Avon 2015 Annual Report Download - page 109

NOTE 8. Financial Instruments and Risk Management
We operate globally, with manufacturing and distribution facilities in various countries around the world. We may reduce our exposure to
fluctuations in the fair value and cash flows associated with changes in interest rates and foreign exchange rates by creating offsetting
positions, including through the use of derivative financial instruments. If we use foreign currency-rate sensitive and interest-rate sensitive
instruments to hedge a certain portion of our existing and forecasted transactions, we would expect that any gain or loss in value of the
hedge instruments generally would be offset by decreases or increases in the value of the underlying forecasted transactions. As of
December 31, 2015, we do not have any interest-rate swap agreements.
We do not enter into derivative financial instruments for trading or speculative purposes, nor are we a party to leveraged derivatives. The
master agreements governing our derivative contracts generally contain standard provisions that could trigger early termination of the
contracts in certain circumstances, including if we were to merge with another entity and the creditworthiness of the surviving entity were to
be “materially weaker” than that of Avon prior to the merger.
Derivatives are recognized on the Consolidated Balance Sheets at their fair values. The following table presents the fair value of derivative
instruments outstanding at December 31, 2015:
Asset Liability
Balance Sheet
Classification Fair Value
Balance Sheet
Classification Fair Value
Derivatives not designated as hedges:
Foreign exchange forward contracts Prepaid expenses and other $ 1.2 Accounts payable $ 1.1
Total derivatives not designated as hedges $ 1.2 $ 1.1
Total derivatives $ 1.2 $ 1.1
The following table presents the fair value of derivative instruments outstanding at December 31, 2014:
Asset Liability
Balance Sheet
Classification Fair Value
Balance Sheet
Classification Fair Value
Derivatives not designated as hedges:
Foreign exchange forward contracts Prepaid expenses and other $ .6 Accounts payable $ 4.9
Total derivatives not designated as hedges $ .6 $ 4.9
Total derivatives $ .6 $ 4.9
Interest Rate Risk
A portion of our borrowings is subject to interest rate risk. In the past we have used interest-rate swap agreements, which effectively
converted the fixed rate on long-term debt to a floating interest rate, to manage our interest rate exposure. The agreements were
designated as fair value hedges. As of December 31, 2015 and 2014, all designated interest-rate swap agreements have been terminated
either in conjunction with repayment of the associated debt or in the January 2013 and March 2012 transactions described below.
Approximately 2% and approximately 5% of our debt portfolio at December 31, 2015 and 2014, respectively, was exposed to floating
interest rates.
In January 2013, we terminated eight of our interest-rate swap agreements previously designated as fair value hedges, with notional
amounts totaling $1,000. As of the interest-rate swap agreements’ termination date, the aggregate favorable adjustment to the carrying
value (deferred gain) of our debt was $90.4, which is being amortized as a reduction to interest expense over the remaining term of the
underlying debt obligations. We incurred termination fees of $2.3 which were recorded in other expense, net in the Consolidated
Statements of Operations. For the years ended December 31, 2015 and December 31, 2014, the net impact of the gain amortization was
$14.6 and $14.4, respectively. The interest-rate swap agreements were terminated in order to improve our capital structure, including
increasing our ratio of fixed-rate debt. At December 31, 2015, the unamortized deferred gain associated with the January 2013 interest-rate
swap termination was $35.4, and was classified within long-term debt in the Consolidated Balance Sheets.
A V O N 2015 F-27
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