Estee Lauder 2015 Annual Report Download - page 102

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THE EST{E LAUDER COMPANIES INC. 99
Location of Gain or (Loss) Amount of Gain or (Loss)
Recognized in Earnings on Derivatives Recognized in Earnings on Derivatives
(1)
June 30
2015 2014
(In millions)
Derivatives in Fair Value Hedging
Relationships:
Interest rate swap contracts Interest expense $(0.2) $—
(1) Changes in the fair value of the interest rate swap agreements are exactly offset by the change 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
2015 2014
(In millions)
Derivatives Not Designated as
Hedging Instruments:
Foreign currency forward contracts Selling, general and administrative $(2.0) $1.9
Cash-Flow Hedges
The Company enters into foreign currency forward con-
tracts to hedge anticipated transactions, as well as receiv-
ables and payables denominated in foreign currencies, for
periods consistent with the Company’s identified expo-
sures. 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 where there is a high probability that antici-
pated exposures will materialize. The foreign currency
forward contracts entered into to hedge anticipated trans-
actions have been designated as cash-flow hedges and
have varying maturities through the end of June 2017.
Hedge effectiveness of foreign currency forward con-
tracts 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 in AOCI are reclassified to earnings when
the underlying forecasted transaction occurs. If it is prob-
able that the forecasted transaction will no longer occur,
then any gains or losses in AOCI are reclassified to cur-
rent-period earnings. As of June 30, 2015, the Company’s
foreign currency cash-flow hedges were highly effective.
At June 30, 2015, the Company had foreign currency
forward contracts in the amount of $2,193.2 million. The
foreign currencies included in foreign currency forward
contracts (notional value stated in U.S. dollars) are prin ci-
pally the Euro ($418.2 million), British pound ($409.3
mil-
lion), Chinese yuan ($168.2 million), Swiss franc ($168.1
million), Canadian dollar ($158.4 million), Hong Kong dol-
lar ($137.7 million) and Australian dollar ($123.0 million).
At June 30, 2014, the Company had foreign currency
forward contracts in the amount of $1,597.3 million. The
foreign currencies included in foreign currency forward
contracts (notional value stated in U.S. dollars) are princi-
pally the British pound ($267.2 million), Euro ($239.8 mil-
lion), Swiss franc ($170.4 million), Canadian dollar ($138.6
million), Australian dollar ($111.3 million), Japanese yen
($108.0 million) and Hong Kong dollar ($103.0 million).
In April and May 2015, in anticipation of the issuance
of the 2045 Senior Notes, the Company entered into
a series of forward-starting interest rate swap agree-
ments,
which were designated as cash-flow hedges.
See Note 10 — Debt for further discussion.