Financial Instruments and Risk Management

12 Months Ended

Dec. 31, 2016

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

Financial Instruments and Risk Management

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, 2016, 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 in the Consolidated Balance Sheets at their fair values. The following table presents the fair value of derivative instruments outstanding at December 31, 2016:

	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	$	3.0
Total derivatives not designated as hedges		$	.6		$	3.0
Total derivatives		$	.6		$	3.0

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

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, 2016 and 2015, 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 1% and approximately 2% of our debt portfolio at December 31, 2016 and 2015, 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. The interest-rate swap agreements were terminated in order to improve our capital structure, including increasing our ratio of fixed-rate debt. 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. During the years ended December 31, 2016 and December 31, 2015, the net impact of the gain amortization was $35.4 and $14.6, respectively, including $23.6 related to the extinguishment of debt during the year ended December 31, 2016 (see Note 6, Debt and Other Financing). At December 31, 2016, there is no unamortized deferred gain associated with the January 2013 interest-rate swap termination, as the underlying debt obligations have been paid.

In March 2012, we terminated two of our interest-rate swap agreements previously designated as fair value hedges, with notional amounts totaling $350. The interest-rate swap agreements were terminated in order to increase our ratio of fixed-rate debt. As of the interest-rate swap agreements’ termination date, the aggregate favorable adjustment to the carrying value (deferred gain) of our debt was $46.1, which is being amortized as a reduction to interest expense over the remaining term of the underlying debt obligations through March 2019. During the years ended December 31, 2016 and 2015, the net impact of the gain amortization was $11.9 and $6.6, respectively, including $5.8 related to the extinguishment of debt during the year ended December 31, 2016 (see Note 6, Debt and Other Financing). At December 31, 2016, the unamortized deferred gain associated with the March 2012 interest-rate swap termination was $10.9, and was classified within long-term debt in the Consolidated Balance Sheets.

At times, we may de-designate the hedging relationship of a receive-fixed/pay-variable interest-rate swap agreement. In these cases, we enter into receive-variable/pay fixed interest-rate swap agreements that are designated to offset the gain or loss on the de-designated contract. At December 31, 2016 and 2015, we do not have any undesignated interest-rate swap agreements.

During 2007, we entered into treasury lock agreements (the "2007 locks") with notional amounts totaling $500.0 that expired on July 31, 2008. The 2007 locks were designated as cash flow hedges of the anticipated interest payments on $250.0 principal amount of notes due in 2013 and $250.0 principal amount of the 2018 Notes. The losses on the 2007 locks of $38.0 were recorded in AOCI. $19.2 of the losses were amortized to interest expense in the Consolidated Statements of Operations over five years and $18.8 were being amortized over ten years. During 2016, we accelerated the recognition of $2.6 of the losses on the 2007 locks related to the extinguishment of debt (see Note 6, Debt and Other Financing). As a result, there are no more unamortized deferred losses relating to the treasury lock agreements in AOCI.

For the years ended December 31, 2016 and 2015, treasury lock agreements impacted AOCI as follows:

	2016			2015
Pre-tax net unamortized deferred losses at beginning of year(1)	$	(4.0	)	$	(5.9	)
Reclassification of net losses to earnings	4.0			1.9
Pre-tax net unamortized deferred losses at end of year(1)	$	—		$	(4.0	)

(1)Amounts above exclude taxes of $2.7 at the beginning of year in 2016 and 2015 and at the end of year in 2015.

Foreign Currency Risk

We use foreign exchange forward contracts to manage a portion of our foreign currency exchange rate exposures. At December 31, 2016, we had outstanding foreign exchange forward contracts with notional amounts totaling approximately $125 for various currencies.

We use foreign exchange forward contracts to manage foreign currency exposure of certain intercompany loans. These contracts are not designated as hedges. The change in fair value of these contracts is immediately recognized in earnings and substantially offsets the foreign currency impact recognized in earnings relating to the associated intercompany loans. During 2016 and 2015, we recorded losses of $13.5 and $2.7, respectively, in other expense, net in the Consolidated Statements of Operations related to these undesignated foreign exchange forward contracts. Also during 2016 and 2015, we recorded a gain of $10.4 and a loss $2.5, respectively, related to the intercompany loans, caused by changes in foreign currency exchange rates.

Credit Risk of Financial Instruments

At times, we attempt to minimize our credit exposure to counterparties by entering into derivative transactions and similar agreements with major international financial institutions with "A" or higher credit ratings as issued by Standard & Poor’s Corporation. Our foreign currency derivatives are typically comprised of over-the-counter forward contracts, swaps or options with major international financial institutions. Although our theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, we believe 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 balance of all the foreign exchange agreements would have resulted in a write-off of $.6 at December 31, 2016. In addition, in the event of non-performance by such counterparties, we would be exposed to market risk on the underlying items being hedged as a result of changes in foreign exchange rates.