For every penny the euro increases against the dollar, United Technologies Corp. records an additional $10 million in earnings. A diversified manufacturing behemoth that earns more than 60 percent of its revenues outside the United States, UTC received an earnings boost of about $100 million last year as the dollar slid against the euro — and slid, and slid a little more. Despite its far-flung revenue streams, the company has never done any financial hedging, says vice president of accounting and finance Greg Hayes. Instead, UTC relies on what are essentially operational hedges: ensuring that it manufactures its products in the markets where they are sold. “The key is to manufacture locally and not put yourself into situations where you’re affected by things you can’t control, like foreign exchange,” says Hayes.
With the dollar at its weakest point in a decade, protection against currency risk looms ever larger on the CFO’s agenda. For U.S. manufacturers selling into Europe, the dollar’s decline has been a boon, allowing them to accelerate overseas growth and boost earnings by 5 or 10 percent. But for other companies, particularly those based in Europe, the prospect of a permanently weaker dollar has heightened the need to diversify their operations, causing some to consider moving manufacturing facilities to a suddenly lower-cost United States. In Asia, rapidly rising currency values have CFOs thinking about ways to protect the margins on their extensive U.S. sales.
While companies have long used financial hedges for short-term currency problems, the fact that businesses are changing their operations in response to the dollar’s fall suggests they suspect that the greenback’s weakness may be a long-term phenomenon. According to the most recent Duke University/CFO magazine Global Business Outlook Survey, a stunning 50 percent of Europe’s CFOs and 60 percent of Asia’s think the decline in the dollar represents a permanent devaluation. A third of their U.S. counterparts agree.
“I think it’s a fundamental adjustment,” says Charles Kane, CFO of investment firm Global BPO Services and a lecturer on international finance at the MIT Sloan School of Management. “There are a lot of factors driving the dollar down.” And it could fall still further, for example, if the oil-exporting countries decide to peg oil prices to another currency or to a basket of currencies.
Even those who say the dollar will bounce back are moving to protect themselves from the downside or to take advantage of its current underdog status. “The dollar has fallen too far too fast, at least relative to the euro,” says Scot Carlson, former CFO of Black Diamond Equipment, a small climbing- and ski-equipment manufacturer based in Salt Lake City that sells one-third of its product in Europe but manufactures in the United States and China. Still, he says, “to be a global player, it has become increasingly important to hedge your bets.”
Seizing the Day
Not that a sagging dollar is altogether bad news. The earnings benefit for companies with overseas sales is undeniable. According to the Duke/CFO survey, half of U.S. CFOs with significant international sales have seen a benefit from the dollar’s decline.