Description of Business

 

Starbucks Corporation (together with its subsidiaries, “Starbucks” or the “Company”) purchases and roasts high-quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-style espresso beverages, cold blended beverages, a variety of complementary food items, a selection of premium teas, and beverage-related accessories and equipment, primarily through its Company-operated retail stores. Starbucks also sells coffee and tea products and licenses its trademark through other channels such as licensed stores, and through certain of its licensees and equity investees, Starbucks produces and sells a variety of ready-to-drink beverages. All channels outside the Company-operated retail stores are collectively known as specialty operations. Additional details on the nature of the Company’s business are in Item 1 of this 10-K.

 

Starbucks has three reportable operating segments: United States (“US”), International and Global Consumer Products Group (“CPG”). See Note 18 for additional details.

 

Principles of Consolidation

 

The consolidated financial statements reflect the financial position and operating results of Starbucks, including wholly owned subsidiaries and investees controlled by the Company. Investments in entities that the Company does not control, but has the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method. Investments in entities in which Starbucks does not have the ability to exercise significant influence are accounted for under the cost method. Intercompany transactions and balances have been eliminated.

 

Fiscal Year End

 

Starbucks fiscal year ends on the Sunday closest to September 30. The fiscal years ended on September 27, 2009, September 28, 2008 and September 30, 2007 all included 52 weeks. Starbucks 2010 fiscal year will include 53 weeks, with the 53^rd week falling in its fourth fiscal quarter.

 

Subsequent Events

 

The Company evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through November 20, 2009, the day the financial statements were issued.

 

Estimates and Assumptions

 

Preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Examples include, but are not limited to, estimates for asset and goodwill impairments, stock-based compensation forfeiture rates, and future asset retirement obligations; assumptions underlying self-insurance reserves; and the potential outcome of future tax consequences of events that have been recognized in the financial statements. Actual results and outcomes may differ from these estimates and assumptions.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with a maturity of three months or less at the time of purchase to be cash equivalents. The Company maintains cash and cash equivalent balances with financial institutions that exceed federally insured limits. The Company has not experienced any losses related to these balances, and management believes its credit risk to be minimal.

 

Cash Management

 

The Company’s cash management system provides for the funding of all major bank disbursement accounts on a daily basis as checks are presented for payment. Under this system, outstanding checks are in excess of the cash balances at certain banks, which creates book overdrafts. Book overdrafts are presented as a current liability in Accounts payable on the consolidated balance sheets.

 

Short-term and Long-term Investments

 

The Company’s short-term and long-term investments consist primarily of investment grade debt securities, equity mutual funds, and equity exchange-traded funds, all of which are classified as available-for-sale or trading. As of September 27, 2009, a substantial portion of the Company’s available-for-sale investments consisted of auction rate securities, as described in more detail in Note 3. Trading securities are recorded at fair value with unrealized holding gains and losses included in net earnings. Available-for-sale securities are recorded at fair value, and unrealized holding gains and losses are recorded, net of tax, as a component of accumulated other comprehensive income. Available-for-sale securities with remaining maturities of less than one year and those identified by management at time of purchase for funding operations in less than one year are classified as short term, and all other available-for-sale securities are classified as long term. Unrealized losses are charged against net earnings when a decline in fair value is determined to be other than temporary. Management reviews several factors to determine whether a loss is other than temporary, such as the length and extent of the fair value decline, the financial condition and near term prospects of the issuer, and for equity investments, the Company’s intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. For debt securities, management also evaluates whether the Company has the intent to sell or will likely be required to sell before its anticipated recovery. Realized gains and losses are accounted for on the specific identification method. Purchases and sales are recorded on a trade date basis.

 

Fair Value of Financial Instruments

 

The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of those instruments. The fair value of the Company’s investments in marketable debt and equity securities, equity mutual funds and equity exchange-traded funds, is based upon the quoted market price on the last business day of the fiscal year. Where an observable quoted market price for a security does not exist, the Company estimates fair value using a variety of valuation methodologies. Such methodologies include comparing the security with securities of publicly traded companies in similar lines of business, applying revenue multiples to estimated future operating results and estimating discounted cash flows. See Note 3 and 7 for additional information and Note 5 for the methods used to measure fair value. The fair value of the Company’s debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying value of short-term debt approximates fair value. The estimated fair value of Starbucks $550 million of 6.25% Senior Notes was approximately $591 million and $536 million as of September 27, 2009 and September 28, 2008, respectively.

 

Derivative Instruments

 

The Company manages its exposure to various risks within the consolidated financial statements according to an umbrella risk management policy. Under this policy, Starbucks may engage in transactions involving various derivative instruments, with maturities generally not longer than five years, to hedge interest rates, commodity prices, and foreign currency denominated revenues, purchases, assets and liabilities.

 

The Company records all derivatives on the balance sheets at fair value. For a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (“OCI”) and subsequently reclassified into net earnings when the hedged exposure affects net earnings. For a net investment hedge, the effective portion of the derivative’s gain or loss is reported as a component of OCI.

 

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. The Company classifies the cash flows from hedging transactions in the same categories as the cash flows from the respective hedged items. Once established, cash flow hedges are generally not removed until maturity unless an anticipated transaction is no longer likely to occur. For discontinued or dedesignated cash flow hedges, the related accumulated derivative gains or losses are recognized in Net interest income and other on the consolidated statements of earnings.

 

Forward contract effectiveness for cash flow hedges is calculated by comparing the fair value of the contract to the change in value of the anticipated transaction using forward rates on a monthly basis. For net investment hedges, the spot-to-spot method is used to calculate effectiveness. Under this method, the change in fair value of the forward contract attributable to the changes in spot exchange rates (the effective portion) is reported as a component of OCI. The remaining change in fair value of the forward contract (the ineffective portion) is reclassified into net earnings. Any ineffectiveness is recognized immediately in Net interest income and other on the consolidated statements of earnings.

 

The Company also enters into certain foreign currency forward contracts and commodity swap and futures contracts that are not designated as hedging instruments for accounting purposes. 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.

 

See Note 5 for additional information on the Company’s fair value measurements related to derivative instruments.

 

Allowance for Doubtful Accounts

 

Allowance for doubtful accounts is calculated based on historical experience, customer credit risk and application of the specific identification method. As of September 27, 2009 and September 28, 2008, the allowance for doubtful accounts was $5.0 million and $4.5 million, respectively.

 

Inventories

 

Inventories are stated at the lower of cost (primarily moving average cost) or market. The Company records inventory reserves for obsolete and slow-moving items and for estimated shrinkage between physical inventory counts. Inventory reserves are based on inventory turnover trends, historical experience and application of the specific identification method. As of September 27, 2009 and September 28, 2008, inventory reserves were $21.1 million and $25.5 million, respectively.

 

Property, Plant and Equipment

 

Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation of property, plant and equipment, which includes assets under capital leases, is provided on the straight-line method over estimated useful lives, generally ranging from two to seven years for equipment and 30 to 40 years for buildings. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease life, generally 10 years. For leases with renewal periods at the Company’s option, Starbucks generally uses the original lease term, excluding renewal option periods, to determine estimated useful lives. If failure to exercise a renewal option imposes an economic penalty to Starbucks, management may determine at the inception of the lease that renewal is reasonably assured and include the renewal option period in the determination of appropriate estimated useful lives. The portion of depreciation expense related to production and distribution facilities is included in Cost of sales including occupancy costs on the consolidated statements of earnings. The costs of repairs and maintenance are expensed when incurred, while expenditures for refurbishments and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. When assets are retired or sold, the asset cost and related accumulated depreciation are eliminated with any remaining gain or loss reflected in net earnings.

 

Goodwill

 

The Company tests its goodwill for impairment on an annual basis, or more frequently if circumstances indicate reporting unit carrying values exceed their fair values. Fair value is estimated by projecting discounted cash flows from the reporting unit in addition to other quantitative and qualitative analyses. If the carrying amount of goodwill exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value.

 

Starbucks conducted its annual test for its consolidated entities in the third fiscal quarter, resulting in $7 million of goodwill impairment in fiscal 2009 related to the US operating segment’s Hawaii reporting unit, which is comprised of retail store operations. The current and future projected operating results for the Hawaii operations, which were acquired in fiscal 2006, were lower than originally anticipated due to the overall economic slowdown and its impact on the travel industry in particular, resulting in a partial impairment of the related goodwill. There was no impairment of goodwill in fiscal 2008 and 2007.

 

Other Intangible Assets

 

Other intangible assets consist primarily of trademarks with indefinite lives which are tested for impairment annually or more frequently if indefinite useful lives are no longer appropriate. Definite-lived intangible assets, which mainly consist of contract-based patents and copyrights, are amortized over their estimated useful lives, and are tested for impairment when facts and circumstances indicate that the carrying values may not be recoverable. For further information on other intangible assets, see Note 9. Based on the impairment tests performed there was no impairment of other intangible assets in fiscal 2009, 2008 and 2007.

 

Long-lived Assets

 

When facts and circumstances indicate that the carrying values of long-lived assets may be impaired, an evaluation of recoverability is performed by comparing the carrying values of the assets to projected undiscounted future cash flows in addition to other quantitative and qualitative analyses. Upon indication that the carrying values of such assets may not be recoverable, the Company compares the fair value of long-lived assets to their carrying value and recognizes an impairment loss by a charge to net earnings for the excess of carrying value over fair value. The fair value of the assets is estimated using the discounted future cash flows of the assets. Property, plant and equipment assets are grouped at the lowest level for which there are identifiable cash flows when assessing impairment. Cash flows for retail assets are identified at the individual store level. Long-lived assets to be disposed of are reported at the lower of their carrying amount, or fair value less estimated costs to sell.

 

The Company recognized net impairment and disposition losses of $224.4 million, $325.0 million and $26.0 million in fiscal 2009, 2008 and 2007, respectively, primarily due to underperforming Company-operated retail stores. The net losses in fiscal 2009 and 2008 include $129.2 million and $201.6 million, respectively, of asset impairments related to the US and International store closures and charges incurred for office facilities no longer occupied by the Company due to the reduction in positions within Starbucks leadership structure and non-store organization. See Note 2 for further details. Depending on the underlying asset that is impaired, these losses may be recorded in any one of the operating expense lines on the consolidated statements of earnings: for retail operations, the net impairment and disposition losses are recorded in Restructuring charges and Store operating expenses; for specialty operations, these losses are recorded in Restructuring charges and Other operating expenses; and for all other operations, these losses are recorded in Cost of sales including occupancy costs, General and administrative expenses, or Restructuring charges.

 

Insurance Reserves

 

The Company uses a combination of insurance and self-insurance mechanisms, including a wholly owned captive insurance entity and participation in a reinsurance pool, to provide for the potential liabilities for certain risks, including workers’ compensation, healthcare benefits, general liability, property insurance, and director and officers’ liability insurance. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions.

 

Revenue Recognition

 

Consolidated revenues are presented net of intercompany eliminations for wholly owned subsidiaries and investees controlled by the Company and for licensees accounted for under the equity method, based on the Company’s percentage ownership. Additionally, consolidated revenues are recognized net of any discounts, returns, allowances and sales incentives, including coupon redemptions and rebates.

 

Stored Value Cards

 

Revenues from the Company’s stored value cards, such as the Starbucks Card, and gift certificates are recognized when tendered for payment, or upon redemption. Outstanding customer balances are included in Deferred revenue on the consolidated balance sheets. There are no expiration dates on the Company’s stored value cards or gift certificates, and Starbucks does not charge any service fees that cause a decrement to customer balances.

 

While the Company will continue to honor all stored value cards and gift certificates presented for payment, management may determine the likelihood of redemption to be remote for certain card and certificate balances due to, among other things, long periods of inactivity. In these circumstances, if management also determines there is no requirement for remitting balances to government agencies under unclaimed property laws, card and certificate balances may then be recognized in the consolidated statements of earnings in Net interest income and other. For the fiscal years ended September 27, 2009, September 28, 2008 and September 30, 2007 income recognized on unredeemed stored value card balances and gift certificates was $26.0 million, $13.6 million and $12.9 million, respectively.

 

Retail Revenues

 

Company-operated retail store revenues are recognized when payment is tendered at the point of sale. Starbucks maintains a sales return allowance to reduce retail revenues for estimated future product returns, including brewing equipment, based on historical patterns. Retail store revenues are reported net of sales, use or other transaction taxes that are collected from customers and remitted to taxing authorities.

 

Specialty Revenues

 

Specialty revenues consist primarily of product sales to customers other than through Company-operated retail stores, as well as royalties and other fees generated from licensing operations. Sales of coffee, tea and related products are generally recognized upon shipment to customers, depending on contract terms. Shipping charges billed to customers are also recognized as revenue, and the related shipping costs are included in Cost of sales including occupancy costs on the consolidated statements of earnings.

 

Specific to retail store licensing arrangements, initial nonrefundable development fees are recognized upon substantial performance of services for new market business development activities, such as initial business, real estate and store development planning, as well as providing operational materials and functional training courses for opening new licensed retail markets. Additional store licensing fees are recognized when new licensed stores are opened. Royalty revenues based upon a percentage of reported sales and other continuing fees, such as marketing and service fees, are recognized on a monthly basis when earned. For certain licensing arrangements, where the Company intends to acquire an ownership interest, the initial nonrefundable development fees are deferred to Other long-term liabilities on the consolidated balance sheets until acquisition, at which point the fees are reflected as a reduction of the Company’s investment.

 

Other arrangements involving multiple elements and deliverables as well as upfront fees are individually evaluated for revenue recognition. Cash payments received in advance of product or service delivery are recorded in Deferred revenue until earned.

 

Advertising

 

The Company expenses most advertising costs as they are incurred, except for certain production costs that are expensed the first time the advertising campaign takes place and direct-response advertising, which is capitalized and amortized over its expected period of future benefits.

 

Advertising expenses, recorded in Store operating expenses, Other operating expenses and General and administrative expenses on the consolidated statements of earnings, totaled $126.3 million, $129.0 million and $103.5 million in fiscal 2009, 2008 and 2007, respectively. As of September 27, 2009 and September 28, 2008, $7.2 million and $8.8 million, respectively, of capitalized advertising costs were recorded in Prepaid expenses and other current assets, and Other assets on the consolidated balance sheets.

 

Research and Development

 

Starbucks expenses research and development costs as they are incurred. The Company spent approximately $6.5 million, $7.2 million and $7.0 million during fiscal 2009, 2008 and 2007, respectively, on technical research and development activities, in addition to customary product testing and product and process improvements in all areas of its business.

 

Store Preopening Expenses

 

Costs incurred in connection with the start-up and promotion of new store openings are expensed as incurred.

 

Operating Leases

 

Starbucks leases retail stores, roasting and distribution facilities and office space under operating leases. Most lease agreements contain tenant improvement allowances, rent holidays, lease premiums, rent escalation clauses and/or contingent rent provisions. For purposes of recognizing incentives, premiums and minimum rental expenses on a straight-line basis over the terms of the leases, the Company uses the date of initial possession to begin amortization, which is generally when the Company enters the space and begins to make improvements in preparation of intended use.

 

For tenant improvement allowances and rent holidays, the Company records a deferred rent liability in Accrued occupancy costs and Other long-term liabilities on the consolidated balance sheets and amortizes the deferred rent over the terms of the leases as reductions to rent expense on the consolidated statements of earnings.

 

For premiums paid upfront to enter a lease agreement, the Company records a deferred rent asset in Prepaid expenses and other current assets and Other assets on the consolidated balance sheets and then amortizes the deferred rent over the terms of the leases as additional rent expense on the consolidated statements of earnings.

 

For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company records minimum rental expenses on a straight-line basis over the terms of the leases on the consolidated statements of earnings.

 

Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. The Company records a contingent rent liability in Accrued occupancy costs on the consolidated balance sheets and the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.

 

When ceasing operations in Company-operated stores under operating leases, in cases where the lease contract specifies a termination fee due to the landlord, the Company records such expense at the time written notice is given to the landlord. In cases where terms, including termination fees, are yet to be negotiated with the landlord, the Company will record the expense upon signing of an agreement with the landlord. Finally, in cases where the landlord does not allow the Company to prematurely exit its lease, but allows for subleasing, the Company estimates the fair value of any sublease income that can be generated from the location and expenses the present value of the excess of remaining lease payments to the landlord over the projected sublease income at the cease-use date.

 

Asset Retirement Obligations

 

Starbucks recognizes a liability for the fair value of required asset retirement obligations (“ARO”) when such obligations are incurred. The Company’s AROs are primarily associated with leasehold improvements which, at the end of a lease, the Company is contractually obligated to remove in order to comply with the lease agreement. At the inception of a lease with such conditions, the Company records an ARO liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. The liability is estimated based on a number of assumptions requiring management’s judgment, including store closing costs, cost inflation rates and discount rates, and is accreted to its projected future value over time. The capitalized asset is depreciated using the convention for depreciation of leasehold improvement assets. Upon satisfaction of the ARO conditions, any difference between the recorded ARO liability and the actual retirement costs incurred is recognized as an operating gain or loss in the consolidated statements of earnings. As of September 27, 2009 and September 28, 2008, the Company’s net ARO asset included in Net property, plant and equipment was $15.1 million and $18.5 million, respectively, while the Company’s net ARO liability included in Other long-term liabilities was $43.4 million and $44.6 million, as of the same respective dates.

 

Stock-based Compensation

 

The Company maintains several equity incentive plans under which it may grant non-qualified stock options, incentive stock options, restricted stock, restricted stock units (“RSUs”) or stock appreciation rights to employees, non-employee directors and consultants. The Company also has employee stock purchase plans (“ESPP”). RSUs issued by the Company are equivalent to nonvested shares under the applicable accounting guidance. See Note 14 for additional details.

 

Foreign Currency Translation

 

The Company’s international operations generally use their local currency as their functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the average monthly exchange rates during the year. Resulting translation adjustments are recorded as a component of Accumulated other comprehensive income on the consolidated balance sheets.

 

Income Taxes

 

The Company computes income taxes using the asset and liability method, under which deferred income taxes are provided for the temporary differences between the financial statement carrying amounts and the tax basis of the Company’s assets and liabilities. The Company will establish a valuation allowance for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. Periodically, the valuation allowance is reviewed and adjusted based on management’s assessments of realizable deferred tax assets.

 

Starbucks adopted the new accounting requirements for uncertain tax positions on the first day of the Company’s first fiscal quarter of 2008. The cumulative impact of adopting the new accounting requirements is shown in the consolidated statements of shareholders’ equity. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties related to income tax matters in income tax expense. See Note 15 for additional details.

 

Earnings per Share

 

Basic earnings per share is computed on the basis of the weighted average number of shares and common stock units that were outstanding during the period. Diluted earnings per share includes the dilutive effect of common stock equivalents consisting of certain shares subject to stock options and RSUs, using the treasury stock method. Performance-based RSUs are considered diluted when the related performance criterion has been met.

 

Common Stock Share Repurchases

 

The Company may repurchase shares of its common stock under a program authorized by its Board of Directors including pursuant to a contract, instruction or written plan meeting the requirements of Rule 10b5-1(c)(1) of the Securities Exchange Act of 1934. In accordance with the Washington Business Corporation Act, share repurchases are not displayed separately as treasury stock on the consolidated balance sheets or consolidated statements of shareholders’ equity. Instead, the par value of repurchased shares is deducted from Common stock and the remaining excess repurchase price over par value is deducted from Additional paid-in capital and from Retained earnings, once additional paid-in capital is depleted. See Note 13 for additional information.

 

Recent Accounting Pronouncements

 

Starbucks adopted the new guidance issued by the Financial Accounting Standards Board (“FASB”) for fair value measurement for its financial assets and liabilities effective September 29, 2008 (see Note 5 for additional disclosures). The guidance defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This guidance is effective for nonfinancial assets and liabilities for Starbucks first fiscal quarter of 2010. The Company believes that the adoption of this new guidance for its nonfinancial assets and liabilities will not have a material impact on its financial statements.

 

In December 2007, the FASB issued authoritative guidance on business combinations, establishing principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any resulting goodwill, and any noncontrolling interest in an acquiree. The guidance also provides for disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This new guidance will be effective for Starbucks first fiscal quarter of 2010 and must be applied prospectively to business combinations completed in fiscal 2010 and beyond.

 

In December 2007, the FASB issued authoritative guidance on accounting and reporting for noncontrolling interests in subsidiaries. The guidance clarifies that a noncontrolling interest in a subsidiary should be accounted for as a component of equity separate from the parent’s equity. Starbucks will apply the new guidance relating to noncontrolling interests beginning in the first fiscal quarter of 2010 on a prospective basis, except for the presentation and disclosure requirements, which will be applied retrospectively. The adoption of this guidance will not have a material impact on the Company’s financial statements.

 

In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities (“VIE”), which will be effective for Starbucks first fiscal quarter of 2011. The new guidance requires a qualitative approach to identifying a controlling financial interest in a variable interest entity, and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. The Company is currently evaluating the impact that adoption may have on its consolidated financial statements.

 

 

In fiscal 2009, Starbucks continued to execute its restructuring efforts to position the Company for long-term profitable growth. These efforts have been focused on both the global Company-operated store base and the non-retail support organization. Starbucks actions to rationalize its store portfolio have included plans (announced in July 2008 and January 2009) to close approximately 800 Company-operated stores in the US, restructure its Australia market, and close approximately 100 additional Company-operated stores internationally. Since those announcements, nearly all of the approximately 800 US stores, 61 stores in Australia and 41 in other International markets have been closed.

 

US Store Closures — In fiscal 2009, the Company closed 383 of the approximately 600 stores announced in July 2008, bringing the total number of US closures under this restructuring action to 588 stores. The Company also closed 183 of the approximately 200 stores announced for closure in January 2009.

 

International Store Closures — During fiscal 2009, the Company closed 41 of the approximately 100 stores announced for closure in January 2009. The Company expects to complete the remaining closures in fiscal 2010, and will recognize the associated lease exit costs concurrently with the actual closures.

 

Workforce Reduction and Other Related Costs — Workforce reductions related to store closures and non-store support positions resulted in the recognition of $19.0 million in employee termination costs in fiscal 2009. In addition, in fiscal 2009, Starbucks recognized $47.8 million of valuation adjustments on corporate office facilities that were no longer intended to be occupied by the Company.

 

Restructuring charges by type and a reconciliation of the associated accrued liability (in millions):

 

 

Restructuring charges by reportable segment (in millions):

 

 

 

 

 

Short-term and long-term investments (in millions):

 

 

Available-for-sale securities

 

Proceeds from sales of available-for-sale securities were $5.0 million, $75.9 million and $47.5 million and in fiscal years 2009, 2008 and 2007, respectively. For fiscal years 2009, 2008 and 2007, there were immaterial realized gains and losses on sales and maturities.

 

As of September 27, 2009, the Company’s long-term available-for-sale securities of $71.2 million included $55.7 million invested in auction rate securities (“ARS”). As of September 28, 2008, the Company’s long-term available-for-sale securities of $71.4 million included $59.8 million invested in ARS. ARS have long-dated maturities but provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals. Due to the auction failures that began in February 2008, these securities became illiquid and were classified as long-term investments. The investment principal associated with the failed auctions will not be accessible until:

 

 

The Company does not intend to sell the ARS, nor is it likely it will be required to sell the ARS before their anticipated recovery. The Company expects such recoveries to occur prior to the contractual maturities. In fiscal 2009, one ARS was called at par value of $7.4 million and one ARS was partially called at par value of $0.6 million.

 

The Company had $2.1 million and $6.0 million of accumulated unrealized losses on ARS as of the end of fiscal 2009 and 2008, respectively, determined to be temporary, which is included in Accumulated other comprehensive income as a reduction in shareholders’ equity. As of September 27, 2009, approximately $4.9 million in ARS were rated A/B2 by Standard & Poor’s and Moody’s, respectively. All of the remaining securities were rated investment grade or higher by two or more of the following rating agencies: Moody’s, Standard & Poor’s and Fitch Ratings. The Company’s ARS are collateralized by portfolios of student loans, substantially all of which are guaranteed by the United States Department of Education.

 

The following table presents the length of time available-for-sale securities were in continuous unrealized loss positions but were not determined to be other-than-temporarily impaired (in millions):

 

Consecutive Monthly Unrealized Losses

 

 

Gross unrealized holding losses on the state and local obligations pertain to the Company’s eleven ARS. As Starbucks does not intend to sell these securities, nor is it likely it will be required to sell these securities before their anticipated recovery, which may be at maturity, the Company does not consider these securities to be other-than-temporarily impaired.

 

There were no realized losses recorded for other than temporary impairments during fiscal years 2009, 2008 or 2007.

 

Trading securities

 

Trading securities are comprised of marketable equity mutual funds and equity exchange-traded funds that approximate a portion of the Company’s liability under the Management Deferred Compensation Plan (“MDCP”), a defined contribution plan. The corresponding deferred compensation liability of $68.3 million and $68.0 million in fiscal 2009 and 2008, respectively, is included in Accrued compensation and related costs on the consolidated balance sheets. The changes in net unrealized holding gains/losses in the trading portfolio included in earnings for the years ended September 27, 2009 and September 28, 2008 were a net loss of $4.9 million and $14.5 million, respectively.

 

 

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 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.

 

The Company had net derivative losses of $3.9 million and $9.2 million, net of taxes, in Accumulated OCI as of September 27, 2009 and September 28, 2008, respectively, related to cash flow hedges. Of the net derivative losses accumulated as of September 28, 2009, $0.9 million 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 2009 and 2008 was insignificant. Outstanding contracts will expire within 36 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 net derivative losses of $19.8 million and $13.0 million, net of taxes, in Accumulated OCI as of September 27, 2009 and September 28, 2008, respectively, related to net investment derivative hedges. Outstanding contracts will expire within 18 months.

 

Other Derivatives

 

The Company enters into certain foreign currency forward contracts that are not designated as hedging instruments to mitigate the translation risk of certain balance sheet items. 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. For the fiscal years 2009 and 2008, these forward contracts resulted in a net gain of $20.0 million and a net loss $0.1 million, respectively. These gains and losses were largely offset by the financial impact of translating foreign currency denominated payables and receivables, which are also recognized in Net interest income and other.

 

In the third quarter of fiscal 2009, the Company entered into certain swap and futures contracts that are not designated as hedging instruments to mitigate the price uncertainty of a portion of its future purchases of dairy products and diesel fuel. These contracts are recorded at fair value, with the changes in fair value recognized in Net interest income and other on the consolidated statement of earnings. For the fiscal year 2009, these swaps and futures contracts resulted in a net loss of $0.6 million.

 

Fair values of derivative instruments on the consolidated balance sheet as of September 27, 2009 (in millions):

 

 

The following table presents the effect of derivative instruments on the consolidated statements of earnings in fiscal 2009 (in millions):

 

 

 

 

 

The Company had the following outstanding derivative contracts as of September 27, 2009, based on notional amounts:

 

 

 

The Company adopted the new fair value accounting guidance related to financial assets and liabilities effective September 29, 2008, and will adopt the new fair value accounting guidance for nonfinancial assets and liabilities in the first fiscal quarter of 2010. The new fair value accounting guidance allows for this two-step adoption approach. The Company continues to evaluate the potential impact of the adoption of fair value measurements related to its property, plant and equipment, goodwill and other intangible assets.

 

The guidance defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. It also establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:

 

 

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis (in millions):

 

 

Trading securities include equity mutual funds and exchange-traded funds. For these securities, the Company uses quoted prices in active markets for identical assets to determine their fair value, thus they are considered to be Level 1 instruments.

 

Available-for-sale securities include government treasury securities, corporate bonds and ARS. For government treasury securities, the Company uses quoted price in active markets for identical assets to determine their fair value, thus they are considered to be Level 1 instruments. The Company uses observable direct and indirect inputs for corporate bonds, which are considered Level 2 instruments. Level 3 instruments are comprised solely of ARS, all of which are considered to be illiquid due to the auction failures that began in February 2008. The Company values ARS using an internally developed valuation model, whose inputs include interest rate curves, credit and liquidity spreads, and effective maturity.

 

Derivative assets and liabilities include foreign currency forward contracts, commodity swaps and futures contracts. Where applicable, the Company uses quoted prices in an active market for identical derivative assets and liabilities that are traded on exchanges. These derivative assets and liabilities are coffee and dairy futures contracts, and are included in Level 1. Derivative assets and liabilities included in Level 2 are over-the-counter currency forward contracts and commodity swaps whose fair values are estimated using industry-standard valuation models. Such models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves and forward and spot prices for currencies and commodities.

 

Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis (in millions):

 

 

Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

The Company measures certain financial assets, including its cost and equity method investments, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired.

 

 

Inventories consisted of the following (in millions):

 

 

Other merchandise held for sale includes, among other items, serveware, tea and brewing equipment.

 

As of September 27, 2009, the Company had committed to purchasing green coffee totaling $155 million under fixed-price contracts and an estimated $84 million under price-to-be-fixed contracts. The Company believes, based on relationships established with its suppliers in the past, the risk of non-delivery on such purchase commitments is remote.

 

 

Equity and cost investments (in millions):

 

 

Equity Method Investments

 

Equity investees and ownership interests by reportable operating segment:

 

 

StarCon, LLC was a joint venture formed in March 2007 with Concord Music Group, Inc. (“Concord”). The Company sold its 50% ownership interest to Concord in early fiscal 2009. The International entities operate licensed Starbucks retail stores. See Note 19 for a discussion of a transaction affecting the Company’s ownership related to its markets in France, Spain and Portugal. The Company also has licensed the rights to produce and distribute Starbucks branded products to two partnerships in which the Company holds 50% equity interests. The North American Coffee Partnership with the Pepsi-Cola Company develops and distributes bottled Frappuccino^® beverages and Starbucks DoubleShot^® espresso drinks. Starbucks Ice Cream Partnership developed and distributed super premium ice creams, and was in the process of being dissolved at the end of fiscal 2009. It was replaced by a licensing agreement with Unilever for the manufacturing, marketing and distribution of Starbucks super-premium ice cream products in the US.

 

Prior to fiscal 2005, Starbucks acquired equity interest in its licensed operations of Malaysia, Austria, Shanghai, Spain, Switzerland and Taiwan. The carrying amount of these investments was $24.3 million more than the underlying equity in net assets due to acquired goodwill, which is evaluated for impairment annually. No impairments were recorded during fiscal years 2009, 2008 or 2007.

 

The Company’s share of income and losses from its equity method investments is included in Income from equity investees on the consolidated statements of earnings. Also included in this line item is the Company’s proportionate share of gross margin resulting from coffee and other product sales to, and royalty and license fee revenues generated from, equity investees. Revenues generated from these related parties, net of eliminations, were $125.3 million, $128.1 million and $107.9 million in fiscal years 2009, 2008 and 2007, respectively. Related costs of sales, net of eliminations, were $64.9 million, $66.2 million and $57.1 million in fiscal years 2009, 2008 and 2007, respectively. As of September 27, 2009 and September 28, 2008, there were $37.6 million and $40.6 million of accounts receivable, respectively, on the consolidated balance sheets from equity investees primarily related to product sales and store license fees.

 

As of September 27, 2009, the aggregate market value of the Company’s investment in Starbucks Japan was approximately $241 million, based on its available quoted market price.

 

Summarized combined financial information of the Company’s equity method investees, which represent 100% of the investees’ financial information (in millions):

 

 

 

Cost Method Investments

 

The Company has equity interests in entities that develop and operate Starbucks licensed retail stores in several global markets. The value of these investments was $36.6 million and $31.9 million as of September 27, 2009 and September 28, 2008, respectively. Additionally, Starbucks has investments in privately held equity securities unrelated to Starbucks licensed retail stores. The value of these investments was $2.5 million at September 27, 2009 and $2.8 million at September 28, 2008. As of September 27, 2009 and September 28, 2008, management determined that the estimated fair values of each cost method investment exceeded the related carrying values. In the third quarter of fiscal 2009 Starbucks recognized a loss of $0.3 million on one of the investments that is unrelated to Starbucks licensed retail stores. There were no realized losses recorded for other-than-temporary impairment of the Company’s cost method investments during fiscal years 2008 or 2007.

 

Starbucks has the ability to acquire additional interests in some of these cost method investees at certain intervals. Depending on the Company’s total percentage of ownership interest and its ability to exercise significant influence over financial and operating policies, additional investments may require the retroactive application of the equity method of accounting.

 

 

Property, plant and equipment (in millions):

 

 

 

Other intangible assets (in millions):

 

 

Amortization expense for definite-lived intangibles was $1.7 million, $1.5 million and $1.0 million during fiscal 2009, 2008 and 2007, respectively.

 

Estimated amortization expense for each of the next five fiscal years and thereafter, as of September 27, 2009 (in millions):

 

 

Changes in the carrying amount of goodwill by reportable operating segment for the fiscal year ended September 27, 2009 (in millions):

 

 

United States

 

The impairment of $7.0 million relates to the Company’s Hawaii reporting unit as discussed further in Note 1.

 

International

 

The decrease in goodwill of $1.2 million was due to purchase price adjustments for property, plant and equipment acquired as a part of the Coffee Vision, Inc. acquisition, completed in the fourth quarter of fiscal 2008. The increase in goodwill of $0.8 million included in Other was due to foreign currency fluctuations.

 

 

Debt consisted of the following (in millions):