Estee Lauder 2004 Annual Report Download - page 73

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THE EST{E LAUDER COMPANIES INC.
of forward exchange contracts and option contracts in the
amount of $476.7 million and $57.7 million, respectively.
The foreign currencies included in forward exchange con-
tracts (notional value stated in U.S. dollars) are principally
the Euro ($114.0 million), Swiss franc ($61.9 million),
Japanese yen ($56.0 million), British pound ($49.8 mil-
lion), Canadian dollar ($37.7 million), South Korean won
($37.6 million) and Australian dollar ($30.6 million). The
foreign currencies included in the option contracts
(notional value stated in U.S. dollars) are principally the
Swiss franc ($21.9 million), Canadian dollar ($21.0 million)
and Euro ($11.7 million).
Interest Rate Risk Management
The Company enters into interest rate derivative contracts
to manage the exposure to fluctuations of interest rates
on its funded and unfunded indebtedness, as well as cash
investments, for periods consistent with the identified
exposures. All interest rate derivative contracts are with
large financial institutions rated as strong investment
grade by a major rating agency.
In May 2003, the Company entered into an interest
rate swap agreement with a notional amount of $250.0
million to effectively convert fixed interest on the existing
6% Senior Notes to a variable interest rate based on six-
month LIBOR. The interest rate swap was designated as a
fair value hedge. As of June 30, 2004, the fair value hedge
was highly effective, in all material respects.
71
Information regarding the interest rate swap is presented in the following table:
Notional Notional
Amount Pay Rate Receive Rate Amount Pay Rate Receive Rate
(Dollars in millions)
Interest rate swap $250.0 3.14% 6.00% $250.0 3.21% 6.00%
Weighted AverageWeighted Average
YEAR ENDED OR AT JUNE 30, 2003YEAR ENDED OR AT JUNE 30, 2004
Additionally, in May 2003, in anticipation of the issuance
of the 5.75% Senior Notes, the Company entered into a
series of treasury lock agreements on a notional amount
totaling $195.0 million at a weighted average all-in rate of
4.53%. The treasury lock agreements were settled upon
the issuance of the new debt and the Company received
a payment of $15.0 million that will be amortized against
interest expense over the life of the 5.75% Senior Notes.
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.
In fiscal 2004, the fair value of redeemable preferred
stock was estimated based on a recent private transaction
and is included in the current portion of long-term debt
pursuant to the provisions of SFAS No. 150.
Cumulative redeemable preferred stock:
In fiscal 2003, the fair value of the cumulative redeemable
preferred stock was estimated utilizing a cash flow analy-
sis at a discount rate equal to rates available for debt with
terms similar to the preferred stock.
Foreign exchange and interest rate contracts:
The fair value of forwards, swaps, options and treasury rate
locks is the estimated amount the Company would
receive or pay to terminate the agreements.