Derivative Financial Instruments

12 Months Ended

Sep. 29, 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 million. These swaps hedged the variability in cash flows due to changes in the benchmark interest rate related to the $750 million of 10-year 3.85% Senior Notes due in October 2023 issued in the fourth quarter of 2013. We cash settled these swap agreements at the time of the pricing of the $750 million in Senior Notes, effectively locking in the benchmark interest rate in effect at the time the swap agreements were initiated. The resulting net gains from these agreements are included in accumulated other comprehensive income and amortized using the constant effective yield method as a reduction to interest expense over the life of these Senior Notes, as the underlying interest expense is recognized in the consolidated statements of earnings.

Net derivative gains from these cash flow hedges of $41.4 million, net of taxes, were included in accumulated other comprehensive income as of September 29, 2013. We had no outstanding forward-starting interest rate swaps as of September 30, 2012. Of the net derivative gains accumulated as of September 29, 2013, $3.6 million is expected to be reclassified into earnings within 12 months.

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 losses from cash flow hedges of $0.3 million and $2.9 million, net of taxes, were included in accumulated other comprehensive income as of September 29, 2013 and September 30, 2012, respectively. Of the net derivative losses accumulated as of September 29, 2013, $0.1 million of net gains are 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 21 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 $12.9 million and $33.6 million, net of taxes, were included in accumulated other comprehensive income as of September 29, 2013 and September 30, 2012, respectively. Outstanding contracts will expire within 29 months.

In addition to the hedging instruments above, to mitigate the translation risk of certain balance sheet items, we enter into certain 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 1. Net derivative losses of $12.2 million and $32.9 million, net of taxes, were included in accumulated other comprehensive income as of September 29, 2013 and September 30, 2012, respectively. Of the net derivative losses accumulated as of September 29, 2013, $11.5 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 6 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 fiscal years ending (in millions):

	Interest Rates				Foreign Currency					Coffee
	Sep 29, 2013		Sep 30, 2012		Sep 29, 2013		Sep 30, 2012			Sep 29, 2013			Sep 30, 2012
Cash Flow Hedges:
Gain/(Loss) recognized in earnings	$	0.5	$	—	$	3.5	$	(11.5	)	$	(49.4	)	$	(3.4	)
Gain/(Loss) recognized in OCI	$	66.2	$	—	$	7.4	$	(2.5	)	$	(26.5	)	$	(39.8	)
Net Investment Hedges:
Gain/(Loss) recognized in earnings					$	—	$	—
Gain/(Loss) recognized in OCI					$	32.8	$	1.1

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 fiscal years ending (in millions):

	Foreign Currency						Coffee					Dairy					Diesel Fuel
	Sep 29, 2013			Sep 30, 2012			Sep 29, 2013			Sep 30, 2012		Sep 29, 2013			Sep 30, 2012		Sep 29, 2013		Sep 30, 2012
Gain/(Loss) recognized in earnings	$	(1.8	)	$	(2.2	)	$	(2.1	)	$	—	$	(4.7	)	$	7.8	$	0.3	$	3.1

Notional amounts of outstanding derivative contracts (in millions):

	Sep 29, 2013		Sep 30, 2012
Foreign currency	$	452	$	383
Coffee	—		125
Dairy	38		72
Diesel fuel	17		24