Coach 2006 Annual Report Download - page 42

material effect on Coach’s cash flow, results of operations or financial position.

In the ordinary course of business, Coach uses derivative financial instruments to hedge foreign currency exchange risk. Coach does not
enter into derivative transactions for speculative or trading purposes.
Substantially all purchases and sales involving international parties are denominated in U.S. dollars, which limits the Company’s
exposure to foreign currency exchange rate fluctuations. However, the Company is exposed to market risk from foreign currency exchange
rate fluctuations with respect to Coach Japan as a result of Coach Japan’s U.S. dollar-denominated inventory purchases. Coach Japan enters
into certain foreign currency derivative contracts, primarily zero-cost collar options, to manage these risks. These transactions are in
accordance with the Company’s risk management policies. As of June 30, 2007 and July 1, 2006, $111,057 and $114,825 of foreign
currency forward contracts were outstanding. These foreign currency contracts entered into by the Company have durations no greater than
12 months. The effective portion of unrealized gains and losses on cash flow hedges are deferred as a component of accumulated other
comprehensive income (loss) and recognized as a component of cost of sales when the related inventory is sold.
Coach is also exposed to market risk from foreign currency exchange rate fluctuations with respect to Coach Japan as a result of its
$231,000 U.S. dollar denominated fixed rate intercompany loan from Coach. To manage this risk, on July 1, 2005, Coach Japan entered
into a cross currency swap transaction, the terms of which include an exchange of a U.S. dollar fixed interest rate for a yen fixed interest
rate. The loan matures in 2010, at which point the swap requires an exchange of yen and U.S. dollar based principals.
The fair values of open foreign currency derivatives included in current assets at June 30, 2007 and July 1, 2006 were $23,329 and
$2,578, respectively. Hedging activity affected accumulated other comprehensive income (loss), net of tax, as follows:

 



Balance at beginning of period $ (3,547) $ 941
Gains, net transferred to earnings (2,724) (3,543)
Change in fair value, net of tax expense 7,432 (945)
Balance at end of period $ 1,161 $ (3,547)
The Company expects that $4,637 of net derivative gains included in accumulated other comprehensive income (loss) at June 30, 2007
will be reclassified into earnings within the next 12 months. This amount will vary due to fluctuations in the yen exchange rate.
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




The changes in the carrying amount of goodwill for the years ended June 30, 2007 and July 1, 2006 are as follows:


 
Balance at July 2, 2005 $ 237,195 $ 1,516 $ 238,711
Coach Japan acquisition adjustment (2,666) — (2,666)
Foreign exchange impact (8,234) — (8,234)
Balance at July 1, 2006 226,295 1,516 227,811
Foreign exchange impact (14,017) — (14,017)
Balance at June 30, 2007 $ 212,278 $ 1,516 $ 213,794
The total carrying amount of intangible assets not subject to amortization is as follows:
 
Trademarks $ 9,788 $ 9,788
Workforce 2,077 2,219
Total Indefinite Life Intangible Assets $ 11,865 $ 12,007
The $142 decrease in the carrying amount of these intangible assets is due to currency translation.

The provisions for income taxes computed by applying the U.S. statutory rate to income before taxes as reconciled to the actual
provisions were:

   
      
Income before provision for income