Estee Lauder 2005 Annual Report Download - page 72

THE EST{E LAUDER COMPANIES INC.
facility may be used for general corporate purposes, includ-
ing financing working capital. Up to the equivalent of $250
million of the facility is available for multicurrency loans.
The interest rate on borrowings under the credit facility is
based on LIBOR or on the higher of prime, which is the
rate of interest publicly announced by the administrative
agent, or 1/2%plus the Federal funds rate. The credit facility
has an annual fee of $0.4 million, payable quarterly, based
on the Company’s current credit ratings. The Company
incurred debt issuance costs of $0.3 million which will be
amortized over the term of the facility. The credit facility
contains various covenants, including one financial
covenant which requires the average of the debt of the
Company to total capital ratio at the last day of each fiscal
quarter to be less than 0.65:1. At June 30, 2005, the Com-
pany was in compliance with all financial covenants in the
credit facility and there were no borrowings.
The Company maintains uncommitted credit facilities in
various regions throughout the world. Interest rate terms
for these facilities vary by region and reflect prevailing
market rates for companies with strong credit ratings.
During fiscal 2005 and 2004, the monthly average amount
outstanding was approximately $10.7 million and $5.1 mil-
lion, respectively, and the annualized monthly weighted
average interest rate incurred was approximately 4.95%
and 5.7%, respectively.
The Company also had an effective shelf registration
statement covering the potential issuance of up to $300.0
million in debt securities at June 30, 2005 and 2004.
The following table represents the Company’s projected
debt service payments over the next five fiscal years:
2006 2007 2008 2009 2010
(In millions)
Debt service
(1)
$291.6 $28.9 $27.5 $27.0 $26.1
(1) Includes long-term and short-term debt and the related projected
interest costs, and to a lesser extent, capital lease commitments.
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 deriva-
tives 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.
Payments Due in Fiscal
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 liability
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 com-
prehensive 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 derivative 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 comprehensive
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 treat-
ment, the Company formally documents all relationships
between hedging instruments and hedged items, as well
as its risk-management objective and strategy for under-
taking 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 fore-
casted 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 trans-
actions 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
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