Memorex 2012 Annual Report Download - page 46

the ready availability and price of energy and key raw materials or critical components including the effects of natural disasters
and our ability to pass along raw materials price increases to our customers; continuing uncertainty in global and regional
economic conditions including adverse effects of the ongoing sovereign debt crisis in Europe, increased Euro currency exchange
rate volatility, and related austerity measures and their potential impact on European economic growth; our ability to identify,
value, integrate and realize the expected benefits from any acquisition which has occurred or may occur in connection with our
strategy; the possibility that our goodwill and intangible assets or any goodwill or intangible assets that we acquire may become
impaired; the ability of our security products to withstand cyber-attacks; the seasonality and volatility of the markets in which we
operate; foreign currency fluctuations; changes in European law or practice related to the imposition or collectability of optical
levies; significant changes in discount rates and other assumptions used in the valuation of our pension plans; changes in tax
laws, regulations and results of inspections by various tax authorities; our ability to successfully defend our intellectual property
rights and the ability or willingness of our suppliers to provide adequate protection against third party intellectual property or
product liability claims; the outcome of any pending or future litigation; ability to access financing to achieve strategic objectives
and growth due to changes in the capital and credit markets; limitations in our operations that could arise from compliance with
the debt covenants in our credit facility; increased compliance with changing laws and regulations potentially affecting our
operating results; failure to adequately protect our information systems from cyber-attacks; our ability to meet our revenue
growth, gross margin and earnings targets and the volatility of our stock price due to our results or market trends, as well as
various factors set forth from time to time in Item 1A of this Form 10-K and from time to time in our filings with the SEC.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to various market risks including volatility in foreign currency exchange rates and credit risk.
International operations, which comprised approximately 59 percent of our revenue in 2012, may be subject to various risks
that are not present in domestic operations. The additional risks include political and economic instability, terrorist activity, the
possibility of expropriation, trade tariffs or embargoes, unfavorable tax laws, restrictions on royalties, dividends and currency
remittances, requirements for governmental approvals for new ventures and local participation in operations such as local
equity ownership and workers’ councils.
Our foreign currency hedging policy attempts to manage some of the foreign currency risks over near term periods;
however, we cannot ensure that these risk management activities will offset more than a portion of the adverse financial
impact resulting from unfavorable movements in foreign exchange rates or that medium and longer term effects of exchange
rates will not be significant. Although we attempt to utilize hedging to manage the impact of changes in currency exchange
rates, our revenue or costs are adversely impacted when the U.S. dollar sustains a strengthening position against currencies
in which we sell products or a weakening exchange rate against currencies in which we incur costs.
In accordance with established policies and procedures, we may utilize derivative financial instruments, including
forward exchange contracts, options, combination option strategies and swap agreements to manage certain of these
exposures. Factors that could impact the effectiveness of our hedging include the accuracy of our forecasts, the volatility of
the currency markets and the availability of hedging instruments. We do not hold or issue derivative financial instruments for
trading or speculative purposes and we are not a party to leveraged derivative transactions. The utilization of derivatives and
hedging activities is described more fully in Note 12 — Fair Value Measurements and Derivative Financial Instruments in our
Notes to the Consolidated Financial Statements.
As of December 31, 2012, we had $295.1 million notional amount of foreign currency forward and option contracts of
which $46.5 million hedged recorded balance sheet exposures. This compares to $241.1 million notional amount of foreign
currency forward and option contracts as of December 31, 2011, of which $32.9 million hedged recorded balance sheet
exposures. An immediate adverse change of 10 percent in year-end foreign currency exchange rates with all other variables
(including interest rates) held constant would reduce the fair value of foreign currency contracts outstanding as of
December 31, 2012 by $5.2 million.
We are exposed to credit risk associated with cash investments and foreign currency derivatives. We do not believe that
our cash investments and foreign currency derivatives present significant credit risks because the counterparties to the
instruments consist of major financial institutions and we monitor and manage the notional amount of contracts entered into
with each counterparty.
43