Starbucks 2008 Annual Report Download - page 63

2007, the changes in net unrealized holding gains/losses in the trading portfolio included in earnings were a net loss
of $14.5 million and a net gain of $7.5 million, respectively.
Note 5: Derivative Financial Instruments
Cash Flow Hedges
The Company and certain subsidiaries enter into cash flow derivative instruments to hedge portions of anticipated
revenue streams and inventory purchases in currencies other than the entity’s functional currency. Outstanding
forward contracts, which comprise the majority of the Company’s derivative instruments, hedge monthly forecasted
revenue transactions denominated in Japanese yen and Canadian dollars, as well as forecasted inventory purchases
denominated primarily in US dollars for foreign operations. From time to time, the Company also uses futures
contracts to hedge the variable price component for a small portion of its price-to-be-fixed green coffee purchase
contracts.
In addition, during fiscal 2007 the Company entered into, dedesignated and settled forward interest rate contracts to
hedge movements in interest rates prior to issuance its $550 million of 6.25% Senior Notes. The resulting net losses
from these contracts will continue to be reclassified to “Interest expense” on the consolidated statements of earnings
over the life of the Senior Notes due in 2017. See Note 10 for additional information on Senior Notes.
Including the interest rate contracts, the Company had accumulated net derivative losses of $9.2 million, net of
taxes, in other comprehensive income as of September 28, 2008, related to cash flow hedges. Of this amount,
$3.6 million of net derivative losses pertain to hedging instruments that will be dedesignated within 12 months and
will also continue to experience fair value changes before affecting earnings. Ineffectiveness from hedges that were
discontinued in fiscal years 2008 and 2007 was insignificant. No cash flow hedges were discontinued and no
significant ineffectiveness was recognized in fiscal year 2006. Outstanding contracts will expire within 48 months.
Net Investment Hedges
Net investment derivative instruments are used to hedge the Company’s equity method investment in Starbucks
Coffee Japan, Ltd. (“Starbucks Japan”) as well as the Company’s net investments in its Canada, UK and China
subsidiaries, to minimize foreign currency exposure. The Company had accumulated net derivative losses of
$13.0 million, net of taxes, in other comprehensive income as of September 28, 2008, related to net investment
derivative hedges. Outstanding contracts expire within 29 months.
The following table presents the net gains and losses reclassified from other comprehensive income into the
consolidated statements of earnings during the fiscal years indicated for cash flow and net investment hedges (in
millions):
Sep 28,
2008
Sep 30,
2007
Oct 1,
2006
Cash flow hedges:
Reclassified (losses)/gains into total net revenues ................. $ (2.5) $ 1.5 $ 1.5
Reclassified losses into cost of sales .......................... (7.7) (2.2) (7.7)
Reclassified losses into interest expense ........................ (0.6) (0.1) —
Net reclassified losses — cash flow hedges ....................... (10.8) (0.8) (6.2)
Net investment hedges:
Reclassified gains into interest income and other, net . ............. 3.5 6.1 3.7
Total.................................................... $ (7.3) $ 5.3 $(2.5)
Other Derivatives
The Company enters into foreign currency forward contracts that are not designated as hedging instruments for
accounting purposes to mitigate the translation risk of certain balance sheet items. For the fiscal years 2008 and
2007, these forward contracts resulted in net losses of $0.1 million and $9.7 million. These losses were largely offset
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