Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in foreign currency exchange rates because we transact in a variety of foreign currencies. We are also exposed to changes in the prices of certain commodities (primarily metals) that we use in production. Changes in these foreign currency exchange rates and commodity prices may have an impact on future cash flows and earnings. We monitor our exposure to these risks, and may employ derivative financial instruments to limit the volatility to earnings and cash flows generated by these exposures. We employ derivative contracts that may or may not be designated for hedge accounting treatment under FASB ASC Topic 815, Derivatives and Hedging , which can result in volatility to earnings depending upon fluctuations in the underlying markets.
By using derivative instruments, we are subject to credit and market risk. The fair market values of these derivative instruments are based upon valuation models whose inputs are derived using market observable inputs, including foreign currency exchange and commodity spot and forward rates, and reflect the asset and liability positions as of the end of each reporting period. When the fair value of a derivative contract is positive, the counterparty is liable to us, thus creating a receivable risk for us. We are exposed to counterparty credit (or repayment) risk in the event of non-performance by counterparties to our derivative agreements. We attempt to minimize this risk by entering into transactions with major financial institutions of investment grade credit rating.
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Interest Rate Risk
As discussed further in Note 14, "Debt," of our Financial Statements, the Credit Agreement provides for the Senior Secured Credit Facilities consisting of the Term Loan, the Revolving Credit Facility, and incremental availability under which additional secured credit facilities could be issued under certain circumstances.
The Term Loan accrues interest at a variable rate that is currently based on LIBOR, plus an interest rate margin, in accordance with the terms of the Credit Agreement.
Sensitivity Analysis
As of December 31, 2020, we had an outstanding balance on the Term Loan (excluding debt discount and deferred financing costs) of $456.1 million. The applicable interest rate associated with the Term Loan at December 31, 2020 was 1.90%. An increase of 100 basis points in this rate would result in additional interest expense of $4.4 million in fiscal year 2021. An additional 100 basis point increase in this rate would result in incremental interest expense of $8.7 million in fiscal year 2021.
As of December 31, 2019, we had an outstanding balance on the Term Loan (excluding debt discount and deferred financing costs) of $460.7 million. The applicable interest rate associated with the Term Loan at December 31, 2019 was 3.59%. An increase of 100 basis points in this rate would have resulted in additional interest expense of $4.7 million in fiscal year 2020. An additional 100 basis point increase in this rate would have resulted in incremental interest expense of $4.7 million in fiscal year 2020.
Foreign Currency Risk
Consistent with our risk management objective and strategy to reduce exposure to variability in cash flows, and for non-trading purposes, we enter into foreign currency exchange rate derivatives that qualify as cash flow hedges, and that are intended to offset the effect of exchange rate fluctuations on forecasted sales and certain manufacturing costs. We also enter into foreign currency forward contracts that are not designated for hedge accounting purposes. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for additional information related to the foreign currency forward contracts outstanding as of December 31, 2020.
Sensitivity Analysis
The tables below present our foreign currency forward contracts as of December 31, 2020 and 2019 and the estimated impact to future pre-tax earnings as a result of a 10% strengthening/weakening in the foreign currency exchange rate:
(Decrease)/Increase to Future Pre-tax Earnings Due to:
(In millions) Net (Liability)/Asset Balance as of December 31, 2020 10% Strengthening of the Value of the Foreign Currency Relative to the U.S. Dollar
10% Weakening of the Value of the Foreign Currency Relative to the U.S. Dollar
Euro $ (21.3) $ (41.9) $ 41.9
Chinese Renminbi $ (2.2) $ (16.5) $ 16.5
Japanese Yen $ 0.0 $ 0.9 $ (0.9)
Korean Won $ (1.0) $ (1.5) $ 1.5
Malaysian Ringgit $ 0.0 $ 0.5 $ (0.5)
Mexican Peso $ 12.3 $ 15.9 $ (15.9)
British Pound Sterling $ 3.7 $ 7.5 $ (7.5)
(Decrease)/Increase to Future Pre-tax Earnings Due to:
(In millions) Net Asset/(Liability) Balance as of December 31, 2019 10% Strengthening of the Value of the Foreign Currency Relative to the U.S. Dollar
10% Weakening of the Value of the Foreign Currency Relative to the U.S. Dollar
Euro $ 12.6 $ (41.2) $ 41.2
Chinese Renminbi $ (0.7) $ (10.7) $ 10.7
Japanese Yen $ 0.0 $ 0.5 $ (0.5)
Korean Won $ 0.3 $ (2.1) $ 2.1
Malaysian Ringgit $ 0.0 $ 0.5 $ (0.5)
Mexican Peso $ 8.5 $ 15.5 $ (15.5)
British Pound Sterling $ 0.8 $ 6.7 $ (6.7)
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Commodity Risk
We are exposed to the potential change in prices associated with certain commodities used in the manufacturing of our products. We offset a portion of this exposure by entering into forward contracts that fix the price at a future date for various notional amounts associated with these commodities. These forward contracts are not designated as accounting hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for additional information related to the commodity forward contracts outstanding as of December 31, 2020.
Sensitivity Analysis
The tables below present our commodity forward contracts as of December 31, 2020 and 2019 and the estimated impact to pre-tax earnings associated with a 10% increase/(decrease) in the related forward price for each commodity:
Net Asset/(Liability) Balance as of
December 31, 2020 Average Forward Price Per Unit as of December 31, 2020 Increase/(Decrease) to Pre-tax Earnings Due to
(In millions, except per unit amounts) 10% Increase
in the Forward Price 10% Decrease
in the Forward Price
Silver $ 4.4 $ 26.47 $ 2.0 $ (2.0)
Gold $ 1.2 $ 1,901.03 $ 1.4 $ (1.4)
Nickel $ 0.2 $ 7.58 $ 0.1 $ (0.1)
Aluminum $ 0.1 $ 0.91 $ 0.2 $ (0.2)
Copper $ 1.2 $ 3.52 $ 0.6 $ (0.6)
Platinum $ 1.1 $ 1,064.51 $ 0.8 $ (0.8)
Palladium $ 0.4 $ 2,423.24 $ 0.2 $ (0.2)
Net Asset/(Liability) Balance as of
December 31, 2019 Average Forward Price Per Unit as of December 31, 2019 Increase/(Decrease) to Pre-tax Earnings Due to
(In millions, except per unit amounts) 10% Increase
in the Forward Price 10% Decrease
in the Forward Price
Silver $ 1.2 $ 18.15 $ 1.6 $ (1.6)
Gold $ 1.1 $ 1,539.13 $ 1.2 $ (1.2)
Nickel $ 0.0 $ 6.41 $ 0.1 $ (0.1)
Aluminum $ (0.2) $ 0.84 $ 0.3 $ (0.3)
Copper $ (0.0) $ 2.81 $ 0.7 $ (0.7)
Platinum $ 0.6 $ 986.68 $ 0.7 $ (0.7)
Palladium $ 0.4 $ 1,873.95 $ 0.2 $ (0.2)
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