Avon 2015 Annual Report Download - page 110

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2012, we terminated two of our interest-rate swap agreements previously designated as fair value hedges, with notional amounts
totaling $350. As of the interest-rate swap agreements’ termination date, the aggregate favorable adjustment to the carrying value
(deferred gain) of our debt was $46.1, which is being amortized as a reduction to interest expense over the remaining term of the
underlying debt obligations through March 2019. We incurred termination fees of $2.5 which were recorded in other expense, net in the
Consolidated Statements of Operations. For the years ended December 31, 2015 and 2014, the net impact of the gain amortization was
$6.6 and $6.3, respectively. The interest-rate swap agreements were terminated in order to increase our ratio of fixed-rate debt. At
December 31, 2015, the unamortized deferred gain associated with the March 2012 interest-rate swap termination was $22.8, and was
classified within long-term debt in the Consolidated Balance Sheets.
At times, we may de-designate the hedging relationship of a receive-fixed/pay-variable interest-rate swap agreement. In these cases, we
enter into receive-variable/pay fixed interest-rate swap agreements that are designated to offset the gain or loss on the de-designated
contract. At December 31, 2015 and 2014, we do not have undesignated interest-rate swap agreements.
During 2007, we entered into treasury lock agreements (the “2007 locks”) with notional amounts totaling $500.0 that expired on July 31,
2008. The 2007 locks were designated as cash flow hedges of the anticipated interest payments on $250.0 principal amount of notes due in
2013 and $250.0 principal amount of the 2018 Notes. The losses on the 2007 locks of $38.0 were recorded in AOCI. $19.2 of the losses
were amortized to interest expense in the Consolidated Statements of Operations over five years and $18.8 are being amortized over ten
years.
As of December 31, 2015, we expect to reclassify $1.9, net of taxes, of net losses on derivative instruments designated as cash flow hedges
from AOCI to earnings during the next twelve months.
For the years ended December 31, 2015 and 2014, treasury lock agreements impacted AOCI as follows:
2015 2014
Pre-tax net unamortized losses at beginning of year(1) $(5.9) $(7.8)
Reclassification of net losses to earnings 1.9 1.9
Pre-tax net unamortized losses at end of year(1) $(4.0) $(5.9)
(1) Amounts above exclude taxes of $2.7 for each period presented, which will be recognized in earnings at the end of the ten-year amortization period.
Foreign Currency Risk
We use foreign exchange forward contracts to manage a portion of our foreign currency exchange rate exposures. At December 31, 2015,
we had outstanding foreign exchange forward contracts with notional amounts totaling approximately $127.9 for various currencies.
We use foreign exchange forward contracts to manage foreign currency exposure of certain intercompany loans. These contracts are not
designated as hedges. The change in fair value of these contracts is immediately recognized in earnings and substantially offsets the foreign
currency impact recognized in earnings relating to the associated intercompany loans. During 2015 and 2014, we recorded losses of $2.7
and $14.9, respectively, in other expense, net in the Consolidated Statements of Operations related to these undesignated foreign exchange
forward contracts. Also during 2015 and 2014, we recorded a loss of $2.5 and a gain of $16.6, respectively, related to the intercompany
loans, caused by changes in foreign currency exchange rates.
Credit Risk of Financial Instruments
At times, we attempt to minimize our credit exposure to counterparties by entering into derivative transactions and similar agreements with
major international financial institutions with “A” or higher credit ratings as issued by Standard & Poor’s Corporation. Our foreign currency
derivatives are typically 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 agreements would have resulted in a write-off of $1.2 at
December 31, 2015. 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 a result of changes in foreign exchange rates.
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