Lexmark 2010 Annual Report Download - page 123

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Lexmark uses fair value hedges to reduce the potentially adverse effects that market volatility may have on
its operating results. Fair value hedges are hedges of recognized assets or liabilities. Lexmark enters into
forward exchange contracts to hedge accounts receivable, accounts payable and other monetary assets
and liabilities. The forward contracts used in this program generally mature in three months or less,
consistent with the underlying asset and liability. Foreign exchange forward contracts may be used as fair
value hedges in situations where derivative instruments expose earnings to further changes in exchange
rates. Although the Company has historically used interest rate swaps to convert fixed rate financing
activities to variable rates, there were no interest rate swaps outstanding as of December 31, 2010.
Net outstanding notional amount of derivative activity as of December 31, 2010 and 2009 is as follows. This
activity was driven by fair value hedges of recognized assets and liabilities primarily denominated in the
currencies below.
Long (Short) Positions by Currency (in USD) December 31, 2010
EUR........................................................... $ (82.7)
CHF........................................................... (31.8)
JPY ........................................................... (19.5)
OtherNet....................................................... (14.5)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(148.5)
Long (Short) Positions by Currency (in USD) December 31, 2009
EUR........................................................... $(62.7)
AUD........................................................... 25.4
ZAR........................................................... 11.7
OtherNet....................................................... 9.8
Total........................................................... $(15.8)
Accounting for Derivatives and Hedging Activities
All derivatives are recognized in the Consolidated Statements of Financial Position at their fair value. Fair
values for Lexmark’s derivative financial instruments are based on pricing models or formulas using
current market data, or where applicable, quoted market prices. On the date the derivative contract is
entered into, the Company designates the derivative as a fair value hedge. Changes in the fair value of a
derivative that is highly effective as — and that is designated and qualifies as — a fair value hedge, along
with the loss or gain on the hedged asset or liability are recorded in current period earnings in Cost of
revenue on the Consolidated Statements of Earnings. Derivatives qualifying as hedges are included in the
same section of the Consolidated Statements of Cash Flows as the underlying assets and liabilities being
hedged.
As of December 31, 2010 and 2009, the Company had the following net derivative assets (liabilities)
recorded at fair value in Prepaid expenses and other current assets (Accrued liabilities) on the
Consolidated Statements of Financial Position:
Foreign Exchange Contracts 2010 2009 2010 2009
Net Asset
Position
Net (Liability)
Position
Gross liability position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(0.8) $(0.4) $— $(0.7)
Gross asset position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0 0.6 — 0.4
Net asset (liability) position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.2 $ 0.2 $— $(0.3)
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