Estee Lauder 2013 Annual Report Download - page 163

Foreign Currency Cash-Flow Hedges
The Company enters into foreign currency forward
contracts to hedge anticipated transactions, as well as
receivables and payables denominated in foreign curren-
cies, for periods consistent with the Company’s 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 the Company receives
from foreign subsidiaries. The majority of foreign currency
forward contracts are denominated in currencies of major
industrial countries. The Company may also enter into
foreign currency option contracts to hedge anticipated
transactions where there is a high probability that antici-
pated exposures will materialize. The foreign currency
forward contracts entered into to hedge anticipated
transactions have been designated as foreign currency
cash-flow hedges and have varying maturities through the
end of March 2015. Hedge effectiveness of foreign cur -
rency forward contracts is based on a hypothetical deriva-
tive methodology and excludes the portion of fair value
attributable to the spot-forward difference which is
recorded in current-period earnings. Hedge effectiveness
of foreign currency option contracts is based on a dollar
offset methodology.
The ineffective portion of both foreign currency for-
ward and option contracts is recorded in current-period
earnings. For hedge contracts that are no longer deemed
highly effective, hedge accounting is discontinued and
gains and losses accumulated in OCI are reclassified to
earnings when the underlying forecasted transaction
occurs. If it is probable that the forecasted transaction will
no longer occur, then any gains or losses in accumulated
OCI are reclassified to current-period earnings. As of
June 30, 2013, the Company’s foreign currency cash-flow
hedges were highly effective in all material respects. The
estimated net gain as of June 30, 2013 that is expected to
be reclassified from accumulated OCI into earnings, net
of tax, within the next twelve months is $9.5 million. The
accumulated gain on derivative instruments in accumu-
lated OCI was $16.9 million and $15.3 million as of
June 30, 2013 and June 30, 2012, respectively.
At June 30, 2013, the Company had foreign currency
forward contracts in the amount of $1,579.6 million. The
foreign currencies included in foreign currency forward
contracts (notional value stated in U.S. dollars) are
principally the British pound ($426.2 million), Euro
($268.8 million), Canadian dollar ($198.6 million), Swiss
franc ($111.5 million), Australian dollar ($92.1 million),
Thailand baht ($75.5 million) and Hong Kong dollar
($58.1 million).
At June 30, 2012, the Company had foreign currency
forward contracts in the amount of $1,476.0 million. The
foreign currencies included in foreign currency forward
contracts (notional value stated in U.S. dollars) are princi-
pally the British pound ($376.7 million), Euro ($223.4
million), Canadian dollar ($184.0 million), Swiss franc
($129.9 million), Australian dollar ($106.5 million), Korean
won ($75.1 million) and Thailand baht ($51.3 million).
Fair-Value Hedges
The Company may enter into interest rate derivative con-
tracts to manage the exposure to interest rate fluctuations
on its funded indebtedness and anticipated issuance of
debt for periods consistent with the identified exposures.
During fiscal 2011, the Company terminated its interest
rate swap agreements which had effectively converted
the fixed rate interest on its outstanding 2017 Senior
Notes to variable interest rates. Additionally, the instru-
ment, which was classified as an asset, had a fair value of
$47.4 million at the date of cash settlement. This net set-
tlement is classified as a financing activity on the consoli-
dated statements of cash flows. Hedge accounting
treatment was discontinued prospectively and the fair
value adjustment to the carrying amount of the related
debt is being amortized against interest expense over the
remaining life of the debt.
Credit Risk
As a matter of policy, the Company only enters into deriv-
ative contracts with counterparties that have a long-term
credit rating of at least A- or higher by at least two nation-
ally recognized rating agencies. 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 $21.7 million at
June 30, 2013, of which 22% and 21% were attributable
to two counterparties. To manage this risk, the Company
has established strict counterparty credit guidelines that
are continually monitored. 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.
At June 30, 2013, the Company was in a net asset position
for certain derivative contracts that contain such features
with two counterparties. The fair value of those contracts
as of June 30, 2013 was approximately $4.6 million. As of
June 30, 2013, the Company was in compliance with such
credit-risk-related contingent features.
THE EST{E LAUDER COMPANIES INC. 161