Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, inflation, interest rates, and other relevant market rates or prices changes. We are exposed to market risk from changes in foreign currency exchange rates, inflation rate and credit risk and we regularly evaluate our exposure to such changes.
Foreign Currency Risk
We have business operations globally, and accordingly, we are exposed to foreign currency fluctuations that can affect our financial results. For the years ended December 31, 2020 and 2019, approximately 11.1%, respectively, of our revenue was derived from contracts denominated in currencies other than the U.S. dollar, whereas approximately 25.2% and 22.3% of our operational costs, including, but not limited to, salaries, wages and other employee benefits, were derived in foreign currencies. Of these exposures, approximately 79.7% and 81.9% of revenue denominated in foreign currencies and approximately 50.8% and 52.8% of operational costs denominated in foreign currencies were Euro denominated for the years ended December 31, 2020 and 2019, respectively. Our financial statements are reported in U.S. dollars and, accordingly, fluctuations in exchange rates will affect the translation of our revenues and expenses denominated in foreign currencies into U.S. dollars for purposes of reporting our consolidated financial results. We recalculated our reported pre-tax income for the years ended December 31, 2020 and 2019 using foreign exchange rates that were 10% higher and 10% lower than actual exchange rates utilized during the year. When utilizing foreign exchange rates 10% higher than actual exchange rates, our pre-tax income for the years ended December 31, 2020 and 2019 is negatively impacted by approximately $8.8 million and $6.7 million, respectively. When utilizing foreign exchange rates 10% lower than actual exchange rates, our pre-tax income for the years ended December 31, 2020 and 2019 is positively impacted by approximately $8.8 million and $6.7 million, respectively.
We are also subject to foreign currency transaction risk for fluctuations in exchange rates during the period of time between contract commencement and cash settlement for services that we provide in relation to the contract. This exposure may affect our contract and operational profitability. To mitigate our foreign currency risk exposure we provide for exchange rate fluctuation adjustments subject to certain thresholds within our contracts where contract currency varies from currencies where costs will be incurred to support delivery of the contract.
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Credit Risk
Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, and accounts receivable and unbilled, net. The cash and cash equivalent balances are held and maintained with high-quality financial institutions with reputable credit ratings and, consequently, we believe that such funds are subject to minimal credit risk.
We generally do not require collateral or other securities to support customer receivables. In the years ended December 31, 2020 and 2019, credit losses have been immaterial and within our expectations. Moreover, in many cases we require advance payment from our customers for a portion of the study contract price upon the signing of a service contract which helps to mitigate credit risk. As of the years ended December 31, 2020 and 2019, there were no major customers accounting for more than 10% of our accounts receivable and unbilled, net.
Inflation
Our contracts that provide for services to be performed in excess of a year generally are based on inflation assumptions for the portion of the services to be performed beyond one year. We do not have significant operations in countries where the economy is considered highly inflationary, and do not believe in the near term that inflation will have a material adverse impact on us. However, if actual rates are greater than our inflation assumptions, inflation could have a material adverse effect on our operations or financial condition.
Interest Rates
We have no outstanding long-term debt as of December 31, 2020. We therefore no longer have meaningful interest rate risk. However, if the need for additional liquidity arises and we utilize our Credit Facility, interest rates could have a material adverse effect on our operations or financial condition.
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