Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. We are exposed to various market risks, including commodity prices for raw materials, foreign currency exchange rates, and changes in interest rates. We may enter into financial instrument transactions, which attempt to manage and reduce the impact of such changes. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
Commodity Price Risk
Our costs are affected by inflation in the U.S. economy and, to a lesser extent, in non-U.S. economies including those of Europe, Canada, Mexico, South America, Japan, and Asia-Pacific. Generally, as we experience fluctuations in our costs, we reflect these increases in costs as price increases to our customers with the goal of being margin neutral. We are currently experiencing higher raw material, freight, and logistics costs than we have seen in recent years, which we have been able to recover with pricing actions. Further, increases in U.S. employee benefits costs such as health insurance and workers compensation insurance have exceeded general inflation levels. In the future, we may be further affected by inflation that we may not be able to pass these increased costs on as price increases to our customers. However, we have been successful in the past, and we expect to be successful in the future, in instituting price increases to pass on these material cost increases. The Company is exposed to trade tariffs, and particularly those recently enacted by the current presidential administration. The Company monitors the impact of tariffs and actively works to mitigate this impact through material productivity actions and pricing strategies, including tariff surcharges.
Foreign Currency Exchange Risk
In fiscal 2026, 44% of our net sales were from manufacturing plants and sales offices in foreign jurisdictions. We manufacture our products in the United States, Japan, China, Germany, United Kingdom, Hungary, Mexico, and Malaysia and sell our products in over 100 countries. Our results of operations could be affected by factors such as changes in foreign currency rates or weak economic conditions in foreign markets. Our operating results are exposed to fluctuations between the U.S. Dollar and the Canadian Dollar, European currencies, the South African Rand, the Mexican Peso, the Brazilian Real, Japanese Yen and the Chinese Yuan. For example, when the U.S. dollar weakens against the Euro, the value of our net sales and net income denominated in Euros increases when translated into U.S. dollars for inclusion in our consolidated results. We are also exposed to foreign currency fluctuations in relation to purchases denominated in foreign currencies. Our foreign currency risk is mitigated since the majority of our foreign operations’ net sales and the related expense transactions are denominated in the same currency, which reduces the impact of a significant change in foreign exchange rates on net income. For example, a 10% change in the value of the U.S. dollar in relation to our most significant foreign currency exposures would have had an impact of approximately $7,256,000 on our income from operations. In addition, the majority of our export sale transactions are denominated in U.S. dollars.
The Company has a cross currency swap agreement that is designated as a cash flow hedge to hedge changes in the value of an intercompany loan to a foreign subsidiary due to changes in foreign exchange rates. This intercompany loan is related to the acquisition of STAHL. As of March 31, 2026, the notional amount of this derivative was $50,170,000, and the contract matures on June 30, 2028. From its March 31, 2026 balance of Accumulated other comprehensive loss ("AOCL"), the Company expects to reclassify approximately $1,166,000 out of AOCL, and into foreign currency exchange loss (gain), net, during the next 12 months based on the contractual payments due under this intercompany loan.
The Company has foreign currency forward agreements that are designated as cash flow hedges to hedge a portion of forecasted inventory purchases denominated in foreign currencies. As of March 31, 2026, the notional amount of these derivatives was $6,243,000, and all contracts mature by March 31, 2027. From its March 31, 2026 balance of AOCL, the Company expects to reclassify approximately $15,000 out of AOCL during the next 12 months based on the expected sales of the goods purchased.
Interest Rate Risk
We are subject to interest rate risk in connection with the Term Loan B and the AR Securitization Facility and Revolving Credit Facility. As of March 31, 2026, we had $1,456,990,000 outstanding under the 2026 Term Loan B, $900,000,000 of Senior Secured Notes, $53,400,000 outstanding on the AR Securitization Facility and $25,000,000 amounts outstanding under the 2026 Revolving Credit Facility. The 2026 Term Loan B, AR Securitization Facility and the 2026 Revolving Credit Facility each bear interest at variable rates, but the interest rate on the Notes is fixed.
The Company has entered into interest rate swap agreements which are designated as cash flow hedges to hedge changes in interest expense due to changes in the interest rate of the Company's variable interest rate debt. The Company has zero interest rate swap agreements outstanding in which it receives interest at a variable rate and pays interest at a fixed rate. The interest
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rate swaps have varying maturity dates between March 31, 2027 and March 31, 2031 with an aggregate notional amount of $965,000,000 as of March 31, 2026.
The effective portion of the changes in fair values of the interest rate swaps is reported in AOCL and will be reclassified to interest expense over the life of the swap agreements. From its March 31, 2026 balance of AOCL, the Company expects to reclassify approximately $238,000 out of AOCL, and into interest expense, during the next 12 months.
An increase of 100 basis points in the variable rates on the 2026 Term Loan B as of March 31, 2026 would increase annual cash interest in the aggregate by approximately $5,000,000. We cannot predict market fluctuations in interest rates and their impact on our debt, nor can there be any assurance that long-term fixed-rate debt will be available at favorable rates, if at all. Consequently, future results may differ materially from estimated results due to adverse changes in interest rates.
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