No hedging of Latin America receivables:
Excerpts from the Annual Report:
Compaq generally has experienced longer
accounts receivable cycles in its emerging markets, in particular
Asia Pacific and Latin America, when compared to
its U.S. and European markets. In the event that accounts
receivable cycles in these developing markets lengthen
further or one or more of Compaq's larger resellers in
these regions fails, Compaq's operating results could be
adversely affected.
The value of the U.S. dollar affects Compaq's financial
results. Changes in exchange rates may positively or
negatively affect Compaq's revenues (as expressed in U.S.
dollars), gross margins, operating expenses, and retained
earnings. Compaq engages in hedging programs aimed
at limiting in part the impact of currency fluctuations.
Using primarily forward exchange contracts, Compaq
hedges those assets and liabilities that, when re-measured
according to generally accepted accounting principles,
impact the income statement. For certain markets, particularly
Latin America, Compaq has determined that
ongoing hedging of non-U.S. dollar net monetary assets
is not cost effective and instead attempts to minimize
currency exposure risk through working capital management.
There can be no assurance that such an
approach will be successful, especially in the event of a
significant and sudden decline in the value of local currencies.
From time to time, Compaq purchases foreign
currency option contracts as well as short-term forward
exchange contracts to protect against currency exchange
risks associated with the anticipated revenue of Compaq's
international marketing subsidiaries, with the exception
of Latin America and certain other subsidiaries that reside
in countries in which such activity would not be cost
effective or local regulations preclude this type of activity.
These hedging activities provide only limited
protection against currency exchange risks. Factors that
could impact the effectiveness of Compaq's hedging programs
include accuracy of sales forecasts, volatility of
the currency markets, and availability of hedging instruments.
All currency contracts that are entered into by
Compaq are components of hedging programs and are
entered into for the sole purpose of hedging an existing or
anticipated currency exposure, not for speculation.
Although Compaq maintains these programs to reduce
the impact of changes in currency exchange rates, when
the U.S. dollar sustains a strengthening position against
currencies in which Compaq sells products and services or
a weakening exchange rate against currencies in which
Compaq incurs costs, Compaq's revenues or costs are
adversely affected.
Note: I think it is possible that the devaluation could exceed current estimates on this board. To wit: CPQ acknowledges that A/R cycles in Latin America are longer than average. Considering A/R at Dec 31 was $6.998 billion on 4Q Revenue of $10.859 billion, that would be an average DSO of 58 days based on an equalized revenue stream over the quarter. Seeing as Latin America is significatly slower, i.e. 60-90 days +, and Brazil is 1-2% of Revenue, that puts Brazil revenue for 4Q at $108 million to $216 million. It is entirely possible that this entire amount was outstanding at the time of the devaluation. We certainly can surmise that it wasn't hedged.
Given the devaluation % of 35%, this equates to a currency loss of between 38 million to 76 million. A lot lower than $200 million, but certainly more than we have considered. A loss of $76 million could have a conceivable effect up to 4.4 cents on EPS.
my2centz
|
