(FROM THE WALL STREET JOURNAL 1/13/15)
By Vipal Monga
An unexpected surge by the U.S. dollar is causing headaches for
finance chiefs.
Not only did the currency's strength weigh on year-end earnings,
but it is clouding this year's outlook, complicating corporate
borrowing and pension accounting. It is even shaking CFOs' belief
the Federal Reserve will raise interest rates in 2015.
As the dollar rises, it lowers the value of revenue companies
take in overseas and makes U.S. exports costlier and less
competitive. Both factors can have a big impact on corporate
results. The S&P 500 companies, for example, rely on foreign
markets for over 45% of their sales.
In last year's third quarter, North American and European
companies recorded $8 billion in currency losses, according to
FiREapps, which advises companies on managing currency risk.
Since then, the dollar has continued to rise. The WSJ Dollar
Index has climbed more than 7.5%, hitting a roughly 11 1/2-year
high this month. The index tracks the dollar against a basket of 16
currencies, including the euro, the Japanese yen and the British
pound.
"It's going to put a damper on fourth-quarter earnings," said
Wolfgang Koester, chief executive of FiREapps.
The dollar's surge has been driven by expectations that the Fed
will raise U.S. short-term interest in the coming months, as well
as a flight to safety as economies in Europe and Asia falter.
To protect against currency fluctuations, many companies hedge
their bets with contracts that lock-in exchange rates. Some of
their foreign units also make goods or buy supplies abroad to avoid
importing parts from the U.S. The stronger dollar makes those
imports costlier.
But those strategies offer only limited protection.
On Jan. 20 International Business Machines Corp. will report a
blow to year-end earnings because its hedges didn't provide enough
cover, said Martin Schroeter, its chief financial officer. In
addition, IBM's management has thrown out its forecast for the
year.
IBM had said it would chalk up adjusted profit of $20 a share in
2015, but it plans to lower its projection this month. "We have
some real macro headwinds in the form of a strong dollar," Mr.
Schroeter said.
Last month, Oracle Corp. last month told investors that its
revenue would have risen 7% in the quarter ended Nov. 30 had the
dollar's value been stable. Instead, the software company reported
half that growth.
Oracle co-CEO Safra Catz said the strengthening dollar would
reduce Oracle's profits in the current quarter by about four cents
a share, and that the currency's "unusually high volatility" made
even that figure iffy.
The dollar's movement is making it riskier for American
companies to borrow money in foreign markets.
Verizon Communications Inc. sold $5.4 billion of bonds in Europe
last year, but the telecom company would think twice about doing
something like that again soon, said CFO Fran Shammo.
That's because Verizon swaps the foreign debt into dollars via
contracts with banks, which take on the risk of exchange-rate
changes. But, if the dollar value of that foreign debt falls too
far, the company might have to put up cash as collateral under the
terms of those contracts.
"That's real cash," said Mr. Shammo. "So we have to manage the
risk and not just raise as much as we want outside the U.S."
Of course, the strong dollar can be a boon for some businesses.
Networking-gear maker Ciena Corp., for example, saved $15.4 million
on research and development costs in Canada last year because of
the weaker Canadian dollar.
Demand for the dollar also has helped drive down U.S. interest
rates. Worried about Europe's economy and emerging markets,
investors have snapped up dollars to buy U.S. Treasury notes.
That's pushed yields on the 10-year Treasury note below 2%, which
has seldom occurred since the summer of 2013.
Corporate-bond yields fell to an average of 3.02% last week,
down from 3.27% this time last year, according to Barclays PLC.
Although falling yields make it cheaper for companies to borrow,
they are playing havoc with corporate pension plans.
Declining interest rates more than doubled pension deficits to
$343 billion at the 40% of the Fortune 1000 companies that have
defined-benefit pension plans and December year-ends, according to
consulting firm Towers Watson.
"We might have a growing gap in pension funding," if rates drop,
said Carol Roberts, CFO of International Paper Co. The company's
pension plan had a $2.2 billion funding deficit at the end of
2013.
"In the world we live in today," Ms. Roberts said, "we just
expect volatility."
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Maxwell Murphy and Shira Ovide contributed to this article.
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