AVIAT NETWORKS, INC. 10-Q

Item 3. Quantitative and Qualitative Disclosures about Market Risk In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes in interest rates. We employ established policies and procedures governing the use of financial instruments to manage our exposure to such risks. Exchange Rate Risk We conduct business globally in numerous currencies and are therefore exposed to foreign currency risks. We use derivative instruments to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. We do not hold or issue derivatives for trading purposes or make speculative investments in foreign currencies. We use foreign exchange forward contracts to hedge forecasted foreign currency transactions relating to forecasted sales and purchase transactions. Beginning the fourth quarter of fiscal 2015, we no longer prepared contemporaneous documentation of hedges for the new foreign exchange forward contracts we entered. As a result, the foreign exchange hedges no longer qualified as cash flow hedges. The changes in fair value related to the hedges were recorded in income or expenses line items on our statements of operations. We also enter into foreign exchange forward contracts to mitigate the change in fair value of specific non-functional currency assets and liabilities on the balance sheet. All balance sheet hedges are marked to market through earnings every period. Changes in the fair value of these derivatives are largely offset by re-measurement of the underlying assets and liabilities. 33 As of April 3, 2020 , we had four foreign currency forward contracts outstanding as follows: Currency Notional Contract Amount (Local Currency) Notional Contract Amount (USD) (In thousands) Canadian dollar 600 $ 440 Euro 3,028 3,358 New Zealand dollar 5,000 3,206 Singapore dollar 1,200 860 Total of all currency forward contracts $ 7,864 Net foreign exchange (income) loss, net recorded in our unaudited condensed consolidated statements of operations during the three and nine months ended April 3, 2020 and March 29, 2019 was as follows: Three Months Ended Nine Months Ended (In thousands) April 3, 2020 March 29, 2019 April 3, 2020 March 29, 2019 Amount included in costs of revenues $ (534 ) $ 22 $ (478 ) $ 193 Certain of our international business is transacted in non-U.S. dollar currency. As discussed above, we utilize foreign currency hedging instruments to minimize the currency risk of international transactions. The impact of translating the assets and liabilities of foreign operations to U.S. dollars for the first nine months of fiscal 2020 and 2019 were $2.5 million and $0.4 million , respectively, was included as a component of stockholders’ equity. As of April 3, 2020 and June 28, 2019 , the cumulative translation adjustment decreased our equity by $15.2 million and $12.7 million , respectively. Interest Rate Risk Our exposure to market risk for changes in interest rates relates primarily to our cash equivalents and borrowings under our credit facility. Exposure on Cash Equivalents We had $39.2 million in total cash and cash equivalents as of April 3, 2020 . Cash equivalents totaled $24.7 million as of April 3, 2020 and were comprised of money market funds and bank certificates of deposit. Cash equivalents investments have been recorded at fair value on our balance sheet. Our cash equivalents earn interest at fixed rates; therefore, changes in interest rates will not generate a gain or loss on these investments unless they are sold prior to maturity. The weighted-average days to maturity for cash equivalents held as of April 3, 2020 was 37.7 days, and these investments had an average yield of approximately 5.98% per annum. A 10% change in interest rates on our cash equivalents is not expected to have a material impact on our financial position, results of operations, or cash flows. Exposure on Borrowings Our borrowings outstanding under the SVB Credit Facility incurred interest at the prime rate plus a spread of 0.50% to 1.50% with such spread determined based on our adjusted quick ratio. During the first nine months of fiscal 2020 , our weighted-average interest rate was 4.24% , and the interest expense on these borrowings was insignificant. A 10% change in interest rates on the current borrowings or on future borrowings is not expected to have a material impact on our financial position, results of operations, or cash flows since interest on our borrowings is not material to our overall financial position. 34