Memorex 2014 Annual Report Download - page 47

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42
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 facilities; our ability to retain
key employees; increased compliance with changing laws and regulations potentially affecting our operating results;
failure to adequately protect our information systems from cyber-attacks; the effect of the announcement of our
review of strategic alternatives; the affect of a potential proxy contest for the election of directors at our annual
meeting and other activist shareholder activities; 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 65 percent of our revenue in 2014, 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 Consolidated Financial Statements.
As of December 31, 2014, we had $110.1 million notional amount of foreign currency forward and option
contracts of which $23.4 million hedged recorded balance sheet exposures. This compares to $163.2 million
notional amount of foreign currency forward and option contracts as of December 31, 2013, of which $29.4 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, 2014 by $8.6 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.