Estee Lauder 2008 Annual Report Download - page 97

Foreign Exchange Risk Management
The Company enters into foreign currency forward con-
tracts to hedge anticipated transactions, as well as receiv-
ables and payables denominated in foreign currencies, for
periods consistent with the Company’s identifi ed expo-
sures. The purpose of the hedging activities is to minimize
the effect of foreign exchange rate movements on costs
and on the cash fl ows that the Company receives from
foreign subsidiaries. The majority of foreign currency for-
ward contracts are denominated in currencies of major
industrial countries and are with large fi nancial institutions
rated as strong investment grade by a major rating agency.
The Company also enters into foreign currency option
contracts to hedge anticipated transactions where there is
a high probability that anticipated exposures will material-
ize. The foreign currency forward and option contracts
entered into to hedge anticipated transactions have been
designated as cash-fl ow hedges. Hedge effectiveness of
foreign currency forward contracts is based on a hypo-
thetical derivative methodology and excludes the portion
of fair value attributable to the spot-forward difference
which is recorded in current-period earnings. Hedge
effectiveness of foreign currency option contracts is based
on a dollar offset methodology. The ineffective portion of
both foreign currency forward and option contracts is
recorded in current-period earnings. For hedge contracts
that are no longer deemed highly effective, hedge
accounting is discontinued and gains and losses accumu-
lated in other comprehensive income are reclassifi ed to
earnings when the underlying forecasted transaction
occurs. If it is probable that the forecasted transaction will
no longer occur, then any gains or losses accumulated in
other comprehensive income are reclassifi ed to current-
period earnings. As of June 30, 2008, these cash-fl ow
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 fi nancial institutions. The Company does
not have signifi cant exposure to any one counterparty.
Exposure to credit loss in the event of nonperformance by
any of the counterparties is limited to only the recognized,
but not realized, gains attributable to the contracts. Man-
agement believes risk of loss under these hedging con-
tracts is remote and in any event would not be material to
the Company’s consolidated fi nancial results. The con-
tracts have varying maturities through the end of June
2009. Costs associated with entering into such contracts
have not been material to the Company’s consolidated
fi nancial results. The Company does not utilize derivative
fi nancial instruments for trading or speculative purposes.
At June 30, 2008, the Company had foreign currency
forward and option contracts in the amount of $1,229.0
million and $64.9 million, respectively. The foreign curren-
cies included in foreign currency forward contracts
(notional value stated in U.S. dollars) are principally the
Euro ($221.6 million), British pound ($220.7 million),
Swiss franc ($206.5 million), Canadian dollar ($130.0 mil-
lion), Australian dollar ($91.8 million), Russian ruble ($71.9
million) and Japanese yen ($64.4 million). The foreign cur-
rencies included in the foreign currency option contracts
(notional value stated in U.S. dollars) are principally the
Canadian dollar ($36.8 million) and the South Korean
won ($23.1 million).
At June 30, 2007, the Company had foreign currency
forward contracts in the amount of $862.0 million. The
foreign currencies included in foreign currency forward
contracts (notional value stated in U.S. dollars) are princi-
pally the British pound ($148.1 million), Canadian dollar
($140.3 million), Euro ($124.1 million), Swiss franc ($113.1
million), Australian dollar ($79.3 million), Japanese yen
($42.6 million) and South Korean won ($33.6 million).
Interest Rate Risk Management
The Company enters into interest rate derivative contracts
to manage the exposure to fl uctuations of interest rates
on its funded indebtedness and anticipated issuance of
debt for periods consistent with the identifi ed exposures.
All interest rate derivative contracts are with large fi nancial
institutions rated as strong investment grade by a major
rating agency.
In April 2007, the Company entered into interest rate
swap agreements with a notional amount totaling $250.0
million to effectively convert the fi xed rate interest on its
2017 Senior Notes to variable interest rates based on six-
month LIBOR. The interest rate swaps were designated as
fair-value hedges. As of June 30, 2008, these fair-value
hedges were highly effective in all material respects.
In April 2007, the Company terminated an interest-rate
swap agreement with a notional amount of $250.0 million
to effectively convert fi xed rate interest on its 2012 Senior
Notes to variable interest rates based on six-month LIBOR.
This instrument was classifi ed as a liability and had a ter-
mination fair value of $11.1 million at cash settlement,
which included $0.9 million of accrued interest payable to
the counterparty. Hedge accounting treatment was dis-
continued prospectively and the offsetting adjustment to
the carrying amount of the related debt will be amortized
to interest expense over the remaining life of the debt.
THE EST{E LAUDER COMPANIES INC. 95