Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to changes in interest rates, foreign currency exchange rates and commodity prices. We may utilize derivative financial instruments, among other methods, to hedge some of these exposures. We do not use derivative financial instruments for speculative or trading purposes.
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Interest Rate Risk
The table below summarizes the expected interest and principal payments associated with our variable rate debt outstanding at December 31, 2022 (mainly the $3.1 billion variable rate senior secured term loan due 2026 (2026 Term Loan) and our asset-based revolving credit facility). The principal payments presented below are based on scheduled maturities and assume no borrowings under our asset-based revolving credit facility. The interest payments presented below assume the interest rates in effect as of December 31, 2022 (see Note 7 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K). The impact of a 1% increase in the interest rate index on projected future interest payments on the variable rate debt is also included in the table below.
2023
2024
2025
2026
2027
Thereafter
Principal and interest payments on
variable rate debt
$
270.5
$
265.8
$
262.2
$
3,028.7
$
—
$
—
Average cash interest rate
7.74
%
7.67
%
7.63
%
7.63
%
—
—
Impact of 1% increase in interest rate
index
$
30.8
$
30.5
$
30.2
$
3.7
$
—
$
—
We also have $6.5 billion aggregate principal amount of fixed rate senior notes. The table below summarizes our expected interest and principal payments related to our fixed rate debt at December 31, 2022.
2023
2024
2025
2026
2027
Thereafter
Principal and interest payments on
fixed rate debt
$
397.3
$
397.3
$
1,658.2
$
1,774.2
$
1,919.3
$
2,088.9
Average cash interest rate
6.11
%
6.11
%
6.12
%
6.16
%
5.99
%
5.01
%
As part of our hedging strategy to mitigate a portion of the exposure to changes in cash flows resulting from the variable interest rate on our 2026 Term Loan, in March 2019, we entered into and designated pay-fixed, receive-variable interest rate swap derivatives as cash flow hedges of interest rate risk. The total notional amount of the interest rate swap derivatives as of December 31, 2022 was $300 million with outstanding maturities of up to fifteen months. As of December 31, 2022, the combined fair value of the interest rate swaps was an $8.6 million gain. The table above excludes the impact of these interest rate swap derivatives. See Note 8 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further discussion of these contracts.
Foreign Currency Risk
Approximately 38% and 42% of net sales for 2022 and 2021, respectively, were to customers located outside the U.S. Significant changes in foreign currency exchange rates could adversely affect our international sales levels and the related collection of amounts due. In addition, a significant decline in the value of currencies used in certain regions of the world as compared to the U.S. dollar could adversely affect product sales in those regions because our products may become more expensive for those customers to pay for in their local currency. Conversely, significant increases in the value of foreign currencies as compared to the U.S. dollar could adversely affect profitability as certain product costs increase relative to a U.S. dollar-denominated sales price. The foreign currencies to which we have the greatest exposure include the Chinese yuan, euro, British pound sterling, Mexican peso, Japanese yen, Canadian dollar, Australian dollar, Brazilian real, South African rand, Indian rupee and Czech koruna. Local manufacturing provides a partial natural hedge and we continue to evaluate additional alternatives to help us reasonably manage the market risk related to foreign currency exposures.
We use derivative instruments such as forward exchange contracts to manage the risk of fluctuations in the value of certain foreign currencies. As of December 31, 2022, we had foreign exchange contracts with a net unrealized gain of $3.4 million, with maturities of up to eight months and aggregate notional value of $522.2 million (based on exchange rates as of December 31, 2022). These contracts are not designated as hedges for accounting purposes and are marked to market each period through earnings and, as such, there were no unrecognized gains or losses as of December 31, 2022 or 2021. Our derivative instruments are not leveraged and are not held for trading or speculation. See Note 8 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further discussion of these contracts. We continuously evaluate the amount and type of derivative instruments utilized to manage the market risk related to foreign currency exposures.
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Commodity Price Risk
Materials account for a large portion of our cost of sales. These materials, such as aluminum, copper, steel, bimetals, optical fiber, plastics and other polymers, capacitors, memory devices and silicon chips, are subject to changes in market price as they are influenced by commodity markets and supply and demand levels, among other factors. Management attempts to mitigate these risks through effective requirements planning and by working closely with key suppliers to obtain the best possible pricing and delivery terms. We may also enter into agreements with certain suppliers to guarantee our access to certain key components. As of December 31, 2022, we had forward purchase commitments outstanding under take-or-pay contracts for certain metals of approximately $4.9 million that we expect to consume in the normal course of operations through the second quarter of 2023. We continuously evaluate the amount and type of derivative instruments utilized to manage commodity price risk.
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