Re: Euro’s Weakness May Effect Telecom Equipment Infrastructure Companies- ADCT Maybe?
Thread- In honor of earnings season starting next week, and since a lot of the last mile equipment companies get substantial revenues in Europe, I thought this was approprite for the LMT. I edited it down to what I thought was applicable to the LMT. I connected this post to another one of my former last mile favorites, ADCT. But that was WAY before it had a cap of $26 billion. -MikeM(From Florida)
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Area Companies Face Falling Value of Euro
July 9 Saint Paul Pioneer Press-- When top executives at Graco turn their attention to their European operations, the first order of business is what to do, if anything, to counter the slumping value of the euro.
The Golden Valley-based company generates roughly 20 percent of its annual sales from European markets, and first-quarter sales from those operations would have been up a smart 24 percent. But instead, the company reported a sales increase in dollars of only 11 percent after converting the weak euros into U.S. currency.
"We're seeing increased volume in Europe, but sales were reduced by half because of the currency exchange," said Jim Graner, Graco's controller. The weak euro also cut Graco's operating profits by about 6 percent, Graner said.
It's a factor affecting dozens of the Twin Cities' largest publicly traded companies and scores more around the country. Company executives, analysts and economists say the weak euro will continue to show up as a factor as companies begin releasing second-quarter earnings in the next weeks, whacking tens of millions of dollars off the top line, squeezing profits, and potentially making the stock market more turbulent.
Lately there have been signs that the euro is bouncing back, and the impact may be muted for some companies by the end of the year. But the decline in the euro points to a bigger issue facing most major U.S. firms in the global economy: As they look to grow internationally, currency risk will loom large. And the unexpected decline of the euro shows that risk can occur even in a region that's generally in good economic shape.
When it was adopted as a common currency by 11 European nations, the euro was hailed as a way to tame the region's complex currency landscape, where German deutsche marks, French francs, Italian lire and a dozen other currencies all traded against each other in a cacophony that made international business inefficient and bargain hunting across the continent a mathematical challenge.
But since most of Europe adopted the euro in January 1999, the new currency has slumped against the U.S. dollar. The euro opened at an exchange rate of 1.18, meaning that one euro bought $1.18. Since then, the euro has fallen as much as 25 percent, and on Friday was worth . Companies that make sales in euros, therefore, lose out when they convert their European sales back into dollars.
Put another way, a company needed only to sell 85 euros worth of merchandise in January 1999 to book $100 worth of revenue in the United States after currency translation. When the euro fell to its lowest exchange rate in May 2000, the same company would need to sell about 112 euros worth of product just to stay even.
--ADC Telecommunications Inc.: The company exports its products to Europe and sells in local currencies. It generates 23 percent of its sales internationally. Doug Rees, assistant treasurer, said currency translation affected sales, but declined to be specific. The company is monitoring the situation.
….In the second quarter, Keon estimates that companies in the Standard & Poor's 500 Stock Index will have quarterly earnings increases of about 17 percent. Those increases would be 1 or 2 percent higher if the euro hadn't fallen. But in his view the dollar isn't overly strong.
"Even though companies are saying earnings are not going to be as good as they might have been had the dollar stayed where it was -- which is true -- it's basically neutral compared to a 10-year average. The basic driver of earnings will be how the U.S. economy is growing. It's a nice rate, but it's slowing," Keon said.
ADC wants to increase its international sales to 40 percent in the next five years from 23 percent today, said Rees, the firm's assistant treasurer. As a long-term solution to foreign currency pressures, ADC is building a $46 million manufacturing plant in Scotland to supply telecom equipment to European customers.
The plant, which is expected to open in the next quarter, will lower ADC's cost of doing business in Europe by reducing shipping and other costs. It also will lessen the impact of the strong dollar because overseas sales and manufacturing expenses will both be recorded in the same currency.
ADC's action is what is called a natural hedge -- a shift in operations that can minimize the affect of foreign currency translation. |
