U.S. multinationals got a big boost from overseas sales last year after five years of flat results, according to a new report from S&P Dow Jones Indices. Foreign sales accounted for nearly 48 percent of selected S&P 500 companies’ revenue, the highest level since 2008 and up from 46.1 percent to 46.6 percent over the previous five years.
The study excluded companies whose foreign revenue made up a very small, or very large, part of the overall top line. Sales to Europe, Canada, Asia and Africa were higher, while those to South America and Australia edged lower.
But even though sales where higher, most experts expect companies to report that FX fluctuations have been a drag on earnings for Q2 2015. The continued weakness of the euro, particularly against the backdrop of the Greek crisis, means that even higher sales translate into lower revenues for dollar-based companies that are not hedging their foreign earnings. And experts estimate only 20 percent to 25 percent of companies actively hedge their earnings. While there are ways to manage earnings exposures, FAS 133 makes it hard to do so, forcing companies to find ways around the rule that will qualify for hedge accounting treatment.
They do so by deploying one of six strategies:
Hedging intercompany transactions: Intercompany sales in a currency other than the subsidiary’s functional currency.
Selectively hedging cash flow exposures: Making sure cash flow hedges are not creating earnings risk by converting exposures into bigger risks.
Hedging non-functional currency expenses: Hedging the cost side vs. the revenue side.
Setting up the right sourcing relationships: Ensuring suppliers allow them to hedge exposures in various currencies.
Setting up a centralized billing entity: The central entity can be dollar-based and thus able to hedge its non-USD exposures directly.
Hedging the cash flow risk of available for sale (AFS) securities: It’s possible to hedge the expected sale of non-USD denominated AFS securities.
So while U.S. companies may be garnering more of their revenues from abroad, whether or not that extra revenue translates into bigger earnings really depends on the source country. For most of the world, the U.S. dollar has been a stronger currency in the last quarter, making it likely that just like in Q1 when companies reported the biggest hit to earnings from currency hits, Q2 will show U.S. based multinationals have suffered from the dollar’s strengths.