Item 3. Quantitative and Qualitative Disclosures About Market Risk
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our operations are exposed to market risks from adverse changes in commodity prices affecting the cost of raw materials and energy, foreign currency exchange rates, and interest rates. In the normal course of business, we may periodically enter into derivatives to minimize these risks, but not for trading purposes. The disruptions in the global economy caused by the war in Ukraine have resulted in volatility and uncertainty in the markets in which we operate. At the time of this filing, we are unable to predict or determine the impacts that these events may continue to have on our exposure to market risk from commodity prices, foreign currency exchange rates, and interest rates, among other factors.
Based on our open commodity contract hedge positions as of August 28, 2022 and August 29, 2021, a hypothetical 10 percent decline in market prices applied to the fair value of the instruments would result in a charge to “Cost of sales” of approximately $5.1 million ($4.0 million after-tax) and $5.7 million ($4.4 million after-tax), respectively. Additionally, based on our LWM joint venture’s open commodity contract hedge positions as of August 28, 2022 and August 29, 2021, a hypothetical 10 percent decline in market prices applied to the fair value of the instruments would result in a charge to “Equity method investment earnings” of approximately $26.3 million ($19.5 million after-tax) and $1.7 million ($1.3 million after-tax), respectively. It should be noted that any change in the fair value of these contracts, real or hypothetical, would be substantially offset by an inverse change in the value of the underlying hedged item.
We transact business in multiple currencies and are subject to currency exchange rate risk through investments and businesses owned and operated in foreign countries. At August 28, 2022, we had no financial instruments to hedge foreign currency risk.
At August 28, 2022, we had $2,170.0 million of fixed-rate and $587.6 million of variable-rate debt outstanding. At August 29, 2021, we had $2,166.0 million of fixed-rate and $578.8 million of variable-rate debt outstanding. We have interest rate risk associated with our variable-rate debt. A one percent increase in interest rates related to variable-rate debt would have resulted in an increase in interest expense and a corresponding decrease in income before taxes of approximately $6.0 million annually ($4.6 million after-tax) and $5.9 million annually ($4.5 million after-tax) at August 28, 2022 and August 29, 2021, respectively.
For more information about our market risks, see Note 9, Debt and Financing Obligations, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report.
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