Insight to All Things Currency and Treasury Management

If you expected positive currency-related revenue impacts in Q3 – since the dollar weakened relative to the euro, and dollar down typically equals revenue up for US based multi-nationals – you were not alone. And you were probably very surprised. Because in the third quarter of 2012, 205 companies out of a subset of the Fortune 2000 reported currency-related losses that, in aggregate, totaled $22.7 billion. Just 23 companies reported currency-related gains.

Those findings come from the FiREapps Q3 Corporate Earnings Currency Impact Report, part of our ongoing effort to provide insight into how currency affects corporations. As in quarters past, we analyzed the earnings calls of a subset of the Fortune 2000 companies: those with revenues of at least $450 million and 15 percent or more international revenues in at least two currencies. The numbers we reveal here are top-line impacts reported during third-quarter earnings calls by companies within that subset of 794. Our results are likely conservative because they reflect only the impacts actually disclosed; there are more companies that had currency impacts but did not report it, because it was not material enough to require disclosure.

Currency impacts are becoming even more significant to multinational corporations’ top lines

In the third quarter of 2011, 69 companies reported a negative revenue impact from currency fluctuation. In the third quarter of 2012, 205 companies did – nearly a three-fold increase. The magnitude of the impact increased significantly as well, from $388 million in the third quarter of 2011 to $22.7 billion in the third quarter of 2012, a 58-fold year-over-year increase in the aggregate negative revenue impact from currency fluctuation.

Both the increase in the number of companies reporting significant currency impacts and the magnitude of those impacts demonstrate how sensitive U.S. corporations are to currency fluctuation. When we look at these numbers in aggregate, the 205 companies reporting a negative currency impact faced an average headwind of 3 percent.

In 2012Q3 many companies were not prepared for those currency impacts – and analysts were surprised, too

At the end of the second quarter this year we reported on the number of analyst questions that focused on currency impact during earnings calls. In the second quarter, 34 percent of the earnings calls of the companies we researched included currency-related questions from analysts.

In the third quarter of this year, less than 15 percent of earnings calls of the companies we researched included analyst questions focused on currency impact. That result can seem counterintuitive, given that in the same quarter the aggregate currency impact on the reporting companies’ top-line revenue was $22.7 billion. But based on our analysis and discussions with the analyst community, analysts and corporate leaders alike were only paying attention to the euro. As a result, they were expecting slightly positive currency impacts – given that the dollar had weakened relative to the euro.

As it played out, analysts and corporate leaders were surprised by significantly negative results. Several currencies other than the euro, including Brazilian real, Indian rupee, Japanese yen, and Canadian dollar, significantly impacted corporate earnings in the third quarter. The extension of currency effects across a number of currencies is a byproduct of wide-ranging volatility, driven by currency war-like activities in a number of countries.

In a recent article published in gtnews, I wrote about the escalating global currency war and how it has resulted in the kinds of “surprising” currency impacts that we saw in the third quarter. The world used to think that when the U.S. dollar rose, it rose against all other currencies, and when it fell, it fell against all others. Today, many believe that what happens to the value of the U.S. dollar relative to the euro happens across all other currencies as well. As the $22.7 billion in currency-related losses makes clear, that is simply wrong. In fact, comparing the third quarter of 2012 to the second quarter of 2012, while the U.S. dollar fell 1.56 percent relative to the euro, it rose almost five times that much against the Indian rupee and twice that much against the Canadian dollar.

The bottom line message for CFOs and corporate treasurers is this: It’s not just the euro. Your board and CEO expect you to manage risk across your entire portfolio of currencies.

Implications for investors and analysts

In the context of top-line revenue losses that could top a billion dollars, investors and analysts must be mindful of the potentially significant impact currency fluctuation can have. Both investors and analysts need to be comfortable with the corporation’s ability to accurately state its currency risk exposure and articulate the actions that it is taking to manage currency risk. With that information, investors can assess the company in the context of their own risk tolerance, and how that aligns with the extent to which the company is managing its currency risk.


Key findings recap

  • In the third quarter of 2012, 205 companies reported a negative revenue impact from currency fluctuations, up 197 percent from a year earlier.
  • Across those 205 companies, the aggregate negative currency-related revenue impact was $22.7 billion in the third quarter of 2012, up 58-fold from a year earlier.
  • The 205 companies reporting a negative currency impact faced an average headwind of 3 percent.

Are multinational corporations faring better in Q4? Or will there be even more significant currency-related revenue impacts as the currency wars heat up? Keep an eye out for our analysis of Q4 earnings reports, which we’ll make available in late February or early March.