Managing the strong U.S. dollar


(As seen on WZZM TV 13) The strong U.S. dollar is great for American tourists going abroad — and not so great for U.S. corporations with sales in other countries.

In late February, the euro was worth about $1.13 and the Canadian dollar was worth about 80 U.S. cents. Last May, the euro was trading at almost $1.40 U.S. and the Canadian dollar was worth about 94 cents.

As the dollar gets stronger, the customer overseas is paying with currency that is going to be worth less when converted into U.S. dollars here. An option is to raise the price in the overseas currency — but then there is the risk that some sales will be lost.

Joel Mitchell, a partner at Plante Moran who has a focus on international tax issues, said currency fluctuations are a wild card that add uncomfortable uncertainty to the work of a chief financial officer at a large corporation trying to estimate future revenues.

“From a business perspective, people want to manage it to minimize the uncertainty so that they can focus on managing the parts of their business that they can control,” said Mitchell.

In its 2014 year-end review Feb. 17, Wolverine Worldwide reported that “foreign exchange had a minimal impact” on its revenue growth during the year, which had record consolidated revenue of $2.76 billion.

However, the global footwear colossus does not expect that to be the case through 2015.

“Given the global nature of the company’s operations, the significantly stronger U.S. dollar versus the Canadian dollar, euro and British pound is expected to have a meaningful negative impact on reported fiscal 2015 results. Further, the continued strengthening of the U.S. dollar since the beginning of this calendar year is the primary driver of the company’s current outlook for fiscal 2015,” the Wolverine Worldwide performance report states.

Management expects revenue in the range of $2.82 billion to $2.87 billion and growth in the range of 2 to 4 percent, compared to the 2.6 percent growth last year. The anticipated revenue is “reflecting negative foreign exchange,” among other factors. Adjusted diluted earnings per share are expected in the range of $1.53 to $1.60, reflecting “the negative impact of foreign exchange,” plus additional brand-building investment and higher pension expense.

On Feb. 4, Amway reported 2014 sales of $10.8 billion, a decline of 8 percent from 2013, “due to lower revenues in China and fluctuation in foreign currency exchange rates.”

Perrigo held a 2Q 2015 conference call with industry analysts Feb. 6, which included a revision of the company’s November guidance for 2015. Perrigo’s executive vice president and chief financial officer, Judy Brown, highlighted the impact of foreign currency on the forecast, noting the pharmaceutical manufacturer’s “mix of business around the globe has been generally neutral to the bottom line; that is, we are currently fairly well naturally hedged through net income.”

Perrigo has been “a very U.S.-focused sales business,” according to Brown.

The change now, however, is Perrigo’s announcement in November that it is acquiring Omega Pharma in Belgium for an estimated $4.48 billion. The deal is expected to be finalized by the end of March.

Brown said the updated guidance for 2015 was “negatively impacted by approximately $45 million, given the extreme movement in the euro since December. However, the majority of this is offset by positive impacts, with an adjusted cost of goods sold and adjusted operating expenses essentially washing out at the bottom line.”

Brown said foreign exchange is “most visible at the top line and explains a portion of the segment and consolidated revenue adjustments. Please do note that once we close the Omega acquisition, however, this conversation of foreign exchange will certainly be an important part of the ongoing dialogue.”

There are different ways to try smoothing it out, Plante Moran’s Mitchell said. A common way is to enter into a hedging transaction at a bank, based on future cash flow.

For example, if a U.S. corporation expects to take in a million euros during 2015, it can sell those euros in advance to the bank at a negotiated exchange rate. It is somewhat of a gamble: If at the end of that period, the euro is weaker than expected, the U.S. company will be better off. On the other hand, if the euro regained in strength, the bank will benefit from the deal. But in either case, the U.S. corporation has been able to eliminate the uncertainty by locking in a given exchange rate, through the year.

Mitchell would not, of course, hazard a guess as to where the dollar will be in comparison to other currencies a year from now.

“Currency gets traded just like oil or other commodities” that fluctuate in price, he said.

He joked that if he knew where currency fluctuations were headed, he would quit his day job and “just buy a bunch of it that was going to appreciate.”

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