Estee Lauder 2010 Annual Report Download - page 134

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THE EST{E LAUDER COMPANIES INC. 133
Foreign Currency Cash-Flow Hedges
The Company enters into foreign currency forward
contracts to hedge anticipated transactions, as well as
receivables and payables denominated in foreign curren-
cies, for periods consistent with the Company’s identified
exposures. The purpose of the hedging activities is to
minimize the effect of foreign exchange rate movements
on costs and on the cash flows that the Company receives
from foreign subsidiaries. The majority of foreign currency
forward contracts are denominated in currencies of major
industrial countries. The Company may also enter into
foreign currency option contracts to hedge anticipated
transactions. The foreign currency forward contracts
entered into to hedge anticipated transactions have been
designated as foreign currency cash-flow hedges and
have varying maturities through the end of June 2011.
Hedge effectiveness of foreign currency forward contracts
is based on a hypothetical derivative methodology and
excludes the portion of fair value attributable to the spot-
forward difference which is recorded in current-period
earnings. Hedge effectiveness of foreign currency option
contracts is based on a dollar offset methodology.
The ineffective portion of both foreign currency for-
ward and option contracts is recorded in current-period
earnings. For hedge contracts that are no longer deemed
highly effective, hedge accounting is discontinued and
gains and losses accumulated in other comprehensive
income (loss) are reclassified to earnings when the under-
lying forecasted transaction occurs. If it is probable that
the forecasted transaction will no longer occur, then any
gains or losses in accumulated other comprehensive
income (loss) are reclassified to current-period earnings.
As of June 30, 2010, the Company’s foreign currency
cash-flow hedges were highly effective in all material
respects. The estimated net gain (loss) as of June 30, 2010
that is expected to be reclassified from accumulated other
comprehensive income (loss) into earnings, net of tax,
within the next twelve months is $6.3 million.
At June 30, 2010, the Company had foreign currency
forward contracts in the amount of $1,348.8 million. The
foreign currencies included in foreign currency forward
contracts (notional value stated in U.S. dollars) are prin-
cipally the Swiss franc ($257.5 million), British pound
($241.9 million), Canadian dollar ($152.2 million), Euro
($148.0 million), Hong Kong dollar ($97.3 million),
Australian dollar ($88.3 million) and Japanese yen
($62.3 million).
At June 30, 2009, the Company had foreign currency
forward contracts in the amount of $1,260.8 million. The
foreign currencies included in foreign currency forward
contracts (notional value stated in U.S. dollars) are prin-
cipally the British pound ($239.1 million), Euro ($212.5
million), Swiss franc ($206.8 million), Canadian dollar
($168.0 million), Hong Kong dollar ($79.4 million),
Japanese yen ($76.0 million) and Australian dollar
($69.6 million).
The amounts of the gains and losses related to the Company’s derivative financial instruments not designated as hedging
instruments are presented as follows:
Location of Gain or (Loss) Amount of Gain or (Loss)
Recognized in Earnings on Derivatives Recognized in Earnings on Derivatives
June 30
2010 2009
(In millions)
Derivatives Not Designated as
Hedging Instruments:
Foreign currency forward contracts Selling, general and administrative $(1.6) $(0.7)
2010
$(1.6)