Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to interest rate risk related to our indebtedness and our investment portfolio. As of September 1, 2022 and September 2, 2021, we had fixed-rate debt with an aggregate carrying value of $4.03 billion and $3.89 billion, respectively, and as a result, the fair value of our debt fluctuates with changes in market interest rates. In 2022, we issued new debt and repaid other debt, which significantly increased the average remaining maturity of our fixed-rate debt resulting in increased variability of its fair value from interest rate changes. We estimate that, as of September 1, 2022 and September 2, 2021, a hypothetical 1% decrease in market interest rates would increase the fair value of our fixed-rate debt by approximately $275 million and $200 million, respectively.
Interest rate risk related to our investment portfolio is managed by primarily investing in shorter term securities. As of September 1, 2022, a hypothetical 1% increase in interest rates would decrease the fair value of our portfolio by approximately $30 million. Such impact would only be realized if investments were sold prior to maturity.
As of September 1, 2022 and September 2, 2021, we had floating-rate debt and fixed-rate debt that is swapped to floating-rate debt with an aggregate principal amount of $2.09 billion. A hypothetical 1% increase in the interest rates of this floating-rate debt would result in an increase in annual interest expense of approximately $21 million as of September 1, 2022 and September 2, 2021.
Foreign Currency Exchange Rate Risk
The information in this section should be read in conjunction with the information related to changes in the currency exchange rates in “Part I – Item 1A. Risk Factors.” Changes in currency exchange rates could materially adversely affect our results of operations or financial condition.
The functional currency for all of our operations is the U.S. dollar. The substantial majority of our sales are transacted in the U.S. dollar; however, significant amounts of our operating expenditures and capital purchases, and certain assets and liabilities, are incurred in or exposed to other currencies, primarily the euro, Malaysian ringgit, New Taiwan dollar, Singapore dollar, and yen. We have established currency risk management programs for our monetary assets and liabilities denominated in foreign currencies to hedge against fluctuations in the fair value and volatility of future cash flows caused by changes in currency exchange rates. We generally utilize currency forward contracts in these hedging programs, which reduce, but do not always entirely eliminate, the impact of currency exchange rate movements. We do not use derivative financial instruments for trading or speculative purposes.
Based on monetary assets and liabilities denominated in foreign currencies, we estimate that a hypothetical 10% adverse change in exchange rates versus the U.S. dollar would result in losses of approximately $186 million as of September 1, 2022 and $122 million as of September 2, 2021. We hedge our exposure to changes in currency exchange rates by utilizing a rolling hedge strategy for our primary currency exposures with currency forward contracts that generally mature within three months. The effectiveness of our hedges is dependent, among other factors, upon our ability to accurately measure exposures on a timely basis. To hedge the exposure of changes in cash flows from changes in currency exchange rates for certain capital expenditures and manufacturing costs, we may utilize currency forward contracts that generally mature within two years. See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Derivative Instruments.”
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