Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates.
Supply chain costs and inflation. We are exposed to risks associated with changes in the costs of our raw materials as well as changes to our supply and distribution costs. During the fifty-two weeks ended August 26, 2023, our gross margins and profitability were negatively affected by higher raw material, packaging, freight and logistics costs, and supply chain challenges, including supply chain disruptions resulting from labor shortages as well as disruptions in ingredients, caused, in part, by the uncertain economic environment, and macroeconomic and geopolitical events and trends. We expect these cost pressures and supply chain challenges to continue, but improve, during fiscal year 2024. In addition, current or future governmental policies may increase the risk of inflation, which could further increase the costs of ingredients, packaging and finished goods for our business. As a result, we instituted price increases effective in the first and fourth quarters of fiscal year 2022. Management believes these price increases and additional cost savings initiatives will enable us to continue to invest in projects that drive growth. However, there can be no assurance that the price increases will fully offset the effects of higher raw material, packaging, supply and distribution costs on our results of operations and financial condition. Refer to Item 1A, Risk Factors, for additional discussion of our risks associated with the costs of our raw materials, our supply chain, and inflation.
Interest rate risk. We are subject to interest rate risk in connection with borrowing based on a variable interest rate. Derivative financial instruments, such as interest rate swap agreements and interest rate cap agreements, may be used for the purpose of managing fluctuating interest rate exposures that exist from our variable rate debt obligations that are expected to remain outstanding. Interest rate changes do not affect the market value of such debt, but could affect the amount of our interest payments, and accordingly, our future earnings and cash flows, assuming other factors are held constant. As of August 26, 2023, the outstanding balance of the Term Facility was $285 million. Based on the amount outstanding of the Term Facility at the end of fiscal year 2023, a 1% increase in interest rates would increase our annual interest expense by approximately $2.9 million.
Foreign currency risk. We are exposed to changes in currency rates as a result of investments in foreign operations and revenue generated in currencies other than the U.S. Dollar. Revenue and profit generated by international operations will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates. Historically, our foreign currency risk has primarily related to our operations in Canada, which were largely related to a brand we sold in September 2020. With this sale transaction, as well as the restructuring-related business activities in Europe, we have mitigated some of our risk of exposure to changes in foreign currency rates.
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