Estee Lauder 2002 Annual Report Download - page 68

THEEST{E LAUDER COMPANIES INC.
changes in fair values or cash flows of hedged items. If it
is determined that a derivative is not highly effective, or
that it has ceased to be a highly effective hedge, the
Company will be required to discontinue hedge account-
ing with respect to that derivative prospectively.
Foreign Exchange Risk Management
The Company enters into forward exchange contracts to
hedge anticipated transactions as well as receivables and
payables denominated in foreign currencies for periods
consistent with the Company’s identified exposures. 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. Almost all foreign currency contracts are
denominated in currencies of major industrial countries
and are with large financial institutions rated as strong
investment grade by a major rating agency. The Company
also enters into foreign currency options to hedge antici-
pated 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, the Company only enters into
contracts with counterparties that have at least an “A” (or
equivalent)credit rating. The counterparties to these con-
tracts are major financial institutions. The Company does
not have significant exposure to any one counterparty.
Exposure to credit loss in the event of nonperformance
by any of the counterparties is limited to only the recog-
nized, but not realized, gains attributable to the contracts.
Management believes risk of loss under these hedging
contracts is remote and in any event would not be mate-
rial to the Company’s consolidated financial results. The
contracts have varying maturities through the end of July
2003. Costs associated with entering into such contracts
have not been material to the Company’s consolidated
financial results. The Company does not utilize derivative
financial instruments for trading or speculative purposes.
At June 30, 2002, we had foreign currency contracts in
the form of forward exchange contracts in the amount of
$227.2 million. The foreign currencies included in these
contracts (notional value stated in U.S. dollars) are prin-
cipallythe Japanese yen ($70.7 million), Euro ($31.7
million),British pound ($26.2 million), Australian dollar
($16.0 million), Swiss franc ($11.8 million), Danish krone
($11.6 million) and Canadian dollar ($10.5 million). At
June 30, 2001, we had foreign currency contracts in the
form of forward exchange contracts in the amount of
$148.2 million. The foreign currencies included in these
contracts (notional value stated in U.S. dollars) are prin-
cipallythe Japanese yen ($53.9 million), Swiss franc
($28.8 million), Korean won ($18.5 million), Taiwan dollar
($13.7 million), British pound ($13.2 million), Euro ($8.5
million) and Mexican peso ($6.8 million).
Interest Rate Risk Management
In February 2002, the Company repaid its outstanding
term loan, which had a floating interest rate, with the pro-
ceeds from the January 2002 public debt offering of 6%
Senior Notes. As a result, the Company terminated the
interest rate swaps and options that were previously out-
standing to mitigate interest rate volatility. No material
gain or loss resulted from the termination of those con-
tracts. Prior to repayment of the term loan, the Company
had entered into an interest rate swap agreement to
exchange floating rate for fixed rate interest payments
periodically over the life of the agreement. In addition, the
Company had purchased interest rate options that offer
similar interest rate protection. The interest rate swap and
options were designated as cash-flow hedges and were
highly effective through the date of termination.
Information regarding the interest rate swap and
options is presented in the following table:
YEAR ENDED OR Notional
AT JUNE 30, 2001 Amounts Pay Rate Receive Rate
(In millions)
Interest rate swap $ 67.0 6.14% 6.32%
Interest rate options 133.0 6.14 6.62
Fair Value of Financial Instruments
The following methods and assumptions were used to
estimate the fair value of each class of financial instru-
ments for which it is practicable to estimate that value:
Cash and cash equivalents:
The carrying amount approximates fair value, primarily
because of the short maturity of cash equivalent
instruments.
Long-term debt:
The fair value of the Company’s long-term debt was esti-
mated based on the current rates offered to the Company
for debt with the same remaining maturities. Included in
such amount is the fair value of the Company’s commer-
cial paper.
Weighted Average
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