Derivative Financial Instruments

9 Months Ended

Jun. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

Interest Rates

During the third quarter of fiscal 2013, we entered into forward-starting interest rate swap agreements with an aggregate notional amount of $750.0 million. These swaps hedge the variability in cash flows due to changes in the benchmark interest rate related to an anticipated fixed-rate debt issuance in 2013. We intend to cash settle these agreements upon issuance of the fixed-rate debt, effectively locking in the benchmark interest rate in effect at the time the swap agreements were initiated. The gain or loss on these agreements is deferred in other comprehensive income and will be amortized using the constant effective yield method as a component of interest expense, as the underlying interest expense on the related debt is recognized in the consolidated statements of earnings.

Net derivative gains from these cash flow hedges of $31.1 million, net of taxes, were included in accumulated other comprehensive income as of June 30, 2013. We had no outstanding forward-starting interest rate swaps as of September 30, 2012. Of the net derivative gains accumulated as of June 30, 2013, $2.0 million is expected to be reclassified into earnings within 12 months and will also continue to experience fair value changes before affecting earnings.

Foreign Currency

We enter into forward and swap contracts to hedge portions of cash flows of anticipated revenue streams and inventory purchases in currencies other than the entity's functional currency. Net derivative gains from these cash flow hedges of $3.3 million and net derivative losses of $2.9 million, net of taxes, were included in accumulated other comprehensive income as of June 30, 2013 and September 30, 2012, respectively. Of the net derivative gains accumulated as of June 30, 2013, $2.5 million is expected to be reclassified into earnings within 12 months and will also continue to experience fair value changes before affecting earnings. Outstanding contracts will expire within 23 months.

We also enter into net investment derivative instruments to hedge our equity method investment in Starbucks Coffee Japan, Ltd., to minimize foreign currency exposure. Net derivative losses from net investment hedges of $12.0 million and $33.6 million, net of taxes, were included in accumulated other comprehensive income as of June 30, 2013 and September 30, 2012, respectively. Outstanding contracts will expire within 32 months.

In addition to the hedging instruments above, to mitigate the translation risk of certain balance sheet items, we enter into foreign currency swap contracts that are not designated as hedging instruments. These contracts are recorded at fair value, with the changes in fair value recognized in net interest income and other on the consolidated statements of earnings. Gains and losses from these instruments are largely offset by the financial impact of translating foreign currency denominated payables and receivables, which is also recognized in net interest income and other.

Coffee

Depending on market conditions, we enter into futures contracts to hedge a portion of anticipated cash flows under our price-to-be-fixed green coffee contracts, which are described further in Note 5. Net derivative losses of $30.0 million and $32.9 million, net of taxes, were included in accumulated other comprehensive income as of June 30, 2013 and September 30, 2012, respectively, related to coffee hedges. Of the net derivative losses accumulated as of June 30, 2013, $29.0 million is expected to be reclassified into earnings within 12 months and will also continue to experience fair value changes before affecting earnings. Outstanding contracts will expire within 9 months.

Dairy

To mitigate the price uncertainty of a portion of our future purchases of dairy products, we enter into futures contracts that are not designated as hedging instruments. These contracts are recorded at fair value, with the changes in fair value recognized in net interest income and other. Gains and losses from these instruments are largely offset by price fluctuations on our dairy purchases, which are included in cost of sales.

Diesel Fuel

To mitigate the price uncertainty of a portion of our future purchases of diesel fuel, we enter into swap contracts that are not designated as hedging instruments. These contracts are recorded at fair value, with the changes in fair value recognized in net interest income and other. Gains and losses from these instruments are largely offset by the financial impact of diesel fuel fluctuations on our shipping costs, which are included in operating expenses.

The following table presents the pretax effect of derivative contracts designated as hedging instruments on earnings and other comprehensive income ("OCI") for the quarter and three quarters ended (in millions):

	Interest Rates				Foreign Currency					Coffee
Quarter Ended	Jun 30, 2013		Jul 1, 2012		Jun 30, 2013		Jul 1, 2012			Jun 30, 2013			Jul 1, 2012
Cash Flow Hedges:
Gain/(Loss) recognized in earnings	$	—	$	—	$	2.4	$	(2.8	)	$	(13.3	)	$	(1.3	)
Gain/(Loss) recognized in OCI	$	49.3	$	—	$	5.6	$	(1.9	)	$	0.7		$	(20.6	)
Net Investment Hedges:
Gain/(Loss) recognized in earnings					$	—	$	—
Gain/(Loss) recognized in OCI					$	7.9	$	(5.4	)

	Interest Rates				Foreign Currency					Coffee
Three Quarters Ended	Jun 30, 2013		Jul 1, 2012		Jun 30, 2013		Jul 1, 2012			Jun 30, 2013			Jul 1, 2012
Cash Flow Hedges:
Gain/(Loss) recognized in earnings	$	—	$	—	$	3.0	$	(8.6	)	$	(29.6	)	$	(1.3	)
Gain/(Loss) recognized in OCI	$	49.3	$	—	$	12.0	$	1.0		$	(26.4	)	$	(40.0	)
Net Investment Hedges:
Gain/(Loss) recognized in earnings					$	—	$	—
Gain/(Loss) recognized in OCI					$	34.3	$	4.9

The amounts shown in the above table as recognized in earnings for interest rates, foreign currency and coffee hedges represent the realized gains/(losses) reclassified from OCI to net earnings during the year. The amounts shown as recognized in OCI are prior to these reclassifications.

The following table presents the pretax effect of derivative contracts not designated as hedging instruments on earnings for the quarter and three quarters ended (in millions):

	Foreign Currency				Coffee					Dairy					Diesel Fuel
	Jun 30, 2013		Jul 1, 2012		Jun 30, 2013			Jul 1, 2012		Jun 30, 2013			Jul 1, 2012		Jun 30, 2013		Jul 1, 2012
Gain/(Loss) recognized in earnings for the quarter ended	$	0.4	$	4.2	$	—		$	—	$	(2.0	)	$	1.2	$	0.1	$	(0.9	)
Gain/(Loss) recognized in earnings for the three quarters ended	$	2.6	$	—	$	(2.1	)	$	—	$	(4.6	)	$	2.0	$	0.2	$	0.7

Notional amounts of outstanding derivative contracts (in millions):

	Jun 30, 2013		Sep 30, 2012
Interest rates	$	750	$	—
Foreign currency	393		383
Coffee	3		125
Dairy	34		72
Diesel fuel	5		24