Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain risks relating to its ongoing business operations, including foreign currency exchange rate risk and interest rate risk. The Company currently mitigates certain foreign currency exchange rate risks with derivative instruments. The Company does not currently manage its interest rate risk with derivative instruments.
Foreign Currency Risk
The Company faces exposure to foreign currency exchange rate fluctuations, as a significant portion of its revenues, expenses, assets, and liabilities are denominated in currencies other than the functional currencies of the Company’s subsidiaries or the reporting currency of the Company, which is the U.S. Dollar. In certain instances, we utilize forward contracts to hedge against foreign currency fluctuations. These contracts are used to minimize foreign currency gains or losses, as the gains or losses on the derivative are intended to offset the losses or gains on the underlying exposure. We do not engage in foreign currency speculation.
The Company enters into economic hedges utilizing foreign currency forward contracts with maturities of up to 95 days to manage the exposure to fluctuations in foreign currency exchange rates arising primarily from foreign-denominated receivables and payables.
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The Company had the following outstanding forward contracts (in thousands):
December 31, 2021 December 31, 2020
Currency Notional Value USD Equivalent High Rate Low Rate Notional Value USD Equivalent High Rate Low Rate
Derivatives Not Designated as Hedging Instruments:
Euro 65,000 $ 73,748 0.8814 0.8814 50,000 $ 61,342 0.8151 0.8151
Chinese Renminbi 54,374 8,500 6.40 6.40 — — — —
Mexican Peso 140,000 6,842 20.46 20.46 155,000 7,776 19.93 19.93
Japanese Yen 600,000 5,213 115.10 115.10 600,000 5,808 103.30 103.30
British Pound 3,370 4,552 0.7403 0.7403 1,675 2,287 0.7324 0.7324
Hungarian Forint 1,355,000 4,155 326.11 326.11 1,330,000 4,494 295.93 295.93
Canadian Dollar 1,480 1,167 1.27 1.27 1,285 1,010 1.27 1.27
Korean Won — — — — 6,925,000 6,377 1,086 1,086
Taiwanese Dollar — — — — 38,035 1,362 27.93 27.93
Singapore Dollar — — — — 1,465 1,110 1.32 1.32
A change in foreign currency exchange rates could materially impact the fair value of these contracts; however, if this occurred, the fair value of the underlying exposures hedged by the contracts would change by a similar amount. Accordingly, management does not believe that a material change in foreign currency exchange rates used in the fair value of our derivative instruments would materially impact operations or cash flows.
The success of our foreign currency risk management program depends on forecasts of transaction activity denominated in various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated foreign currency gains or losses that could have a material impact on our results of operations. Furthermore, our failure to identify new exposures and hedge them in an effective manner may result in material foreign currency gains or losses.
The Company’s functional currency/reporting currency exchange rate exposures result from revenues and expenses that are denominated in currencies other than the U.S. Dollar. In addition to the U.S. Dollar, a significant portion of our revenues and expenses are denominated in the Euro and Chinese Renminbi, and to a lesser extent the Japanese Yen, Korean Won, and Mexican Peso. We estimate that approximately 49% of our sales in 2021 were invoiced in currencies other than the U.S. Dollar, and we expect sales denominated in foreign currencies to continue to represent a significant portion of our total revenue. While we also have expenses denominated in these same foreign currencies, the impact on revenues has historically been, and is expected to continue to be, greater than the offsetting impact on expenses. Therefore, in times when the U.S. Dollar strengthens in relation to these foreign currencies, we would expect to report a net decrease in operating income. Conversely, in times when the U.S. Dollar weakens in relation to these foreign currencies, we would expect to report a net increase in operating income. Thus, changes in the relative strength of the U.S. Dollar may have a material impact on our operating results.
Interest Rate Risk
The Company’s investment portfolio of debt securities includes corporate bonds, treasury bills, asset-backed securities, agency bonds, sovereign bonds, and municipal bonds. Debt securities with original maturities greater than three months are designated as available-for-sale and are reported at fair value. As of December 31, 2021, the fair value of the Company’s portfolio of debt securities amounted to $721,203,000 with amortized cost amounts totaling $725,105,000, maturities that do not exceed five years, and a yield to maturity of 0.92%. Differences between the fair value and principal amounts of the Company’s portfolio of debt securities are primarily attributable to discounts and premiums arising at the acquisition date, as well as unrealized gains and losses as of the balance sheet date.
The Company’s investment policy allows investment in debt securities with effective maturities up to ten years, however as of December 31, 2021, 84% of the investment portfolio has effective maturity dates of less than three years. Given the relatively short maturities and investment-grade quality of the Company’s portfolio of debt securities as of December 31, 2021, a sharp rise in interest rates should not have a material adverse effect on the fair value of these instruments. As a result, the Company does not currently hedge these interest rate exposures.
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The following table presents the hypothetical change in the fair value of the Company’s portfolio of debt securities arising from selected potential changes in interest rates (in thousands). This modeling technique measures the change in fair value that would result from a parallel shift in the yield curve plus or minus 50 and 100 basis points (BP) over a twelve-month time horizon.
Type of security Valuation of securities given
an interest rate decrease No change in
interest rates Valuation of securities given
an interest rate increase
(100 BP) (50 BP) 50 BP 100 BP
Corporate bonds $ 563,840 $ 559,073 $ 554,306 $ 549,539 $ 544,772
Asset-backed securities 82,998 82,297 81,595 80,893 80,192
Treasury bills 59,674 59,170 58,665 58,161 57,656
Agency bonds 19,203 19,041 18,879 18,716 18,554
Municipal bonds 5,736 5,687 5,639 5,591 5,542
Sovereign bonds 2,156 2,138 2,119 2,101 2,083
$ 733,607 $ 727,406 $ 721,203 $ 715,001 $ 708,799
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