Avon 2009 Annual Report Download - page 55

contain standard provisions that could trigger early termination
of the contracts in some circumstances, including if we were to
merge with another entity and the creditworthiness of the sur-
viving entity were to be “materially weaker” than that of Avon
prior to the merger.
Interest Rate Risk
Our long-term, fixed-rate borrowings are subject to interest rate
risk. We use interest rate swaps, which effectively convert the
fixed rate on the long-term debt to afloating interest rate, to
manage our interest rate exposure. At December 31, 2009, we
held interest rate swap agreements that effectively converted
approximately 82% of our outstanding long-term, fixed-rate
borrowings to avariable interest rate based on LIBOR, as compared
to 50% at December 31, 2008. Our total exposure to floating
interest rates was 83% at December 31, 2009, and 65% at
December 31, 2008.
Our long-term borrowings and interest rate swaps were analyzed
at year-end to determine their sensitivity to interest rate changes.
Based on theoutstanding balance of all these financial instruments
at December 31, 2009, ahypothetical 50-basis-point change
(either an increase or adecrease) in interest rates prevailing at
that date, sustained for one year, would not represent amaterial
potential change in fair value, earnings or cash flows. This potential
change was calculated based on discounted cash flow analyses
using interest rates comparable to our current cost of debt.
Foreign Currency Risk
We operate globally, with operations in various locations around
the world. Over the past three years, approximately 80% of our
consolidated revenue was derived from operations of subsidiaries
outside of the U.S. The functional currency formost of our foreign
operations is the local currency. We are exposed to changes in
financial market conditions in the normal course of our operations,
primarily due to international businesses and transactions
denominated in foreign currencies and the use of various financial
instruments to fund ongoing activities. At December 31, 2009,
the primary currencies for which we had net underlying foreign
currency exchange rate exposures were 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 hryvnia
and Venezuelan bolivar.
We may reduce our exposure to fluctuations in cash flows
associated with changes in foreign exchange rates by creating
offsetting positions through the use of derivative financial
instruments.
Our hedges of our foreign currency exposure are not designed
to, and, therefore, cannot entirely eliminate the effect of
changes in foreign exchange rates on our consolidated financial
position, results of operations and cash flows.
Our foreign-currency financial instruments were analyzed at
year-end to determine their sensitivity to foreign exchange rate
changes. Based on our foreign exchange contracts at December
31, 2009, the impact of ahypothetical 10% appreciation or 10%
depreciation of the U.S. dollar against our foreign exchange
contracts would not represent amaterial potential change in fair
value, earnings or cash flows. This potential change does not
consider our underlying foreign currency exposures. The hypothetical
impact was calculated on the open positions using forward
rates at December 31, 2009, adjusted for an assumed 10%
appreciation or 10% depreciation of the U.S. dollar against these
hedging contracts.
Credit Risk of Financial Instruments
We attempt to minimize our credit exposure to counterparties by
entering into derivative transactions and similar agreements only
with major international financial institutions with "A" or higher
credit ratings as issued by Standard &Poor's Corporation. Our
foreign currency and interest rate derivatives are comprised of
over-the-counter forward contracts, swaps or options with major
international financial institutions. Although our theoretical
credit risk is the replacement cost at the then estimated fair
value of these instruments, we believe that the risk of incurring
credit risk losses is remote and that such losses, if any, would not
be material.
Non-performance of the counterparties on the balance of all the
foreign exchange and interest rate agreements would result in a
write-off of $60.0 at December 31, 2009. In addition, in the
event of non-performance by such counterparties, we would be
exposed to market risk on the underlying items being hedged as
aresult of changes in foreign exchange and interest rates.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Reference is made to the Index on page F-1 of our Consolidated
Financial Statements and Notes thereto contained herein.
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
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