rental Expense” definition. The purpose of the amendment was to limit the short-term effects
of lease-related restructuring expenses from the Company’s store closure actions on the fixed charge coverage ratio.
These expenses would have otherwise put pressure on the coverage ratio and raised the risk of the Company losing
access to liquidity. Over the long term, the reduction in lease expense and improvement in operating cash flows
resulting from these store closures are expected to have a favorable effect on this coverage ratio. The amendment
also increased the cost to borrow under the facility by an additional 0.10% to 0.40%, depending on the Company’s
fixed charge ratio and its senior unsecured debt rating.
The $550 million of 10-year 6.25% Senior Notes, issued in the fourth quarter of fiscal 2007, also require Starbucks
to maintain compliance with certain covenants that limit future liens and sale and leaseback transactions on certain
material properties. As of September 28, 2008 and September 30, 2007, the Company was in compliance with each
of these covenants.
The Company expects to use its cash and liquid investments, including any borrowings under its revolving credit
facility and commercial paper program to invest in its core businesses, including new beverage innovations, as well
as 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. Any decisions to
increase its ownership interest in its equity method investees or licensed operations will be driven by valuation and
fit with the Company’s ownership strategy and are likely to be infrequent.
Depending on market conditions and within the constraint of maintaining an appropriate capital structure, Starbucks
may repurchase shares of its common stock under its authorized share repurchase program. Due to the current
challenging operating and economic environment, the Company continues to be conservative in its uses of cash and
did not repurchase any shares in the second, third or fourth quarters of fiscal 2008. Management also does not currently
anticipate any share repurchases in fiscal 2009. Management believes that cash flows generated from operations and
existing cash and liquid investments should be sufficient to finance capital requirements for its core businesses for the
foreseeable future, as well as to fund the cost of lease termination and severance costs from the US and Australia store
closures. As a result, the Company expects to decrease short-term borrowings in fiscal 2009. Significant new joint
ventures, acquisitions and/or other new business opportunities may require additional outside funding.
Other than normal operating expenses, cash requirements for fiscal 2009 are expected to consist primarily of capital
expenditures for new Company-operated retail stores, remodeling and refurbishment of existing Company-operated
retail stores, and new equipment to support enhanced quality standards and expanded offerings in the stores. Other
capital expenditures in fiscal 2009 are expected to consist principally of investments in information technology
systems and in the Company’s global supply chain operations. Total expenditures for fiscal 2009 are expected to be
approximately $700 million.
Cash provided by operating activities decreased by $72.5 million to $1.3 billion for fiscal 2008 compared to the
corresponding period of fiscal 2007. The modest decrease was primarily due to the slowing pace of store
construction which led to a decline in the balance in accounts payable year-over-year.
Cash used by investing activities for fiscal 2008 totaled $1.1 billion. Net capital additions to property, plant and
equipment used $984.5 million, primarily from opening new Company-operated retail stores and remodeling
certain existing stores during fiscal 2008. In addition, the sale and maturity of available-for-sale securities provided
$75.9 million and $20.0 million, respectively, for fiscal 2008, consisting primarily of auction rate securities and
agency notes. The auction rate securities were sold through the normal auction process prior to the auction failures
that began in mid-February 2008, as described in Note 4 to the consolidated financial statements, and the agency
notes, issued by government-sponsored enterprises, were called in the first half of fiscal 2008.
Cash used by financing activities for fiscal 2008 totaled $184.5 million. Cash used to repurchase shares of the
Company’s common stock totaled $311.4 million, all in the first quarter of fiscal 2008. This amount includes the
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