Starbucks 2009 Annual Report Download - page 42

As of September 27, 2009, the Company had $92.7 million invested in available-for-sale securities. Included in
available-for-sale securities were $55.7 million of auction rate securities (“ARS”), compared with $59.8 million of
ARS held as of September 28, 2008, with the decrease due to calls of individual securities. As described in more
detail in Note 3, while the ongoing auction failures will limit the liquidity of these investments for some period of
time, the Company does not believe the auction failures will materially impact its ability to fund its working capital
needs, capital expenditures or other business requirements.
Credit rating agencies currently rate the Company’s borrowings as follows:
Description Standard & Poor’s Moody’s
Short-term debt .......................................... A-2 P-3
Senior unsecured long-term debt.............................. BBB Baa3
Outlook ................................................ Stable Stable
On August 28, 2009, Standard and Poor’s Ratings Services revised its outlook on the Company’s credit ratings to
stable from negative based on improved credit metrics and stabilizing performance. The rating agency also affirmed
the BBB corporate credit rating on the Company and raised the short-term rating to A-2 from A-3 to conform with
the stable rating outlook. As a result of the Moody’s P-3 short-term rating issued in May 2009, commercial paper
has become less liquid and more expensive than borrowing under the Company’s credit facility. Consequently, the
Company utilized its credit facility for almost all short-term borrowing needs subsequent to May 2009. In the latter
half of the year the Company reduced its total short-term borrowings to a zero balance due to strong operating cash
flows and lower capital spending on new Company-operated stores. Management is unlikely to make significant use
of its commercial paper program until its Moody’s short-term ratings improve.
Despite limited access to the commercial paper markets, management believes that cash flow from operations and
its existing cash and liquid investments, supplemented as needed by the $1 billion in short-term borrowing capacity
under the Company’s revolving credit facility, will 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 related costs from the
remaining international store closures. Significant new joint ventures, acquisitions and/or other new business
opportunities may require additional outside funding.
The Company’s credit facility contains provisions requiring Starbucks to maintain compliance with certain
covenants, including a minimum fixed charge coverage ratio. On June 8, 2009, the credit facility was amended
to more accurately reflect the parties’ intent with respect to Amendment No. 4 to the credit facility. Amendment
No. 5 to the credit facility did not impact the Company’s borrowing terms, facility size, or covenant ratio, and was
completed at minimal cost to the Company. As of September 27, 2009 and September 28, 2008, the Company was in
compliance with each of these covenants.
The $550 million of 10-year 6.25% Senior Notes, issued in 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 27, 2009 and September 28, 2008, the Company was in compliance with each of these
covenants.
The Company generated strong operating cash flowduring the year ended September 27, 2009and used its free cash
flow to reduce its short-term borrowings from $713.0 million at the end of fiscal 2008 to a zero balance at the end of
fiscal 2009 and to increase the balance of its cash and liquid investments.
The Company expects to use its cash and liquid investments, including any borrowings under its credit facility and
commercial paper program, to invest in itscore businesses, including new beverage and product 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. Starbucks
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