Coach 2014 Annual Report Download - page 49

TABLE OF CONTENTS
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The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows, arising from adverse changes in
foreign currency exchange rates or interest rates. Coach manages these exposures through operating and financing activities and, when appropriate, through
the use of derivative financial instruments. The use of derivative financial instruments is in accordance with Coach’s risk management policies, and we do
not enter into derivative transactions for speculative or trading purposes.
The quantitative disclosures in the following discussion are based on quoted market prices obtained through independent pricing sources for the same or
similar types of financial instruments, taking into consideration the underlying terms and maturities and theoretical pricing models.
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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 purchases and
sales involving international parties, excluding international consumer sales, are denominated in U.S. dollars and, therefore, are not subject to foreign
currency exchange risk. The Company is exposed to risk from foreign currency exchange rate fluctuations resulting from its foreign operating subsidiaries’
U.S. dollar denominated inventory purchases. To mitigate such risk, Coach Japan and Coach Canada enter into foreign currency derivative contracts,
primarily zero-cost collar options. As of June 28, 2014 and June 29, 2013, zero-cost collar options designated as cash flow hedges with a notional amount of
$90.3 million and $193.4 million, respectively, were outstanding. As a result of the use of derivative instruments, we are exposed to the risk that
counterparties to the derivative instruments will fail to meet their contractual obligations. To mitigate the counterparty credit risk, we only enter into
derivative contracts with carefully selected financial institutions. The Company also reviews the creditworthiness of our counterparties on a regular basis. As
a result of the above considerations, we do not believe that we are exposed to any undue concentration of counterparty credit risk associated with our
derivative contracts as of June 28, 2014.
Coach is also exposed to market risk from foreign currency exchange rate fluctuations with respect to various cross-currency intercompany and related
party loans which are not long term in investment nature. This primarily includes exposure to exchange rate fluctuations in the Hong Kong Dollar, the South
Korean Won, the New Taiwan Dollar, and the British Pound Sterling. 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 November 2014. As
of June 28, 2014 and June 29, 2013, the total notional values of outstanding forward exchange and cross-currency swap contracts related to these loans were
$13.2 million and $147.6 million, respectively.
The fair value of outstanding foreign currency derivatives included in current assets at June 28, 2014 and June 29, 2013 was $0.5 million and $4.5
million, respectively. The fair value of outstanding foreign currency derivatives included in current liabilities at June 28, 2014 and June 29, 2013 was $0.9
million and $2.9 million, respectively. The fair value of these contracts is sensitive to changes in foreign currency exchange rates. A sensitivity analysis of
the effects of foreign exchange rate fluctuations on the fair values of our derivative contracts was performed to assess the risk of loss. As of June 28, 2014, a
10% devaluation of the U.S. Dollar against the exchange rates for foreign currencies under contract would result in an immaterial impact on derivative
contract fair values.
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Coach is exposed to interest rate risk in relation to its investments and revolving credit facilities.
The Company’s investment portfolio is maintained in accordance with the Company’s investment policy, which defines our investment principles
including 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.
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See “Index to Financial Statements,” appearing at the end of this Annual Report on Form 10-K.
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None.
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