Avon 2008 Annual Report Download - page 70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The net asset (liability) amounts recorded in the balance sheet
(carrying amount) and the estimated fair values of financial
instruments at December 31 consisted of the following:
2008 2007
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Cash and cash
equivalents $1,104.7 $1,104.7 $ 963.4 $ 963.4
Available-for-sale
securities 17.7 17.7 18.5 18.5
Grantor trust cash and
cash equivalents 4.7 4.7 11.0 11.0
Debt maturing within
one year 1,031.4 1,038.6 929.5 929.5
Long-term debt, net of
related discount or
premium 1,456.2 1,346.1 1,167.7 1,178.4
Foreign exchange
forward contracts (10.7) (10.7) 2.8 2.8
Interest-rate swap and
treasury lock
agreements 87.6 87.6 (29.0) (29.0)
The methods and assumptions used to estimate fair value are as
follows:
Available-for-sale securities - The fair values of these investments
were based on the quoted market prices for issues listed on
securities exchanges.
Debt maturing within one year and long-term debt - The fair
values of all debt and other financing were determined based on
quoted market prices.
Foreign exchange forward contracts - The fair values of forward
contracts were based on quoted forward foreign exchange
prices at the reporting date.
Interest rate swap and treasury lock agreements - The fair values
of interest rate swap and treasury lock agreements were esti-
mated based LIBOR yield curves at the reporting date.
NOTE 9. Share-Based Compensation
Plans
The Avon Products, Inc. 2005 Stock Incentive Plan (the “2005
Plan”), which is shareholder approved, provides for several types
of share-based incentive compensation awards including stock
options, stock appreciation rights, restricted stock, restricted
stock units and performance unit awards. Under the 2005 Plan,
the maximum number of shares that may be awarded is
31,000,000 shares, of which no more than 8,000,000 shares
may be used for restricted stock awards and restricted stock unit
awards. Shares issued under share-based awards will be primarily
funded with issuance of new shares.
We have issued stock options, restricted stock, restricted stock
units and stock appreciation rights under the 2005 Plan. Stock
option awards are granted with an exercise price equal to the
closing market price of Avon’s stock at the date of grant; those
option awards generally vest in thirds over the three-year period
following each option grant date and have ten-year contractual
terms. Restricted stock or restricted stock units generally vest
after three years.
We recognized compensation cost of $54.8, $61.6 and $62.9
for stock options, restricted stock, restricted stock units, and
stock appreciation rights, all of which was recorded in selling,
general and administrative expenses, during the three years
ended December 31, 2008, 2007 and 2006, respectively. The
total income tax benefit recognized for share-based arrange-
ments was $18.8, $20.7 and $21.5 during the three years ended
December 31, 2008, 2007 and 2006, respectively. For the years
ended December 31, 2008 and 2007, we have determined that
we have a pool of windfall tax benefits.
Stock Options
The fair value of each option award is estimated on the date of
grant using a Black-Scholes-Merton option pricing model with
the following weighted-average assumptions for options granted
during the years ended December 31, :
2008 2007 2006
Risk-free rate(1) 2.3% 4.5% 5.1%
Expected term(2) 4 years 4 years 4 years
Expected volatility(3) 28% 27% 26%
Expected dividends(4) 2.0% 2.1% 2.3%
(1) The risk-free rate is based upon the rate on a zero coupon U.S. Treasury
bill, for periods within the contractual life of the option, in effect at the
time of grant.
(2) The expected term of the option is based on historical employee
exercise behavior, the vesting terms of the respective option and a
contractual life of ten years.
(3) Expected volatility is based on the weekly historical volatility of our
stock price, over a period similar to the expected life of the option.
(4) Assumes the current cash dividends of $.20, $.185 and $.175 per share
each quarter on Avon’s common stock for options granted during
2008, 2007 and 2006, respectively.
The weighted-average grant-date fair values per share of options
granted during 2008, 2007 and 2006, were $8.04, $8.41 and
$6.75, respectively.