Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in certain commodity prices, interest rates, inflation, and foreign currency exchange rates. All of these market risks arise in the normal course of business, as we do not engage in speculative trading activities. We have established policies, procedures, and internal processes governing our management of market risk and the use of financial instruments to manage our exposure to such risk.
Commodity Risk
We have commodity exposure with respect to fuel used in company-owned tractors. Increases in fuel prices will raise our operating costs, even after applying fuel surcharge revenues. Historically, we have been able to recover a majority of fuel price
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increases from our customers in the form of fuel surcharges. The average diesel price per gallon in the U.S., as reported by the Department of Ener gy, decreased from an average of $3.05 per gallon for fiscal year 2019 to an average of $2.56 per gallon for fiscal year 2020. We cannot predict the exte nt or speed of potential changes in fuel prices in the future, the degree to which the lag effect of our fuel surcharge programs will impact us as a result of the timing and magnitude of such changes, or the extent to which effective fuel surcharges can be maintained and collected to offset future increases. We generally have not used derivative financial instruments to hedge our fuel price exposure in the past but continue to evaluate this possibility.
Interest Rate Risk
We h ad cash and cash equivalents of $395.5 million as of December 31, 2020, which consists of bank deposits with Federal Deposit Insurance Corporation participating banks and money market accounts of $336.8 million that are sensitive to changes in interest rates. A hypothetical 1% decrease in our interest rates would decrease our annual interest income by an immaterial amount.
A t December 31, 2020, we had no outstanding variable rate borrowings under either our accounts receivable securitization facility or our revolving credit facility. In the futu re, if we borrow under either our accounts receivable securitization facility or our revolving credit facility, we will have interest rate exposure arising from variable interest rates. These variable interest rates are impacted by changes in short-term interest rates and currently use LIBOR as a benchmark. LIBOR is expected to be phased out after 2021 and the Alternative Reference Rates Committee has proposed the SOFR as an alternative. While our current facilities indicate that either LIBOR or SOFR can be used in determining interest rates, it is not presently known whether SOFR or any other alternative reference rates that have been proposed will attain market acceptance as replacements for LIBOR. If we borrow under either of these facilities in the future, we will need to make the determination of which benchmark to use or revise our existing agreements with our lenders should an alternative benchmark be adopted. We manage interest rate exposure through a mix of variable rate debt, fixed rate senior debt, fixed rate financing, and fixed rate lease financing.
Inflation Risk
Inflation can have an impact on our operating costs. A prolonged period of inflation could cause interest rates, fuel, wages, and other costs to increase, which would adversely affect our results of operations unless freight rates correspondingly increase. However, we do not believe that inflation has had a material effect on our business, financial condition, or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.
Foreign Currency Exchange Risk
Although we conduct business in foreign countries, international operations are not material to our consolidated financial position, results of operations, or cash flows. Net foreign currency transaction gains and losses were also not material to our results of operations. We are not currently subject to material foreign currency exchange rate risks from the effects that exchange rate movements of foreign currencies would have on our future costs or on future cash flows we would receive from our foreign operations. To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
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