Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosure
We are exposed to certain financial risks, including fluctuations in foreign currency exchange rates, interest rates, and commodity prices. We
manage our exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. Our policies do not allow speculation in derivative instruments for
profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes and we are not a party to any leveraged derivatives. We monitor our underlying market risk
exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as needed.
Interest Rate Risk
We are exposed to changes in interest rates as a result of our borrowing activities and our cash balances. On a selective basis, we have in the past entered into
interest rate swap or cap agreements to reduce the potential negative impact that increases in interest rates could have on our outstanding variable rate debt. As of December 31, 2023, 2022, and 2021 we did not have any outstanding interest rate swap or cap agreements.
The interest paid on our credit facilities is based on variable reference rates and an interest margin. At December 31, 2023, we had no amounts outstanding under our revolving credit facilities. Future U.S. dollar borrowings under the revolving credit commitment will bear interest at SOFR plus
1.60%.
Our convertible debt instruments bear interest at a fixed rate, and accordingly are not subject to interest rate fluctuation risks.
At December 31, 2023, we had $972.7 million of cash and cash equivalents and $35.8
million of short-term investments, which earn interest at various variable rates.
Based on the debt and cash positions at December 31, 2023,
we would expect a 50 basis point increase or decrease in interest rates to increase or decrease our annualized net earnings by approximately $3.6 million.
See Note 6 to our consolidated financial statements for additional information about our long-term debt.
Foreign Exchange Risk
We are exposed to foreign currency exchange rate risks, particularly due to market values of transactions in currencies other than the functional currencies of certain
subsidiaries. We have used forward exchange contracts to economically hedge a portion of these exposures in the past. We had no outstanding forward contracts as of December 31, 2023. We do not utilize derivatives or other financial instruments for trading or other speculative purposes.
Our significant foreign subsidiaries are located in Germany, Israel, and Asia. We finance our operations in Europe and certain locations in Asia in local currencies. Our
operations in Israel and most significant locations in Asia are largely financed in U.S. dollars, but these subsidiaries also have significant transactions in local currencies. Our exposure to foreign currency risk is mitigated to the extent that the
costs incurred and the revenues earned in a particular currency offset one another. Our exposure to foreign currency risk is more pronounced in Israel, the Czech Republic, and China because the percentage of expenses denominated in Israeli shekels,
Czech koruna, and Chinese renminbi to total expenses is much greater than the percentage of sales denominated in Israeli shekels, Czech koruna, and Chinese renminbi to total sales. Therefore, if the Israeli shekel, Czech koruna, and Chinese renminbi
strengthen against all or most of our other major currencies, our operating profit is reduced. Where possible, we maintain local currency denominated cash balances in these countries approximately equal to the local currency liabilities to naturally
hedge our exposures. We also have a slightly higher percentage of euro-denominated sales than expenses. Therefore, when the euro strengthens against all or most of our other major currencies, our operating profit is slightly increased.
Accordingly, we monitor several important cross-rates. Upon completion of the acquisition of Nexperia's Newport wafer fab, we anticipate greater exposure to British sterling, where costs incurred in British sterling are expected to exceed sales
denominated in British sterling. The acquisition price for Nexperia's Newport wafer fab is denominated in U.S. dollars.
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We have performed sensitivity analyses of our consolidated foreign exchange risk as of December 31, 2023, using a model that measures the change in the values arising from a hypothetical 10% adverse movement in foreign currency exchange rates relative to the U.S. dollar, with all other
variables held constant. The foreign currency exchange rates we used were based on market rates in effect at December 31, 2023. The
sensitivity analyses indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would impact our net earnings by approximately $15.3 million at December 31, 2023, although individual line items in our consolidated statement of operations would be materially affected. For example, a 10% weakening in all foreign currencies would decrease the U.S.
dollar equivalent of operating income generated in foreign currencies, which would be offset by foreign exchange gains of our foreign subsidiaries that have significant transactions in U.S. dollars or have the U.S. dollar as their functional
currency.
A change in the mix of the currencies in which we transact our business could have a material effect on the estimated impact of the hypothetical 10% movement in the
value of the U.S. dollar. Furthermore, the timing of cash receipts and disbursements could result in materially different actual results versus the hypothetical 10% movement in the value of the U.S. dollar, particularly if there are significant
changes in exchange rates in a short period of time.
Commodity Price Risk
Although most materials incorporated in our products are available from a number of sources, certain materials are available only from a relatively limited number of
suppliers or are subject to significant price volatility. Our results of operations may be materially and adversely affected if we have difficulty obtaining these raw materials, the quality of available raw materials deteriorates, or there are
significant price changes for these raw materials. The determination that any of the raw materials used in our products are conflict minerals originating from the Democratic Republic of the Congo and adjoining countries could increase the probability
that we will encounter the challenges noted above, incur additional expenses to comply with government regulations, and face public scrutiny. For periods in which the prices of these raw materials are rising, we may be unable to pass on the increased
cost to our customers which would result in decreased margins for the products in which they are used. For periods in which the prices are declining, we may be required to write down our inventory carrying cost of these raw materials, since we record
our inventory at the lower of cost or market. Depending on the extent of the difference between market price and our carrying cost, this write-down could have a material adverse effect on our net earnings. We also may need to record losses for
adverse purchase commitments for these materials in periods of declining prices.
Silicon wafers are the most important raw material for the manufacturing of our semiconductor products. Silicon wafers are manufactured from high-purity silicon, a
metalloid. There have at times been industry-wide shortages of high-purity silicon resulting primarily from growing demand of the electronic component and solar power industries, and limited growth in high-purity silicon manufacturing capacities.
Shifts in demand for high-purity silicon and in turn, silicon wafers, have resulted in significant fluctuation in prices of silicon wafers.
We are a major consumer of the world’s annual production of tantalum, a metal used in the manufacturing of tantalum capacitors. There are few suppliers that process
tantalum ore into capacitor grade tantalum powder.
Palladium, a metal used to produce multi-layer ceramic capacitors, is currently found primarily in South Africa and Russia. Palladium is a commodity metal that is
subject to price volatility. Certain other metals used in the manufacture of our products, such as copper, are traded on active markets, and can also be subject to significant price volatility. We periodically enter into short-term commitments to
purchase palladium and defined portions of annual consumption of other metals if market prices decline below budget. In certain circumstances, we also purchase precious metals bullion in excess of our immediate manufacturing needs to mitigate the
risk of supply shortages or volatile price fluctuations.
We estimate that a 10% increase or decrease in the costs of raw materials subject to commodity price risk would decrease or increase our net earnings by $8.5 million,
assuming that such changes in our costs have no impact on the selling prices of our products and that we have no pending commitments to purchase metals at fixed prices.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are filed herewith, commencing on page F-1 of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.