Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates that could adversely affect our results of operations and financial condition. To manage the volatility relating to these typical business exposures, we may enter into various derivative transactions when appropriate. We do not hold or issue derivative instruments for trading or other speculative purposes.
Foreign Currency Exchange and Other Rate Risks
We operate on a global basis and are exposed to the risk that changes in foreign currency exchange rates could adversely affect our financial condition, results of operations and cash flows. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, British pounds, Swiss francs, Canadian dollars, Japanese yen, Mexican pesos, Brazilian reais, Australian dollars and Chinese yuan. We manage the foreign currency exposure centrally, on a combined basis, which allows us to net exposures and to take advantage of any natural offsets. To mitigate the impact of currency fluctuations on transactions denominated in nonfunctional currencies, we periodically enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. We temporarily record realized and unrealized gains and losses on these contracts that qualify as cash flow hedges in other comprehensive income, and then recognize them in other income or expense when the hedged item affects net earnings.
From time to time, we enter into foreign currency forward exchange contracts to manage currency exposures for transactions denominated in a currency other than an entity’s functional currency. As a result, the impact of foreign currency gains/losses recognized in earnings are partially offset by gains/losses on the related foreign currency forward exchange contracts in the same reporting period. Refer to Note 6, Derivative Instruments for further information of the Notes to Consolidated Financial Statements (Part II, Item 8 of this Form 10-K).
We maintain written policies and procedures governing our risk management activities. With respect to derivatives, changes in hedged items are generally expected to be completely offset by changes in the fair value of hedge instruments. Consequently, foreign currency exchange contracts would not subject us to material risk due to exchange rate movements, because gains and losses on these contracts offset gains and losses on the assets, liabilities or transactions being hedged.
47
The results of operations discussed herein have not been materially affected by inflation.
Interest Rate Risk
Cash and Cash Equivalents - We are exposed to the risk of interest rate fluctuations on the interest income earned on our cash and cash equivalents. A hypothetical 100 basis points movement in interest rates applicable to our cash and cash equivalents outstanding at December 31, 2021 would increase interest income by approximately $5.1 million on an annual basis. No significant decrease in interest income would be expected as our cash balances are earning interest at rates of approximately one basis points. We are subject to foreign currency exchange risk with respect to cash balances maintained in foreign currencies.
Debt - Our interest rate risk relates primarily to U.S. dollar LIBOR-indexed borrowings. We use interest rate swap derivative instruments to manage our earnings and cash flow exposure to changes in interest rates. These interest rate swaps fix the interest rate on a portion of our expected LIBOR-indexed floating-rate borrowings. The Company held the following interest rate swaps as of December 31, 2021 (dollar amounts in thousands):
Hedged Item Notional Amount Designation Date Effective Date Termination Date Fixed Interest Rate Estimated Fair Value
Assets (Liabilities)
1-month USD LIBOR Loan 300,000 December 13, 2017 January 1, 2018 December 31, 2022 2.201 % (5,268)
1-month USD LIBOR Loan 150,000 December 13, 2017 July 1, 2019 June 30, 2024 2.423 % (5,520)
1-month USD LIBOR Loan 200,000 December 13, 2017 January 1, 2018 December 31, 2024 2.313 % (7,421)
1-month USD LIBOR Loan 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.220 % (5,512)
1-month USD LIBOR Loan 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.199 % (5,464)
1-month USD LIBOR Loan 75,000 October 10, 2018 July 1, 2020 June 30, 2025 3.209 % (5,494)
1-month USD LIBOR Loan 100,000 December 18, 2018 December 30, 2022 December 31, 2027 2.885 % (6,886)
1-month USD LIBOR Loan 100,000 December 18, 2018 December 30, 2022 December 31, 2027 2.867 % (6,764)
1-month USD LIBOR Loan 575,000 December 15, 2020 July 31, 2025 December 31, 2027 1.415 % 3,552
1-month USD LIBOR Loan 125,000 December 15, 2020 July 1, 2025 December 31, 2027 1.404 % 821
$ 1,775,000 $ (43,957)
These interest rate swaps were designated as cash flow hedges as of December 31, 2021. The total notional amounts related to the Company’s interest rate swaps were $1.8 billion and with $875.0 million effective as of December 31, 2021. Based on our outstanding borrowings at December 31, 2021, a 100 basis points change in interest rates would have impacted interest expense on the unhedged p ortion of the debt by $1.1 million on an annualized basis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and the financial statement schedule specified by this Item, together with the report thereon of PricewaterhouseCoopers LLP, are presented following Item 15 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
48
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.