Canadian Dollar Weakness Leads to Near-Term Hedge Loss, But Improves Company Outlook for Revenue and Gross Profit
COM DEV International Ltd. (TSX:CDV), a leading manufacturer of space hardware subsystems, announced today that the rapid and dramatic weakening of the Canadian dollar against its U.S. counterpart in January had negatively impacted the Company’s hedge portfolio. Similar to most other global companies with currency exposures, COM DEV manages its currency risk through the use of a hedging strategy. That strategy will be the subject of a review by the Company’s Board of Directors to ensure it continues to be appropriate in light of these recent events. With approximately 30 percent of total Company revenues recognized in U.S. dollars, the objective of that strategy is to protect the Company against weakness in the value of the U.S. dollar against the Canadian dollar. The recent weakness in the value of the Canadian dollar results in an IFRS-based reported loss on that hedge strategy in the first quarter of fiscal 2015; however, there is no immediate cash flow impact from these hedges. Further, any cash impact from the hedges is expected to be more than offset over future months with lifts in revenue and gross profit that would result from continued weakness in the Canadian dollar.
The Company had expected to see one-time impacts in its fiscal 2015 Q1 results related to restructuring ($3.1 million) and wind up of operations ($3.5 million) associated with its U.S. operations in El Segundo, as well as transaction costs ($1.5 million) associated with its December 31st acquisition of MESL Microwave Ltd.
Unexpected however, was the rapid erosion of crude oil prices, and the Bank of Canada decision to reduce its overnight lending rate. These two January events served to send the Canadian dollar into a slide against the U.S. dollar, to levels well below where all five major Canadian banks expected the dollar to trade for the next 12 months. The weakening of the Canadian dollar against the U.S. dollar, while benefiting the translated value of the Company’s revenues in Q1 by approximately $4 million, also led to an unrealized valuation loss on the Company’s hedge portfolio due the mechanics of mark to market valuation calculations required under accounting standards. The unrealized valuation loss resulted in a foreign exchange loss in the quarter, estimated between $9.5 and $10 million, based on the spot rate at the time of the valuation of 1.2711.
It is important to note that over 30 percent of the Company’s total backlog at the end of October was denominated in U.S. dollars, and that trend is expected to persist over time. Based on historical revenue levels, roughly $60 million in U.S. dollar revenues would therefore be expected each year. While the benefit of U.S. dollar revenue will only be realized month by month, the unrealized loss on the hedge portfolio – which plays out over the next 21 months – must be recognized all at once. If exchange rates were to remain constant over that 21 month period, the benefit of those exchange rates on revenues would be expected to more than offset the unrealized loss on the Company’s hedge portfolio that is reflected all in Q1.
To the extent the Company can mitigate these settlements, and/or to the extent the Canadian dollar strengthens versus the U.S. dollar, the unrealized losses seen in Q1 may be reduced over time. At the time of issuing this release, the spot rate has moved back from the valuation rate of 1.2711 to spot rates in the range of 1.24 to 1.25. The relative strengthening this represents would result in a partial reversal of the unrealized loss if the Company were reporting its results today rather than as at the end of January.
About COM DEV
COM DEV International Ltd. (www.comdev.ca) is a leading global provider of space hardware and services. The company has a staff of 1,100, annual revenues of $208 million, and facilities in Canada, the United Kingdom the United States, India, and China. COM DEV designs manufactures, and integrates advanced products, subsystems and microsatellites that are sold to major satellite prime contractors, government agencies and satellite operators, for use in communications, space science, remote sensing and defence applications. The company has won contracts to supply its equipment on over 900 spacecraft. COM DEV’s majority-owned subsidiary, exactEarth Ltd., provides satellite data services for global maritime surveillance.
For further information:
Gary Calhoun
Chief Financial Officer
Tel: (519) 622-2300 ext. 2826
gary.calhoun@comdev.ca
Craig MacPhail
TMX Equicom
Tel: (416) 815-0700 ext. 290
cmacphail@tmxequicom.com
