Estee Lauder 2007 Annual Report Download - page 51

50 THE EST{E LAUDER COMPANIES INC.
Commitments and Contingencies
Certain of our business acquisition agreements include
“earn-out” provisions. These provisions generally require
that we pay to the seller or sellers of the business addi-
tional amounts based on the performance of the acquired
business. Since the size of each payment depends upon
performance of the acquired business, we do not expect
that such payments will have a material adverse impact on
our future results of operations or fi nancial condition.
For additional contingencies, refer to “Legal Proceedings”
in Note 14 of Notes to Consolidated Financial Statements.
million, other accrued liabilities of $19.0 million and other
noncurrent liabilities of $237.3 million on our consolidated
balance sheet representing the funded status of our pen-
sion and post-retirement plans.
Prior to the adoption of SFAS No. 158, we recognized
a liability on our balance sheet for each pension plan if the
fair market value of the assets of that plan was less than
the accumulated benefi t obligation and, accordingly, a
benefi t or a charge was recorded in accumulated other
comprehensive income in shareholders’ equity for the
change in such liability. During fi scal 2006, we recorded a
benefi t, net of deferred tax, of $29.9 million.
Contractual Obligations
The following table summarizes scheduled maturities of our contractual obligations for which cash fl ows are fi xed and
determinable as of June 30, 2007:
Payments Due in Fiscal
Total 2008 2009 2010 2011 2012 Thereafter
(In millions)
Debt service(1) $2,198.7 $ 122.4 $ 63.6 $ 62.6 $ 61.9 $304.4 $1,583.8
Operating lease commitments(2) 1,240.6 166.3 156.6 139.8 118.9 103.3 555.7
Unconditional purchase obligations(3) 1,553.0 1,046.1 132.5 99.9 63.9 36.9 173.7
Total contractual obligations $4,992.3 $1,334.8 $352.7 $302.3 $244.7 $444.6 $2,313.2
(1)
Includes long-term and short-term debt and the related projected interest costs, and to a lesser extent, capital lease commitments. Refer to Note 8
of Notes to Consolidated Financial Statements.
(2) Refer to Note 14 of Notes to Consolidated Financial Statements.
(3) Unconditional purchase obligations primarily include inventory commitments, estimated future earn-out payments, estimated royalty payments
pursuant to license agreements, advertising commitments, capital improvement commitments, planned funding of pension and other
post- retirement benefi t obligations, commitments pursuant to executive compensation arrangements and obligations related to our cost savings
initiative. Future earn-out payments and future royalty and advertising commitments were estimated based on planned future sales for the term
that was in effect at June 30, 2007, without consideration for potential renewal periods.
Derivative Financial Instruments and
Hedging Activities
We address certain fi nancial exposures through a con-
trolled program of risk management that includes the use
of derivative fi nancial instruments. We primarily enter into
foreign currency forward exchange contracts and foreign
currency options to reduce the effects of fl uctuating for-
eign currency exchange rates. We also enter into interest
rate derivative contracts to manage the effects of fl uctu-
ating interest rates. We categorize these instruments as
entered into for purposes other than trading.
For each derivative contract entered into where we
look to obtain special hedge accounting treatment,
we formally document the relationship between the
hedging instrument and hedged item, as well as its risk-
management objective and strategy for undertaking the
hedge, the nature of the risk being hedged, how
the hedging instruments’ effectiveness in offsetting the
hedged risk will be assessed prospectively and retro-
spectively, and a description of the method of measuring
ineffectiveness. This process includes linking all derivatives
that are designated as fair-value, cash-fl ow, or foreign-
currency hedges to specifi c assets and liabilities on the
balance sheet or to specifi c fi rm commitments or fore-
casted transactions. We also formally assess, both at the
hedge’s inception and on an ongoing basis, whether
the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash
fl ows of hedged items. If it is determined that a derivative
is not highly effective, then we will be required to
discontinue hedge accounting with respect to that
derivative prospectively.
Foreign Exchange Risk Management
We enter into forward exchange contracts to hedge antic-
ipated transactions, as well as receivables and payables
denominated in foreign currencies, for periods consistent
with our identifi ed exposures. The purpose of the hedging
activities is to minimize the effect of foreign exchange rate
movements on our costs and on the cash fl ows that we
receive from foreign subsidiaries. Almost all foreign cur-
rency contracts are denominated in currencies of major