Estee Lauder 2011 Annual Report Download - page 115

THE EST{E LAUDER COMPANIES INC. 113
Derivative Financial Instruments and
Hedging Activities
We address certain financial exposures through a con-
trolled program of risk management that includes the use
of derivative financial instruments. We enter into foreign
currency forward and may enter into option contracts
to reduce the effects of fluctuating foreign currency
exchange rates and interest rate derivatives to manage the
effects of interest rate movements on our aggregate liabil-
ity portfolio. We also enter into foreign currency forward
and option contracts, not designated as hedging instru-
ments, to mitigate the change in fair value of specific
assets and liabilities on the balance sheet. We do not
utilize derivative financial instruments for trading or spec-
ulative purposes. Costs associated with entering into
these derivative financial instruments have not been
material to our consolidated financial results.
For each derivative contract entered into where we
look to obtain special hedge accounting treatment, we for-
mally document all relationships between hedging instru-
ments and hedged items, as well as our risk-management
objective and strategy for undertaking the hedge transac-
tion, the nature of the risk being hedged, how the hedging
instruments’ effectiveness in offsetting the hedged risk
will be assessed prospectively and retrospectively, and
a description of the method of measuring ineffective-
ness. This process includes linking all derivatives to
specific assets and liabilities on the balance sheet or
to specific firm commitments or forecasted 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 offset-
ting changes in fair values or cash flows of hedged items.
If it is determined that a derivative is not highly effective,
or that it has ceased to be a highly effective hedge, we
will be required to discontinue hedge accounting with
respect to that derivative prospectively.
Foreign Exchange Risk Management
We enter into foreign currency forward contracts to
hedge anticipated transactions, as well as receivables and
payables denominated in foreign currencies, for periods
consistent with our 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 we receive from foreign subsidiaries. The majority of
foreign currency forward contracts are denominated in
currencies of major industrial countries. We may also
enter into foreign currency option contracts to hedge
Contractual Obligations
The following table summarizes scheduled maturities of our contractual obligations for which cash flows are fixed and
determinable as of June 30, 2011:
Payments Due in Fiscal
Total 2012 2013 2014 2015 2016 Thereafter
(In millions)
Debt service(1) $2,043.3 $ 202.1 $ 67.7 $285.2 $ 46.2 $ 46.2 $1,395.9
Operating lease commitments(2) 1,364.4 247.7 218.7 182.6 153.1 129.3 433.0
Unconditional purchase obligations(3) 1,881.5 810.8 275.1 169.5 165.1 105.3 355.7
Gross unrecognized tax benefits and
interest — current(4) 13.0 13.0 — — — — —
Total contractual obligations $5,302.2 $1,273.6 $561.5 $637.3 $364.4 $280.8 $2,184.6
(1) Includes long-term and short-term debt and the related projected interest costs, and to a lesser extent, capital lease commitments. Interest costs
on long-term and short-term debt are projected to be $71.5 million in fiscal 2012, $64.3 million in fiscal 2013, $55.1 million in fiscal 2014, $46.2
million in fiscal 2015, $46.2 million in fiscal 2016 and $595.9 million thereafter. Projected interest costs on variable rate instruments were calculated
using market rates at June 30, 2011. Refer to “Note 10 — Debt” of Notes to Consolidated Financial Statements.
(2) Minimum operating lease commitments only include base rent. Certain leases provide for contingent rents that are not measurable at inception
and primarily include rents based on a percentage of sales in excess of stipulated levels, as well as common area maintenance. These amounts are
excluded from minimum operating lease commitments and are included in the determination of total rent expense when it is probable that the
expense has been incurred and the amount is reasonably measurable.
(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 benefit obligations, commitments pursuant to executive compensation arrangements, obligations related to our cost savings initiatives
and acquisitions. 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, 2011, without consideration for potential renewal periods.
(4) Refer to “Note 8 — Income Taxes” of Notes to Consolidated Financial Statements for information regarding unrecognized tax benefits. As of
June 30, 2011, the noncurrent portion of our unrecognized tax benefits, including related accrued interest and penalties was $129.5 million. At this
time, the settlement period for the noncurrent portion of the unrecognized tax benefits, including related accrued interest and penalties, cannot
be determined and therefore was not included.