Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from changes in interest rates, foreign exchange rates and commodity prices.
Interest Rates Risk
The Company made payments of $30.0 million on the amended revolving credit facility during the fiscal year 2021. The balance under the facility was $100.0 million as of January 1, 2022. With variable interest rates, the Company is subject to future interest rate fluctuations in relation to these borrowings which could potentially have a negative impact on cash flows of the Company. A prospective increase of 100 basis points in the interest rate applicable to the Company’s outstanding borrowings under its credit facility would result in an increase of approximately $1.0 million in annual interest expense. This exposure would be partially if not fully offset by higher interest income from the Company's investments. The Company is not party to any currency exchange or interest rate protection agreements as of January 1, 2022.
Foreign Exchange Rate Risk
The majority of the company’s operations consist of manufacturing and sales activities in foreign countries. The Company has operations in China, Germany, Mexico, Philippines, U.K., Japan, Lithuania, Netherlands, Portugal, Singapore, South Korea, Spain, and the U.S. During 2021, sales to customers outside the U.S. were approximately 69% of total net sales. During 2020, sales to customers outside the U.S. were approximately 73% of total net sales. Substantially all sales in Europe are denominated in euros and substantially all sales in the Asia-Pacific region are denominated in U.S. dollars, Chinese renminbi, Japanese yen, or Korean won.
The company’s foreign exchange exposures result primarily from inter-company loans, external borrowings, sale of products in foreign currencies, foreign currency denominated purchases, employee-related and other costs of running operations in foreign countries. The company’s most significant foreign currency exposures are to the euro, the Chinese renminbi, Mexican peso, and Philippine peso. Changes in foreign exchange rates could affect the company’s sales, costs, balance sheet values and earnings.
At January 1, 2022, the net value of the Company’s assets with exposure to foreign currency risk was approximately $148 million, with the largest exposure being a Japanese yen denominated inter-company loan with a Euro functional currency subsidiary. The reduction in earnings from a hypothetical instantaneous 10% adverse change in quot ed foreign currency spot rates applied to foreign currency sensitive asset instruments would be $15 million at January 1, 2022. At January 1, 2022, the net value of the Company’s liabilities with exposure to foreign currency risk was $389 million, with the largest exposure being U.S. Dollar denominated inter-company loans with a Euro functional currency subsidiary. The reduction in earnings from a hypothetical instantaneous 10% adverse change in quoted foreign currency spot rates applied to foreign currency sensitive liability instruments would be $39 million at January 1, 2022. As a result of th e mix in currencies impacting the hypothetical 10% changes, the movements in some instruments would offset movements in other instruments reducing the hypothetical exposure to the Company.
Commodity Price Risk
The Company uses various metals in the manufacturing of its products, including copper, zinc, tin, gold, and silver. Prices of these and other commodities can rise and result in materially higher costs of producing our products. The Company believes it has adequate primary and secondary sources of supply for each of our key materials. While the Company is exposed to significant changes in certain metal prices and expects higher material costs, the Company actively monitors these exposures and may take various actions, including price increases and productivity improvements to mitigate any negative impacts of these exposures.
Due to the continued impact from COVID-19, transportation costs increased significantly in 2021 and may further increase in 2022. The Company has taken and, in the future, may take further various actions, including price increases and changing freight modes or other alternative solutions to mitigate the impact of rising transportation costs.
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