Avon 2000 Annual Report Download - page 29

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At December 31, 2000, Avon had foreign operating
loss carryforwards of approximately $78.7. The loss carry-
forwards expiring between 2001 and 2008 were $35.5
and the loss carryforwards which do not expire were
$43.2. Capital loss carryforwards, which expire in 2001
and may be used to offset capital gains, if any, were
approximately $.7at December 31, 2000.
In January 2001, the Company received a federal
income tax refund consisting of $32.5 of tax and $62.7 of
interest related to the carryback of foreign tax credits and
general business credits to the years ended December 31,
1982, 1983, 1985 and 1986. The Company recognized
$40.1 million as an income tax benefit in 2000 resulting
from the impact of the tax refund offset by taxes due on
interest received and other related tax obligations.
7Financial Instruments and Risk Management
Risk Management > The Company operates globally, with
manufacturing and distribution facilities in various loca-
tions around the world. The Company may reduce its
exposure to fluctuations in interest rates and foreign
exchange rates by creating offsetting positions through
the use of derivative financial instruments. The Company
does not use derivative financial instruments for trading
or speculative purposes, nor is the Company a party to
leveraged derivatives.
The notional amount of forward exchange contracts
and options is the amount of foreign currency bought or
sold at maturity. The notional amount of interest rate
swaps is the underlying principal amount used in deter-
mining the interest payments exchanged over the life of
the swap. The notional amounts are not a direct measure
of the Company’s exposure through its use of derivatives.
Interest Rates > The Company periodically uses interest
rate swaps to hedge portions of interest payable on its
debt. In addition, the Company may periodically employ
interest rate caps to reduce exposure, if any, to increases in
variable interest rates.
As discussed in Note 4of the Notes to Consolidated
Financial Statements, the Company entered into a five-
year interest rate swap contract with a notional amount of
$50.0 to effectively convert fixed interest on a portion of
the Bonds to a variable interest rate based on libor. The
Company has also entered into four-year and nine-year
interest rate swap contracts with notional amounts of
$200.0 and $300.0, respectively, to convert fixed interest
on the Notes to a variable interest rate, based on libor.
In May 2000, Avon entered into an interest rate cap
agreement with a notional amount of $150.0 expiring on
May 31, 2001, to convert a variable interest rate, resulting
from the interest rate swaps above, to a fixed interest rate.
The cap rate under this contract is 7%.
Foreign Currencies > The Company may periodically
hedge foreign currency royalties, net investments in
foreign subsidiaries, firm purchase commitments and
contractual foreign currency cash flows or obligations,
including third-party and intercompany foreign cur-
rency transactions. The Company regularly monitors
its foreign currency exposures and ensures that hedge
contract amounts do not exceed the amounts of the
underlying exposures.
At December 31, 2000, the Company held foreign
currency forward contracts with notional amounts total-
ing $393.7 (1999 –$290.2) and option contracts with
notional amounts totaling $19.1 (1999–$20.0) to hedge
foreign currency items. All of these contracts mature
within the next 13 months. Additionally, the Company
also held forward contracts with notional amounts total-
ing $34.2 (1999 –$66.7) which do not qualify as hedg-
ing transactions under the current accounting definitions
and, accordingly, have been marked to market. The
mark-to-market adjustments on these forward contracts
at December 31, 2000 and 1999, were not material.
These forward and option contracts to purchase
and sell foreign currencies, including cross-currency
contracts to sell one foreign currency for another currency
at December 31, are summarized below:
2000 1999
Buy Sell Buy Sell
Argentine peso $ — $15.0 $—$—
Brazilian real —8.0 15.0 65.0
British pound 5.5 41.7 7.3 30.1
Canadian dollar — 10.8 — 23.8
Euro 151.3 104.1 82.9 10.0
French franc .9 — 10.9 —
Indonesian rupiah .9 — 1.7 —
Irish punt 2.8 — 1.7 —
Italian lira 1.6 — 4.7 —
Japanese yen 13.7 20.0 4.8 60.5
Mexican peso — 43.8 — 45.0
Polish zloty —8.4 ——
Taiwanese dollar —7.0 —3.0
Other currencies 2.3 9.2 6.2 4.3
Total $179.0 $268.0 $135.2 $241.7
At December 31, 2000, the Company has entered
into forward contracts to purchase approximately
1,374,400 shares of Avon common stock at an average
price of $37.09 per share at December 31, 2000. The
contracts mature over the next 10 months and provide
for physical or net share settlement to the Company.
Accordingly, no adjustment for subsequent changes in
fair value has been recognized. In accordance with the
provisions of eitf 00-19, $51.0 of these contracts have
been included in the accompanying Consolidated Balance
Sheets in Share repurchase commitments with a
corresponding decrease in Additional paid-in capital.