Estee Lauder 2015 Annual Report Download - page 103

100 THE EST{E LAUDER COMPANIES INC.
The estimated net gain on the Company’s derivative
instruments designated as cash-flow hedges as of June 30,
2015 that is expected to be reclassified from AOCI into
earnings, net of tax, within the next twelve months is
$22.8 million. The accumulated gain (loss) on derivative
instruments in AOCI was $68.4 million and $(1.2) million
as of June 30, 2015 and 2014, respectively.
Fair-Value Hedges
The Company enters into interest rate derivative contracts
to manage the 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 con-
vert the fixed rate interest on its 2022 Senior Notes to
variable interest rates based on three-month LIBOR plus a
margin. These interest rate swap agreements are desig-
nated as fair-value hedges of the related long-term debt,
and the changes in the fair value of the interest rate swap
agreements are exactly offset by the change in the fair
value of the underlying long-term debt.
Credit Risk
As a matter of policy, the Company enters into derivative
contracts only 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 $43.1 million at
June 30, 2015. 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.
During the fourth quarter of fiscal 2015, the Company
renegotiated the terms related to certain of its derivative
financial instruments that contained credit-risk-related
contingent features. As a result, the Company no longer
holds instruments that contain such features.
NOTE 12 — FAIR VALUE MEASUREMENTS
The Company records certain of 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 participants at the measurement date. The
accounting for fair value measurements must be applied
to nonfinancial assets and nonfinancial liabilities that
require initial remeasurement or remeasurement at fair
value, which principally consist of assets and liabilities
acquired through busines s combinations and goodwill,
indefinite-lived intangible assets and long-lived assets for
the purposes of calculating potential impairment. 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 sim-
ilar 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 corroborated 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.