filings.toolsItem 7A. Quantitative and Qualitative Disclosures about Market Risk
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Risk Management Framework
Success in business requires risk-taking, but we must balance risk and reward appropriately. Our enterprise risk management process is intended to ensure that we take risks knowingly and thoughtfully and that we balance potential risks and rewards. Our integrated enterprise risk management framework is designed to identify, evaluate, communicate, and appropriately mitigate risks across our operations. Within this framework:
| • | Our Board of Directors is responsible for overseeing our enterprise risk assessment and mitigation processes and procedures. The Board itself oversees some strategic enterprise risks and delegates responsibility for other risks to committees that report to the Board regularly on matters within their purview, and to management. |
| ◦ | The Audit Committee oversees policies and processes related to enterprise risk management, compliance with legal and regulatory requirements, and financial reporting and accounting control risks. |
| ◦ | The Compensation Committee periodically reviews our compensation policies and practices to assess whether they could lead to unnecessary risk taking. |
| • | Our Chief Ethics, Compliance, and Risk Officer is responsible for Enterprise Risk Management and reports to the Board at least annually. Our Enterprise Risk Management program includes systematically identifying and evaluating the major |
risks we face, identifying people responsible for managing each risk, ensuring that risk mitigation plans are in place and, together with internal audit, verifying that mitigation plans are being followed.
| • | Our Risk Management function identifies and assesses potential operational hazards and safety and security risks, and facilitates ongoing communication about those risks with our executive leaders. Within Risk Management, our crisis management team facilitates simulations with the appropriate function and executive leaders to increase awareness and preparedness. |
| • | Our Internal Audit Department evaluates the ongoing effectiveness of our key internal controls through periodic audit and review procedures. |
| • | The Chief Ethics, Compliance, and Risk Officer helps ensure that all of our employees’ actions globally comply with all applicable laws, our Code of Conduct, and our internal policies. The Chief Ethics, Compliance, and Risk Officer reports the status of our compliance efforts four times a year to the Audit Committee. |
Market risks
We face market risks arising from changes in foreign currency exchange rates, commodity prices, and interest rates. We manage market risks through procurement strategies as well as the use of derivative and other financial instruments. Our risk management program is governed by policies that authorize and control the nature and scope of transactions that we use to mitigate market risks. Our policy permits the use of derivative financial instruments to mitigate market risks but prohibits their use for speculative purposes.
Foreign currency exchange rate risk. Foreign currency fluctuations affect our net investments in foreign subsidiaries and foreign currency-denominated cash flows. In general, we expect our cash flows to be negatively affected by a stronger dollar and positively affected by a weaker dollar. Our most significant foreign currency exposures include the euro (EUR), the British pound (GBP), the Australian dollar (AUD), the Polish zloty (PLN), the Mexican peso (MXN), and the Russian ruble (RUB). We manage our foreign currency exposures through derivative financial instruments, principally foreign currency forward contracts, and debt denominated in foreign currency. We had outstanding currency derivatives with notional amounts totaling $1,098 million and $1,241 million at April 30, 2018 and 2019, respectively.
We estimate that a hypothetical 10% weakening of the dollar compared to exchange rates of hedged currencies as of April 30, 2019, would decrease the fair value of our then-existing foreign currency derivative contracts by approximately $51 million. This hypothetical change in fair value does not consider the expected inverse change in the underlying foreign currency exposures.
Commodity price risk. Commodity price changes can affect our production and supply chain costs. Our most significant commodities exposures include corn, malted barely, rye, natural gas, agave, and wood. We manage certain exposures through a combination of purchase orders and long-term supply contracts.
Interest rate risk. Interest rate changes affect (a) the fair value of our fixed-rate debt, and (b) cash flows and earnings related to our variable-rate debt and interest-bearing investments. In addition to currently outstanding debt, any potential future debt offerings are subject to interest rate risk. Our interest rate exposures include U.S. Treasury rates, European Central Bank rates, British government rates, and LIBOR.
As of April 30, 2019, our cash and cash equivalents ($307 million) and variable-rate debt ($150 million) were exposed to interest rate changes. Based on the then-existing balances of these items, a hypothetical one percentage point increase in interest rates would result in a negligible decrease in net interest expense.
See Notes 14 and 15 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” (the Consolidated Financial Statements) for additional information on our foreign currency exchange rate risk. See Note 6 to the Consolidated Financial Statements for details on our grape and agave purchase obligations, which are exposed to commodity price risk, and “Critical Accounting Policies and Estimates” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of our pension and other postretirement plans’ exposure to interest rate risks. Also see “Item 1A. Risk Factors” for details on how economic conditions affecting market risks also affect the demand for and pricing of our products and how we are affected by exchange rate fluctuations.
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