Estee Lauder 2003 Annual Report Download - page 72

THEEST{E LAUDER COMPANIES INC.71
cash-flow hedges. As of June 30, 2003, these cash-flow
hedges were highly effective, in all material respects.
As a matter of policy, the Company only enters into
contracts with counterparties that have at least an “A” (or
equivalent)credit rating. The counterparties to these con-
tracts are major financial institutions. The Company does
not have significant exposure to any one counterparty.
Exposure to credit loss in the event of nonperformance
by any of the counterparties is limited to only the recog-
nized, but not realized, gains attributable to the contracts.
Management believes risk of loss under these hedging
contracts is remote and in any event would not be mate-
rial to the Company’s consolidated financial results. The
contracts have varying maturities through the end of June
2004. Costs associated with entering into such contracts
have not been material to the Company’s consolidated
financial results. The Company does not utilize derivative
financial instruments for trading or speculative purposes.
At June 30, 2003, the Company had foreign currency con-
tracts in the form of forward exchange contracts and
option contracts in the amount of $476.7 million
and $57.7 million, respectively. The foreign currencies
included in forward exchange contracts (notional value
stated in U.S. dollars) are principally the Euro ($114.0
million),Swiss franc ($61.9 million), Japanese yen
($56.0 million), British pound ($49.8 million), Canadian
dollar ($37.7 million), South Korean won ($37.6 million)
and Australian dollar ($30.6 million). The foreign curren-
cies included in the option contracts (notional value stated
in U.S. dollars) are principally the Swiss franc ($21.9
million),Canadian dollar ($21.0 million) and Euro
($11.7 million). At June 30, 2002, the Company had for-
eign currency contracts in the form of forward exchange
contracts in the amount of $227.2 million. The foreign
currencies included in these contracts (notional value
stated in U.S. dollars) are principally the Japanese
yen ($70.7 million), Euro ($31.7 million), British pound
($26.2 million), Australian dollar ($16.0 million), Swiss
franc ($11.8 million), Danish krone ($11.6 million) and
Canadian dollar ($10.5 million).
Interest Rate Risk Management
The Company enters into interest rate derivative contracts
to manage the exposure to fluctuations of interest rates
on its funded and unfunded indebtedness, as well as cash
investments, for periods consistent with the identified
exposures. All interest rate derivative contracts are with
large financial institutions rated as strong investment
grade by a major rating agency.
In May 2003, the Company entered into an interest
rate swap agreement with a notional amount of $250.0
million to effectivelyconvert fixed interest on the existing
6% Senior Notes to a variable interest rate based on
LIBOR. The interest rate swap was designated as a fair
value hedge. As of June 30, 2003, the fair value hedge was
highly effective, in all material respects.
Information regarding the interest rate swap is pre-
sented in the following table:
YEAR ENDED OR Notional
AT JUNE 30, 2003 Amount Pay Rate Receive Rate
(In millions)
Interest rate swap $250.0 3.21% 6.00%
Additionally, in May 2003, 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%. These treasury lock agreements expire in Septem-
ber 2003 and are used to hedge the exposure to a possi-
ble rise in interest rates prior to the anticipated issuance of
new debt, if completed. The agreements will be settled
upon the issuance of the new debt and any realized gain
or loss to be received or paid by the Company will be
amortized in interest expense over the life of new debt.
The treasury lock agreements were designated as cash
flow hedges. As of June 30, 2003, the cash flow hedges
were highly effective, in all material respects.
Fair Value of Financial Instruments
The following methods and assumptions were used to
estimate the fair value of each class of financial instru-
ments for which it is practicable to estimate that value:
Cash and cash equivalents:
The carrying amount approximates fair value, primarily
because of the short maturity of cash equivalent
instruments.
Long-term debt:
The fair value of the Company’s long-term debt was esti-
mated based on the current rates offered to the Company
for debt with the same remaining maturities. Included in
such amount, where applicable, is the fair value of the
Company’s commercial paper.
Cumulative redeemable preferred stock:
The fair value of the cumulative redeemable preferred
stock is estimated utilizing a cash flow analysis at a
discount rate equal to rates available for debt with terms
similar to the preferred stock.
Foreign exchange and interest rate contracts:
The fair value of forwards, swaps, options and treasury rate
locks is the estimated amount the Company would
receive or pay to terminate the agreements.
Weighted Average