Estee Lauder 2010 Annual Report Download - page 132

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THE EST{E LAUDER COMPANIES INC. 131
NOTE 11
—
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
and option contracts to reduce the effects of fluctuating
foreign currency exchange rates and interest rate deriva-
tives to manage the effects of interest rate movements on
the Company’s aggregate liability portfolio. The Company
also enters into foreign currency forward contracts and
may use option contracts, not designated as hedging
instruments, to mitigate the change in fair value of specific
assets and liabilities on the balance sheet. The Company
does not utilize derivative financial instruments for trading
or speculative purposes. Costs associated with entering
into these derivative financial instruments have not been
material to the Company’s consolidated financial results.
For each derivative contract entered into where the
Company looks to obtain hedge accounting treatment,
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 to specific assets and liabilities on the balance
sheet or to specific firm commitments or forecasted trans-
actions. 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 deriva-
tive prospectively.
corporate purposes. Up to the equivalent of $250 million
of the credit facility is available for multi-currency loans.
The interest rate on borrowings under the credit facility is
based on LIBOR or on the higher of prime, which is the
rate of interest publicly announced by the administrative
agent, or
1
/
2
% plus the 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. This facility also contains a cross-default provision
whereby a failure to pay other material financial obliga-
tions in excess of $50.0 million (after grace periods and
absent a waiver from the lenders) would result in an event
of default and the acceleration of the maturity of any out-
standing debt under this facility. As of June 30, 2010, the
Company was in compliance with all related financial and
other restrictive covenants, including limitations on
indebtedness and liens. The financial covenant of this
facility requires an interest expense coverage ratio of
greater than 3:1 as of the last day of each fiscal quarter.
There are no other conditions where the lender’s commit-
ments may be withdrawn, other than certain events of
default, as defined 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 reflect prevail-
ing market rates for companies with strong credit ratings.
During fiscal 2010 and 2009, the monthly average amount
outstanding was approximately $12.6 million and $28.2
million, respectively, and the annualized monthly weighted
average interest rate incurred was approximately 10.0%
and 13.4%, respectively.
Refer to Note 14 — Commitments and Contingencies
for the Company’s projected debt service payments over
the next five fiscal years.