Item 3. Quantitative and Qualitative Disclosures About Market Risk
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks from changes in foreign currency exchange rates, commodity steel pricing, commodity energy prices, and interest rates. Changes in these factors cause fluctuations in our earnings and cash flows. We evaluate and manage exposure to these market risks as follows:
Foreign currency exchange rates – Foreign currency fluctuations can affect our net investments, our operations in countries other than the U.S., and earnings denominated in foreign currencies. Historically, our primary exchange rate exposure has been with the Canadian dollar against the United States dollar. We have not historically hedged our foreign currency risk given that exposure to date has not been material. In the first quarter of 2022, changes in foreign currency exchange rates decreased our reported net sales by $2.0 with the estimated effect on our net earnings being immaterial.
Commodity steel pricing – We buy and sell various types of steel products; these products consist primarily of different types of threaded fasteners and related hardware. We are exposed to the impacts of commodity steel pricing and our related ability to pass through the impacts to our end customers. The price level of steel as reflected in many market indexes has stabilized and even slightly fallen from recent price peaks. However, it remains slightly higher versus the first quarter of 2021, which has contributed to cost inflation in our steel-based products. Based on our ability to pass higher input costs on, the estimated effect on our net earnings in the first quarter of 2022 was immaterial.
An exception to the stability we are seeing in the broader steel market is stainless steel, a key input for which is nickel. Due to concerns for disruption in production due to the Ukrainian conflict, nickel prices soared late in the first quarter of 2022. Given the volatility of the situation, the fact that stainless steel fasteners constitute less than 5% of our total net sales, and our traditional ability to pass higher input costs on, the impact on future net earnings is unclear. The estimated effect on our net earnings in the first quarter of 2022 was immaterial.
Commodity energy prices – We have market risk for changes in prices of oil, gasoline, diesel fuel, natural gas, and electricity. During the first quarter of 2022, the price of energy as reflected in many market indexes increased due to both strong economic activity and the effects of the Ukrainian conflict, which contributed to higher costs for fuel in our vehicles and utilities at our facilities. In the first quarter of 2022, based on the fact that total energy exposure is less than 5% of our total net sales, our estimated net earnings exposure for commodity energy prices was immaterial.
Fossil fuels are also often a key feedstock for chemicals and plastics that comprise a key raw material for many products that we sell. Given the volatility of the current marketplace and the time it takes for higher fossil fuel costs to flow through the supply chain, it is unclear to what degree the current rise in fossil fuel prices might affect future net earnings. Based on our ability to pass higher input costs on, the estimated effect on our net earnings in the first quarter of 2022 was immaterial.
Interest rates - Loans under our Credit Facility bear interest at float ing rates tied to LIBOR (or, if LIBOR is no longer available, at a replacement rate to be determined by the administrative agent for the Credit Facility and consented to by us). As a result, chang es in LIBOR can affect our operating results and liquidity to the extent we do not have effective interest rate swap arrangements in place. We have not historically used interest rate swap arrangements to hedge the variable interest rates under our Credit Facility. A one percentage point increase in LIBOR in the first quarter of 2022 would have resulted in approximately $0.1 of additional interest expense. A description of our Credit Facility is contained in Note 6 of the Notes to Condensed Consolidated Financial Statements.
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