Estee Lauder 2010 Annual Report Download - page 135

134 THE EST{E LAUDER COMPANIES INC.
Fair-Value Hedges
The Company enters into interest rate derivative contracts
to manage its exposure to interest rate fluctuations on
its funded indebtedness and anticipated issuance of debt
for periods consistent with the identified exposures.
The Company has interest rate swap agreements, with a
notional amount totaling $250.0 million, to effectively
convert the fixed rate interest on its 2017 Senior Notes to
variable interest rates based on six-month LIBOR. These
interest rate swap agreements are designated as fair-value
hedges of the related long-term debt and the changes in
the fair values of the interest rate swap agreements are
exactly offset by changes in the fair value of the underly-
ing long-term debt. As of June 30, 2010, these fair-value
hedges were highly effective in all material respects.
Information regarding the Company’s interest rate swap
agreements is presented in the following table:
YEAR ENDED OR AT JUNE 30, 2010 YEAR ENDED OR AT JUNE 30, 2009
Notional Weighted Average Notional Weighted Average
Amount Pay Rate Receive Rate Amount Pay Rate Receive Rate
($ in millions)
Interest rate swaps on 2017 Senior Notes $250.0 0.96% 5.55% $250.0 1.75% 5.55%
YEAR
E
NDED
OR
AT
J
UNE
30, 2010
YEAR
Notional
Weighted Average
Amount
Pay Rate
Receive Rate
$250.0
0.96%
5.55%
Credit Risk
As a matter of policy, the Company only enters into deriv-
ative contracts with counterparties that have at least an
“A” (or equivalent) credit rating. The counterparties to
these contracts are major financial institutions. Exposure
to credit risk in the event of nonperformance by any of
the counterparties is limited to the gross fair value of con-
tracts in asset positions, which totaled $57.7 million at
June 30, 2010, of which 40% and 35% were attributable
to two counterparties. To manage this risk, the Company
has established strict counterparty credit guidelines that
are continually monitored and reported to management.
Accordingly, management believes risk of loss under these
hedging contracts is remote.
Certain of the Company’s derivative financial instru-
ments contain credit-risk-related contingent features.
As of June 30, 2010, the Company was in compliance
with such features and there were no derivative financial
instruments with credit-risk-related contingent features
that were in a net liability position.
NOTE 12 — FAIR VALUE MEASUREMENTS
The Company records its financial assets and liabilities at
fair value, which is defined as the price that would be
received to sell an asset or paid to transfer a liability, in the
principal or most advantageous market for the asset or
liability, in an orderly transaction between market partici-
pants at the measurement date. Effective beginning in the
Company’s fiscal 2010, the accounting for fair value mea-
surements must be applied to nonrecurring nonfinancial
assets and nonfinancial liabilities, which principally consist
of assets or liabilities acquired through business combi-
nations, goodwill, indefinite-lived intangible assets and
long-lived assets for purposes of calculating potential
impairment, and liabilities associated with restructuring
activities. In addition, the disclosure for the accounting
for the fair value measurements must be applied to the
Company’s defined benefit pension plans and post-
retirement benefit plans. See Note 13 — Pension, Deferred
Compensation and Post-retirement Benefit Plans. The
Company is required to maximize the use of observable
inputs and minimize the use of unobservable inputs when
measuring fair value. The three levels of inputs that may
be used to measure fair value are as follows:
Level 1: Inputs based on quoted market prices for identi-
cal assets or liabilities in active markets at the
measurement date.
Level 2: Observable inputs other than quoted prices
included in Level 1, such as quoted prices for
similar assets and liabilities in active markets;
quoted prices for identical or similar assets and
liabilities in markets that are not active; or other
inputs that are observable or can be corrobo-
rated by observable market data.
Level 3: Inputs reflect management’s best estimate of
what market participants would use in pricing
the asset or liability at the measurement date.
The inputs are unobservable in the market and
significant to the instrument’s valuation.