Estee Lauder 2011 Annual Report Download - page 141

THE EST{E LAUDER COMPANIES INC. 139
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 for-
eign currency option contracts to hedge anticipated trans-
actions where there is a high probability that anticipated
exposures will materialize. 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
March 2013. Hedge effectiveness of foreign currency
forward contracts is based on a hypothetical derivative
methodology and excludes the portion of fair value attrib-
utable to the spot-forward difference which is recorded in
current-period earnings.
The ineffective portion of foreign currency forward
contracts is recorded in current-period earnings. For
hedge contracts that are no longer deemed highly effec-
tive, hedge accounting is discontinued and gains and
losses accumulated in OCI are reclassified to earnings
when the underlying forecasted transaction occurs. If it is
probable that the forecasted transaction will no longer
occur, then any gains or losses in accumulated OCI are
reclassified to current-period earnings. As of June 30,
2011, the Company’s foreign currency cash-flow hedges
were highly effective in all material respects. The
estimated net loss as of June 30, 2011 that is expected to
be reclassified from accumulated OCI into earnings, net
of tax, within the next twelve months is $8.2 million. The
accumulated gain (loss) on derivative instruments in accu-
mulated OCI was $(13.2) million and $9.7 million as of
June 30, 2011 and June 30, 2010, respectively.
At June 30, 2011, the Company had foreign currency
forward contracts in the amount of $1,490.7 million. The
foreign currencies included in foreign currency forward
contracts (notional value stated in U.S. dollars) are princi-
pally the Swiss franc ($284.9 million), British pound
($273.5 million), Canadian dollar ($210.1 million), Euro
($164.6 million), Australian dollar ($110.7 million), Korean
won ($77.9 million) and Russian ruble ($45.2 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 princi-
pally 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).
Location of Gain or (Loss) Amount of Gain or (Loss)
Recognized in Earnings on Derivatives Recognized in Earnings on Derivatives(1
)
June 30
2011 2010
(In millions)
Derivatives in Fair Value Hedging
Relationships:
Interest rate swap contracts Interest expense, net $8.7 $14.2
(1) Changes in the fair values of the interest rate swap agreements are exactly offset by changes in the fair value of the underlying long-term debt.
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
2011 2010
(In millions)
Derivatives Not Designated as
Hedging Instruments:
Foreign currency forward contracts Selling, general and administrative $0.6 $(1.6)