Coach 2012 Annual Report Download - page 45

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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