Derivative Financial Instruments

12 Months Ended

Oct. 02, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

Interest Rates

Depending on market conditions, we enter into interest rate swap agreements to hedge the variability in cash flows due to changes in benchmark interest rates related to anticipated debt issuances. These agreements are cash settled at the time of the pricing of the related debt. The effective portion of the derivative's gain or loss is recorded in accumulated other comprehensive income ("AOCI") and is subsequently reclassified to interest expense over the life of the related debt.

During fiscal 2016, we entered into forward-starting interest rate swap agreements with an aggregate notional amount of $375 million related to the $500 million and $250 million of 5-year 2.100% Senior Notes (the "2021 notes") due February 2021 and $500 million of 10-year 2.450% Senior Notes (the "2026 notes") due June 2026. Refer to Note 9, Debt, for details of the components of our long-term debt. We cash settled these swap agreements at the time of pricing the 2021 and 2026 notes.

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 effective portion of the derivative's gain or loss is recorded in AOCI and is subsequently reclassified to revenue, cost of sales including occupancy costs or interest income and other, net, respectively, when the hedged exposure affects net earnings.

In connection with the acquisition of Starbucks Japan, as discussed in Note 2, Acquisitions and Divestitures, we entered into cross-currency swap contracts during the first and third quarters of fiscal 2015 to hedge the foreign currency transaction risk of certain yen-denominated intercompany loans with a total notional value of ¥86.5 billion, or approximately $717 million as of September 27, 2015. As of October 2, 2016, the total notional value of these cross-currency swap contracts was ¥66.8 billion, or approximately, $660 million. Gains and losses from these swaps offset the changes in value of interest and principal payments as a result of changes in foreign exchange rates. The difference between the U.S. dollar interest payments received from the swap counterparty and the U.S. dollar equivalent of the Japanese yen interest payments, as recognized in interest expense or interest income and other, net on our consolidated statements of earnings, is dependent on a number of market factors, including relevant interest rate differentials and foreign exchange rates. These swaps have been designated as cash flow hedges and, based on the timing of the settlement of these intercompany loans, matured or will mature in September 2016 or November 2024. There are no credit-risk-related contingent features associated with these swaps, although we may hold or post collateral depending upon the gain or loss position of the swap agreements.

We also enter into forward contracts to hedge the foreign currency exposure of our net investment in certain foreign operations. The effective portion of the derivative's gain or loss is recorded in AOCI and is subsequently reclassified to net earnings when the hedged net investment is either sold or substantially liquidated.

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

Commodities

Depending on market conditions, we may enter into coffee 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 5, Inventories. The effective portion of each derivative's gain or loss is recorded in AOCI and is 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. Gains and losses from these derivatives are recorded in interest income and other, net and 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 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			Contract Remaining Maturity (Months)
	Oct 2, 2016			Sep 27, 2015
Cash Flow Hedges:
Interest rates	$	20.5		$	30.1		$	2.9		0
Cross-currency swaps	(7.7		)	(27.8		)	—			98
Foreign currency - other	(0.4		)	29.0			3.3			35
Coffee	(1.6		)	(5.7		)	(1.4		)	6
Net Investment Hedges:
Foreign currency	1.3			1.3			—			0

Pretax gains and losses on derivative contracts designated as hedging instruments recognized in other comprehensive income ("OCI") and reclassifications from AOCI to earnings (in millions):

	Year Ended
	Gains/(Losses) Recognized in OCI Before Reclassifications						Gains/(Losses) Reclassified from AOCI to Earnings
	Oct 2, 2016			Sep 27, 2015			Oct 2, 2016			Sep 27, 2015
Cash Flow Hedges:
Interest rates	$	(10.3	)	$	(6.8	)	$	5.0		$	3.2
Cross-currency swaps	(75.7		)	11.4			(101.1		)	46.2
Foreign currency - other	(25.4		)	52.0			19.1			26.1
Coffee	1.7			(9.0		)	(2.8		)	(3.5		)
Net Investment Hedges:
Foreign currency	—			4.3			—			7.2

Pretax gains and losses on derivative contracts not designated as hedging instruments recognized in earnings (in millions):

	Gains/(Losses) Recognized in Earnings
	Oct 2, 2016			Sep 27, 2015
Foreign currency - other	$	(5.7	)	$	27.1
Dairy	(5.5		)	(3.8		)
Diesel fuel and other commodities	(0.2		)	(9.0		)

Notional amounts of outstanding derivative contracts (in millions):

	Oct 2, 2016		Sep 27, 2015
Interest rates	$	—	$	125
Cross-currency swaps	660		717
Foreign currency - other	688		577
Coffee	7		38
Dairy	76		43
Diesel fuel and other commodities	46		14

Fair value of outstanding derivative contracts (in millions):

	Derivative Assets				Derivative Liabilities
	Oct 2, 2016		Sep 27, 2015		Oct 2, 2016		Sep 27, 2015
Designated Derivative Hedging Instruments:
Interest rates	$	—	$	0.2	$	—	$	—
Cross-currency swaps	—		26.9		57.0		16.3
Foreign currency - other	20.8		45.4		24.0		2.2
Coffee	1.8		—		—		2.7
Non-designated Derivative Hedging Instruments:
Foreign currency - other	6.2		32.7		6.5		10.1
Dairy	1.5		0.1		1.6		1.1
Diesel fuel and other commodities	3.8		0.2		0.5		1.3

Additional disclosures related to cash flow hedge gains and losses included in AOCI, as well as subsequent reclassifications to earnings, are included in Note 11, Equity.