Derivative Instruments and Hedging Activities | 9 Months Ended |
Mar. 28, 2015 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | |
Derivative Instruments and Hedging Activities | Derivative Instruments and Hedging Activities |
Substantially all of the Company’s transactions involving international parties, excluding international consumer sales, are denominated in U.S. dollars, which limits the Company’s exposure to the transactional effects of foreign currency exchange rate fluctuations. However, the Company is exposed to foreign currency exchange risk related to its foreign operating subsidiaries’ U.S. dollar-denominated inventory purchases and various cross-currency intercompany and related party loans. 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. |
The Company records all derivative contracts at fair value on the condensed consolidated balance sheet. The fair values of foreign currency derivatives are based on the forward curves of the specific indices upon which settlement is based and include an adjustment for the Company’s credit risk. Judgment is required of management in developing estimates of fair value. The use of different market assumptions or methodologies could affect the estimated fair value. |
For derivative instruments that qualify for hedge accounting, the effective portion of changes in the fair value of these instruments is either (i) offset against the changes in fair value of the hedged assets or liabilities through earnings or (ii) recognized as a component of AOCI until the hedged item is recognized in earnings, depending on whether the derivative is being used to hedge changes in fair value or cash flows, respectively. |
Each derivative instrument entered into by the Company that qualifies for hedge accounting is expected to be highly effective at reducing the risk associated with the exposure being hedged. For each derivative that is designated as a hedge, the Company documents the related risk management objective and strategy, including identification of the hedging instrument, the hedged item and the risk exposure, as well as how hedge effectiveness will be assessed over the term of the instrument. The extent to which a hedging instrument has been and is expected to remain highly effective in achieving offsetting changes in fair value or cash flows is assessed and documented by the Company on at least a quarterly basis. |
To the extent that a derivative designated as a cash flow hedge is not considered to be effective, any change in its fair value related to such ineffectiveness is immediately recognized in earnings as a foreign currency gain (loss). If it is determined that a derivative instrument has not been highly effective, and will continue not to be highly effective in hedging the designated exposure, hedge accounting is discontinued and further gains (losses) are recognized in earnings as a foreign currency gain (loss). Upon discontinuance of hedge accounting, the cumulative change in fair value of the derivative previously recorded in AOCI is recognized in earnings when the related hedged item affects earnings, consistent with the original hedging strategy, unless the forecasted transaction is no longer probable of occurring, in which case the accumulated amount is immediately recognized in earnings as a foreign currency gain (loss). |
As a result of the use of derivative instruments, the Company may be exposed to the risk that the counterparties to such contacts will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected financial institutions based upon an evaluation of their credit ratings, among other factors. |
The fair values of the Company’s derivative instruments are recorded on its condensed consolidated balance sheets on a gross basis. For cash flow reporting purposes, the Company classifies proceeds received or amounts paid upon the settlement of a derivative instrument in the same manner as the related item being hedged, primarily within cash from operating activities. |
Hedging Portfolio |
The Company enters into derivative contracts primarily to reduce its risks related to exchange rate fluctuations on U.S. dollar-denominated inventory purchases and various cross-currency intercompany loans. To the extent its derivative contracts designated as cash flow hedges are highly effective in offsetting changes in the value of the hedged items, the related gains (losses) are initially deferred in AOCI and subsequently recognized in the condensed consolidated statements of income as follows: |
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• | Zero-cost collars - These derivatives are primarily executed by two of the Company’s businesses outside of the United States (Coach Japan and Coach Canada), and are recognized as part of the cost of the inventory purchases being hedged within cost of sales, when the related inventory is sold to a third party. Current maturity dates range from April 2015 to March 2016. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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• | Cross currency swaps - These derivatives relate to intercompany loans, and are recognized as a foreign currency gain (loss) generally in the period in which the related payments being hedged are revalued or settled. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Forward foreign currency exchange contracts, designated as fair value hedges and associated with intercompany and other contractual obligations, are recognized within foreign currency gains (losses) generally in the period in which the related payments being hedged are revalued. Current maturity dates are in April 2015. |
The following tables provide information related to the Company’s derivatives as of March 28, 2015 and June 28, 2014: |
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| | Notional Value | | Derivative Assets | | Derivative Liabilities |
| | | | | | | | Fair Value | | | | Fair Value |
Designated Derivative Hedging Instruments(1) | | March 28, | | June 28, | | Balance Sheet Classification | | March 28, | | June 28, | | Balance Sheet Classification | | March 28, | | June 28, |
2015 | 2014 | 2015 | 2014 | 2015 | 2014 |
| | (millions) |
C - Inventory purchases | | $ | 130.1 | | | $ | 90.2 | | | Other current assets | | $ | 5.4 | | | $ | 0.4 | | | Accrued liabilities | | $ | (0.4 | ) | | $ | (0.6 | ) |
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CCS - Intercompany loans | | — | | | 4.8 | | | Other current assets | | — | | | 0.1 | | | — | | — | | | — | |
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FC - Intercompany loans | | 21.1 | | | 8.4 | | | Other current assets | | 0.1 | | | — | | | — | | — | | | — | |
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FC - Contractual obligations(2) | | — | | | 4 | | | — | | — | | | — | | | Accrued liabilities | | — | | | (0.3 | ) |
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Total Hedges | | $ | 151.2 | | | $ | 107.4 | | | | | $ | 5.5 | | | $ | 0.5 | | | | | $ | (0.4 | ) | | $ | (0.9 | ) |
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(1) | C =ero-cost Collars; CCS =ross Currency Swaps; FC =orward foreign currency exchange contracts | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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(2) | Contractual obligations at the end of fiscal 2014 consisted of a $4.0 million payment due to Shinsegae International, related to the acquisition of the domestic retail business in South Korea. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | Amount of Gain (Loss) Recognized in OCI on Derivatives | | | | | | | | | | | | |
(Effective Portion) | | | | | | | | | | | | |
| | Three Months Ended(1) | | Nine Months Ended(2) | | | | | | | | | | | | |
| | (millions) | | | | | | | | | | | | |
| | March 28, | | March 29, | | March 28, | | March 29, | | | | | | | | | | | | |
Designated Cash Flow Hedges: | | 2015 | | 2014 | | 2015 | | 2014 | | | | | | | | | | | | |
C - Inventory purchases | | $ | 0.2 | | | $ | (1.3 | ) | | $ | 9.6 | | | $ | 4 | | | | | | | | | | | | | |
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CCS - Intercompany loans | | — | | | 1.9 | | | — | | | (0.1 | ) | | | | | | | | | | | | |
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Total | | $ | 0.2 | | | $ | 0.6 | | | $ | 9.6 | | | $ | 3.9 | | | | | | | | | | | | | |
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(1) | For the three months ended March 28, 2015 and March 29, 2014, the amounts above are net of tax of $0.1 million and $1.0 million, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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(2) | For the nine months ended March 28, 2015 and March 29, 2014, the amounts above are net of tax of ($5.1) million and ($2.2) million, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | Amount of Net Gain Reclassified from Accumulated OCI into Income | | | | | | | | | | |
(Effective Portion) | | | | | | | | | | |
| | Three Months Ended(1) | | Nine Months Ended(2) | | | | | | | | | | | | |
| | (millions) | | | | | | | | | | | | |
| | March 28, | | March 29, | | March 28, | | March 29, | | Income Statement | | | | | | | | | | |
Designated Cash Flow Hedges: | | 2015 | | 2014 | | 2015 | | 2014 | | Classification | | | | | | | | | | |
C - Inventory Purchases | | $ | 2.6 | | | $ | 0.8 | | | $ | 4.4 | | | $ | 4.7 | | | Cost of sales | | | | | | | | | | |
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(1) | For the three months ended March 28, 2015 and March 29, 2014, the amounts above are net of tax of ($1.3) million and $0.3 million, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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(2) | For the nine months ended March 28, 2015 and March 29, 2014, the amounts above are net of tax of ($2.3) million and ($2.8) million, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
During the three and nine months ended March 28, 2015 and March 29, 2014, there were no material gains or losses recognized in income due to hedge ineffectiveness. |
For forward foreign currency exchange contracts that are designated as fair value hedges, the gain (loss) on the derivative as well as the offsetting gain (loss) on the hedged item attributable to the hedged risk, both of which are recorded within SG&A expenses, resulted in an immaterial net impact to the Company's statement of operations. |
The Company expects $6.0 million of net derivative gains included in AOCI at March 28, 2015 will be reclassified into earnings within the next 12 months. This amount will vary due to fluctuations in foreign currency exchange rates. |