Coach 2010 Annual Report Download - page 63

TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
7. COMMITMENTS AND CONTINGENCIES – (continued)
In addition to the employment agreements described above, other contractual cash obligations as of July 2, 2011 and July 3, 2010
included $195,382 and $166,596, respectively, related to inventory purchase obligations and $1,087 and $1,611, respectively, related
to capital expenditure purchase obligations.
In the ordinary course of business, Coach is a party to several pending legal proceedings and claims. Although the outcome of such
items cannot be determined with certainty, Coach’s general counsel and management are of the opinion that the final outcome will not have a
material effect on Coach’s cash flow, results of operations or financial position.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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
risk related to Coach Japan’s and Coach Canada’s U.S. dollar-denominated inventory purchases and Coach Japan’s $109,110 U.S. dollar-
denominated fixed rate intercompany loan. Coach uses derivative financial instruments to manage these risks. These derivative transactions
are in accordance with the Company’s risk management policies. Coach does not enter into derivative transactions for speculative or trading
purposes.
Coach Japan and Coach Canada enter into certain foreign currency derivative contracts, primarily zero-cost collar options, to manage
the exchange rate risk related to their inventory purchases. As of July 2, 2011 and July 3, 2010, $171,030 and $248,555 of foreign
currency forward contracts were outstanding, respectively.
On July 1, 2005, to manage the exchange rate risk related to a $231,000 intercompany loan, Coach Japan entered into a cross currency
swap transaction. The terms of the cross currency swap transaction included an exchange of a yen fixed interest rate for a U.S. dollar fixed
interest rate and an exchange of yen and U.S. dollar-based notional values at maturity on July 2, 2010.
On July 2, 2010, Coach Japan repaid the loan, settled the cross currency swap, and entered into a new $139,400 intercompany loan
agreement. Concurrently, Coach Japan entered into a cross currency swap transaction, the terms of which included an exchange of a yen
fixed interest rate for a U.S. dollar fixed interest rate, requiring an exchange of yen and U.S. dollar based notional values at maturity on June
30, 2011.
On June 30, 2011, Coach Japan repaid the loan, settled the cross currency swap, and entered into a new $109,110 intercompany loan
agreement with a maturity date of December 29, 2011. Similar to the previous loans, to manage the exchange rate risk, Coach Japan entered
into a new 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 and an exchange of yen and U.S. dollar based notional values at maturity on December 29, 2011.
The Company’s derivative instruments are designated as cash flow hedges. The effective portion of gains or losses on the derivative
instruments are reported as a component of other comprehensive income and reclassified into earnings in the same periods during which the
hedged transaction affects earnings. The ineffective portion of gains or losses on the derivative instruments are recognized in current
earnings and are included within net cash provided by operating activities.
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