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This excerpt taken from the FL 10-K filed Mar 29, 2005. Foreign Exchange Risk Management The Company operates internationally and utilizes
certain derivative financial instruments to mitigate its foreign currency exposures, primarily related to third party and intercompany forecasted
transactions. Also, the Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign currency denominated earnings.
Such strategies may at times include holding a variety of derivative instruments, which includes entering into forwards and option contracts, whereby
the changes in the fair value of these financial instruments are charged to the statements of operations immediately. For a derivative to qualify as a
hedge at inception and throughout the hedged period, the Company formally documents the nature and relationships between the hedging instruments and
hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and the methods of assessing hedge
effectiveness and hedge ineffectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a
forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed
probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings immediately. No such gains or losses were
recognized in earnings during 2004 or 2003.
Derivative financial instruments qualifying for
hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and
throughout the hedged period, which management evaluates periodically.
The primary currencies to which the Company is
exposed are the euro, the British Pound and the Canadian Dollar. When using a forward contract as a hedging instrument, the Company excludes the time
value from the assessment of effectiveness. The change in a forward contract’s time value is reported in earnings. For forward foreign exchange
contracts designated as cash flow hedges of inventory, the effective portion of gains and losses is deferred as a component of accumulated other
comprehensive loss and is recognized as a component of cost of sales when the related inventory is sold. Amounts classified to cost of sales related to
such contracts were a loss of approximately $1 million in 2004 and a gain of $2 million in 2003. The ineffective portion of gains and losses related to
cash flow hedges recorded to earnings in 2004 was approximately $1 million and was not significant in 2003. The Company also enters into other forward
contracts to hedge intercompany royalty cash flows that are denominated in foreign currencies. The effective portion of gains and losses associated
with these forward contracts is reclassified from accumulated other comprehensive loss to selling, general and administrative expenses in the same
quarter as the underlying intercompany royalty transaction occurs and were not significant for any of the periods presented.
At each year-end, the Company had not hedged
forecasted transactions for more than the next twelve months, and the Company expects all derivative-related amounts reported in accumulated other
comprehensive loss to be reclassified to earnings within twelve months.
The changes in fair value of forward contracts and
option contracts that do not qualify as hedges are recorded in earnings. In 2004, the Company entered into certain forward foreign exchange contracts
to hedge intercompany foreign-currency denominated firm commitments and recorded losses of approximately $2 million in selling, general and
administrative expenses to reflect their fair value. These losses were offset by the foreign exchange gains on the revaluation of the underlying
commitments, which were expected to be settled in 2004 and 2005.
In 2003, the Company recorded a gain of
approximately $7 million for the change in fair value of derivative instruments not designated as hedges, which was offset by a foreign exchange loss
related to the underlying transactions. These amounts were primarily related to the intercompany foreign-currency denominated firm commitments, as the
gains on the other forward contracts were not significant.
The fair value of derivative contracts outstanding
at January 29, 2005 comprised other assets of $2 million and current liabilities of $3 million. The fair value of derivative contracts outstanding at
January 31, 2004 comprised current assets of $1 million, current liabilities of $3 million, and other liabilities of $1 million.
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