THQ 2007 Annual Report Download - page 58

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50
Interest Rate Risk
We have interest rate risk primarily related to our investment portfolio. A substantial portion of our
portfolio is in short-terminvestments made up of floating rate securities and municipal securities. The
value of theseinvestments may fluctuatewith changesin interestrates. However, we believethis risk is
immaterial dueto the short-term nature of the investments. At March 31, 2007, we had outstanding letters
of credit of approximately $22.7 million.
Foreign Currency Risk
We transact business in many different foreign currencies andare exposed to financialmarket risk
resulting from fluctuations in foreigncurrency exchange rates, particularly the British Pound (“GBP”) and
the Euro, which may result in a gain or loss of earnings to us. Our international business is subject to risks
typicalof an international business, including, but not limitedto, foreign currency exchange ratevolatility.
Accordingly, our future results could be materially and adversely affected by changes in foreign currency
exchange rates.
Throughout the year,we frequently monitor the volatility of theGBP and theEuro (and all other
applicablecurrencies). We utilize foreign exchange forward contracts to mitigateforeign currency risk
associated with foreign currency denominated assets and liabilities, primarily certaininter-company
receivables and payables. Our foreign exchangeforward contracts are accounted for as derivatives whereby
the fair value of the contractsare reflected as other current assets or othercurrent liabilitiesand the
associated gains and losses arereflected in interest and other income in the consolidated statements of
operations. The forward contracts generally have acontractual term of onemonth or less and are
transacted near month-end. Therefore, the fair valueof the forward contracts generally is not significant at
each month-end.
Foreign exchange forward contracts are designed to offset gains and losses on the underlying foreign-
currency-denominated assets and liabilities. Any movement in foreign currency exchange rates resulting in
a gain or loss on our foreign exchangeforward contracts would be offsetbyanopposinggain or loss in the
underlying foreign-currency-denominated assets and liabilities that were hedged and wouldnot have a
material impact on our financial position.
As of March 31,2007, we hadforeign exchange forward contracts in thenotional amount of $47.0 million,
allwithmaturities of one month,consisting primarily of Euros, British Pounds, and Australian Dollars.
Thecounterparties to these forward contracts arecreditworthy multinational commercial and investment
banks. The risks of counterparty non-performanceassociated with these contracts are notconsidered to be
material. Notwithstanding ourefforts to manage foreign exchange risks, there can be no assurances that
our mitigating or hedging activities will adequately protectus against therisks associated with foreign
currency fluctuations.
We do not hedgeforeign currency translation risk. A hypothetical 10% adverse change in exchangerates
would result in areduction of reported netsales of approximately $42.5 million and areduction of
reported income before taxesof approximately $3.2 million. This estimate assumes an adverse shift in all
foreigncurrency exchange rates, whichdonot always move in thesame direction;actual resultsmaydiffer
materially.
Item 8. Consolidated Financial Statements andSupplementary Data
Thereport of Independent Registered Public Accounting Firm, consolidated financial statements and
notes to consolidated financial statements follow below.