Vistance Networks, Inc. 10-K

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. Interest Rate Risk The table below summarizes the expected interest and principal payments associated with our variable rate debt outstanding at December 31, 2024, primarily the 2029 Term Loan and the Revolving Credit Facility. The principal payments presented below are based on scheduled maturities and assume no borrowings under our Revolving Credit Facility. The interest payments presented below assume the interest rates in effect as of December 31, 2024 (see Note 9 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. 2025 2026 2027 2028 2029 Thereafter Principal and interest payments on variable rate debt $ 0.5 $ 0.3 $ 0.3 $ 0.3 $ 3.5 $ — Average cash interest rate 9.86 % 9.86 % 9.86 % 9.9 % 9.9 % — Impact of 1% increase in interest rate index $ 31.5 $ 31.5 $ 31.5 $ 31.5 $ 31.5 $ — We also have $6.0 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, 2024. 2025 2026 2027 2028 2029 Thereafter Principal and interest payments on fixed rate debt $ 2.1 $ 0.3 $ 1.9 $ 0.8 $ 1.1 $ 1.2 Average cash interest rate 6.79 % 7.01 % 7.07 % 7.18 % 7.97 % 9.50 % 61 We have utilized a hedging strategy to mitigate a portion of the exposure to changes in cash flows resulting from variable interest rates on the 2026 Term Loan. The hedging strategy extends to future borrowings or debt issued, to fix a portion of the future interest cash flows by designating qualifying receive-variable and pay-fixed interest rate swaps as a cash flow hedge for accounting and financial reporting purposes. In June 2023, and in conjunction with the amendment to its 2026 Term Loan due to reference rate reform, we settled and derecognized our cash flow hedges. A gain of $6.1 million remaining as a component of accumulated comprehensive loss in the Consolidated Balance Sheets continued to be reclassified to earnings through interest expense as the interest payments continued to be made on the 2026 Term Loan through December 17, 2024, at which time as a result of the refinancing transactions, the forecasted hedge transaction was no longer probable of occurring which resulted in a gain of $3.1 million being reclassified to earnings. We reenacted our hedging strategy in the third quarter of 2023, by entering into new interest rate swap derivatives with a total notional amount of $700 million which terminate on July 31, 2026. As a result of the refinancing transaction and changes in the terms of the 2029 Term Loan, we dedesignated our interest rate swaps as of December 17, 2024 and redesignated $700 million of the swaps as hedging instruments on the same day. As a result of the dedesignation and redesignation, there was no charge to gain (loss) related to amounts previously recorded in accumulated other comprehensive loss. We believe the likelihood that floating rate debt in the amount of $700 million will exist through the interest rate swaps' maturity in July 2026 and therefore, will continue to apply hedge accounting to the interest rate swaps. The total notional amount of the interest rate swap derivatives as of December 31, 2024 was $700.0 million with outstanding maturities up to nineteen months. As of December 31, 2024, the combined fair value of the interest rate swaps was an $2.4 million loss. The table above excludes the impact of these interest rate swap derivatives. See Note 10 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 34% and 34% of net sales for 2024 and 2023, 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, 2024, we had foreign exchange contracts with a net unrealized loss of $3.4 million, with maturities of up to four months and aggregate notional value of $123.6 million (based on exchange rates as of December 31, 2024). 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, 2024 or 2023. Our derivative instruments are not leveraged and are not held for trading or speculation. See Note 10 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. 62 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, 2024, we had no forward purchase commitments outstanding under take-or-pay contracts. We continuously evaluate the amount and type of derivative instruments utilized to manage commodity price risk. In July 2023, the Company entered into a long-term supply contract with a third-party to secure the supply of certain raw materials. Under the terms of the contract, the Company will make advance payments through 2026 totaling $120.0 million (undiscounted) and based on meeting certain minimum purchase requirements through 2031, such advance payments will be credited and applied to future orders on a quarterly basis beginning in 2027 through 2031. Advance payments of $60.0 million and $30.0 million are recorded as other noncurrent assets in the Consolidated Balance Sheets as of December 31, 2024 and 2023. The Company has committed to growing purchases of raw materials under this agreement to a level of approximately $137 million per year by 2026 and continuing through 2032. 63