Avon 2011 Annual Report Download - page 18

PART I
One risk associated with our international operations is that the functional currency for most of our international operations is the applicable
local currency. Because of this, movements in exchange rates may have a significant impact on our earnings, assets, cash flow and financial
position. For example, currencies for which we have significant exposures include the Argentine peso, Australian dollar, Brazilian real, British
pound, Canadian dollar, Chinese renminbi, Colombian peso, the euro, Mexican peso, Philippine peso, Polish zloty, Russian ruble, South
Africa rand, Turkish lira, Ukrainian hryvnia and Venezuelan bolívar. Periodically, we implement foreign currency hedging and risk
management strategies to reduce our exposure to fluctuations in earnings and cash flows associated with changes in foreign exchange
rates. There can be no assurance that foreign currency fluctuations will not have a material adverse effect on our business, results of
operations and financial condition.
Another risk associated with our international operations is the possibility that a foreign government may impose currency remittance
restrictions. Due to the possibility of government restrictions on transfers of cash out of the country and control of exchange rates, we may
not be able to immediately repatriate cash at the official exchange rate or if the official exchange rate devalues, it may have a material
adverse effect on our business, results of operations and financial condition. For example, currency restrictions enacted by the Venezuelan
government in 2003 have become more restrictive and have impacted the ability of our subsidiary in Venezuela (Avon Venezuela) to obtain
foreign currency at the official rate to pay for imported products. Unless official foreign exchange is made more readily available, Avon
Venezuela’s operations will continue to be negatively impacted as it will need to obtain more of its foreign currency needs from
non-government sources where the exchange rate is less favorable than the official rate.
Inflation is another risk associated with our international operations. For example, Venezuela has been designated as a highly inflationary
economy. Gains and losses resulting from the remeasurement of the financial statements of subsidiaries operating in highly inflationary
economies are recorded in earnings. Given Venezuela’s designation as a highly inflationary economy and the devaluation of the official rate,
our revenue, operating profit, and net income will continue to be negatively impacted in 2012 and beyond. In addition, there can be no
assurance that other countries in which we operate will not also become highly inflationary and that our operations will not be negatively
impacted as a result. See the “Segment Review” section within MD&A on pages 30 through 32 of our 2011 Annual Report for additional
information regarding Venezuela.
A general economic downturn, a recession globally or in one or more of our geographic
regions or sudden disruption in business conditions or other challenges may adversely affect
our business and our access to liquidity and capital.
A downturn in the economies in which we sell our products, including any recession in one or more of our geographic regions,
or the current global macro-economic pressures, could adversely affect our business and our access to liquidity and capital. Recent global
economic events over the past few years, including job losses, the tightening of credit markets and failures of financial institutions and other
entities, have resulted in challenges to our business and a heightened concern regarding further deterioration globally. We could experience
declines in revenues, profitability and cash flow due to reduced orders, payment delays, supply chain disruptions or other factors caused by
economic or operational challenges. Any or all of these factors could potentially have a material adverse effect on our liquidity and capital
resources, including our ability to issue commercial paper, raise additional capital and maintain credit lines and offshore cash balances. An
adverse change in our credit ratings could result in an increase in our borrowing costs and have an adverse impact on our ability to access
certain debt markets, including the commercial paper market.
Consumer spending is also generally affected by a number of factors, including general economic conditions, inflation, interest rates, energy
costs, gasoline prices and consumer confidence generally, all of which are beyond our control. Consumer purchases of discretionary items,
such as beauty and related products, tend to decline during recessionary periods, when disposable income is lower, and may impact sales of
our products. We face continued economic challenges in fiscal 2012 because customers may continue to have less money for discretionary
purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit and sharply falling home prices, among other things.
In addition, sudden disruptions in business conditions as a result of a terrorist attack similar to the events of September 11, 2001, including
further attacks, retaliation and the threat of further attacks or retaliation, war, adverse weather conditions and climate changes or other
natural disasters, such as Hurricane Katrina, pandemic situations or large scale power outages can have a short or, sometimes, long-term
impact on consumer spending.