Avon 2001 Annual Report Download - page 32

PAGE 56
Avon has designated the interest rate swaps as fair
value hedges of the changes in the fair value of fixed-rate
debt pursuant to FAS No. 133 (see Note 4, Debt and
Other Financing). During 2002 and 2001, Long-term
debt increased by $46.8 and $33.2, respectively, with a
corresponding increase to Other assets to reflect the fair
values of outstanding interest rate swaps. Long-term debt
also includes remaining unamortized gains of $5.4 and
$7.5 at December 31, 2002 and 2001, respectively, result-
ing from terminated swap agreements, which are being
amortized over the remaining terms of the underlying
debt. There were no amounts of hedge ineffectiveness for
the years ended December 31, 2002 and 2001, related to
these interest rate swaps.
At December 31, 2001, Avon held forward interest
rate agreements to protect against increases in interest
rates on a portion of Avon’s fixed to variable interest rate
swap agreements as follows:
Notional Maturity
Amount Date
$150.0 May 15, 2002
150.0 November 15, 2002
250.0 May 15, 2002
The forward interest rate agreements were not
designated as hedges and the changes in fair value were
recorded in earnings in the Consolidated Statements of
Income. These agreements were settled in 2002. The impact
was not material to the Consolidated Financial Statements.
At December 31, 2002, Avon held a treasury lock
agreement with a notional amount of $100.0 that expires
in May 2003 and is used to hedge the exposure to a possi-
ble rise in interest rates prior to the anticipated issuance of
debt in connection with the exercise of the put/call option
associated with the $100.0 bonds maturing in May 2018.
The agreement will be settled at the time the new debt
is expected to be issued. Upon settlement of the agree-
ment, the realized gain or loss to be received or paid by
Avon will be amortized as interest expense over the life
of the new debt. Avon has designated the treasury lock
agreement as a cash flow hedge. For the year ended
December 31, 2002, the treasury lock agreement was
determined to be highly effective, and no ineffective por-
tion was recognized in earnings.
Foreign Currency Risk > Avon uses foreign currency forward
contracts and options to hedge portions of its forecasted
foreign currency cash flows resulting from intercompany
royalties, intercompany loans, and other third-party and
intercompany foreign currency transactions where there is
a high probability that anticipated exposures will materi-
alize. These contracts have been designated as cash flow
hedges. At December 31, 2002, the primary currencies for
which Avon has net underlying foreign currency exchange
rate exposure are the U.S. dollar versus the Argentine peso,
Brazilian real, British pound, Canadian dollar, the euro,
Japanese yen, Mexican peso, Philippine peso, Polish zloty,
Russian ruble and Venezuelan bolivar.
For the years ended December 31, 2002 and 2001,
the ineffective portion of Avon’s cash flow hedging instru-
ments was not material. In addition, the portion of hedg-
ing instruments excluded from the assessment of hedge
effectiveness (time value of options prior to June 1, 2001)
was not material. For the years ended December 31, 2002
and 2001, the net gains or losses reclassified from OCI to
earnings for cash flow hedges that had been discontinued
because the forecasted transactions were not probable of
occurring, were not material.
At December 31, 2002, Avon held foreign
currency forward contracts and option contracts, princi-
pally for the euro, Japanese yen, British pound, Canadian
dollar, Brazilian real, Polish zloty and Mexican peso,
with aggregate notional amounts totaling $218.6 and
$34.6, respectively, for both the purchase and/or sale of
foreign currencies.
At December 31, 2002, the maximum remaining
term over which Avon was hedging exposures to the vari-
ability of cash flows for all forecasted transactions was
13 months. As of December 31, 2002, Avon expects to
reclassify $4.0 ($2.6, net of taxes) of net losses on deriva-
tive instruments designated as cash flow hedges from
Accumulated other comprehensive loss to earnings during
the next 12 months due to (a) foreign currency denomi-
nated intercompany royalties, (b) intercompany loan set-
tlements and (c) foreign currency denominated purchases
or receipts.
For the year ended December 31, 2002 and 2001,
cash flow hedges impacted Accumulated other compre-
hensive loss as follows:
2002 2001
Net derivative losses at beginning of year $(2.2) $ —
Cumulative effect of accounting change,
net of taxes of $2.1 —(3.9)
Net (losses) gains on derivative instruments,
net of taxes of $.2 and $1.8 .4 (3.3)
Reclassification of net losses (gains) to
earnings, net of taxes of $.4 and $2.7 (.8) 5.0
Net derivative losses at end of year,
net of taxes of $1.4 and $1.2 $(2.6) $(2.2)
During 2002 and 2001, Avon held foreign currency
forward contracts and options to protect against the
adverse effects that exchange rate fluctuations may have on
the earnings of its foreign subsidiaries. These derivatives
do not qualify for hedge accounting and, therefore, the
gains and losses on these derivatives have been recognized
in earnings each reporting period.