Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which the Company is exposed are:
• interest rates on debt and cash equivalents;
• foreign exchange rates, generating translation and transaction gains and losses; and
• ingredient inputs.
Interest Rates
We centrally manage our debt and cash equivalents, considering investment opportunities and risks, tax consequences and overall financing strategies. Our cash equivalents consist primarily of money market funds or their equivalent. As of June 30, 2022, we had $889 million of variable rate debt outstanding under our Credit Agreement. During fiscal 2021, the Company used interest rate swaps to hedge a portion of the interest rate risk related its outstanding variable rate debt. As of June 30, 2022, the notional amount of the interest rate swaps was $630 million. Of this amount, $230 million has a weighted average fixed rate of 1.77% with a maturity date in February 2023. The remaining amount of $400 million relates to derivatives for which fixed rate payments of 4.85% w ill start from February 2023. Assuming current cash equivalents, variable rate borrowings and the effects of the interest rate swaps, a hypothetical change in average interest rates of one percentage point would have no impact to net interest expense.
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Foreign Currency Exchange Rates
Operating in international markets involves exposure to movements in currency exchange rates, which are volatile at times, and the impact of such movements, if material, could cause adjustments to our financing and operating strategies.
During fiscal 2022, approximately 45% of our consolidated net sales were generated from sales outside the United States, while such sales outside the United States were 52% of net sales in fiscal 2021 and 51% of net sales in fiscal 2020. These revenues, along with related expenses and capital purchases, were conducted primar ily in British Pounds Sterling, Euros and Canadian Dollars. Sales and operating income would have decreased by approximatel y $42.3 million and $4.2 million, respectiv ely, if average foreign exchange rates had been lower by 5% against the U.S. Dollar in fiscal 2022. These amounts were determined by considering the impact of a hypothetical foreign exchange rate on the sales and operating income of the Company’s international operations.
Fluctuations in currency exchange rates may also impact the Stockholders’ Equity of the Company. Amounts invested in our non-United States subsidiaries are translated into United States Dollars at the exchange rates as of the last day of each reporting period. Any resulting cumulative translation adjustments are recorded in Stockholders’ Equity as Accumulated Other Comprehensive Loss. The cumulative translation adjustments component of Accumulated Other Comprehensive Loss decreased by $102.1 million during the fiscal year ended June 30, 2022.
To reduce that risk, the Company ma y enter into certain derivative financial instruments, when available on a cost-effective basis, to manage such risk. We had approximately $131.8 million in notional amounts of cross-currency swaps and foreign currency exchange contracts at June 30, 2022. See Note 16, Derivatives and Hedging Activities , in the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
Ingredient Inputs Price Risk
The Company purchases ingredient inputs such as vegetables, fruits, oils, grains, beans, nuts, tea and herbs, spices, dairy products, plant-based surfactants, glycerin and alcohols, as well as packaging materials, to be used in its operations. These inputs are subject to price fluctuations that may create price risk. Although we sometimes hedge against fluctuations in the prices of the ingredients by using future or forward contracts or similar instruments, the ma jority of our future purchases of these items are subject to changes in price. We may enter into fixed purchase commitments in an attempt to secure an adequate supply of specific ingredients. These agreements are tied to specific market prices. Market risk is estimated as a hypothetical 10% increase or decrease in the weighted average cost of our primary inputs as of June 30, 2022. Based on our cost of goods sold duri ng the fiscal year ended June 30, 2022, such a change would have resulted in an increase or decrease to cost of sales of approximately $101 million. W e attempt to offset the impact of input cost increases with a combination of cost savings initiatives and efficiencies and price increases.