Coach 2011 Annual Report Download - page 45

TABLE OF CONTENTS
terms and maturities and theoretical pricing models. These quantitative disclosures do not represent the maximum possible loss or any
expected loss that may occur, since actual results may differ from those estimates.
Foreign Currency Exchange
Foreign currency exposures arise from transactions, including firm commitments and anticipated contracts, denominated in a currency
other than the entity’s functional currency, and from foreign-denominated revenues and expenses translated into U.S. dollars.
Substantially all of Coach’s fiscal 2012 non-licensed product needs are purchased from independent manufacturers in countries other
than the United States, including China, Vietnam, India, Philippines, Thailand, Italy, Taiwan, Peru, Malaysia, Columbia, Turkey and
Great Britain. Additionally, sales are made through international channels to third party distributors. Substantially all purchases and sales
involving international parties, excluding consumer sales at Coach Japan, Coach Canada, Coach China, Coach Singapore, and Coach
Taiwan are denominated in U.S. dollars and, therefore, are not subject to foreign currency exchange risk.
In Japan and Canada, Coach is exposed to market risk from foreign currency exchange rate fluctuations resulting from Coach Japan
and Coach Canada’s U.S. dollar denominated inventory purchases. Coach Japan and Coach Canada enter into certain foreign currency
derivative contracts, primarily zero-cost collar options, to manage these risks. As of June 30, 2012 and July 2, 2011, open foreign currency
forward contracts designated as hedges with a notional amount of $310.9 million and $171.0 million, respectively, were outstanding.
Coach had exposure to market risk from foreign currency exchange rate fluctuations with respect to Coach Japan as a result of its $65.0
million U.S. dollar-denominated fixed rate intercompany loan. To manage this risk, on December 29, 2011, Coach Japan entered into a
cross-currency swap transaction, the terms of which included an exchange of Japanese yen fixed interest for U.S. dollar fixed interest. The
loan and swap were settled at maturity in June 2012, at which point the swap required an exchange of Japanese yen and U.S. dollar based
notional values.
Coach is also exposed to market risk from foreign currency exchange rate fluctuations with respect to various cross-currency
intercompany and related party loans. These loans are denominated in various foreign currencies, with a total notional value of
approximately $207 million as of June 30, 2012. To manage the exchange rate risk related to these loans, the Company entered into forward
exchange and cross-currency swap contracts, the terms of which include the exchange of foreign currency fixed interest for U.S. dollar fixed
interest and an exchange of the foreign currency and U.S. dollar based notional values at the maturity dates of the contracts, the latest of
which is June 2013.
The fair value of open foreign currency derivatives included in current assets at June 30, 2012 and July 2, 2011 was $1.5 million and
$2.0 million, respectively. The fair value of open foreign currency derivatives included in current liabilities at June 30, 2012 and July 2,
2011 was $4.1 million and $1.7 million, respectively. The fair value of these contracts is sensitive to changes in foreign currency exchange
rates.
Coach believes that exposure to adverse changes in exchange rates associated with revenues and expenses of foreign operations, which
are denominated in Japanese yen, Chinese renminbi, Hong Kong dollar, Macanese pataca, Canadian dollar, Singapore dollar, Taiwan
dollar, Malaysian ringgit, Korean won and the euro, are not material to the Company’s consolidated financial statements.
Interest Rate
Coach is exposed to interest rate risk in relation to its investments, revolving credit facilities and long-term debt.
The Company’s investment portfolio is maintained in accordance with the Company’s investment policy, which identifies allowable
investments, specifies credit quality standards and limits the credit exposure of any single issuer. The primary objective of our investment
activities is the preservation of principal while maximizing interest income and minimizing risk. We do not hold any investments for trading
purposes. The Company’s investment portfolio primarily consists of U.S. government and agency securities as well as
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