Estee Lauder 2002 Annual Report Download - page 67

THEEST{E LAUDER COMPANIES INC.
In January 2002, the Company issued and sold $250.0
million of 6% Senior Notes due 2012 (“6% Senior Notes”)
in a public offering. The 6% Senior Notes were priced at
99.538% with a yield of 6.062%. Interest payments are
required to be made semi-annually on January 15 and July
15 of each year. The first payment was made on July 15,
2002. The primary portion of the net proceeds of the
offering was used to repay a $200.0 million term loan. The
remainder was used to repay a portion of the outstand-
ing commercial paper.
The Company maintains uncommitted credit facilities
in various regions throughout the world. Interest rate
terms for these facilities vary by region and reflect pre-
vailing market rates for companies with strong credit rat-
ings. During fiscal 2002 and 2001, the monthly average
amount outstanding was approximately $12.9 million and
$18.6 million, respectively, and the annualized monthly
weighted average interest rate incurred was approxi-
mately 4.1% and 6.5%, respectively.
During fiscal 1998, the Company entered into a 2%
loan payable in Japan. Principal repayments of 350.0 mil-
lion yen, approximately $2.9 million at current rates, will
be made semi-annually through 2003.
Effective June 28, 2001, the Company entered into a
newfive-year $400.0 million revolving credit facility,
expiring on June 28, 2006, which includes an annual fee
of .07% on the total commitment. The new facility
replaced a five-year $400.0 million revolving credit
facility entered into in July 1996. The 1996 facility had an
annual fee of .06% on the total commitment. At June 30,
2002 and 2001, the Company was in compliance with all
related financial and other restrictive covenants, includ-
ing limitations on indebtedness and liens.
Commercial paper is classified as long-term debt
based upon the Company’s intent and ability to refinance
maturing commercial paper on a long-term basis. It is the
Company’s policy to maintain backup facilities to support
the commercial paper program and its classification as
long-term debt.
NOTE 9 – FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company addresses certain financial exposures
through a controlled program of risk management that
includes the use of derivative financial instruments. The
Company primarily enters into foreign currency forward
exchange contracts and foreign currency options to
reduce the effects of fluctuating foreign currency
exchange rates. The Company, if necessary, enters into
interest rate swaps and options to manage the effects of
interest rate movements on the Company’s aggregate
liability portfolio. The Company categorizes these instru-
ments as entered into for purposes other than trading.
All derivatives are recognized on the balance sheet at
their fair value. On the date the derivative contract is
entered into, the Company designates the derivative as
(i) a hedge of the fair value of a recognized asset or liabil-
ity or of an unrecognized firm commitment (“fair value”
hedge), (ii) 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 (“cash flow” hedge), (iii) a
foreign-currency fair-value or cash-flow hedge (“foreign
currency” hedge), (iv) a hedge of a net investment in a
foreign operation, or (v) “held for trading” (“trading”
instruments). 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 that is attributable to the hedged
risk (including losses or gains on firm commitments), are
recorded in current-period earnings. Changes in the fair
value of a derivative that is highly effective as (and that is
designated and qualifies as) a cash-flow hedge are recorded
in other comprehensive income, until earnings are affected
by the variability of cash flows (e.g., when periodic settle-
ments on a variable-rate asset or liability are recorded in
earnings). Changes in the fair value of derivatives that are
highly effective as (and that are designated and qualify as)
foreign-currency hedges are recorded in either current-
period earnings or other comprehensive income, depend-
ing on whether the hedge transaction is a fair-value hedge
(e.g., a hedge of a firm commitment that is to be settled in
a foreign currency) or a cash-flow hedge (e.g., a foreign-
currency-denominated forecasted transaction). If, how-
ever, a derivative is used as a hedge of a net investment in
a foreign operation, its changes in fair value, to the extent
effective as a hedge, are recorded in accumulated other
comprehensive income within equity. Furthermore,
changes in the fair value of derivative trading instruments
are reported in current-period earnings.
The Company formally documents all relationships
between hedging instruments and hedged items, as well
as its risk-management objective and strategy for under-
taking various hedge transactions. 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. The Company
also formally assesses, 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
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