Estee Lauder 2009 Annual Report Download - page 141

Foreign Currency Cash-Flow Hedges
The Company enters into foreign currency forward
contracts to hedge anticipated transactions, as well as
receivables and payables denominated in foreign curren-
cies, for periods consistent with the Company’s identifi ed
exposures. 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
forward contracts are denominated in currencies of major
industrial countries. The Company also enters into foreign
currency option contracts to hedge anticipated transac-
tions where there is a high probability that anticipated
exposures will materialize. The foreign currency forward
contracts entered into to hedge anticipated transactions
have been designated as foreign currency cash-flow
hedges and have varying maturities through the end of
June 2010. Hedge effectiveness of foreign currency for-
ward contracts is based on a hypothetical derivative meth-
odology 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 meth-
odology. 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 accumulated in other comprehensive
income (loss) are reclassifi ed to earnings when the under-
lying forecasted transaction occurs. If it is probable that
the forecasted transaction will no longer occur, then any
gains or losses in accumulated other comprehensive
income (loss) are reclassifi ed to current-period earnings.
As of June 30, 2009, the Company’s foreign currency
cash-fl ow hedges were highly effective, in all material
respects. The estimated net gain (loss) as of June 30, 2009
that is expected to be reclassifi ed from accumulated other
comprehensive income (loss) into earnings within the
next twelve months is $10.4 million.
At June 30, 2009, the Company had foreign currency
forward contracts in the amount of $1,260.8 million. The
foreign currencies included in foreign currency forward
contracts (notional value stated in U.S. dollars) are princi-
pally the British pound ($239.1 million), Euro ($212.5 mil-
lion), Swiss franc ($206.8 million), Canadian dollar ($168.0
million), Hong Kong dollar ($79.4 million), Japanese yen
($76.0 million) and Australian dollar ($69.6 million).
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
million), Australian dollar ($91.8 million), Russian ruble
($71.9 million) and Japanese yen ($64.4 million). The
foreign currencies 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).
Fair Value Hedges
The Company enters into interest rate derivative contracts
to manage its exposure to interest rate fl uctuations on its
funded indebtedness and anticipated issuance of debt for
periods consistent with the identifi ed exposures. The
Company has interest rate swap agreements, with a
notional amount totaling $250.0 million, to effectively
convert the fi xed rate interest on its 2017 Senior Notes to
variable interest rates based on six-month LIBOR. These
interest rate swap agreements are designated as fair value
hedges of the related long-term debt and the changes in
the fair values of the interest rate swap agreements are
exactly offset by changes in the fair value of the underly-
ing long-term debt. As of June 30, 2009, these fair-value
hedges were highly effective in all material respects.
Information regarding the Company’s interest rate swap
agreements is presented in the following table:
140 THE EST{E LAUDER COMPANIES INC.
YEAR ENDED OR AT JUNE 30, 2009 YEAR ENDED OR AT JUNE 30, 2008
Notional Weighted Average Notional Weighted Average
Amount Pay Rate Receive Rate Amount Pay Rate Receive Rate
($ in millions)
Interest rate swaps on 2017 Senior Notes $250.0 1.75% 5.55% $250.0 3.17% 5.55%
Credit Risk
As a matter of policy, the Company only enters into deriv-
ative contracts with counterparties that have at least an
“A” (or equivalent) credit rating. The counterparties to
these contracts are major fi nancial institutions. Exposure
to credit risk in the event of nonperformance by any of
the counterparties is limited to the gross fair value of con-
tracts in asset positions, which totaled $41.2 million at
June 30, 2009, of which 42% and 37% were attributable
to two counterparties. To manage this risk, the Company
has established strict counterparty credit guidelines that
are continually monitored and reported to management.