Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
We are exposed to risk that our earnings, cash flows and equity could be adversely impacted by changes in foreign exchange rates, interest rates and commodity prices. We maintain risk management controls and policies to monitor these risks and take appropriate risk mitigation actions. We use certain derivative instruments, when available on a cost-effective basis, to hedge our underlying economic exposures. For additional information on our financial instruments and hedging strategies, See Note 23 – Derivative Financial Instruments of our consolidated financial statements for the year ended December 31, 2023 included elsewhere in this Form 10-K.
Exchange Rate Risk
We have global operations and therefore enter into transactions denominated in various foreign currencies. To mitigate cross-currency transaction risk, we analyze significant forecast exposures where we expect receipts or payments in a currency other than the functional currency of our operations, and from time to time we may strategically enter into short-term foreign currency forward contracts to lock in some or all of the cash flows associated with these transactions. In most of the countries in which we operate, the exposure to foreign currency movements is limited because the operating revenues and expenses of our business units are substantially denominated in the local currency. We also are subject to currency translation risk associated with converting our foreign operations’ financial statements into U.S. dollars. The exchange rates used to translate our foreign subsidiaries’ financial results for the year ended December 31, 2023 compared to the year ended December 31, 2022 reflected, on average, the U.S. dollar strengthened against the Canadian dollar 4% and weakened against the Euro by 3%, respectively. Exchange rates had a nominal impact on our consolidated net revenues and Adjusted EBITDA from continuing operations, respectively, in the year ended December 31, 2023 as compared to an adverse impact of (4%) and of (3%) on our consolidated net revenues and Adjusted EBITDA from continuing operations, respectively, in the year ended December 31, 2022.
We cannot be certain that fluctuations in foreign currency exchange rates, particularly the strengthening of the U.S. dollar against major currencies, such as the Euro, the Canadian dollar, the British pound, or the currencies of large developing countries, would not materially adversely affect our business, financial condition, and results of operations.
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We use short-term foreign currency forward contracts to mitigate the impact of foreign exchange fluctuations on consolidated earnings. As of December 31, 2023, we held foreign currency derivative contracts, with a total notional amount of $95.9 million in order to manage the effect of exchange fluctuations on forecasted sales, purchases, acquisitions, capital expenditures and certain intercompany transactions that are denominated in foreign currencies. We have foreign currency derivative contracts, with a total notional amount of $140.1 million, to manage the risks of foreign currency gains and losses on intercompany loans and interest. We also used foreign currency derivative contracts, with a total notional amount of $28.9 million as of December 31, 2023, to mitigate the impact to the consolidated earnings of the Company from the effect of the translation of certain subsidiaries’ local currency results into U.S. dollars. We do not use derivative financial instruments for trading or speculative purposes.
By using derivative financial instruments to hedge exposures to foreign currency fluctuations, we are exposed to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, we are not exposed to the counterparty’s credit risk in those circumstances. We attempt to minimize counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties whose credit rating is at least upper-medium investment grade. Our derivative instruments do not contain credit risk related contingent features.
Interest Rate Risk
We are exposed to interest rate market risk in connection with our long-term debt, some of which is based upon floating interest rates. To manage our interest rate risk, we may enter into interest rate derivatives, such as interest rate swaps, caps, or collars when we deem it to be appropriate. We do not use derivative financial instruments for trading or other speculative purposes and are not a party to any leveraged derivative instruments. Our net exposure to interest rate risk would primarily be based on the difference between outstanding variable rate debt and the notional amount of any interest rate derivatives. We assess interest rate risk by identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We monitor interest rate risk attributable to our outstanding debt obligations, involving the use of analytical techniques to determine the potential impact of interest rate volatility on future interest payments.
Raw Materials Risk
Our major raw materials include wood, wood composites, wood components, steel, glass, internally produced door skins, fiberglass compound, hardware, petroleum-based products such as resin and binders, as well as aluminum and vinyl extrusions. Prices of these materials can fluctuate significantly in response to, among other things, variable worldwide supply and demand across different industries, speculation in commodities futures, general economic or environmental conditions, labor costs, competition, import duties, tariffs, worldwide currency fluctuations, freight, regulatory costs, and product and process evolutions that impact demand for the same materials. Increasing raw material prices directly impact our cost of sales and our ability to maintain margins depends on implementing price increases in response to increasing raw material costs. The market for our products may or may not accept price increases, and as such, there is no assurance that we can maintain margins in an environment of rising commodity prices. See Item 1A- Risk Factors - Prices and availability of the raw materials we use to manufacture our products are subject to fluctuations and we may be unable to pass along to our customers the effects of any price increases.
We purchase from multiple geographically diverse companies to mitigate the adverse impact of higher prices for our raw materials. Also, from time to time, we enter into derivatives to hedge commodity price fluctuations that are immaterial to the consolidated financial statements. For more information about our derivative asset and liabilities, refer to Note 23 - Derivative Financial Instruments of our audited consolidated financial statements included in this Form 10-K. We also maintain other strategies to mitigate the impact of higher raw material, energy, and commodity costs, which typically offset only a portion of the adverse impact.
Item 8 - Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements beginning on page F-1 of the Form 10-K.
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.