“One of the aspects of Apple’s earnings that is not well understood or discussed is the impact of changes in foreign currency values on the company’s balance sheet and earnings,” Anthony Ruben writes for Seeking Alpha. “As many readers know, the US dollar has been on a tear, increasing 15% since the third quarter of fiscal 2014 (July 1, 2014), with the dollar appreciating to less than $1.16/Euro, from $1.26/Euro (I am showing the exchange rate in the way most commonly presented – an equivalent would be €0.862/USD) since the beginning of fiscal 2015 (October 1, 2014).”
“AAPL uses derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates,” Ruben writes. “However, as the company notes in its 10-K, the use of such hedging activities may not offset any, or more than a portion, of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place.”
“The impact of foreign exchange on other markets, such as Japan, was not addressed. However, the surging US dollar will impact all markets and cause increases in the cost of hedging and decreases in the number of US dollars received for product sold (unless the price is increased, which will then have a demand impact),” Ruben writes. “And of course, the large cash balance outside of the US, which has saved the company billions in taxes, is now a potential income statement liability (to the extent unhedged).”
Read more in the full article here.