Estee Lauder 2007 Annual Report Download - page 73

Federal funds rate. The Company incurred costs of
approximately $0.3 million to establish the facility which
will be amortized over the term of the facility. The credit
facility has an annual fee of $0.4 million, payable quarterly,
based on the Company’s current credit ratings. The credit
facility contains various covenants, including one fi nancial
covenant which requires the Company’s interest expense
coverage ratio (as defi ned in the facility) at the last day of
each fiscal quarter to be greater than 3.0:1.0. As of
June 30, 2007, the Company was in compliance with this
fi nancial covenant. There are no other conditions where
the lender’s commitments may be withdrawn, other than
certain events of default, as defi ned in the facility, which
are customary for facilities of this type.
The Company maintains uncommitted credit facilities
in various regions throughout the world. Interest rate
terms for these facilities vary by region and refl ect prevail-
ing market rates for companies with strong credit ratings.
During fi scal 2007 and 2006, the monthly average amount
outstanding was approximately $20.0 million and $22.8
million, respectively, and the annualized monthly weighted
average interest rate incurred was approximately 5.96%
and 5.56%, respectively.
Refer to Note 14 — Commitments and Contingencies
for the Company’s projected debt service payments over
the next fi ve fi scal years.
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 fi nancial 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 derivatives to manage the effects of interest
rate movements on the Company’s aggregate liability
portfolio. The Company categorizes these instruments as
entered into for purposes other than trading.
All derivatives are recognized at their fair value and are
included in prepaid expenses and other current assets or
other accrued liabilities in the accompanying balance
sheets. The associated gains and losses on these deriva-
tives are recorded in cost of goods sold and selling, gen-
eral and administrative expenses in the accompanying
statements of earnings. 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 liability or of an unrecognized fi rm commitment
(“fair-value” hedge), (ii) a hedge of a forecasted transac-
tion or of the variability of cash fl ows to be received or
paid related to a recognized asset or liability (“cash-fl ow”
hedge), (iii) a foreign-currency fair-value or cash-fl ow
hedge (“foreign-currency” hedge), (iv) a hedge of a net
investment in a foreign operation, or (v) other. Changes in
the fair value of a derivative that is highly effective as (and
that is designated and qualifi es 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 fi rm 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
qualifi es as) a cash-fl ow hedge are recorded in other com-
prehensive income, until earnings are affected by the vari-
ability of cash fl ows (e.g., when periodic settlements 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 fi rm commitment that is to be settled in
a foreign currency) or a cash-fl ow hedge (e.g., a foreign-
currency-denominated forecasted transaction). If,
however, a derivative is used as a hedge of a net invest-
ment in a foreign operation, its changes in fair value, to
the extent effective as a hedge, are recorded in accumu-
lated other comprehensive income within equity. Further-
more, changes in the fair value of other derivative
instruments are reported in current-period earnings.
For each derivative contract entered into where the
Company looks to obtain special hedge accounting treat-
ment, the Company formally documents all relationships
between hedging instruments and hedged items, as well
as its risk-management objective and strategy for under-
taking the hedge transaction, the nature of the risk being
hedged, how the hedging instruments’ effectiveness in
offsetting the hedged risk will be assessed prospectively
and retrospectively, and a description of the method of
measuring ineffectiveness. This process includes linking all
derivatives that are designated as fair-value, cash-fl ow, or
foreign-currency hedges to specifi c assets and liabilities
on the balance sheet or to specifi c fi rm 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 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 accounting with
respect to that derivative prospectively.
72 THE EST{E LAUDER COMPANIES INC.