Estee Lauder 2014 Annual Report Download - page 93

THE EST{E LAUDER COMPANIES INC. 91
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 cur-
rencies, for periods consistent with the Company’s identi-
fied 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. The majority of foreign currency
forward contracts are denominated in currencies of major
industrial countries. The Company may also enter into
foreign currency option contracts to hedge anticipated
transactions where there is a high probability that
anticipated exposures will materialize. The foreign cur-
rency 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 2016. Hedge effectiveness of foreign
currency forward contracts is based on a hypothetical
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 for-
ward 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 in AOCI are reclassified 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 in AOCI are reclassified
to current -period earnings. As of June 30, 2014, the
Company’s foreign currency cash-flow hedges were
highly effective in all material respects. The estimated net
loss as of June 30, 2014 that is expected to be reclassified
from AOCI into earnings, net of tax, within the next twelve
months is $6.5 million. The accumulated gain (loss) on
derivative instruments in AOCI was $(12.5) million and
$16.9 million as of June 30, 2014 and June 30, 2013,
respectively.
At June 30, 2014, the Company had foreign currency
forward contracts in the amount of $1,597.3 million. The
foreign currencies included in foreign currency forward
contracts (notional value stated in U.S. dollars) are princi-
pally the British pound ($267.2 million), Euro ($239.8 mil-
lion), Swiss franc ($170.4 million), Canadian dollar ($138.6
million), Australian dollar ($111.3 million), Japanese yen
($108.0 million) and Hong Kong dollar ($103.0 million).
At June 30, 2013, the Company had foreign currency
forward contracts in the amount of $1,579.6 million. The
foreign currencies included in foreign currency forward
contracts (notional value stated in U.S. dollars) are
principally the British pound ($426.2 million), Euro
($268.8 million), Canadian dollar ($198.6 million), Swiss
franc ($111.5 million), Australian dollar ($92.1 million),
Thailand baht ($75.5 million) and Hong Kong dollar
($58.1 million).
Fair-Value Hedges
The Company may enter into interest rate derivative con-
tracts to manage the exposure to interest rate fluctuations
on its funded indebtedness and anticipated issuance of
debt for periods consistent with the identified exposures.
Credit Risk
As a matter of policy, the Company only enters into
derivative contracts with counterparties that have a
long-term credit rating of at least A- or higher by at
least two nationally recognized rating agencies. The
counterparties to these contracts are major financial
institutions. Exposure to credit risk in the event of non-
performance by any of the counterparties is limited to the
gross fair value of contracts in asset positions, which
totaled $4.2 million at June 30, 2014. To manage this risk,
the Company has established strict counterparty credit
guidelines that are continually monitored. Accordingly,
management believes risk of loss under these hedging
contracts is remote.
Certain of the Company’s derivative financial instru-
ments, with two counterparties, contain credit-risk-related
contingent features. At June 30, 2014, the Company was
in a net liability position for certain derivative contracts
that contain such features. Such credit-risk-related contin-
gent features would be triggered if (a) upon a merger
involving the Company, the ratings of the surviving entity
were materially weaker than prior to the merger or (b) the
Company’s credit ratings fall below investment grade
(rated below BBB-/Baa3) and the Company fails to enter
into an International Swaps & Derivatives Association
Credit Support Annex within 30 days of being requested
by the counterparty. The fair value of collateral required to
settle the instruments immediately if a triggering event
were to occur is estimated at approximately the fair value
of the contracts. The fair value of those contracts as of
June 30, 2014 was $4.5 million. As of June 30, 2014, the
Company was in compliance with such credit-risk-related
contingent features.
NOTE 11
— FAIR VALUE MEASUREMENTS
The Company records its financial assets and liabilities at
fair value, which is defined as the price that would be
received to sell an asset or paid to transfer a liability, in the