Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Risk
As of December 31, 2021, we had cash and restricted cash of $65.4 million, which consisted primarily of bank deposits. Our cash is held for working capital purposes.
On September 3, 2021, we entered into a new Credit Agreement which replaced our previous credit facilities under First Lien and Credit Guaranty Agreement. As of December 31, 2021, under the new Credit Agreement, we had a $248.8 million Term Loan outstanding (face value), and the Term Loan bears variable market interest rates, primarily LIBOR. Refer to Note 8 “Debt – Credit Agreement” for additional information on this new Credit Agreement. A significant change in these market interest rates may adversely affect our operating results. As of December 31, 2021, a hypothetical 100 basis point change in interest rates would result in a change to interest expense by approximately $2.5 million.
Foreign Currency Risk
Approximately 18.7% of our net revenue in fiscal year 2021 was denominated in foreign currencies, primarily Euro and British Pound. Any unfavorable movement in the exchange rate between U.S. dollars and the currencies in which we conduct sales in foreign
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countries could have an adverse impact on our net revenue and gross margins as we may have to have to adjust local currency product pricing due to competitive pressures if there is significant volatility in foreign currency exchange rates. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the United States, Europe, China and Taiwan. Our operating results and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates.
We enter into forward currency contracts to reduce the short-term effects of currency fluctuations on Euro, British Pound, and Chinese Yuan denominated cash, accounts receivable, and intercompany receivable and payable balances. These forward contracts generally mature within three to four months, and we do not enter into foreign currency forward contracts for trading purposes. The outstanding notional principal amount was $48.6 million and $41.6 million as of December 31, 2021 and 2020, respectively. The gains or losses on these contracts are recognized in earnings based on the changes in fair value of the foreign currency forward contracts.
The net impact of changes in foreign currency rates, including the net gains or (losses) on the forward currency contracts, recognized in other (expense) income, net was $(5.8) million, $(1.5) million, and $(1.6) million, for the years ended December 31, 2021, 2020, and 2019, respectively. A hypothetical ten percent change in exchange rates between foreign currencies and the U.S. dollar would increase or decrease our gains or losses on foreign currency exchange of approximately $3.3 million in our consolidated financial statements for the year ended December 31, 2021.
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