Estee Lauder 2013 Annual Report Download - page 136

Derivative Financial Instruments and
Hedging Activities
We address certain financial exposures through a con-
trolled program of risk management that includes the use
of derivative financial instruments. We enter into foreign
currency forward contracts. We may enter into option
contracts to reduce the effects of fluctuating foreign
currency exchange rates and interest rate derivatives to
manage the effects of interest rate movements on our
aggregate liability portfolio. We also enter 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. We do not utilize derivative financial
instruments for trading or speculative purposes. Costs
associated with entering into these derivative financial
instruments have not been material to our consolidated
financial results.
For each derivative contract entered into where we
look to obtain hedge accounting treatment, we formally
document all relationships between hedging instruments
and hedged items, as well as our risk-management objec-
tive and strategy for undertaking 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 transactions. We also for-
mally assess, 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, we will be
required to discontinue hedge accounting with respect to
that derivative prospectively.
Foreign Exchange Risk Management
We enter into foreign currency forward contracts to
hedge anticipated transactions, as well as receivables and
payables denominated in foreign currencies, for periods
consistent with our 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 we receive from foreign subsidiaries. The majority of
foreign currency forward contracts are denominated in
134 THE EST{E LAUDER COMPANIES INC.
Contractual Obligations
The following table summarizes scheduled maturities of our contractual obligations for which cash flows are fixed and
determinable as of June 30, 2013:
Payments Due in Fiscal
Total 2014 2015 2016 2017 2018 Thereafter
(In millions)
Debt service(1) $2,386.3 $ 79.6 $ 65.5 $ 61.8 $361.3 $ 44.7 $1,773.4
Operating lease commitments(2) 1,534.7 280.2 241.0 210.9 176.5 146.1 480.0
Unconditional purchase obligations(3) 2,681.7 1,441.6 346.3 358.2 139.1 143.8 252.7
Gross unrecognized tax benefits
and interest — current(4) 0.9 0.9 — — — — —
Total contractual obligations $6,603.6 $1,802.3 $652.8 $630.9 $676.9 $334.6 $2,506.1
(1) Includes long-term and current debt and the related projected interest costs, and to a lesser extent, capital lease commitments. Interest costs on
long-term and current debt are projected to be $61.3 million in each of the years from fiscal 2014 through fiscal 2017, $44.6 million in fiscal 2018
and $773.3 million thereafter. Projected interest costs on variable rate instruments were calculated using market rates at June 30, 2013. Refer to
“Note 9 „ DebtŽ of Notes to Consolidated Financial Statements.
(2) Minimum operating lease commitments only include base rent. Certain leases provide for contingent rents that are not measurable at inception
and primarily include rents based on a percentage of sales in excess of stipulated levels, as well as common area maintenance. These amounts are
excluded from minimum operating lease commitments and are included in the determination of total rent expense when it is probable that the
expense has been incurred and the amount is reasonably measurable.
(3) Unconditional purchase obligations primarily include inventory commitments, estimated future earn-out payments, estimated royalty payments
pursuant to license agreements, advertising commitments, capital improvement commitments, planned funding of pension and other post-retire-
ment benefit obligations, commitments pursuant to executive compensation arrangements, obligations related to our cost savings initiatives and
acquisitions. Future earn-out payments and future royalty and advertising commitments were estimated based on planned future sales for the term
that was in effect at June 30, 2013, without consideration for potential renewal periods.
(4) Refer to • Note 7 „ Income TaxesŽ of Notes to Consolidated Financial Statements for information regarding unrecognized tax benefits. As of
June 30, 2013, the noncurrent portion of our unrecognized tax benefits, including related accrued interest and penalties was $80.5 million. At this
time, the settlement period for the noncurrent portion of the unrecognized tax benefits, including related accrued interest and penalties, cannot
be determined and therefore was not included.