Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks relating to fluctuations in foreign currency exchange rates, commodity prices and interest rates. Management has established a variety of programs including the use of derivative instruments and other financial instruments to manage the exposure to financial market risks as to minimize volatility of financial results. In the ordinary course of business, management may enter into derivative instruments to hedge its exposure to foreign currency, interest rate and commodity price risks under established procedures and controls. Decisions regarding whether or not to hedge a given commitment are made on a case-by-case basis, taking into consideration the amount and duration of the exposure, market volatility and economic trends. Foreign currency exchange contracts are also used, from time to time, to manage near-term foreign currency cash requirements.

Foreign Exchange Risk

The Company has significant international operations resulting in a large number of currency transactions from international sales, purchases, investments and borrowings. The primary currencies for which the Company has an exchange rate exposure are the Chinese renminbi ("CNY"), Japanese yen ("JPY"), the Taiwan dollar ("TWD"), European euro ("EUR") and South Korean won ("KRW"). The Company uses forward exchange contracts to offset its net exposures, by currency, related to the foreign currency denominated monetary assets and liabilities of its operations. In addition to the contracts disclosed in Note 20 to the Consolidated Financial Statements, from time to time, the Company will enter into foreign currency exchange contracts to establish with certainty the U.S. dollar ("USD") amount of future firm commitments denominated in a foreign currency.

The following table illustrates the fair values of outstanding foreign currency contracts at December 31, 2025 and the effect on fair values of a hypothetical adverse change in the foreign exchange rates that existed at December 31, 2025. The sensitivities for foreign currency contracts are based on a 10 percent adverse change in foreign exchange rates.

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Interest rate risk arises primarily from borrowings under our Senior Secured Term Loan Facility, which bears interest at variable rates. Changes in interest rates could affect the Company’s interest expense and cash flows.

As of December 31, 2025, the Company had $2.35 billion outstanding under its senior secured term loan facility with an weighted average interest rate of 5.698%. Borrowings under the Senior Secured Credit Facilities bear interest at a rate per annum equal to either (i) the applicable base rate or (ii) term Secured Overnight Financing Rate (“SOFR”), in each case plus an applicable margin. The applicable margin for borrowings under the Senior Secured Revolving Facility ranges from 0.25% to 1.25% for base rate borrowings and 1.25% to 2.25% for term SOFR borrowings, in each case based on the Company’s consolidated first lien net leverage ratio. The applicable margin for borrowings under the Senior Secured Term Loan Facility is 1.00% for base rate borrowings and 2.00% for term SOFR borrowings. A fluctuation in the weighted average interest rate of 100 basis points as of December 31, 2025, would result in an increase or decrease in annual interest expense of $24 million in relation to our Senior Secured Term Loan.

Concentration of Credit Risk

The Company maintains cash and cash equivalents, derivatives and certain other financial instruments with various financial institutions. These financial institutions are generally highly rated and geographically dispersed, and the Company has a policy to limit the dollar amount of credit exposure with any one institution.

As part of the Company’s financial risk management processes, it continuously evaluates the relative credit standing of all the financial institutions that service Qnity and monitors actual exposures versus established limits. The Company has not sustained credit losses from instruments held at financial institutions.

For the year ended December 31, 2025, Samsung Electronics Co., Ltd. accounted for approximately 11% of total net sales and Taiwan Semiconductor Manufacturing Company Limited accounted for approximately 8% of total net sales. The concentration of credit risk related to accounts receivable is consistent with the geographic, industry, and customer diversity associated with the Company’s global product portfolio.

The Company also maintains strong credit controls in evaluating and granting customer credit. As a result, it may require that customers provide some type of financial guarantee in certain circumstances. Length of terms for customer credit varies by industry and region.