Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We hold securities in our investment portfolio that are sensitive to market risks. Our securities with fixed interest rates may have their market value adversely impacted by a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to a fall in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our investments in debt securities as available‑for‑sale, no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other‑than‑temporary. Should interest rates fluctuate by 10%, our interest income would change by an immaterial amount over an annual period. We do not believe that we have a material exposure to interest rate risk as our investment policies specify credit quality standards for our investments and limit the amount of credit exposure from any single issue, issuer or type of investment.
We do not believe that inflation and changing prices have had a material impact on our results of operations, and as approximately 46% and 29% of our investments at December 31, 2021 are in corporate debt securities with a minimum rating of Aa2 (Moody’s)/AA (Standard and Poor’s) and debt securities issued by the U.S. government or its agencies, respectively, our exposure to liquidity and credit risk is not believed to be significant.
At December 31, 2021, our borrowings consisted of $295.8 million outstanding under the 2026 Term Loans. The 2026 Term Loans bear interest at the one-, three- or six-month LIBOR rate of our choosing, plus 2.5% with a 0.5% LIBOR floor. We are currently using the three-month LIBOR rate, which was 0.21% at December 31, 2021. A 10% increase in the one-month LIBOR rate would not have increased the amount of interest we owed under this agreement as the LIBOR floor of 0.5% is higher than the LIBOR rate plus 10%. At December 31, 2020, under the 2023 Term Loans which had no LIBOR floor, a 10% increase in the one-month LIBOR rate, which was the LIBOR rate in use at the time, would have increased the amount of interest we owed by approximately $0.4 million. For a discussion about risks relating to LIBOR, see “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “Discontinuation, reform or replacement of LIBOR, or uncertainty related to the potential for any of the foregoing, may adversely affect us.”
Currency Exchange Rate Risk
Manufacturing and royalty revenues we receive on certain of our products and services are a percentage of the net sales made by our licensees, and a portion of these sales are made in countries outside the U.S. and are denominated in currencies in which the product is sold, which is predominantly the euro. The manufacturing and royalty payments on these non‑U.S. sales are calculated initially in the currency in which the sale is made and are then converted into USD to determine the amount that our licensees pay us for manufacturing and royalty revenues. Fluctuations in the exchange ratio of the USD and these non‑U.S. currencies will have the effect of increasing or decreasing our revenues even if there is a constant amount of sales in non‑U.S. currencies. For example, if the USD weakens against a non‑U.S. currency, then our revenues will increase given a constant amount of sales in such non‑U.S. currency. For the year ended December 31, 2021, an average 10% strengthening of the USD relative to the currencies in which these
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products are sold would have resulted in revenues being reduced by approximately $ 33.1 million, as compared to a reduction in revenues of approximately $ 2 8.9 million for the year ended December 31, 20 20 .
We incur significant operating costs in Ireland and face exposure to changes in the exchange ratio of the USD and the euro arising from expenses and payables at our Irish operations that are settled in euro. The impact of changes in the exchange ratio of the USD and the euro on our USD denominated revenues earned in countries other than the U.S. is partially offset by the opposite impact of changes in the exchange ratio of the USD and the euro on operating expenses and payables incurred at our Irish operations that are settled in euro. For the year ended December 31, 2021, an average 10% weakening in the USD relative to the euro would have resulted in an increase to our expenses denominated in euro of approximately $8.3 million, as compared to an increase in our expenses of approximately $7.3 million in the year ended December 31, 2020.
Item 8. Financial Statements and Supplementary Data
All financial statements required to be filed hereunder are filed as exhibits hereto, are listed under Item 15(a) (1) and (2) and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.