Avon 2008 Annual Report Download - page 68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally, at December 31, 2008 and 2007, we had interest
rate swaps that were not designated as fair value hedges with
unrealized gains of $3.9 and $9.7, respectively. Long-term debt
at December 31, 2008 and 2007, respectively, included net
unrealized gains (losses) of $80.0 and ($9.4), respectively, on
interest rate swaps designated as fair value hedges. Long-term
debt at December 31, 2008 and 2007, also included remaining
un- amortized gains of $3.9 and $8.4, respectively, resulting
from terminated swap agreements and swap agreements no
longer designated as fair value hedges, which are being amor-
tized to interest expense over the remaining terms of the under-
lying debt. There was no hedge ineffectiveness for the years
ended December 31, 2008, 2007 and 2006, related to these
interest rate swaps.
During 2007, we entered into treasury lock agreements (the
“locks”) with notional amounts totaling $500.0 that expired on
January 31, 2008. On January 31, 2008, we extended the
maturity date of the locks to July 31, 2008 and the locks were
designated as cash flow hedges of the anticipated interest
payments on $250.0 principal amount of the 2013 Notes and
$250.0 principal amount of the 2018 Notes. The losses on the
locks of $38.0 were recorded in accumulated other compre-
hensive loss. $19.2 and $18.8 of the losses are being amortized
to interest expense over five years and ten years, respectively.
During 2005, we entered into treasury lock agreements that we
designated as cash flow hedges and used to hedge exposure to
a possible rise in interest rates prior to the anticipated issuance
of ten- and 30-year bonds. In December 2005, we decided that
a more appropriate strategy was to issue five-year bonds given
our strong cash flow and high level of cash and cash equivalents.
As a result of the change in strategy, in December 2005, we de-
designated the locks as hedges and reclassified the gain of $2.5
on the locks from AOCI to other expense, net. Upon the change
in strategy in December 2005, we entered into a treasury lock
agreement with a notional amount of $250.0 designated as a
cash flow hedge of the $500.0 principal amount of five-year
notes payable issued in January 2006. The loss on the 2005 lock
agreement of $1.9 was recorded in AOCI and is being amortized
to interest expense over five years.
During 2003, we entered into treasury lock agreements that we
designated as cash flow hedges and used to hedge the exposure
to the possible rise in interest rates prior to the issuance of the
4.625% Notes. The loss of $2.6 was recorded in AOCI and is
being amortized to interest expense over ten years.
At December 31, 2008 and 2007, AOCI includes remaining
unamortized losses of $35.2 and $27.9 ($22.9 and $18.1 net of
taxes), respectively, resulting from treasury lock agreements.
Foreign Currency Risk
The primary currencies for which we have net underlying foreign
currency exchange rate exposures are the Argentine peso,
Brazilian real, British pound, Canadian dollar, Chinese renminbi,
Colombian peso, the Euro, Japanese yen, Mexican peso,
Philippine peso, Polish zloty, Russian ruble, Turkish lira, Ukrainian
hryvna and Venezuelan bolivar. We use foreign currency forward
contracts and options to hedge portions of our forecasted
foreign currency cash flows resulting from intercompany
royalties, and other third-party and intercompany foreign cur-
rency transactions where there is a high probability that antici-
pated exposures will materialize. These contracts have been
designated as cash flow hedges.
For the years ended December 31, 2008, 2007 and 2006, the
ineffective portion of our cash flow foreign currency derivative
instruments and the net gains or losses reclassified from AOCI to
earnings for cash flow hedges that had been discontinued be-
cause the forecasted transactions were not probable of occurring
were not material.
At December 31, 2008, the maximum remaining term over
which we were hedging foreign exchange exposures to the
variability of cash flows for all forecasted transactions was 12
months. As of December 31, 2008, we expect to reclassify
$27.2, net of taxes, of net losses on derivative instruments
designated as cash flow hedges from AOCI to earnings during
the next 12 months due to (a) foreign currency denominated
intercompany royalties, (b) intercompany loan settlements and
(c) foreign currency denominated purchases or receipts.
For the years ended December 31, 2008 and 2007, cash flow
hedges impacted AOCI as follows:
2008 2007
Net derivative losses at beginning of year $(17.7) $ (.3)
Net gains on derivative instruments,
net of taxes of $8.4 and $12.2 20.3 16.8
Reclassification of net gains to earnings,
net of taxes of $3.3 and $2.7 (29.8) (34.2)
Net derivative losses at end of year, net of
taxes of $14.8 and $9.7 $(27.2) $(17.7)
Certain forward contracts used to manage foreign currency
exposure of intercompany loans are not designated as hedges. In
these cases, the change in value of the contracts is designed to
offset the foreign currency impact of the underlying exposure.
The change in fair value of these instruments is immediately
recognized in earnings.
We use foreign currency forward contracts and foreign currency-
denominated debt to hedge the foreign currency exposure