Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in the ordinary course of business, which consists primarily of interest rate risk associated with our cash and cash equivalents and foreign exchange rate risk.
Interest rate risk . Certain of our financial instruments are subject to interest rate risk due to variable interest rates that fluctuate with market conditions. However, our exposure to market risk from interest rate fluctuations is limited. We maintain a portfolio of cash, cash equivalents, and short-term and long-term investments, which primarily includes bank deposits, money market funds, certificates of deposit, commercial paper, corporate bonds, and U.S. Treasury and agency securities. The majority of these investments mature within one year, although some corporate bonds have maturities approaching, but not exceeding, two years. Due to the short-term to intermediate-term nature of these instruments, we do not expect that a sudden change in market interest rates would have a material impact on our financial condition or results of operations.
We are also exposed to market risk as a result of increases or decreases in the amount of interest expense we must pay on our borrowings on our bank credit facilities. Although our U.S. revolving line of credit and our euro credit facilities have variable rates, we do not believe that a 10% change in market interest rates would have a material impact on our financial position or results of operations.
Exchange rates. Due to our international operations, a significant portion of our net sales, cost of sales and operating expenses are denominated in currencies other than the U.S. dollar, principally the euro and the Chinese yuan. Changes in the exchange rate of the U.S. dollar versus the functional currencies of our subsidiaries affect the translated value and relative level of sales and net income that we report from one period to the next. In addition, our subsidiaries may have assets or liabilities denominated in a currency other than their functional currency, which results in foreign exchange transaction gains and losses due to changes in the value of the functional currency versus the currency the assets and liabilities are denominated in. In 2025, we incurred a loss on foreign exchange transactions of $9.4 million as compared to a loss of $5.5 million in 2024. As our German and Italian subsidiaries have net U.S. dollar denominated assets, the appreciation of the euro relative to the U.S. dollar contributed to a significant portion of the foreign exchange loss in 2025. In addition, our Indian and Chinese subsidiaries have U.S. dollar-denominated liabilities, and the strengthening of the U.S. dollar relative to the Indian rupee and Chinese yuan at certain times during the year also contributed to the foreign exchange loss during the year, though to a lesser extent. Management attempts to minimize these exposures by partially or fully off-setting foreign currency denominated assets and liabilities at our subsidiaries that operate in different functional currencies. The effectiveness of this strategy can be limited by the volume of underlying transactions at various subsidiaries and by our ability to accelerate or delay inter-company cash settlements. As a result, we are unable to create a perfect offset of the foreign currency denominated assets and liabilities. Furthermore, if we expect a currency movement to be beneficial to us in the short or medium term, we have, on occasions, chosen not to hedge or otherwise offset the underlying assets or liabilities. However, it is difficult to predict foreign currency movements accurately.
At December 31, 2025, our material foreign currency exposure consists of net U.S. dollar denominated assets at subsidiaries where the euro is the functional currency, and U.S. dollar denominated liabilities where the Chinese yuan and Indian rupee is the functional currency. The net U.S. dollar denominated assets are comprised of cash, third party receivables and inter-company receivables offset by third party and inter-company U.S. dollar denominated payables. The U.S. dollar denominated liabilities are comprised of inter-company payables.
A 5% change in the relative exchange rate of the U.S. dollar to the euro applied to the net U.S. dollar asset balances as of December 31, 2025, would result in a foreign exchange gain of $0.5 million if the U.S. dollar appreciated and a $0.5 million foreign exchange loss if the U.S. dollar depreciated. A 5% change in the relative exchange rate of the U.S. dollar to the Chinese
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yuan applied to the net U.S. dollar liability balances as of December 31, 2025, would result in a foreign exchange loss of $0.7 million if the U.S. dollar appreciated and a $0.8 million foreign exchange gain if the U.S. dollar depreciated. A 5% change in the relative exchange rate of the U.S. dollar to the Indian rupee applied to the net U.S. dollar liability balances as of December 31, 2025, would result in a foreign exchange loss of $0.2 million if the U.S. dollar appreciated and a $0.2 million foreign exchange gain if the U.S. dollar depreciated.
A 5% change in the relative exchange rate of the U.S. dollar to the euro applied to the net U.S. dollar asset balances as of December 31, 2024, would result in a foreign exchange gain of $1.1 million if the U.S. dollar appreciated and a $1.2 million foreign exchange loss if the U.S. dollar depreciated. A 5% change in the relative exchange rate of the U.S. dollar to the Chinese yuan applied to the net U.S. dollar liability balances as of December 31, 2024, would result in a foreign exchange loss of $0.4 million if the U.S. dollar appreciated and a $0.4 million foreign exchange gain if the U.S. dollar depreciated. A 5% change in the relative exchange rate of the U.S. dollar to the South Korea won applied to the net U.S. dollar liability balances as of December 31, 2024, would result in a foreign exchange loss of $0.4 million if the U.S. dollar appreciated and a $0.5 million foreign exchange gain if the U.S. dollar depreciated.
Volatility between the U.S. dollar and the currencies to which we are exposed may be increased by changes in central bank policy, primarily related to interest rates.
In addition, we are exposed to foreign currency translation risk for those subsidiaries whose functional currency is not the U.S. dollar as changes in the value of their functional currency relative to the U.S. dollar affect the translated amounts of our assets and liabilities. Changes in the translated value of assets and liabilities due to changes in functional currency exchange rates relative to the U.S. dollar result in foreign currency translation adjustments that are a component of other comprehensive income or loss on the Consolidated Statements of Comprehensive Income (Loss).
Foreign currency derivative instruments can also be used to hedge exposures and reduce the risks of certain foreign currency transactions; however, these instruments provide only limited protection and can carry significant cost. We have no foreign currency derivative instrument hedges as of December 31, 2025. We will continue to analyze our exposure to currency exchange rate fluctuations and may engage in financial hedging techniques in the future to attempt to minimize the effect of these potential fluctuations. Exchange rate fluctuations may adversely affect our financial results in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information is incorporated by reference from pages F-1
through F-33
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.