Estee Lauder 2003 Annual Report Download - page 71

THEEST{E LAUDER COMPANIES INC. 70
amount outstanding was approximately $1.4 million and
$12.9 million, respectively, and the annualized monthly
weighted average interest rate incurred was approxi-
mately 5.4% and 4.1%, respectively.
Effective June 28, 2001, the Company entered into a
five-year $400.0 million revolving credit facility, expiring
on June 28, 2006, which includes an annual fee of .07%
on the total commitment. At June 30, 2003 and 2002, the
Company was in compliance with all related financial and
other restrictive covenants, including limitations on
indebtedness and liens.
The Company also had an effective shelf registration
statement covering the potential issuance of up to $500.0
million and $150.0 million in debt securities at June 30,
2003 and 2002, respectively.
NOTE 9 – FINANCIAL INSTRUMENTS
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 primarily enters into foreign currency forward
exchange contracts and foreign currency options to
reduce the effects of fluctuating foreign currency
exchange rates. The Company, if necessary, enters into
interest rate derivatives to manage the effects of interest
rate movements on the Company’s aggregate liability
portfolio. The Company categorizes these instruments as
entered into for purposes other than trading.
All derivatives are recognized on the balance sheet at
their fair value. On the date the derivative contract is
entered into, the Company designates the derivative as
(i) a hedge of the fair value of a recognized asset or liabil-
ity or of an unrecognized firm commitment (“fair value”
hedge), (ii) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to
a recognized asset or liability (“cash flow” hedge),
(iii) a foreign-currency fair-value or cash-flow hedge
(“foreign currency” hedge), (iv) a hedge of a net invest-
ment in a foreign operation, or (v) other. Changes in the
fair value of a derivative that is highly effective as (and that
is designated and qualifies as) a fair-value hedge, along
with the loss or gain on the hedged asset or liability that is
attributable to the hedged risk (including losses or gains
on firm commitments), are recorded in current-period
earnings. Changes in the fair value of a derivative that is
highly effective as (and that is designated and qualifies as)
a cash-flow hedge are recorded in other comprehensive
income, until earnings are affected by the variability of
cash flows (e.g., when periodic settlements on a variable-
rate asset or liability are recorded in earnings). Changes in
the fair value of derivatives that are highly effective as (and
that are designated and qualify as) foreign-currency
hedges are recorded in either current-period earnings or
other comprehensive income,depending on whether
the hedge transaction is a fair-value hedge (e.g., a hedge
of a firm commitment that is to be settled in a foreign
currency) or a cash-flow hedge (e.g., a foreign-currency-
denominated forecasted transaction). If, however, a deriv-
ative is used as a hedge of a net investment in a foreign
operation, its changes in fair value, to the extent effective
as a hedge, are recorded in accumulated other compre-
hensive income within equity. Furthermore, changes in the
fair value of other derivative instruments are reported in
current-period earnings.
For each derivative contract entered into where the
Company looks to obtain special hedge accounting
treatment, the Company formally documents all relation-
ships between hedging instruments and hedged items, as
well as its risk-management objective and strategy for
undertaking the hedge transaction. This process includes
linking all derivatives that are designated as fair-value,
cash-flow, or foreign-currency hedges to specific assets
and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions. The Company
also formally assesses, 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, the Company
will be required to discontinue hedge accounting with
respect to that derivative prospectively.
Foreign Exchange Risk Management
The Company enters into forward exchange contracts to
hedge anticipated transactions as well as receivables and
payables denominated in foreign currencies 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 sub-
sidiaries. Almost all foreign currency contracts are denom-
inated in currencies of major industrial countries and are
with large financial institutions rated as strong investment
grade by a major rating agency. The Company also enters
into foreign currency options to hedge anticipated trans-
actions where there is a high probability that anticipated
exposures will materialize. The forward exchange
contracts and foreign currency options entered into to
hedge anticipated transactions have been designated as