Looming risk: Foreign exchange concerns grow as Maine expands international trade
Photo / Tim Greenway
Carolyn Brodsky, president of Biddeford-based Sterling Rope Co. Inc., is keeping a sharper eye on currency rates after being hit with exchange losses.
The strong U.S. dollar stretches buying power for Americans traveling overseas, but for businesses, large currency fluctuations can eat into revenues and competitiveness.
Measuring currency exposure and figuring out how — or whether — to manage that foreign exchange risk can be more art than science. Some firms say so-called “forex” or “FX” exposure can't be measured precisely, so they hesitate to act. Others say the monetary ups and downs between them and their overseas partners will eventually even out. Yet others actively hedge risk with sophisticated strategies like futures and options trading, many with the help of outside experts or in-house specialists.
A bad guess on a currency's future value can be disastrous.
“You learn quickly when you get punched in the eye that you have to protect yourself, you have to put your hands up,” says Rick Moskowitz, vice president at KeyBank's foreign exchange group in Boston. He says companies shouldn't be afraid to institute FX strategies, which may at first seem daunting. An adverse event, like losing a lot of money, may be all the impetus a company needs to start hedging or more aggressively using other risk-mitigation strategies.
Take Sterling Rope Co. Inc., a Biddeford climbing and rescue rope maker that must print its price lists about six months in advance for European trade shows, where its distributors place orders. “We pegged our price list at $1.32 to the euro, and so are taking a 20% hit on pricing right now,” Sterling Rope President Carolyn Brodsky notes. Based on that exchange rate, which was figured last fall, the company is now getting 75.75 euro for its $100 wholesale product, or about a 19% discount on top of its distributor discount. Brodsky says that based on today's exchange rate, she should be getting 93.40 euros for that $100 product.
South America is another trouble spot for many companies, including Sterling Rope, especially with the peso trading better against the euro than it does against the dollar, Brodsky says. That means her products' prices just became 30% more expensive.
“The price of our product is very expensive relative to the products coming from Europe,” she says. “Our largest rescue distributor, and one of our largest customers in general, canceled their March order. We are giving that distributor an extra 15% to 20% discount to help him adjust pricing and to keep him from canceling more orders.”
Adds Brodsky, “All of this will greatly affect our profits this year, basically wiping them out on many of our international sales. But you can't risk losing your customers or letting your competitors get a foot in the door.”
Taking the long view is wise, says Adrian Kendall, an attorney at Norman, Hanson & DeTroy LLC in Portland. “It's difficult to get new clients,” he says. “There are costs to get new vendors or suppliers and costs to qualify a product.”
He says one way to help keep a strong business relationship during currency hiccups is to add an exchange rate price adjustment clause to a contract stipulating that if the exchange rate on the actual date of payment differs by more than a certain percentage of the base rate, the contract price should be adjusted accordingly.
The long view also may be wise in terms of how much longer the dollar's strength will hold. “I still see a strong U.S. dollar ahead of us till the end of 2016,” says Craig Donlan, director of foreign exchange for TD Bank in Toronto.
Plugging the gaps
Perhaps the most well-known recent FX loss came from WEX Inc. (NYSE: WEX), a corporate payment solution company based in South Portland. In February, WEX reported 2014 fourth quarter earnings that included an $8.1 million non-operating expense related to FX losses. The company noted it has accounts in 17 different currencies because of its broad global operations.
During a conference call with analysts at the time, WEX Chief Financial Officer Steve Elder said the company has undertaken a lot of changes to its FX hedging programs, tightening them in a lot of cases and bringing down the total exposures since the end of 2014, according to a seekingalpha.com transcript of the call. The company has been posting jobs for foreign exchange analysts both at its headquarters and at WEX Europe in West London. As this issue of Mainebiz went to press, WEX was in a quiet period prior to reporting its most recent results.
Two common hedges companies use are forward contracts and currency options. A forward contract locks in a set amount of currency for settlement at a determined future date and at a predetermined exchange rate. Fixing prices in advance can help businesses budget and plan for costs, notes Kendall, who recommends choosing a conservative forward delivery date. A currency option also sets an exchange rate by a certain date at a certain amount, but the company is not obligated to exercise the option. If the exchange rate is in their favor, they can forego the option and take the spot rate instead.
Some companies try to mitigate risk by keeping all their business in U.S. dollars. One example is Kepware Technologies, a Portland software company that does about half of its business overseas.
“To date, all of our international partners and customers have agreed to deal in U.S. dollars,” says Brett Austin, company president. “At times it has benefited Kepware, and at other times our partners and customers. I suspect that as we open offices in Europe and Asia, we may deal in local currency. When we make that move, we will begin to hedge our risk.”
There is a risk to dealing strictly in dollars. If you invoice German customers in dollars, for example, and if the euro drops, you may have to adjust prices or be undercut by local competitors, market experts note.
Peter Klein, CEO and president of KICTeam Inc., an Auburn-based maker of cleaning cards for industrial equipment, actually found himself increasing prices in Canada, one of its foreign markets. It also sells in Australia, China, Europe and elsewhere. In the past year, the Canadian dollar has fallen from 0.9 per U.S. dollar to 0.83.
“We just had to increase prices due to the exchange rate,” says Klein of his agreement with his Canadian customers, who he says are expecting the price increases because they do so much business with U.S. companies. The current exchange rates will stay in effect until the contracts expire, but new business will see a 25% price rise.
Another way his company is offsetting some currency risk is via the manufacturing company it bought in England last year. Currency issues were not the reason for the purchase. However, the company is able to purchase materials in Europe using euros for products it then sells in the United States. “It's a natural hedge,” he says. “The objective is to minimize the currency exchange impact.”
With a rising international presence, KICTeam is being more proactive in managing FX. In the last few months it put processes into place to pay more attention to the currencies of its international partners. The company's chief financial officer is charged with looking at the impact of six currencies, he says.
Jeff Edel, CEO of Soleras Advanced Coatings in Biddeford, which also operates in Europe and China, doesn't hedge. “We are really focused on cash generation and debt reduction,” he says. “We don't really need to have an accurate forecast of results in U.S. dollars 12 months from now as long as we generate sufficient cash for debt repayment.”
Other considerations
George Babeu, president and founder of One Source risk management in Portland, says that while his company typically issues credit insurance and risk mitigation products, for example, for receivables, in the past six months clients have asked about FX protection.
“One [Maine] company was doing 20% of its business in Canada, and lost about 20% on their top line,” he says of the U.S. dollar's impact. One Source works with what Babeau describes as an external boutique forex organization catering to small- and medium-sized companies.
“We're hearing more about forex in the last six months in Maine because of the Canadian dollar alone,” Babeu says. “They're our biggest trading partner.”
Some of the smaller companies are trying to do business by getting cash in advance or a letter of credit, he says, but that can make the company look financially weak to its trading partner.
Companies should also factor tax implications into their FX strategies, says Matthew Litz, tax senior manager at BerryDunn in Portland.
“The taxation of foreign currency transactions can be complex,” he says, noting that FX gains or losses must be considered in the FX strategy, and the earlier, the better.
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