Surging dollar may take a bite out of Apple’s earnings

“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.

9 Comments

  1. First, Apple has raised its pricing to compensate in some countries. Second, if a dollar banked abroad has risen in value 15% versus gold and other currencies where’s the problem?

      1. Yah, Remember, they’re only “seeking” alpha. They haven’t found it. I could help them out. Here’s a rewrite of the story…

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      1. From Apple’s 10K:

        “In general, the Company is a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, will negatively affect the Company’s net sales and gross margins as expressed in U.S. dollars. There is a risk that the Company will have to adjust local currency product pricing due to competitive pressures when there have been significant volatility in foreign currency exchange rates.

        The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows, and net investments in foreign subsidiaries. Generally, the Company’s practice is to hedge a majority of its material foreign exchange exposures, typically for up to six months. However, the Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to accounting considerations and the prohibitive economic cost of hedging particular exposures.

        To provide a meaningful assessment of the foreign currency risk associated with certain of the Company’s foreign currency derivative positions, the Company performed a sensitivity analysis using a value-at-risk (“VAR”) model to assess the potential impact of fluctuations in exchange rates. The VAR model consisted of using a Monte Carlo simulation to generate thousands of random market price paths assuming normal market conditions. The VAR is the maximum expected loss in fair value, for a given confidence interval, to the Company’s foreign currency derivative positions due to adverse movements in rates. The VAR model is not intended to represent actual losses but is used as a risk estimation and management tool. The model assumes normal market conditions. Forecasted transactions, firm commitments, and assets and liabilities denominated in foreign currencies were excluded from the model. Based on the results of the model, the Company estimates with 95% confidence a maximum one-day loss in fair value of $161 million as of September 24, 2011 compared to a maximum one-day loss in fair value of $103 million as of September 25, 2010. Because the Company uses foreign currency instruments for hedging purposes, the loss in fair value incurred on those instruments are generally offset by increases in the fair value of the underlying exposures.”

        It sounds like they’ve actually given this some thought, despite what Seeking Alpha might assume.

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