Estee Lauder 2005 Annual Report Download - page 73

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THE EST{E LAUDER COMPANIES INC.
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
subsidiaries. Almost all foreign currency contracts are
denominated 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 transactions 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 cash-flow hedges. As of June 30, 2005,
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
contracts are major financial institutions. The Company
does not have significant exposure to any one counter-
party. Exposure to credit loss in the event of nonperfor-
mance by any of the counterparties is limited to only the
recognized, but not realized, gains attributable to the con-
tracts. Management believes risk of loss under these hedg-
ing contracts is remote and in any event would not be
material to the Company’s consolidated financial results.
The contracts have varying maturities through the end of
June 2006. 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, 2005, the Company had foreign currency
contracts in the form of forward exchange contracts and
option contracts in the amount of $667.5 million and
$120.9 million, respectively. The foreign currencies
included in forward exchange contracts (notional value
stated in U.S. dollars) are principally the Swiss franc
($128.6 million), British pound ($127.6 million), Euro
($123.3 million), Canadian dollar ($78.1 million), Australian
dollar ($43.3 million), Japanese yen ($31.6 million) and
South Korean won ($27.6 million). The foreign currencies
included in the option contracts (notional value stated
in U.S. dollars) are principally the Japanese yen ($33.6
million), South Korean won ($26.3 million), Euro ($21.5
million) and Swiss franc ($20.3 million). At June 30, 2004,
the Company had foreign currency contracts in the form of
forward exchange contracts and option contracts in the
amount of $593.6 million and $82.0 million, respectively.
The foreign currencies included in forward exchange con-
tracts (notional value stated in U.S. dollars) are principally
the Euro ($122.6 million), Swiss franc ($117.1 million),
British pound ($72.8 million), Japanese yen ($66.7 million),
South Korean won ($42.0 million), Canadian dollar ($41.7
million) and Australian dollar ($33.7 million). The foreign
currencies included in the option contracts (notional value
stated in U.S. dollars) are principally the Euro ($34.1 million),
British pound ($25.4 million) and Swiss franc ($12.7 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 for periods con-
sistent 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 $250.0 million
to effectively convert fixed interest on the existing 6%
Senior Notes to a variable interest rate based on six-month
LIBOR. The interest rate swap was designated as a fair-value
hedge. As of June 30, 2005, the fair-value hedge was highly
effective, in all material respects.
72
Information regarding the interest rate swap is presented in the following table:
Notional Notional
Amount Pay Rate Receive Rate Amount Pay Rate Receive Rate
($ in millions)
Interest rate swap $250.0 4.31% 6.00% $250.0 3.14% 6.00%
Weighted AverageWeighted Average
YEAR ENDED OR AT JUNE 30, 2004YEAR ENDED OR AT JUNE 30, 2005