Companies review hedging strategies as stronger dollar cuts into profits

The WSJ Dollar Index, which measures the performance of the US currency against 16 others, is up more than 12% over the past year and is up 8% from the beginning of the year. This is causing problems for companies in the S&P 500, as many of them generate a portion of their revenue — about 30% on average — overseas and consolidate it in the US.

Some businesses benefit from natural hedges, for example having both revenues and expenses in local currencies, but others do not, making them more dependent on hedging programs to hedge some currency risk and allowing them to do so. Provide visibility into what future revenues from overseas will be. Likely to look like

“High volatility and interest rates around the world increase the cost of hedging currency risk as well as the risk of not hedging,” said Global Head Flavio Figueredo.

Citigroup Inc. of

Rates and Currencies Corporate Sales Division. “This has prompted companies to take a more proactive approach to how they manage currency risk in order to more effectively manage impacts on results.”

According to FactSet, companies in the S&P 500 reported a total of $7.42 billion more in foreign exchange impact in the first quarter of the year compared to the prior-year period, and $12.57 billion less from hedges and derivatives combined. data provider. Forex analysts expect a similar impact in the second quarter.

Data provider S&P Global Market Intelligence found that mentioning foreign exchange impacts in earnings calls for S&P 500 companies has increased to 220 from June 20 to June 20 in recent weeks, up from 183 during the prior-year period. . The S&P said similar patterns occur for keywords such as hedging and currency headwinds.

“The strength of the US dollar undermines the value of foreign earnings,” said Anthony Carfang, managing director of Carfang Group LLC, a provider of Treasury services. “Companies have to grow their overseas revenues equitably,” with 2021, he said.

Coke Co.

,

Microsoft Corporation

And

sales force Inc.

are among companies that have pointed to the negative impact of a stronger dollar on their financial results in recent weeks.

Microsoft earlier this month Cut your earnings and revenue guidance Pointing to unfavorable foreign exchange rate movements for the quarter ended June 30. Salesforce, a San Francisco-based software company, expects forex headwinds of about $600 million for the fiscal year ending in January, which is $300 million more than its previously forecast.

medtronic

Medical-technology company Plc said foreign exchange rates would become a major deterrent to its business if recent rates had a negative impact on full-year revenue of $1 billion to $1.1 billion.

“Inflation and FX pressures pose near-term challenges to our margins, although we continue to seek opportunities to offset them,” Medtronic chief financial officer Karen Parkhill said last month. Medtronic declined to comment further.

The advisors said companies now have more tools at their disposal to hedge against forex risks, with automated technology allowing for better, more timely insight into risk. Businesses are also watching when and how they are converting revenue from overseas and trying to mix local income with local spending to create a buffer.

Eric Hutman, chief executive of foreign-exchange marketplace MillTechFX, said, “We have seen an increase in interest in hedging, and we are also seeing companies that have never hedging before revisiting it.”

respect Corporation

Finance chief James Moylan, a Hannover, MD-based provider of network and communications infrastructure, hedged some of his exposure to the Canadian and Australian dollars, the Indian rupee, the euro and the Brazilian real. “What happens is once we bill our customers in currencies other than the US dollar, we will hedge,” Mr. Moylan said. The company generates about 25% of its revenue outside the US.

Beverage maker Coca-Cola saw a negative impact of about $200 million on its first-quarter operating income, which increased 25% compared to the prior-year period to $3.4 billion. The company has approximately $7.6 billion in estimated foreign currency cash flow hedges.

CFO John Murphy said, “Based on current rates and our hedge position, we expect to expect a two- to three-point currency headwind for comparable net revenue and a three- to four-point currency headwind for comparable EPS for fiscal 2022. Reiterating the approach.” said during the company’s most recent earnings presentation in April.

There are a variety of instruments that treasurers and other officials may use, including forward contracts, which lock the exchange rate for the purchase or sale of currency at a future date; Derivatives that give the right but not the obligation to exchange at a pre-arranged rate on a specified date, also called options; As well as instruments such as knock-in and knock-out, which allow companies to obtain the security of a hedge only at certain exchange rates.

“A knock-out transaction can be a hedge that goes away when the exchange rate rises to a certain level,” said Amol Dhargalkar, managing partner at financial services firm Chatham Financial.

Some companies are also seeing operational changes, for example changing the terms of contracts when negotiating with foreign suppliers or clients, said Andy Gage, vice president of FX advisory services at Kiriba, a provider of Treasury software.

Executives may convert excess cash held by foreign subsidiaries into dollars to increase visibility, or use instruments such as intercompany debt to offset some of the effects of currency fluctuations, Mr. Gage said. .

net storage Inc.,

A Mountain View, California-based data-solutions company that generates about 25% to 30% of revenue outside the U.S. The business reported $620.4 million in revenue during the quarter ended May 8—up 50% from the previous year— It is seeing some pressure from a stronger dollar, finance chief Kevin Chrysler said, even though some of its overseas orders are being paid for in dollars.

“We are monitoring this closely,” Chrysler said, adding that the company is looking to expand its international business.

write to Nina Trentman nina.trentman@wsj.com