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.
Although we have seen a significant increase in the number of our investment securities in unrealized loss positions, we do not believe our exposure to liquidity and credit risk to be significant as approximately 47% and 45% of our investments at December 31, 2022 are in corporate debt securities with a minimum rating of A2 (Moody’s)/A (Standard and Poor’s) and debt securities issued by the U.S. government or its agencies, respectively. We have the intent and ability to hold these securities until recovery, which may be at maturity.
At December 31, 2022, our borrowings consisted of $294.8 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 one-month LIBOR rate, which was 4.32% at December 31, 2022. A 10% increase in the one-month LIBOR rate would have increased the amount of interest we owed by approximately $1.3 million. At December 31, 2021, a 10% increase in the three-month LIBOR rate, which was the LIBOR rate in use at the time, would not have increased the amount of interest we owed under this agreement as the LIBOR floor of 0.5% was higher than the then-current LIBOR rate of 0.21% plus 10%.
In 2017, the U.K. Financial Conduct Authority announced its intention to phase out LIBOR after 2023. Currently, it is anticipated that LIBOR will be completely phased out by June 30, 2023. On July 29, 2021, the ARRC, a steering committee comprised of large U.S. financial institutions, formally recommended SOFR as its preferred alternative replacement rate for USD LIBOR. The 2026 Term Loans contain customary ARRC hardwired benchmark replacement language to transition from LIBOR to SOFR. At this time, it is not possible to predict the effect that the anticipated discontinuance of LIBOR, or the establishment of alternative reference rates such as SOFR, will have on us or our borrowing costs. SOFR is a relatively new reference rate and its composition and characteristics are not the same as LIBOR. Given SOFR’s very limited history and potential volatility as compared to other benchmark or market rates, the future performance of SOFR cannot be predicted based on historical performance. The consequences of using SOFR could include an increase in the cost of our variable rate indebtedness. We are monitoring these transition efforts and, although the 2026 Term Loans contain provisions designed to accommodate an alternate reference rate, we may need to amend these and other contracts to accommodate any replacement rate. The potential effect of any such event on our cost of capital cannot yet be determined, but we do not expect it to have a material impact on our consolidated financial condition, results of operations, or cash flows. 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 and SOFR, or uncertainty related to the potential for any of the foregoing, may adversely affect us.”
Currency Exchange Rate Risk
Manufacturing and royalty revenues that 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
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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, 202 2 , an average 10% strengthening of the USD relative to the currencies in which these products are sold would have resulted in revenues being reduced by approximately $ 1.1 million, as compared to a reduction in revenues of approximately $ 33.1 million for the year ended December 31, 20 2 1 .
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, 2022, 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 $7.5 million, as compared to an increase in our expenses of approximately $8.3 million in the year ended December 31, 2021.
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) below and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.