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FX Risk Continues to Affect International Business Performance

By Megan Doyle

Everyone knows fluctuations in exchange rates can have tremendous effects on business performance, both positively and negatively – yet managing FX risk continues to be among the biggest strategic challenges international businesses face. A view into 2017 and early 2018 data on corporate earnings suggests that while risks related to the complexity of FX volatility continue to be difficult to mitigate and hedge against, they swung in favor of U.S. companies during the course of the past year.

Negative FX risks were "widespread and significant" throughout 2016, but were 67 percent smaller in the first quarter of 2017 than the same 2016 period.1 That trend continued all year. According to FX risk technology management company FiREapps' most recent Currency Impact Report (for the third quarter of 2017), the number of North American companies reporting negative currency impact dropped to 68 in Q3 2017 from 245 companies in Q4 2016.2

 

The dollar cost of FX risk for those companies experiencing negative impact also appeared to be trending down. For Q3 2017, the average negative impact to North American companies was $39 million, compared to $57 million in Q4 2016 and $218 million in Q4 2015.3

 

According to the same study, the euro was named the "most impactful currency" by North American and European companies alike. The following four currencies were also listed as particularly impactful by North American companies during the third quarter of 2017: the U.K. pound, the Canadian dollar, the Australian dollar, and the Brazilian real. The report named the top five North American industries affected by FX risk as biotechnology and drugs, medical equipment and supplies, business services, auto and truck parts, and electronic equipment and controls.

 

Volatility Eases in 2017, Though FX Risk Remains

 

The majority of the top U.S. companies in those five most-effected industries reported positive currency impacts. Johnson & Johnson's Q4 2017 results, for example, show sales increased 9.4 percent, with a 2.1 percent positive impact of FX rates, year-over-year.4 Similarly, Pfizer noted "foreign exchange positively impacted fourth quarter 2017 revenues by approximately $114 million."5 On the other hand, FX negatively impacted Pfizer's "adjusted cost of sales, adjusted SI&A [selling, informational, and administrative] expenses, and adjusted R&D expenses in the aggregate by $127 million."6

 

Dana Inc., a player in the U.S. auto parts industry, saw a currency exchange tailwind in Q4 2017; it boosted sales by $42 million. Further, the company's adjusted earnings before interest, taxes, depreciation, and amortization increased by $6 million due to "translation of foreign subsidiary results at currency rates that strengthened against the U.S. dollar."7

 

In technology, IBM reported tailwinds added 2.7 points in the fourth quarter, which equated to approximately "$600 million on the top line" – after approximately five years during which currency headwinds were "a dramatic drain on our portfolio," according to CFO James Kavanaugh.8 On the bottom line, IBM said currency effects were "de minimis," or "a couple of pennies at most."

 

Facebook also saw tailwinds, with positive FX risk contributing $329 million in revenue for Q4 2017; the company continues expecting to "benefit from favorable exchange rate tailwinds due to the recent depreciation of the dollar."9

 

Apple's effects are far less noticeable, according to their financial results for the fiscal 2018 first quarter, ending December 30, 2017.10 Luca Maestri, Apple's chief financial officer, said effects from FX risk on a sequential basis are fairly muted as a result of hedging against currency volatility in the short-term. But Maestri also mentioned that "the weaker the dollar in the long term, if it holds, will be a positive" effect, although it may not quickly translate to a gross margin tailwind.11

 

The Bigger Picture

 

From a global perspective, The Economist noted in September 2017 that the weakness of USD has benefited the world economy, because it allows "emerging-market economies room to breathe," and cheaper borrowing in dollars in global markets. For example, Kevin Daly of Goldman Sachs explains, "when investors are cautious, they cling to ‘safe haven' currencies, such as the dollar, yen, or Swiss franc. But when the volatility index (the Vix, or fear index) falls, the riskier ("risk-on") emerging-market currencies tend to do well."12

 

While a pattern of low volatility has been evident in recent quarters, Global Trade Magazine warns that international businesses that "are not managing their foreign exchange risk and hedge ratios will likely be caught off guard by a spike in volatility," because such low-volatility periods are often followed "by a steep increase in volatility and negative currency impact."13

 

It may also be important to note that overall impacts are often underestimated. Many companies with currency headwinds do not report them, and, according to FiREapps, "only 38 percent of the companies that reported negative impacts [for Q3 2017] actually quantified their losses."14Global Trade Magazine considers the decrease in the number of companies reporting currency impacts as an indication that "many multinationals are still not aware of what their [FX] risks are and have been lucky to sustain only minor impacts during the last few low volatility quarters."15

 

The

Takeaway:

Many North American international businesses saw little-to-no negative results from FX risk in 2017, a year of generally low FX volatility. But as the market ebbs and flows, it may be worth preparing for imminent headwinds. Otherwise, international businesses may be caught off guard by an unexpected increase in volatility.

Megan Doyle - The Author

The Author

Megan Doyle

Megan Doyle is a business technology writer and researcher based in Wantagh, NY, whose work focuses primarily on financial services technology.

Sources

1. “International Trade Currency Impact Eases in 2017,” Global Trade; http://www.globaltrademag.com/global-trade-daily/international-trade-currency-impact-eases-2017
2. Q3 2017 Currency Impact Report, FiREapps; https://www.fireapps.com/q3-2017-currency-impact-report/
3. Ibid.
4. “Johnson & Johnson’s Q4 2017 Earnings Call Transcript,” Seeking Alpha; https://seekingalpha.com/article/4139545-johnson-and-johnsons-jnj-ceo-alex-gorsky-q4-2017-results-earnings-call-transcript?part=single
5. “Pfizer’s Q4 2017 Earnings Call Transcript,” Seeking Alpha; https://seekingalpha.com/article/4141479-pfizers-pfe-ceo-ian-read-q4-2017-results-earnings-call-transcript?part=single
6. Ibid.
7. “Dana’s Q4 2017 Earnings Call Transcript,” Seeking Alpha; https://seekingalpha.com/article/4146088-danas-dan-ceo-james-kamsickas-q4-2017-results-earnings-call-transcript?part=single
8. “IBM’s Q4 2017 Earnings Call Transcript,” Seeking Alpha; https://seekingalpha.com/article/4138552-international-business-machines-ibm-q4-2017-results-earnings-call-transcript?part=single
9. “Facebook Q4 2017 Earnings Call Transcript,” Seeking Alpha; https://seekingalpha.com/article/4141984-facebooks-fb-ceo-mark-zuckerberg-q4-2017-results-earnings-call-transcript?part=single
10. “Apple Reports First Quarter Results,” Apple; https://www.apple.com/newsroom/2018/02/apple-reports-first-quarter-results/
11. “Apple’s Q1 2018 Earnings Call Transcript,” Seeking Alpha; https://seekingalpha.com/article/4142447-apples-aapl-ceo-tim-cook-q1-2018-results-earnings-call-transcript?part=single
12. “Exchange-rate shifts have helped the global economy,” The Economist; https://www.economist.com/news/finance-and-economics/21728629-euros-strength-and-dollars-weakness-have-had-benign-effects-exchange-rate?zid=295&ah=0bca374e65f2354d553956ea65f756e0
13. “International Trade Currency Impact Eases in 2017,” Global Trade; http://www.globaltrademag.com/global-trade-daily/international-trade-currency-impact-eases-2017
14. Q3 2017 Currency Impact Report, FiREapps; https://hbr.org/2017/07/globalization-in-the-age-of-trump
15. “International Trade Currency Impact Eases in 2017,” Global Trade; http://www.globaltrademag.com/global-trade-daily/international-trade-currency-impact-eases-2017

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