Managing the Dollar’s Decline

The melting greenback isn't necessarily bad news, but finding the best way to adjust could be a CFO's toughest challenge this year.

Ever since Carlo Ferro was promoted to CFO at STMicroelectronics, a $10 billion (€6.8 billion) Geneva-based chipmaker, two years ago, he’s spent a lot of time pondering the plight of the dollar. The US-listed firm reports in dollars, and nearly all of its invoices are in dollars or Asian currencies linked to the dollar, while most of its operating expenses are in euros. As the dollar lost value against the euro — roughly 20% over the past two years — ST has taken a beating.

But Ferro hasn’t sat idly by watching the dollar’s tumble. Since becoming CFO, he has been “continuously evolving” how the company handles its currency exposure. This has meant readjusting the heavy euro weighting of costs of goods sold at ST, which has fallen from around 60% to 40%, while the dollar’s share of costs increased from 40% to 50%. This was a critical move as the dollar slid to $1.47 against the euro last summer, the highest level since Europe’s common currency began trading in January 1999. Ferro also introduced a programme to hedge around 50% of its dollar exposure which requires ST subsidiaries to book capital expenses in dollars rather than euros. (See “Accounting for the Dollar” at the end of the article.)

Managing a rapidly changing forex environment is critical at ST, asserts the CFO. The company aims to “absorb” medium-term changes to exchange rates through “organic growth, enhancing the quality of our product portfolio and progressing cost measures, while reducing the expense structure not only in Europe but also globally.” That explains ST’s decision to close facilities in Europe, North Africa and the US over the past year, moving work to sites in low-cost Asia, where most of the demand for its products comes from.

ST is certainly not alone. With the greenback at its weakest in decades, companies around the world are feeling the impact of its decline and scrambling to adjust. Consider Infosys Technologies in India. For every percentage point that the dollar slips against the rupee, the Bangalore-based outsourcing firm sees its profit margins shrink 50 basis points. And the dollar has fallen a long way over the past few years. Two years ago, one dollar bought 44 rupees. Today it buys 39.

The size of the earnings hit Infosys suffered is not all that surprising, considering how dependent the business is on dollar-denominated revenues. “About 98% of our revenue comes from overseas and about 63% comes from North America,” says CFO V. Balakrishnan. Unlike his peers in industries such as manufacturing, however, Balakrishnan doesn’t have significant US dollar costs to balance against the blow to revenues — as a service business, Infosys imports relatively little. “Indian companies like ours are very exposed,” he says.

But other companies are happy to make adjustments. For example, for every cent the euro increases against the dollar, Connecticut-based United Technologies Corporation (UTC) records an additional $10m in earnings. The diversified manufacturer earns more than 60% of its revenues outside the US, and it received an earnings boost of about $100m last year as the dollar slid against the euro, according to vice president of accounting and finance, Greg Hayes.


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