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 three months 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 as of December 31, 2023 and 2022 (in thousands):
December 31, 2023 December 31, 2022
Currency Notional Value USD Equivalent High Rate Low Rate Notional Value USD Equivalent High Rate Low Rate
Derivatives Not Designated as Hedging Instruments:
Euro 40,000 $ 44,302 0.9029 0.9029 60,000 $ 64,174 0.9350 0.9350
Singapore Dollar 39,700 30,136 1.32 1.32 — — — —
Mexican Peso 145,000 8,505 17.05 17.05 185,000 9,480 19.51 19.51
Chinese Renminbi 50,000 7,025 7.12 7.12 55,000 7,619 7.22 7.22
Hungarian Forint 2,240,000 6,466 346.45 346.45 1,590,000 4,238 375.19 375.19
British Pound 3,345 4,258 0.7855 0.7855 3,445 4,161 0.8279 0.8279
Japanese Yen 600,000 4,255 141.02 141.02 700,000 5,281 132.56 132.56
Canadian Dollar 1,470 1,112 1.32 1.32 1,730 1,278 1.35 1.35
Swiss Franc — — 0 0 1,120 1,218 0.92 0.92
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 Korean Won, Japanese Yen, Mexican Peso, and Indian Rupee. We estimate that approximately 52% of our sales in 2023 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 notes, asset-backed securities, and sovereign 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, 2023, the fair value of the Company’s portfolio of debt securities amounted to $373,622,000, with amortized cost amounts totaling $383,589,000, maturities that do not exceed seven years, and a yield to maturity of 2.3%. 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. Management currently intends to hold these securities to full value recovery at maturity.
In July 2023, the Company’s investment policy was modified to reduce effective maturities of newly purchased securities to up to five years. As of December 31, 2023, the Company held investments with maturities in excess of the five-year limit that were approved as pre-existing exceptions to the new policy. As of December 31, 2023, 68% of the investment portfolio had 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, 2023, we do not expect a sharp rise in interest rates to 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 $ 314,317 $ 311,567 $ 308,816 $ 306,066 $ 303,316
Treasury notes 44,298 43,911 43,523 43,135 42,748
Asset-backed securities 19,658 19,486 19,314 19,142 18,970
Sovereign bonds 2,003 1,986 1,969 1,951 1,933
$ 380,276 $ 376,950 $ 373,622 $ 370,294 $ 366,967
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