This excerpt taken from the HWK 10-Q filed May 6, 2009.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures. The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. In seeking to minimize the risk and costs associated with market risk, we manage our exposures to interest rates and foreign currency exchange rates through our regular operating and financial activities and through foreign currency hedge contracts if deemed appropriate. We had no foreign currency hedge contracts outstanding as of March 31, 2009. We do not use derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. At March 31, 2009, none of our total outstanding debt bore interest at a variable rate. Typically, our primary interest rate risk exposures results from floating rate debt and investment instruments. Our cash is primarily invested in bank deposits, money market funds and other marketable debt securities, including commercial paper and U.S. agency debt. The assets held by our non-qualified deferred compensation plan are invested in equity securities. The primary objective of our investments is to preserve principal while maximizing yields without significantly increasing risk. In undertaking this strategy, we are exposed to financial market risks including default risk, changes in marketable debt prices, equity security prices and interest rates. Due to the short-term nature of our investments, a 1% change in market interest rates would have an impact on interest income of approximately $0.8 million on an annual basis as of March 31, 2009.
Inflation/Deflation Risk. We manage our inflation risks by ongoing review of product selling prices and production costs. Overall, the impact of inflation has not been significant to us because of the relatively low rates of inflation experienced by us during the last few years. The ability to pass on material price increase to our customers is dependent on market conditions. It is difficult to predict the impact that possible future raw material cost decreases might have on our profitability. The effect of deflation in raw material costs would depend on the extent to which we had to lower selling prices of our products to respond to sales price competition in the market. Consequently, it is difficult for us to accurately predict the impact that inflation or deflation might have on our operations. Based on current information, we expect that neither inflation nor deflation will have a material impact on our operations during the next twelve months.
Foreign Currency Exchange Risk. We have foreign manufacturing operations in Italy, China and Canada. Revenue and expenses from these operations are denominated in local currency, thereby creating exposures to changes in exchange rates. As such, fluctuations in these operations respective currencies may have an impact on our business, results of operations and financial position. We currently do not use financial instruments to hedge our exposure to exchange rate fluctuations with respect to our foreign operations. As a result, we may experience substantial foreign currency translation gains or losses due to the volatility of other currencies compared to the U.S. dollar, which may positively or negatively affect our results of operations attributed to these operations. Gains or losses resulting from foreign currency transactions are translated to local currency at the rates of exchange prevailing at the dates of the transactions. Sales or purchases in foreign currencies, other than the subsidiarys local currency, are exchanged at the date of the transaction. The effect of transaction gains or losses is included in Other income (expense), net in our Consolidated Statements of Operations.
Benefit Plan Valuations. Asset returns for our defined benefit pension plans have been significantly impacted through March 31, 2009 by the overall decrease in fair market value on our pension plan assets. Overall, the net effects of actual plan asset returns due to the lower value of plan assets has led to significantly higher pension expense in 2009 compared to 2008. We expect that our pension expense in 2009 will be approximately $1.9 million compared to $0.2 million in 2008. Additionally, we made voluntary contributions totaling $3.9 million in the first quarter of 2009 into our domestic pension plans as additional contributions for the 2008 plan year.
This excerpt taken from the HWK 10-Q filed Nov 6, 2008.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK