Derivative Financial Instruments

9 Months Ended

Jun. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Instruments

The following significant accounting policies related to derivative instruments included in our most recent Annual Report on Form 10-K have been restated to reflect the adoption of the new guidance.

We manage our exposure to various risks within our consolidated financial statements according to a market price risk management policy. Under this policy, we may engage in transactions involving various derivative instruments to hedge interest rates, commodity prices and foreign currency-denominated revenue streams, inventory purchases, assets and liabilities and investments in certain foreign operations. In order to manage our exposure to these risks, we use various types of derivative instruments including forward contracts, commodity futures contracts, collars and swaps. Forward contracts and commodity futures contracts are agreements to buy or sell a quantity of a currency or commodity at a predetermined future date and at a predetermined rate or price. A collar is a strategy that uses a combination of a purchased call option and a sold put option with equal premiums to hedge a portion of anticipated cash flows, or to limit possible gains or losses on an underlying asset or liability to a specific range. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. We do not enter into derivative instruments for speculative purposes.

We record all derivatives on our consolidated balance sheets at fair value and typically do not offset derivative assets and liabilities. Excluding interest rate swaps and foreign currency debt, we generally do not enter into derivative instruments with maturities longer than three years. However, we are allowed to net settle transactions with respective counterparties for certain derivative contracts, inclusive of interest rate swaps and foreign currency forwards, with a single, net amount payable by one party to the other. We also enter into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. As of June 30, 2019 and September 30, 2018, we received $5.5 million and $5.4 million, respectively, of cash collateral related to the derivative instruments under collateral security arrangements. As of June 30, 2019 and September 30, 2018, the potential effects of netting arrangements with our derivative contracts, excluding the effects of collateral, would be a reduction to both derivative assets and liabilities of $4.5 million and $5.5 million, respectively, resulting in net derivative assets of $19.4 million and net derivative liabilities of $21.0 million as of June 30, 2019, and net derivative assets of $29.4 million and net derivative liabilities of $44.5 million as of September 30, 2018.

By using these derivative instruments, we expose ourselves to potential credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. We minimize this credit risk by entering into transactions with carefully

selected, credit-worthy counterparties and distribute contracts among several financial institutions to reduce the concentration of credit risk.

Cash Flow Hedges

For derivative instruments that are designated and qualify as a cash flow hedge, the derivative's gain or loss is reported as a component of other comprehensive income (“OCI”) and recorded in accumulated other comprehensive income (“AOCI”) on our consolidated balance sheets. The gain or loss is subsequently reclassified into net earnings when the hedged exposure affects net earnings, in the same line item as the underlying hedged item on our consolidated statements of earnings.

Cash flow hedges related to anticipated transactions are designated and documented at the inception of each hedge by matching the terms of the contract to the underlying transaction. Cash flows from hedging transactions are classified in the same categories as the cash flows from the respective hedged items. For de-designated cash flow hedges in which the transactions are no longer likely to occur, the related accumulated derivative gains or losses are recognized in interest income and other, net or interest expense on our consolidated statements of earnings based on the nature of the underlying transaction.

Net Investment Hedges

For derivative instruments that are designated and qualify as a net investment hedge, the derivative's, or qualifying non-derivative instrument’s, gain or loss is reported as a component of OCI and recorded in AOCI. The gain or loss will be subsequently reclassified into net earnings when the hedged net investment is either sold or substantially liquidated.

Fair Value Hedges

For derivative instruments that are designated and qualify as a fair value hedge, the changes in fair value of the derivative instrument and the offsetting changes in fair value of the underlying hedged item due to changes in the hedged risk are recorded in interest income and other, net or interest expense on our consolidated statements of earnings.

Derivatives Not Designated As Hedging Instruments

We also enter into certain foreign currency forward contracts, commodity futures contracts, collars and swaps that are not designated as hedging instruments for accounting purposes. The changes in the fair values of these contracts are immediately recognized in interest income and other, net on our consolidated statements of earnings.

Normal Purchase Normal Sale

We enter into fixed-price and price-to-be-fixed green coffee purchase commitments, which are described further in Note 6, Inventories. For both fixed-price and price-to-be-fixed purchase commitments, we expect to take delivery of green coffee and to utilize the coffee in a reasonable period of time in the ordinary course of business. Since these types of purchase commitments qualify for the normal purchase normal sale exemption, they are not recorded as derivative instruments on our consolidated balance sheets.

Interest Rates

From time to time, we enter into designated cash flow hedges to manage the variability in cash flows due to changes in benchmark interest rates. We enter into interest rate swap agreements and treasury locks, which are synthetic forward sales of U.S. treasury securities settled in cash based upon the difference between an agreed upon treasury rate and the prevailing treasury rate at settlement. These agreements are cash settled at the time of the pricing of the related debt. Each derivative agreement's gain or loss is recorded in AOCI and is subsequently reclassified to interest expense over the life of the related debt.

To hedge the exposure to changes in the fair value of our fixed-rate debt, we enter into interest rate swap agreements, which are designated as fair value hedges. The changes in fair values of these derivative instruments and the offsetting changes in fair values of the underlying hedged debt due to changes in the relevant benchmark interest rates are recorded in interest expense. Refer to Note 9, Debt, for additional information on our long-term debt.

Foreign Currency

To reduce cash flow volatility from foreign currency fluctuations, we enter into forward and swap contracts to hedge portions of cash flows of anticipated intercompany royalty payments, inventory purchases, and intercompany borrowing and lending activities. The resulting gains and losses from these derivatives are recorded in AOCI and subsequently reclassified to revenue, cost of sales including occupancy costs, or interest income and other, net, respectively, when the hedged exposures affect net earnings.

From time to time, we enter into forward contracts or use foreign currency-denominated debt to hedge the currency exposure of our net investments in certain international operations. The resulting gains and losses from these derivatives are recorded in

AOCI and are subsequently reclassified to net earnings when the hedged net investment is either sold or substantially liquidated.

Foreign currency forward and swap contracts not designated as hedging instruments are used to mitigate the foreign exchange risk of certain other balance sheet items. Gains and losses from these derivatives are largely offset by the financial impact of translating foreign currency-denominated payables and receivables; these gains and losses are recorded in interest income and other, net.

Commodities

Depending on market conditions, we may enter into coffee forward contracts, futures contracts, and collars to hedge a portion of anticipated cash flows under our price-to-be-fixed green coffee contracts, which are described further in Note 6, Inventories. The resulting gains and losses are recorded in AOCI and are subsequently reclassified to cost of sales including occupancy costs when the hedged exposure affects net earnings.

To mitigate the price uncertainty of a portion of our future purchases, primarily of dairy products, diesel fuel and other commodities, we enter into swap contracts, futures and collars that are not designated as hedging instruments. The resulting gains and losses are recorded in interest income and other, net to help offset price fluctuations on our beverage, food, packaging and transportation costs, which are included in cost of sales including occupancy costs on our consolidated statements of earnings.

Gains and losses on derivative contracts and foreign currency-denominated debt designated as hedging instruments included in AOCI and expected to be reclassified into earnings within 12 months, net of tax (in millions):

	Net Gains/(Losses) Included in AOCI						Net Gains/(Losses) Expected to be Reclassified from AOCI into Earnings within 12 Months		Outstanding Contract/Debt Remaining Maturity (Months)
	Jun 30, 2019			Sep 30, 2018
Cash Flow Hedges:
Interest rates	$	3.0		$	24.7		$	2.4	0
Cross-currency swaps	(3.1		)	(12.6		)	—		65
Foreign currency - other	6.2			5.8			3.6		36
Coffee	—			(0.2		)	—		30
Net Investment Hedges:
Foreign currency	16.0			16.0			—		0
Foreign currency debt	(26.3		)	3.6			—		57

Pretax gains and losses on derivative contracts and foreign currency-denominated long-term debt designated as hedging instruments recognized in OCI and reclassifications from AOCI to earnings (in millions):

		Quarter Ended
	Location of gain/(loss)	Gains/(Losses) Recognized in OCI Before Reclassifications						Gains/(Losses) Reclassified from AOCI to Earnings
		Jun 30, 2019			Jul 1, 2018			Jun 30, 2019			Jul 1, 2018
Cash Flow Hedges:
Interest rates	Interest expense	$	5.3		$	4.7		$	1.1		$	1.2
Cross-currency swaps	Interest expense	(5.8		)	19.7			0.1			0.1
	Interest income and other, net							(9.9		)	18.4
Foreign currency - other	Licensed stores revenues	(2.7		)	21.7			2.2			0.5
	Cost of sales including occupancy costs							1.4			(1.3		)
Coffee	Cost of sales including occupancy costs	—			(0.1		)	—			(0.5		)
Net Investment Hedges:
Foreign currency debt		(21.1		)	32.4			—			—
		Three Quarters Ended
	Location of gain/(loss)	Gains/(Losses) Recognized in OCI Before Reclassifications						Gains/(Losses) Reclassified from AOCI to Earnings
		Jun 30, 2019			Jul 1, 2018			Jun 30, 2019			Jul 1, 2018
Cash Flow Hedges:
Interest rates	Interest expense	$	(25.3	)	$	1.5		$	3.9		$	3.6
Cross-currency swaps	Interest expense	(8.4		)	(16.4		)	(0.5		)	0.5
	Interest income and other, net							(19.7		)	(8.6		)
Foreign currency - other	Licensed stores revenues	9.0			15.6			4.9			(1.2		)
	Cost of sales including occupancy costs							3.6			(4.5		)
Coffee	Cost of sales including occupancy costs	—			(0.1		)	(0.3		)	(7.3		)
Net Investment Hedges:
Foreign currency		—			(0.1		)	—			—
Foreign currency debt		(40.1		)	(11.7		)	—			—

Pretax gains and losses on non-designated derivatives and designated fair value hedging instruments and the related hedged item recognized in earnings (in millions):

		Gains/(Losses) Recognized in Earnings
	Location of gain/(loss) recognized in earnings	Quarter Ended						Three Quarters Ended
		Jun 30, 2019			Jul 1, 2018			Jun 30, 2019			Jul 1, 2018
Non-Designated Derivatives:
Foreign currency - other	Interest income and other, net	$	(2.3	)	$	(1.3	)	$	(9.7	)	$	(2.4	)
Dairy	Interest income and other, net	0.3			0.1			(1.9		)	(1.9		)
Diesel fuel and other commodities	Interest income and other, net	(0.8		)	2.0			(5.5		)	2.9
Fair Value Hedges:
Interest rate swap	Interest expense	15.0			(5.1		)	41.2			(28.5		)
Long-term debt (hedged item)	Interest expense	(16.3		)	5.1			(44.8		)	28.5

Notional amounts of outstanding derivative contracts (in millions):

	Jun 30, 2019		Sep 30, 2018
Interest rate swap	$	750	$	750
Cross-currency swaps	357		434
Foreign currency - other	1,162		914
Coffee	2		—
Dairy	5		16
Diesel fuel and other commodities	24		21

Fair value of outstanding derivative contracts (in millions) including the location of the asset and/or liability on the condensed consolidated balance sheets:

		Derivative Assets
	Balance Sheet Location	Jun 30, 2019		Sep 30, 2018
Designated Derivative Instruments:
Cross-currency swaps	Other long-term assets	$	—	$	5.8
Foreign currency - other	Prepaid expenses and other current assets	7.3		9.0
	Other long-term assets	5.7		4.6
Interest rate swap	Other long-term assets	4.6		—
Non-designated Derivative Instruments:
Foreign currency	Prepaid expenses and other current assets	5.8		13.7
Dairy	Prepaid expenses and other current assets	0.1		0.2
Diesel fuel and other commodities	Prepaid expenses and other current assets	0.3		1.6
		Derivative Liabilities
	Balance Sheet Location	Jun 30, 2019		Sep 30, 2018
Designated Derivative Instruments:
Cross-currency swaps	Other long-term liabilities	$	11.9	$	9.3
Foreign currency - other	Accrued liabilities	2.7		3.6
	Other long-term liabilities	1.7		1.7
Interest rate swap	Other long-term liabilities	—		32.5
Non-designated Derivative Instruments:
Foreign currency	Accrued liabilities	6.2		2.5
	Other long-term liabilities	0.6		—
Dairy	Accrued liabilities	—		0.1
Diesel fuel and other commodities	Accrued liabilities	2.4		0.3

The following amounts were recorded on the condensed consolidated balance sheets related to fixed-to-floating interest rate swaps designated in fair value hedging relationships:

	Carrying amount of hedged assets (liabilities)				Cumulative amount of fair value hedging adjustment included in the carrying amount
	Jun 30, 2019		Sep 30, 2018		Jun 30, 2019		Sep 30, 2018
Location on the balance sheet
Long-term debt	$	755.8	$	711.0	$	5.8	$	(39.0	)

Additional disclosures related to cash flow gains and losses included in AOCI, as well as subsequent reclassifications to earnings, are included in Note 10, Equity.