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 our business 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 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 or may not employ derivative financial instruments ("derivative instruments") to limit the volatility to earnings and cash flows generated by these exposures. Any derivative instrument we employ may or may not be designated for hedge accounting treatment under FASB ASC Topic 815, Derivatives and Hedging , which may 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.
Interest Rate Risk
As discussed further in Note 14: Debt of our Financial Statements included elsewhere in this Report, the Credit Agreement provides for the Senior Secured Credit Facilities including the Revolving Credit Facility, and incremental availability (the "Accordion") under which additional secured credit facilities could be issued under certain circumstances. Borrowings under the Revolving Credit Facility continue to be subject to interest based on a variable rate, but we had no outstanding balance on the Revolving Credit Facility at December 31, 2025 and 2024.
Foreign Currency Risk
Consistent with our risk management objectives and strategy to reduce exposure to variability in cash flows, and for non-trading purposes, we may 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 forecasted costs. We may 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 included elsewhere in this Report for additional information related to the foreign currency forward contracts outstanding as of December 31, 2025.
Sensitivity Analysis
The tables below present our foreign currency forward contracts as of December 31, 2025 and 2024 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 Asset/(Liability) Balance as of December 31, 2025
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 $ (15.1) $ (47.2) $ 47.2
Mexican Peso $ 15.5 $ 20.5 $ (20.5)
British Pound Sterling $ 2.3 $ 9.1 $ (9.1)
(Decrease)/Increase to Future Pre-Tax Earnings Due to:
(In millions) Net (Liability)/Asset Balance as of December 31, 2024
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 $ 18.7 $ (48.7) $ 48.7
Chinese Renminbi $ (6.2) $ 5.9 $ (5.9)
Mexican Peso $ (20.4) $ 19.8 $ (19.8)
British Pound Sterling $ (0.7) $ 6.2 $ (6.2)
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