Estee Lauder 2008 Annual Report Download - page 96

facility. The credit facility has an annual fee of $0.4 million,
payable quarterly, based on the Company’s current credit
ratings. The credit facility contains various covenants,
including one financial covenant which requires the
Company’s interest expense coverage ratio (as defi ned in
the facility) at the last day of each fi scal quarter to be
greater than 3.0:1.0. As of June 30, 2008, the Company
was in compliance with this fi nancial covenant. There are
no other conditions where the lender’s commitments may
be withdrawn, other than certain events of default, as
defi ned in the facility, which are customary for facilities of
this type.
The Company maintains uncommitted credit facilities
in various regions throughout the world. Interest rate
terms for these facilities vary by region and refl ect prevail-
ing market rates for companies with strong credit ratings.
During fi scal 2008 and 2007, the monthly average amount
outstanding was approximately $17.4 million and $20.0
million, respectively, and the annualized monthly weighted
average interest rate incurred was approximately 5.76%
and 5.96%, respectively.
Refer to Note 15 for the Company’s projected debt
service payments over the next fi ve fi scal years.
NOTE 12 — FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company addresses certain financial exposures
through a controlled program of risk management that
includes the use of derivative fi nancial instruments. The
Company primarily enters into foreign currency forward
and option contracts to reduce the effects of fl uctuating
foreign currency exchange rates. The Company, if neces-
sary, 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 at their fair value and are
included in Prepaid expenses and other current assets or
Other accrued liabilities in the accompanying balance
sheets. The associated gains and losses on these deriva-
tives are recorded in Cost of sales and Selling, general and
administrative expenses in the accompanying statements
of earnings. 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 fi rm commitment (“fair-value” hedge), (ii) a
hedge of a forecasted transaction or of the variability of
cash fl ows to be received or paid related to a recognized
asset or liability (“cash-flow” hedge), (iii) a foreign-
currency fair-value or cash-fl ow hedge (“foreign-currency”
hedge), (iv) a hedge of a net investment in a foreign oper-
ation, or (v) other. Changes in the fair value of a derivative
that is highly effective as (and that is designated and qual-
ifi es 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 fi rm commit-
ments), are recorded in current-period earnings. Changes
in the fair value of a derivative that is highly effective as
(and that is designated and qualifi es as) a cash-fl ow hedge
are recorded in other comprehensive income, until
earnings are affected by the variability of cash fl ows (e.g.,
when periodic settlements on a variable-rate asset or lia-
bility are recorded in earnings). Changes in the fair value
of derivatives that are highly effective as (and that are des-
ignated 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 fi rm
commitment that is to be settled in a foreign currency) or
a cash-fl ow 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 cur-
rent-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, the nature of the risk being
hedged, how the hedging instruments’ effectiveness in
offsetting the hedged risk will be assessed prospectively
and retrospectively, and a description of the method of
measuring ineffectiveness. This process includes linking all
derivatives that are designated as fair-value, cash-fl ow, or
foreign-currency hedges to specifi c assets and liabilities
on the balance sheet or to specifi c fi rm commitments or
forecasted transactions. The Company also formally
assesses, both at the hedge’s inception and on an ongo-
ing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in
fair values or cash fl ows of hedged items. If it is deter-
mined 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.
94 THE EST{E LAUDER COMPANIES INC.