Coach 2006 Annual Report Download - page 23

remove Sara Lee from all of its existing leases, and Sara Lee is not a guarantor or a party to any new or renewed leases. Coach has obtained
a letter of credit for the benefit of Sara Lee in an amount approximately equal to the annual minimum rental payments under leases
transferred to Coach by Sara Lee, but for which Sara Lee retains contingent liability. Coach is required to maintain this letter of credit until
the annual minimum rental payments under the relevant leases are less than $2.0 million. The initial letter of credit had a face amount of
$20.6 million, and we expect this amount to decrease annually as Coach’s guaranteed obligations are reduced. Coach expects that it will be
required to maintain the letter of credit for approximately 10 years.
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As of June 30, 2007, Coach’s long-term contractual obligations are as follows:
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  


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
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 (amounts in millions)
Capital expenditure
commitments(1)
$ 2.5 $ 2.5 $ — $ — $ —
Inventory purchase obligations(2) 134.7 134.7 — — —
Long-term debt, including the current portion 3.1 0.2 0.6 0.8 1.5
Operating leases 683.8 89.0 175.8 162.5 256.5
Total $ 824.1 $ 226.4 $ 176.4 $ 163.3 $ 258.0
(1) Represents the Company’s legally binding agreements related to capital expenditures.
(2) Represents the Company’s legally binding agreements to purchase finished goods.
The table above excludes the following: amounts included in current liabilities, other than the current portion of long-term debt, in the
Consolidated Balance Sheet at June 30, 2007 as these items will be paid within one year; long-term liabilities not requiring cash payments,
such as deferred lease incentives; and cash contributions for the Company’s pension plans. The Company intends to contribute
approximately $0.6 million to its pension plans during the next year.
Coach does not have any off-balance-sheet financing or unconsolidated special purpose entities. Coach’s risk management policies
prohibit the use of derivatives for trading purposes. The valuation of financial instruments that are marked-to-market are based upon
independent third-party sources.
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Coach is party to an Industrial Revenue Bond related to its Jacksonville, Florida distribution and consumer service facility. This loan
has a remaining balance of $3.1 million and bears interest at 4.5%. Principal and interest payments are made semiannually, with the final
payment due in 2014.
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Because its products are frequently given as gifts, Coach has historically realized, and expects to continue to realize, higher sales and
operating income in the second quarter of its fiscal year, which includes the holiday months of November and December. In addition,
fluctuations in sales and operating income in any fiscal quarter are affected by the timing of seasonal wholesale shipments and other events
affecting retail sales. However, over the past several years, we have achieved higher levels of growth in the non-holiday quarters, which has
reduced these seasonal fluctuations. We expect these trends to continue.
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The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires
the use of judgment. Actual results may vary from estimates in amounts that may be material to the financial statements. The development
and selection of the Company’s critical accounting policies and estimates are periodically reviewed with the Audit Committee of the Board of
Directors.
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The accounting policies discussed below are considered critical because changes to certain judgments and assumptions inherent in these
policies could affect the financial statements. For more information on Coach’s accounting policies, please refer to the Notes to Consolidated
Financial Statements.
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The Company’s inventories are reported at the lower of cost or market. Inventory costs include material, conversion costs, freight and
duties and are determined by the first-in, first-out method, except for inventories of Coach Japan, for which cost is determined by the last-
in, first-out method. The Company reserves for slow-moving and aged inventory based on historical experience, current product demand
and expected future demand. A decrease in product demand due to changing customer tastes, buying patterns or increased competition could
impact Coach’s evaluation of its slow-moving and aged inventory and additional reserves might be required. At June 30, 2007, a 10%