Estee Lauder 2004 Annual Report Download - page 54

THE EST{E LAUDER COMPANIES INC.
Derivative Financial Instruments and
Hedging Activities
We address certain financial exposures through a con-
trolled program of risk management that includes the use
of derivative financial instruments. We primarily enter into
foreign currency forward exchange contracts and foreign
currency options to reduce the effects of fluctuating for-
eign currency exchange rates. We also enter into interest
rate derivative contracts to manage the effects of fluctu-
ating interest rates. We categorize these instruments as
entered into for purposes other than trading.
For each derivative contract entered into where we look
to obtain special hedge accounting treatment, we for-
mally document the relationship between the hedging
instrument and hedged item, as well as its risk-manage-
ment objective and strategy for undertaking the hedge.
This process includes linking all derivatives that are desig-
nated 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. We
also formally assess, 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, then
we will be required to discontinue hedge accounting with
respect to that derivative prospectively.
Foreign Exchange Risk Management
We enter into forward exchange contracts to hedge antici-
pated transactions as well as receivables and payables
denominated in foreign currencies for periods consistent
with our identified exposures. The purpose of the hedging
activities is to minimize the effect of foreign exchange
rate movements on our costs and on the cash flows that
we receive from foreign subsidiaries. Almost all foreign
currency contracts are denominated in currencies of
major industrial countries and are with large financial insti-
tutions rated as strong investment grade by a major rating
agency. We also enter into foreign currency options to
hedge anticipated transactions where there is a high prob-
ability that anticipated exposures will materialize. The for-
ward exchange contracts and foreign currency options
entered into to hedge anticipated transactions have
been designated as cash-flow hedges. As of June 30,
2004, these cash-flow hedges were highly effective, in all
material respects.
As a matter of policy, we only enter into contracts with
counterparties that have at least an “A” (or equivalent)
credit rating. The counterparties to these contracts are
major financial institutions. We do not have significant
exposure to any one counterparty. Our exposure to credit
loss in the event of nonperformance by any of the coun-
terparties is limited to only the recognized, but not real-
ized, gains attributable to the contracts. Management
believes risk of default under these hedging contracts is
remote and in any event would not be material to the con-
solidated financial results. The contracts have varying
maturities through the end of June 2005. Costs associ-
ated with entering into such contracts have not been
material to our consolidated financial results. We do not
52
Contractual Obligations
The following table summarizes scheduled maturities of our contractual obligations for which cash flows are fixed and
determinable as of June 30, 2004.
Total 2005 2006 2007 2008 2009 Thereafter
(In millions)
Long-term debt including current portion
(1)
$ 535.3 $ 73.8 $ 27.6 $ — $ — $ — $ 433.9
Lease commitments
(2)
1,001.9 132.8 122.5 108.9 92.6 80.9 464.2
Unconditional purchase obligations
(3)
873.7 372.8 115.0 77.4 76.4 42.7 189.4
Deferred compensation
(4)
16.1 16.1 ———— —
Total contractual obligations $2,427.0 $595.5 $265.1 $186.3 $169.0 $123.6 $1,087.5
(1) Refer to Notes 8 and 12 of Notes to Consolidated Financial Statements.
(2) Includes operating lease commitments, and to a lesser extent, minimal capital lease commitments. Refer to Note 15 of Notes to Consolidated
Financial Statements.
(3) Unconditional purchase obligations primarily include inventory commitments, estimated future earn-out payments, estimated royalty payments pursuant
to license agreements, advertising commitments and capital improvement commitments.
(4)
Share units that were recorded as a component of Stockholders’ Equity as of June 30, 2004 have been converted to the cash equivalent value and
placed in a deferred compensation account in fiscal 2005 based on a decision of the Compensation Committee of the Board of Directors in August 2004.
Payments Due in Fiscal