Estee Lauder 2012 Annual Report Download - page 147

THE EST{E LAUDER COMPANIES INC. 145
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
2012 2011
(In millions)
Derivatives Not Designated as
Hedging Instruments:
Foreign currency forward contracts Selling, general and administrative $(0.3) $0.6
Foreign Currency 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 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 2014. Hedge effectiveness of foreign currency for-
ward contracts is based on a hypothetical derivative meth-
odology and excludes the portion of fair value attributable
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,
2012, the Company’s foreign currency cash-flow hedges
were highly effective in all material respects. The esti-
mated net gain as of June 30, 2012 that is expected to be
reclassified from accumulated OCI into earnings, net of
tax, within the next twelve months is $8.6 million. The
accumulated gain (loss) on derivative instruments in accu-
mulated OCI was $15.3 million and $(13.2) million as of
June 30, 2012 and June 30, 2011, respectively.
At June 30, 2012, the Company had foreign currency
forward contracts in the amount of $1,476.0 million. The
foreign currencies included in foreign currency forward
contracts (notional value stated in U.S. dollars) are princi-
pally the British pound ($376.7 million), Euro ($223.4 mil-
lion), Canadian dollar ($184.0 million), Swiss franc
($129.9 million), Australian dollar ($106.5 million), Korean
won ($75.1 million) and Thailand baht ($51.3 million).
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).
Fair-Value Hedges
The Company may enter into interest rate derivative con-
tracts to manage the exposure to interest rate fluctuations
on its funded indebtedness and anticipated issuance of
debt for periods consistent with the identified exposures.
During fiscal 2011, the Company terminated its interest
rate swap agreements which had effectively converted
the fixed rate interest on its outstanding 2017 Senior
Notes to variable interest rates. Additionally, the instru-
ment, which was classified as an asset, had a fair value of
$47.4 million at the date of cash settlement. This net
settlement is classified as a financing activity on the con-
solidated statements of cash flows. Hedge accounting
treatment was discontinued prospectively and the fair
value adjustment to the carrying amount of the related
debt is being amortized against interest expense over the
remaining life of the debt.
Credit Risk
As a matter of policy, the Company only enters into deriv-
ative contracts with counterparties that have a long-term
credit rating of at least A- or higher by at least two nation-
ally recognized rating agencies. The counterparties to
these contracts are major financial institutions. Exposure