Ingevity Corp 10-Q

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign currency exchange rate risk We have non-U.S.-based operations, primarily in Europe, South America and Asia, which accounted for approximately 26 percent of our net sales in the first six months of 2021. We have designated the local currency as the functional currency of our significant operations outside of the U.S. The primary currencies for which we have exchange rate exposure are the U.S. dollar versus the euro, the Japanese yen, the pound sterling, and the Chinese renminbi. In addition, our domestic operations have sales to foreign customers, and in the conduct of our foreign operations, we also make inter-company sales. All of this exposes us to the effect of changes in foreign currency exchange rates. Our earnings are, therefore, subject to change due to fluctuations in foreign currency exchange rates when our foreign currency denominated transactions are translated into U.S. dollars. In some cases, we use foreign exchange forward contracts to hedge firm and highly anticipated foreign currency cash flows. Our largest exposures are to the Chinese renminbi and the euro. A hypothetical 10 percent change in the average Chinese renminbi and euro to U.S. dollar exchange rates during the six months ended June 30, 2021, would have impacted our net sales and income before income taxes by approximately $8.5 million or one percent, and $3.0 million or two percent, respectively. Interest rate risk As of June 30, 2021, approximately $338 million of our borrowings include a variable interest rate component. As a result, we are subject to interest rate risk with respect to such floating-rate debt. A 100 basis point increase in the variable interest rate component of our borrowings as of June 30, 2021 would increase our annual interest expense by approximately $3.4 million or seven percent. As of June 30, 2021, we have entered into interest rate swaps with an aggregate notional amount of $166.2 million to limit exposure to interest rate payments associated with our existing LIBOR-based interest payments, effectively converting $166.2 million of our floating rate debt to a fixed rate. In accordance with the terms of the interest rate swap, we receive floating rate interest payments based upon three-month U.S. dollar LIBOR and in return are obligated to pay interest at a fixed rate of 3.79 percent until July 2023. The fair value of the interest rate swap was an asset (liability) of $(6.7) million and $(8.9) million at June 30, 2021 and December 31, 2020, respectively. Other market risks Information about our other remaining market risks for the period ended June 30, 2021 does not differ materially from that discussed under Item 7A of our 2020 Annual Report.