Estee Lauder 2002 Annual Report Download - page 51

THEEST{E LAUDER COMPANIES INC.
In September 1998, our Board of Directors authorized
a share repurchase program. We have purchased, and
may continue to purchase, over an unspecified period of
time, a total of up to eight million shares of Class A Com-
mon Stock in the open market or in privately negotiated
transactions, depending on market conditions and other
factors. During fiscal 2002, we purchased 1.5 million
shares for $49.7 million. As of June 30, 2002, we have
purchased approximately 2.6 million shares under this
program. Subsequent to year-end, we purchased an addi-
tional 4.4 million shares for $138.1 million bringing the
cumulative total of acquired shares to 7.0 million.
The Board of Directors declared, and we paid, quar-
terly dividends on our Class A Common Stock and Class B
Common Stock at the rate of $.05 per share in each quar-
ter of fiscal 2002, 2001 and 2000. In fiscal 2002, 2001
and 2000, dividends declared on our common stock
totaled $47.5 million, $47.7 million and $47.5 million,
respectively. In May 2002, we announced that, after
declaring the $.05 per share quarterly dividend paid on
July 2, 2002, the Board of Directors determined that it
would pay future cash dividends on its common stock
annually rather than quarterly. We expect that the Board
of Directors will declare the first annual dividend of $.20
per share in the second quarter of fiscal 2003, so it will
be payable in January 2003. Accordingly, we expect total
dividends paid on the Common Stock in fiscal 2003 to
amount to $.25 per share. Total dividends declared,
including dividends on the $6.50 Cumulative Redeemable
Preferred Stock, were $70.9 million, $71.1 million and
$70.9 million in fiscal 2002, 2001 and 2000, respectively.
We will be required to redeem the outstanding $6.50
Cumulative Redeemable Preferred Stock on June 30,
2005. However, in the event that Mrs. Estée Lauder were
to pass away before such date, then we would have the
right to redeem the shares from the current holders, and
the holders of such shares would have the right to put the
shares to us, at $100 per share (or an aggregate of $360.0
million).Ifshares of $6.50 Cumulative Redeemable Pre-
ferred Stock are put to us, we would have up to 120 days
after notice to purchase such shares.
The effects of inflation have not been significant to our
overall operating results in recent years. Generally, we
have been able to increase selling prices sufficiently to
offset cost increases, which have been moderate.
We believe that cash on hand, cash generated from
operations, available credit lines and access to credit
markets will be adequate to support currently planned
business operations and capital expenditures on both a
near-term and long-term basis.
Derivative Financial Instruments
We address certain financial exposures through a con-
trolled program of risk management that includes the use
of derivative financial instruments. We primarily enter into
foreign currency forward exchange contracts and foreign
currency options to reduce the effects of fluctuating for-
eign currency exchange rates. We categorize these instru-
ments as entered into for purposes other than trading.
For each derivative contract we enter into,we formally
document the relationship between the hedging instru-
ment and hedged item, as well as its risk-management
objective and strategy for undertaking the hedge. This
process includes linking all derivatives that are designated
as fair-value, cash-flow, or foreign-currency hedges to
specific assets and liabilities on the balance sheet or
to specific firm commitments or forecasted transactions.
We also formally assess, both at the hedge’s inception and
on an ongoing basis, whether the derivatives that are used
in hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items. If it is
determined that a derivative is not highly effective, then
we will be required to discontinue hedge accounting with
respect to that derivative prospectively.
Foreign Exchange Risk Management
We enter into forward exchange contracts to hedge antici-
pated transactions as well as receivables and payables
denominated in foreign currencies for periods consistent
with our identified exposures. The purpose of the hedging
activities is to minimize the effect of foreign exchange
rate movements on our costs and on the cash flows that
we receive from foreign subsidiaries. Almost all foreign
currency contracts are denominated in currencies of
major industrial countries and are with large financial insti-
tutions rated as strong investment grade by a major rat-
ing agency. We also enter into foreign currency options
to hedge anticipated transactions where there is a high
probability that anticipated exposures will materialize. The
forward exchange contracts and foreign currency options
have been designated as cash-flow hedges. As of June 30,
2002, these cash-flow hedges were highly effective, in all
material respects.
As a matter of policy, we only enter into contracts with
counterparties that have at least an “A” (or equivalent)
credit rating. The counterparties to these contracts are
major financial institutions. We do not have significant
exposure to any one counterparty. Our exposure to credit
loss in the event of nonperformance by any of the coun-
terparties is limited to only the recognized, but not real-
ized,gains attributable to the contracts. Management
believes risk of loss under these hedging contracts is
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