Avon 2004 Annual Report Download - page 23

Off Balance Sheet Arrangements
At December 31, 2004, Avon had no material off balance
sheet arrangements.
Capital Resources
Total debt at December 31, 2004, decreased $203.8 to
$918.0 from $1,121.8 at December 31, 2003, primarily
due to the repayment of Avon’s $200.0, 6.90% Notes in
November 2004 and repayment of foreign debt, partially
offset by commercial paper borrowings (see Note 4,
Debt and Other Financing).
Avon has a five-year, $600.0 revolving credit and com-
petitive advance facility (the “credit facility”), which
expires in 2006. The credit facility may be used for gen-
eral corporate purposes, including financing working
capital and capital expenditures and stock repurchase
programs. The interest rate on borrowings under the
credit facility is based on LIBOR or on the higher of
prime or .5% plus the federal funds rate. The credit facil-
ity has an annual facility fee, payable quarterly, of $0.5,
based on Avon’s current credit ratings. The credit facility
contains various covenants, including one financial
covenant which requires Avon’s interest coverage ratio
(determined in relation to Avon’s consolidated pretax
income and interest expense) to equal or exceed 4:1.
At December 31, 2004, Avon was in compliance with all
covenants in the credit facility. At December 31, 2004,
there were no borrowings under the credit facility. Avon
maintains a $600.0 commercial paper program, which is
supported by the credit facility. Outstanding commercial
paper effectively reduces the amount available for bor-
rowing under the credit facility. At December 31, 2004,
Avon had commercial paper outstanding of $26.9.
The cost of borrowings under the credit facility, as well as
the amount of the facility fee and utilization fee (applica-
ble only if more than 50% of the facility is borrowed),
depend on Avon’s credit ratings. A downgrade in Avon’s
credit ratings would increase the cost to Avon of main-
taining and borrowing under the credit facility or
increase the cost to Avon of issuing commercial paper in
the future. The credit facility does not contain a rating
downgrade trigger that would prevent Avon from bor-
rowing under the credit facility. The credit facility would
become unavailable for borrowing only if Avon were to
fail to satisfy one of the conditions to borrowing in the
facility. These conditions to borrowing are generally
based on the accuracy of certain representations and
warranties, compliance by Avon with the covenants in
the credit facility (discussed above) and the absence of
defaults, including but not limited to bankruptcy and
insolvency, change of control, failure to pay other mate-
rial debts and failure to stay or pay material judgments,
as those events are described more fully in the credit
facility agreement.
At December 31, 2004, Avon was in compliance with all
covenants in its indentures (see Note 4, Debt and Other
Financing). Such indentures do not contain any rating
downgrade triggers that would accelerate the maturity
of its debt.
At December 31, 2004, Avon had an international commit-
ted line of credit of $1.0 of which no amounts were out-
standing. The fee on this line is .25% on the unused portion.
Risk Management Strategies and
Market Rate Sensitive Instruments
The overall objective of Avon’s financial risk manage-
ment program is to reduce the potential negative
effects from changes in foreign exchange and interest
rates arising from Avon’s business activities. Avon may
reduce its exposure to fluctuations in earnings and cash
flows associated with changes in interest rates and for-
eign exchange rates by creating offsetting positions
through the use of derivative financial instruments and
For the three years ended 2004, 2003
and 2002, Avon derived approximately 70%
and 90% of its consolidated net sales and
operating profit, respectively, from operations
of subsidiaries outside of the U.S.