Coach 2010 Annual Report Download - page 41

TABLE OF CONTENTS
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 2011 non-licensed product needs were purchased from independent manufacturers in countries other
than the United States. These countries include China, United States, Italy, Hong Kong, India, Thailand, Vietnam, Macau, Philippines,
Turkey, Colombia, Malaysia, Mexico, Peru, South Africa and Taiwan. 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 and Coach China, 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 July 2, 2011 and July 3, 2010, open foreign currency
forward contracts designated as hedges with a notional amount of $171.0 million and $248.6 million, respectively, were outstanding.
Coach is also exposed to market risk from foreign currency exchange rate fluctuations with respect to Coach Japan as a result of its
$109.1 million U.S. dollar-denominated fixed rate intercompany loan from Coach. To manage this risk, on June 30, 2011, Coach Japan
entered into a cross currency swap transaction, the terms of which include an exchange of a yen fixed interest rate for a U.S. dollar fixed
interest rate. The loan matures on December 29, 2011, at which point the swap requires an exchange of Japanese yen and U.S. dollar based
notional values.
The fair value of open foreign currency derivatives included in current assets at July 2, 2011 and July 3, 2010 was $2.0 million and
$2.1 million, respectively. The fair value of open foreign currency derivatives included in current liabilities at July 2, 2011 and July 3,
2010 was $1.7 million and $7.5 million, respectively. The fair value of these contracts is sensitive to changes in Japanese yen and
Canadian dollar 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, Macau pataca and Canadian dollars, 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 consists of U.S. government and agency securities as well as corporate debt securities. As
the Company does not have the intent to sell and will not be required to sell these securities until maturity, investments are classified as held-
to-maturity and stated at amortized cost, except for auction rate securities, which are classified as available-for-sale. At July 2, 2011 and
July 3, 2010, the Company’s investments, classified as held-to-maturity, consisted of commercial paper and treasury bills valued at $2.3
million and $99.9 million, on those dates respectively. As the adjusted book value of the commercial paper and treasury bills equals its fair
value, there were no unrealized gains or losses associated with these investments. At July 2, 2011, the Company’s investments, classified as
available-for-sale, consisted of a $6.0 million auction rate security. At July 2, 2011, as the auction rate securities’ adjusted book value
equaled its fair value, there were no unrealized gains or losses associated with this investment.
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