Avon 2001 Annual Report Download - page 33

PAGE 57
At December 31, 2002, certain Avon subsidiaries
held U.S. dollar denominated assets, primarily to mini-
mize foreign-currency risk and provide liquidity as fol-
lows: Mexico ($23.5), Argentina ($12.4), Venezuela ($6.8)
and Brazil ($7.6). For the years ended December 31, 2002
and 2001, Other (income) expense, net included net trans-
action gains of $27.8 and $8.0, respectively, related to
these U.S. dollar denominated assets.
Hedges of Net Investments in Foreign Operations > Avon
uses foreign currency forward contracts and foreign
currency denominated debt to hedge the foreign currency
exposure related to the net assets of certain of its
foreign subsidiaries.
During 2001, Avon entered into loan agreements
and notes payable to borrow Japanese yen to hedge Avon’s
net investment in its Japanese subsidiary (see Note 4,
Debt and Other Financing). During 2001, Avon also
entered into foreign currency forward contracts to hedge
its net investment in its Mexican subsidiary. The forward
contracts were settled in 2002. For the years ended
December 31, 2002 and 2001, net losses of $.8 and net
gains of $5.1, respectively, related to the effective portion
of these hedges were included in foreign currency transla-
tion adjustments within Accumulated other comprehen-
sive loss on the Consolidated Balance Sheets.
Credit and Market Risk > Avon attempts to minimize its
credit exposure to counterparties by entering into interest
rate swap, forward rate, interest rate cap contracts and
treasury lock agreements only with major international
financial institutions with “A” or higher credit ratings as
issued by Standard & Poor’s Corporation. Avon’s foreign
currency and interest rate derivatives are comprised of
over-the-counter forward contracts, swaps or options with
major international financial institutions. Although the
Company’s theoretical credit risk is the replacement cost
at the then estimated fair value of these instruments,
management believes 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 bal-
ance of all the foreign exchange and interest rate swap and
forward rate agreements would not result in a material
write-off at December 31, 2002. In addition, in the event
of non-performance by such counterparties, Avon would
be exposed to market risk on the underlying items being
hedged as a result of changes in foreign exchange and
interest rates.
Fair Value of Financial Instruments > The fair value of a
financial instrument is the amount at which the instru-
ment could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
The methods and assumptions used to estimate fair
value are as follows:
Grantors trust > The fair values of these investments,
principally fixed income funds and equity securities, were
based on the quoted market prices for issues listed on secu-
rities exchanges.
Debt maturing within one year and Long-term debt >
The fair values of all debt and other financing were esti-
mated based on quoted market prices.
Share repurchase commitments and foreign exchange
forward and option contracts > The fair values of forward
and option contracts were estimated based on quoted mar-
ket prices from banks.
Interest rate swap, forward rate, treasury lock and cap
agreements > The fair values of interest rate swap, forward
rate, treasury lock and cap agreements were estimated
based on quotes from market makers of these instruments
and represent the estimated amounts that Avon would
expect to receive or pay to terminate the agreements.
The asset (liability) amounts recorded in the bal-
ance sheet (carrying amount) and the estimated fair values
of financial instruments at December 31 consisted of
the following:
2002 2001
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and cash
equivalents $ 606.8 $ 606.8 $ 508.5 $ 508.5
Grantors trust 49.6 49.6 62.1 62.1
Debt maturing
within one year (605.2) (647.1) (88.8) (88.8)
Long-term debt,
net of related dis-
count or premium (769.2) (760.5) (1,236.2) (1,250.3)
Share repurchase
commitments ——(.6) (.7)
Foreign exchange
forward and
option contracts 7.2 7.2 (7.3) (7.3)
Interest rate swap,
forward rate,
treasury lock and
cap agreements 82.1 82.1 35.1 35.1