Estee Lauder 2012 Annual Report Download - page 106

104 THE EST{E LAUDER COMPANIES INC.
Our derivative financial instruments are recorded as
either assets or liabilities on the balance sheet and mea-
sured at fair value. All derivatives outstanding as of June
30, 2012 are (i) designated as a hedge of the fair value of
a recognized asset or liability or of an unrecognized firm
commitment (“fair-value” hedge), (ii) designated as a
hedge of a forecasted transaction or of the variability of
cash flows to be received or paid related to a recognized
asset or liability (“foreign currency cash-flow” hedge), or
(iii) not designated as a hedging instrument. Changes in
the fair value of a derivative that is designated and quali-
fies as a fair-value hedge that is highly effective are
recorded in current-period earnings, along with the loss
or gain on the hedged asset or liability that is attributable
to the hedged risk (including losses or gains on unrecog-
nized firm commitments). Changes in the fair value of a
derivative that is designated and qualifies as a foreign cur-
rency cash-flow hedge of a foreign-currency-denominated
forecasted transaction that is highly effective are recorded
in other comprehensive income (loss) (“OCI”). Gains and
losses deferred in OCI are then recognized in current-
period earnings when earnings are affected by the
variability of cash flows of the hedged foreign-currency-
denominated forecasted transaction (e.g., when periodic
settlements on a variable-rate asset or liability are
recorded in earnings). Changes in the fair value of deriva-
tive instruments not designated as hedging instruments
are reported in current-period earnings.
For a discussion on the quantitative impact of market
risks related to our derivative financial instruments, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources — Market Risk.”
QUANTITATIVE ANALYSIS
During the three-year period ended June 30, 2012 there
have not been material changes in the assumptions under-
lying these critical accounting policies, nor to the related
significant estimates. The results of our business underly-
ing these assumptions have not differed significantly from
our expectations.
While we believe that the estimates that we have
made are proper and the related results of operations for
the period are presented fairly in all material respects,
other assumptions could reasonably be justified that
would change the amount of reported net sales, cost of
sales, operating expenses or our provision for income
taxes as they relate to the provisions for anticipated sales
returns, allowance for doubtful accounts, inventory obso-
lescence reserve and income taxes. For fiscal 2012, had
these estimates been changed simultaneously by 2.5% in
either direction, our reported gross profit would have
increased or decreased by approximately $4.8 million,
operating expenses would have changed by approxi-
mately $0.8 million and the provision for income taxes
would have remained unchanged. The collective impact
of these changes on operating income, net earnings
attributable to The Estée Lauder Companies Inc., and net
earnings attributable to The Estée Lauder Companies Inc.
per diluted common share would be an increase or
decrease of approximately $5.6 million, $5.6 million and
$.01, respectively.
RESULTS OF OPERATIONS
We manufacture, market and sell beauty products
including those in the skin care, makeup, fragrance and
hair care categories which are distributed in over 150
countries and territories. The following table is a com-
parative summary of operating results from continuing
operations for fiscal 2012, 2011 and 2010 and reflects the
basis of presentation described in “Note 2 — Summary of
Significant Accounting Policies and Note 20 — Segment
Data and Related Information” of Notes to Consolidated
Financial Statements for all periods presented. Products
and services that do not meet our definition of skin care,
makeup, fragrance and hair care have been included in
the “other” category.