Estee Lauder 2015 Annual Report Download - page 100

THE EST{E LAUDER COMPANIES INC. 97
The Company has a $1.0 billion commercial paper pro-
gram under which it may issue commercial paper in the
United States. At June 30, 2015, the Company had no
commercial paper outstanding. At August 14, 2015, the
Company had $220.0 million of commercial paper out-
standing, which may be refinanced on a periodic basis as
it matures at then-prevailing market interest rates.
The Company has a $1.0 billion senior unsecured
revolving credit facility (the “Facility”) that the Company
extended by one year and is currently set to expire on
July 15, 2020. The Company has a remaining option to
extend the Facility one more year. At June 30, 2015, no
borrowings were outstanding under the Facility. The Facility
may be used for general corporate purposes. Up to the
equivalent of $350 million of the Facility is available for
multi-currency loans. The interest rate on borrowings
under the Facility is based on LIBOR or on the higher of
prime, which is the rate of interest publicly announced by
the administrative agent, or ½% plus the Federal funds
rate. The Company incurred costs of approximately $1.0
million to establish the Facility, which costs are being
amortized over the term of the Facility. The Facility has an
annual fee of $0.6 million, payable quarterly, based on the
Company’s current credit ratings. The Facility also contains
a cross-default provision whereby a failure to pay other
material financial obligations in excess of $150.0 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 outstanding debt under the Facility.
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 2015 and 2014, the monthly average amount
outstanding was approximately $15.4 million and $13.7
million, respectively, and the annualized monthly weight-
ed-average interest rate incurred was approximately
11.3% and 9.2%, respectively.
Refer to Note 14 —Commitments and Contingencies
for the Company’s projected debt service payments, as of
June 30, 2015, over the next five fiscal years.
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 enters into foreign currency forward contracts
and may enter into option contracts to reduce the effects
of fluctuating foreign currency exchange rates. In addi-
tion, the Company enters into interest rate derivatives to
manage the effects of interest rate movements on the
Company’s aggregate liability portfolio, including poten-
tial future debt issuances. The Company also enters into
foreign currency forward contracts and may use option
contracts, not designated as hedging instruments, to miti-
gate the change in fair value of specific assets and liabili-
ties on the balance sheet. The Company does not utilize
derivative financial instruments for trading or speculative
purposes. Costs associated with entering into 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 and contemporaneously docu-
ments all relationships between hedging instruments and
hedged items, as well as its risk-management objective
and strategy for undertaking the hedge transaction, the
nature of the risk being hedged, how the hedging instru-
ments’ effectiveness in offsetting the hedged risk will be
assessed prospectively and retrospectively, and a descrip-
tion 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 com-
mitments or forecasted transactions. The Company also
formally assesses, both at the inception of the hedges and
on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offset-
ting 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 account-
ing with respect to that derivative prospectively.
(3) In April 2007, in anticipation of the issuance of the 2037 Senior Notes, the Company entered into a series of forward-starting interest rate
swap agreements on a notional amount totaling $210.0 million at a weighted-average all-in rate of 5.45%. The forward-starting interest rate swap
agreements were settled upon the issuance of the new debt and the Company recognized a loss in OCI of $0.9 million that is being amortized to
interest expense over the life of the 2037 Senior Notes. As a result of the forward-starting interest rate swap agreements, the debt discount and
debt issuance costs, the effective interest rate on the 2037 Senior Notes will be 6.181% over the life of the debt.
(4) In May 2003, in anticipation of the issuance of the 2033 Senior Notes, the Company entered into a series of treasury lock agreements on a
notional amount totaling $195.0 million at a weighted-average all-in rate of 4.53%. The treasury lock agreements were settled upon the issuance
of the new debt and the Company received a payment of $15.0 million that is being amortized against interest expense over the life of the 2033
Senior Notes. As a result of the treasury lock agreements, the debt discount and debt issuance costs, the effective interest rate on the 2033 Senior
Notes will be 5.395% over the life of the debt.