Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk consists primarily of foreign currency exchange risk and interest rate risk. Our functional currency is the U.S. dollar and our primary manufacturing operations and inventory supply contracts are in the U.S. or in U.S. dollars, but we distribute our products worldwide both through direct export and through our foreign subsidiaries. Our primary foreign currency transaction risk consists of intercompany purchases and sales of products and we attempt to mitigate this risk through our hedging program described below. For the year ended December 31, 2020, approximately 21% of our consolidated revenue was derived from products manufactured or sourced in U.S. dollars and sold internationally in local currencies, as compared to 22% for the years ended December 31, 2019, and 2018, respectively. The functional currency of most of our subsidiaries is their local currency, except four of our foreign subsidiaries where the functional currency is the U.S. dollar.

Our foreign currency exchange impacts are comprised of three components: 1) local currency revenues and expenses; 2) the impact of hedge contracts; and 3) intercompany and monetary balances for our subsidiaries that are denominated in a currency that is different from the functional currency used by each subsidiary. Based on projected revenues and expenses for 2021, excluding the impact of intercompany and trade balances denominated in currencies other than the functional subsidiary currencies, a 1% strengthening of the U.S. dollar would reduce revenue by approximately $11 million and operating income by approximately $5.5 million. Additionally, we project our foreign currency hedge contracts in place as of December 31, 2020, would provide incremental offsetting gains of approximately $2 million. The impact of the intercompany and monetary balances referred to in the third component above have been excluded, as they are transacted at multiple times during the year and we are not able to reliably forecast the impact that changes in exchange rates would have.

At our current foreign exchange rate assumptions, we anticipate the effect of a weaker U.S. dollar will have a favorable effect on our operating results by increasing our revenues by 1.5% to 2.0% and increasing our diluted earnings per share by approximately $0.14 for the year ending December 31, 2021. This favorable impact includes foreign currency hedging activity, which is expected to decrease total company operating profit by approximately $8 million and diluted earnings per share by $0.07 during the year ending December 31, 2021. The actual impact of changes in the value of the U.S. dollar against foreign currencies in which we transact may materially differ from our expectations described above. The above estimate assumes that the value of the U.S. dollar relative to other currencies will reflect the euro at $1.19, the British pound at $1.34, the Canadian dollar at $0.77, and the Australian dollar at $0.76; and the Japanese yen at ¥105, the Chinese renminbi at RMB 6.57, and the Brazilian real at R$5.36 to the U.S. dollar for the full year of 2021.

The following table presents the estimated foreign currency exchange impact on our revenues, operating profit, and diluted earnings per share for the current period and as compared to the respective prior-year period:

The primary purpose of our foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions. We also utilize natural hedges to mitigate our transaction and commitment exposures. Our corporate policy prescribes the range of allowable hedging activity. We enter into foreign currency exchange contracts with large multinational financial institutions and we do not hold or engage in transactions involving derivative instruments for purposes other than risk management. Our accounting policies for these contracts are based on our designation of such instruments as hedging transactions. If a hedging instrument qualifies for hedge accounting, changes in the fair value of the derivative instrument from the effective portion of the hedge are deferred in accumulated other comprehensive income, net of tax, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. We immediately record in earnings the extent to which a hedge instrument is not effective in achieving offsetting changes in fair value. We primarily utilize foreign currency exchange contracts with durations of less than 24 months.

Our subsidiaries enter into foreign currency exchange contracts to manage the exchange risk associated with their forecasted intercompany inventory purchases and sales for the next year. From time to time, we may also enter into other foreign currency exchange contracts or foreign-denominated debt issuances to minimize the impact of foreign currency fluctuations associated with specific balance sheet exposures, including net investments in certain foreign subsidiaries. See "Part II, Item 8. Financial Statements and Supplementary Data, Note 19. Hedging Instruments" to the consolidated financial statements of this Annual Report on Form 10-K for details regarding euro-denominated notes that we designated as a hedge of our euro net investment in certain foreign subsidiaries.

Our foreign currency hedging strategy is consistent with prior periods and there were no material changes in our market risk exposure during the year ended December 31, 2020. We enter into foreign currency exchange contracts designated as cash flow hedges for amounts that are less than the full value of forecasted intercompany purchases and sales and for amounts that are equivalent to, or less than, other significant transactions. As a result, no significant ineffectiveness has resulted or been recorded through the statements of income for the years ended December 31, 2020, 2019 and 2018. Our hedging strategy related to intercompany inventory purchases and sales is to employ the full amount of our hedges for the succeeding year at the conclusion of our budgeting process for that year. Quarterly, we enter into contracts to hedge incremental portions of anticipated foreign currency transactions for the current and following year. Accordingly, our risk with respect to foreign currency exchange rate fluctuations may vary throughout each annual cycle.

We enter into hedge agreements where we believe we have meaningful exposure to foreign currency exchange risk, with the exception of certain emerging markets where it is not practical to hedge our exposure. We target to hedge approximately 85% of the estimated exposure from intercompany product purchases and sales denominated in the euro, British pound, Canadian dollar, Japanese yen, and Australian dollar. We will continue to assess the reasonableness of increasing our hedge exposure to our long-term level during 2021. We have additional unhedged foreign currency exposures related to foreign services and emerging markets where it is not practical to hedge. The notional amount of foreign currency exchange contracts to hedge forecasted intercompany purchases and sales totaled $202.7 million at December 31, 2020, and $210.9 million at December 31, 2019. At December 31, 2020, we had $12.1 million of net unrealized losses on foreign currency exchange contracts recorded in accumulated other comprehensive loss, net of related tax. For more information on our hedge agreements see "Part II, Item 8. Financial Statements and Supplementary Data, Note 19. Hedging Instruments."

We have a Credit Facility with a syndicate of multinational banks, which matures on April 14, 2023, and requires no scheduled prepayments before that date. Although the Credit Facility does not mature until April 14, 2023, all individual borrowings under the terms of the Credit Facility have a stated term between 30 and 180 days. At December 31, 2020, we had no borrowings outstanding under the Credit Facility. As of December 31, 2020, based on our gross leverage ratio, our borrowing costs under the Credit Facility would have been approximately 2.5%.

For additional information, see "Part I, Item 1A. Risk Factors; Risks associated with doing business internationally could negatively affect our operating results and Strengthening of the rate of exchange for the U.S. dollar has a negative effect on our business," and "Part II, Item 8. Financial Statements and Supplementary Data, Note 2. Summary of Significant Accounting Policies."