Case Study: Plantronics Tames the Impact of FX Volatility

The company, which is headquartered in Santa Cruz, California, now has offices in 20 countries outside the US, with major facilities in China, Mexico, the Netherlands and the UK. However, Plantronics’ quarterly earnings reports had been impacted by fluctuations in below-the-line expense, some of it caused by FX volatility.

As the company’s senior vice president and chief financial officer (CFO), pointed out, the business was changing internationally, which was creating larger exposures to more currencies in growing and emerging markets. At the same time, the volatility of those currencies was increasing, causing quarterly FX gain/loss to become increasingly less certain – at a time when international revenues became a larger proportion of Plantronics’ total revenues. The most important currency pairs for Plantronics are the US dollar (USD) versus the euro (EUR), British pound (GBP), Australian dollar (AUD), Mexican peso (MXN) and the Chinese renminbi (RMB).

Treasury’s initial investigations revealed that the enterprise resource planning (ERP) system wasn’t generating accurate or complete FX exposure data, so the hedging process was unable to work effectively. Identifying exposures was like trying to find a needle in a haystack, although the team was unsure what they looked like or if they were even there in the first place. Treasury lacked confidence in the static reports – they were not very functional and team members could not easily export them to Excel for scenario analysis. It was obvious that this problem had to be fixed quickly.

Beginning the Transformation Project

After an evaluation exercise, Plantronics selected the FiREapps FX Pro exposure management platform. Treasury secured management buy-in for this project and assembled a cross-functional team that worked closely with the vendor’s professional services organisation to design and implement a new FX exposure management process. It was a collaborative effort, driven by treasury and accounting. All parties involved appreciated the importance and urgency to Plantronics of improving the identification and management of its FX exposures, at a time of market volatility and economic uncertainty.

This involved analysis of the accounting issues that had been preventing treasury from obtaining an accurate forecast. The project team organised the necessary support of the accounting, tax and IT departments, as it was clear that the underlying issue was not simply a treasury or an accounting problem.

Team members took a systematic approach with the following objectives:

  • Identify all sources of FX exposure, including the accounts that needed re-measurement. This involved re-aligning inter-company accounting data within the ERP system.
  • Configure the FiREapps system to automatically extract, aggregate, harmonise and validate current and historical general ledger data originating from the ERP system.
  • Provide analytical views in the system for export to Excel. The requirement was to report exposures in a range of dimensions, such as legal entity and corporate views, and to produce analysis by financial asset and liability class and general ledger account. The detail may be expressed in local and transaction currency.

The team successfully completed a three-month enrolment effort to get the new solution running in the Plantronics environment.

Plantronics treasury now enjoys on-demand visibility of the real FX exposure position. Data is automatically captured and analysed by the system, meaning that all hidden exposures are revealed. Any natural hedging opportunities can be identified and used before treasury needs to make use of the external FX market to complete hedging operations. The hedging programme enables the team to achieve predictable earnings and earnings per share (EPS) as planned among the key project objectives.

A key difference today is that the data is now extracted in a manageable format, enabling the exposures to be fully researched and understood. Once identified treasury is able to manage them more effectively, either in-house through inter-company operations or by executing external forward hedge transactions.

Using Value at Risk to Direct Hedging Priorities

The natural exposure data extracted by the system enables treasury to determine which of Plantronics’ corporate entities have the highest value at risk (VaR). The VaR calculation analyses both gross exposure and the volatility per currency pair. The team uses a 99% VaR confidence level, applied over a 30-day period. The VaR analysis calculates Plantronics’ potential loss from unhedged FX exposures as a consequence of currency volatility.

The VaR analysis enables the treasury team to determine which currencies to hedge, quickly and easily. This has enabled team members to direct focus onto the currency pairs with the highest volatility and which therefore present the most favourable hedging opportunities, rather than just being directed by the highest exposure values. The improved data and analytics now being used are driving the achievement of improved forecast activity and hedge results.

Business Benefits Achieved

Swift enrolment in the FIREapps service led to a range of process improvements in accounting and treasury, based on much higher levels of confidence that Plantronics’ FX exposures are now being fully and accurately identified. This has enabled the team to focus on other duties and to move on to new projects. Members do not have to spend substantial amounts of time in research and in repairing out-of-date and incomplete data; but can see seasonal fluctuations and analyse historical data.

The process of improvement is continuous. The benefits are shared between treasury, accounting, tax and IT. There is now a high level of inter-departmental collaboration, which has improved efficiency and the quality of the results being achieved.

Before the solution was in place, the adverse effects of FX volatility could sometimes impact earnings by as much as 3 or 4 cents per share. The FX gain/loss performance had been volatile and that volatility has been significantly reduced through accurate forecasting and hedging; it is now rarely more than a penny per share. Treasury has been able to increase the percentage of exposure and the number of currency pairs hedged. The project goal of restricting FX gain/loss per quarter to less than US$500,000 has been exceeded and the forecast to actual variance is now consistently less than US$250,000 per quarter. The team has also achieved its goal of 90% balance sheet forecast accuracy.

Enrolment in the FiREapps service was completed in less than three months, providing the lean treasury team of just two people with a fast track to achieving the planned benefits of optimising FX forecasting and hedging.

Conclusion

Treasury now has an effective and dependable means of identifying Plantronics’ net position in FX exposures and their associated risks and of hedging them to provide a consistently predictable earnings picture during a sustained period of FX market volatility. This has eliminated what had been a time-consuming issue, replacing it with a reliable system and process. Under the previous process, the data gathering exercise alone would have taken weeks or even months to complete; now the team can see all exposures across the company’s full currency portfolio in minutes and is in a position to plan and start hedging quickly.

This project has produced very positive results: net-position forecast accuracy is now more than 90%, and the company’s hedging programme has been expanded beyond two currency pairs to four, with full visibility into more than 35 to reduce quarterly FX gain/loss variance to within $.01 earnings per share (EPS) and less than US$250,000, exceeding project objectives. This improved visibility allows the team to efficiently analyse the exposures in greater detail and to leverage natural hedges where appropriate.

The solution now in place enables treasury to prepare for what might happen in the future, for example in the emerging markets led by China. The team can react quickly to changes in the currency market, so that new exposures do not creep up unnoticed.

Lastly, the CFO no longer expects surprises – nor does she get them. She is able to give more attention to issues such as revenue growth, the control of operating expense and managing gross margins.

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