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Building a New Electric World
Schneider Electric SA
Annual
Report
2002

Table of contents

  • Page 1
    Schneider Electric SA Annual Report 2002 Building a New Electric World

  • Page 2
    Annual report 2002 Contents Chairman's Message Key Figures Board of Directors, Management 1 2 4 Business Presentation 12345678- 7 Background (industrial background, ownership background, current business) 7 Operations 8 Strengths 8 Strategy 8 Products, equipment and services 10 Markets 11 Product...

  • Page 3
    ... secure power supply and high value-added services to optimize our customers' equipment and electrical networks. Acquisitions of this type will help widen our potential available market. This assertive strategy is designed to position us as the leader in Power & Control through our three main brands...

  • Page 4
    ... exchange rate to the euro. At constant scope of consolidation and exchange rates, sales decreased 5.2%. As part of the N EW2004 program, Schneider Electric is committed to improving its gross margin by one point each year. T hanks to the initial effects of the productivity plans launched...

  • Page 5
    ... provision on our Legrand shares. Free cash flow rose 10% in 2002 thanks to good control over capital spending and reduced working capital requirement. Free cash flow represented 6.5% of sales. * Before dividend payment. Net cash 2002 operating margin by core business 2002 operating margin by...

  • Page 6
    ...Girard Electrical Distribution Steve Little Information Systems Alain Marbach Automation Claude Ricaud Science and Technology Laurent Vernerey Manufacturing and Logistics Daniel Victoir Quality Strategy and Market Development Claude Breining Business Development Pascal Charriau Residential Buildings...

  • Page 7
    ... Spain and Portugal Russell Stocker Greater China Pierre Tabary Pacific Flemming Tomdrup Lexel Functional Divisions Gérard Fauconnet Communication Jean Netter Schneider Electric Ventures Pedro Salazar Legal Affairs Carlos Siria NEW2004 program Gilles Vermot-Desroches Sustainable Development

  • Page 8
    ... sale of Spie Batignolles. In 1999, the Company acquired Lexel A/S, Europe's second largest supplier of low voltage final distribution products and systems, with operations primarily in Northern Europe. In 2000, Schneider Electric acquired Crouzet Automatismes, a French leader in electronic control...

  • Page 9
    ..., 192 production sites, 150 service centers and some 13,000 sales outlets through its distributors. In 2002, the Company generated total sales of â,¬ 9,060 million with an average weighted workforce of 74,814 employees. As the world's Power & Control specialist, Schneider Electric is involved...

  • Page 10
    ... key directions: on energy consumption in one or several sites allows users to manage their energy costs even more effectively. Expand our product lineup. Demand is high for new products and services in our main markets. According to our estimates, electrical distribution, industrial control...

  • Page 11
    ...sub-category is generally used by electric companies for power generation, transmission and distribution. In January 2001, we transferred our highvoltage business to VA Tech Schneider High Voltage GmbH, a joint venture in which we hold a 40% interest. 5 - Products, equipment and services Our lineup...

  • Page 12
    ... entire life of installed products and equipment by providing high value-added services such as on-line training and assistance, remote diagnostics, technical support, and on or off-site maintenance and management contracts. We also help them evaluate and optimize their energy consumption and offer...

  • Page 13
    ...We offer companies in a large number of sectors a wide range of products, equipment and services to distribute and manage electricity, control and monitor machines, automate industrial processes, and supervise and manage industrial sites and their consumption. to provide high-value added support to...

  • Page 14
    ... building renovation market. We use specialist distribution channels for our highly technical products such as human machine interface and VDI transmission equipment, PLCs and industrial software. The remaining 40% of sales are handled by: Panelbuilders, OEMs and systems integrators. Contractors...

  • Page 15
    ...concerning prices and/or services, development and product modifications. SGBD allows us to meet our global accounts' needs more effectively, support our worldwide presence and optimize sales with these major customers. as smart capabilities that allow for the transfer of images or data. Design and...

  • Page 16
    ...industrial control and general contracting, as well as to carry out any and all commercial, securities, real estate and financial transactions (Article 2 of the bylaws). Schneider Electric's fiscal year runs from January 1 to December 31. The bylaws, minutes of Annual Meetings, Auditors' Reports and...

  • Page 17
    ... and the tender in August 2001 of 98.1% of outstanding Legrand shares to the public exchange offer initiated by Schneider Electric SA. New capital 1,159,893,842 euros Conversion of bonds Conversion of Square D bonds Exercise of stock options Capital at Dec. 31, 1998 (1) 759,848 247,273 241,900...

  • Page 18
    ... purchase new or existing shares in the Company. At the Combined Annual and Extraordinary Shareholders' Meeting of May 5, 2000, the Board of Directors was authorized to issue new shares to Group employees who are members of the Employee Stock Purchase Plan. The number of shares issued may not exceed...

  • Page 19
    ... best of the Company's knowledge, no shareholders other than Caisse des Dépôts, listed above, hold, either directly or indirectly, more than 5% of Schneider Electric's capital or voting rights. 4 - Employee profit-sharing and stock purchase plans a. Profit-sharing plans Profit-sharing and other...

  • Page 20
    ...share price of the twenty trading days prior to the date of grant by the Board of Directors. No discount is applied. The options have an eight year life. Options granted under plans 12 through 19 may be exercised as from the fourth year, as long as the grantee holds the shares subscribed or acquired...

  • Page 21
    ... 2004 sales and operating income - - 1,600,000 50% of options: operating margin and operating income to capital employed - - 2,000,000 None (reserved for winners of the NEW2004 Trophies) N/A N/A 111,000 11,457,940 Exercise criteria (1) Because targets were not met. (2) In light of the plan's rules...

  • Page 22
    ...this authorization, the Company purchased 172,909 shares at an average unit price of â,¬ 51.42 in 2002 and sold 50,000 shares at an average unit price of 57.29 euros. The Annual Shareholders' Meeting of May 27, 2002 authorized the Board of Directors to buy back shares on the open market. Pursuant to...

  • Page 23
    General Presentation of Schneider Electric SA 22 6 - Stock market data The Schneider Electric SA share is listed on the Euronext First Market in Paris, where it is traded in lots of one under Euroclear code 12197. It is part of the market's benchmark CAC 40 index of France's largest stocks. 18-...

  • Page 24
    .... 15, 2003 â- in euros â- Schneider Electric share â- CAC 40 index (base: Schneider Electric on December 31, 1997) Monep Options on Schneider Electric SA shares have been traded on the Monep market since December 20, 1996. As part of the Euro Medium Term Notes program initiated on December 21...

  • Page 25
    ...'s financial communication policy towards individual shareholders, the presentation of the Company's businesses, site tours and the organization of the Annual Shareholders' meeting. The Company has followed up on a number of Committee suggestions, such as reducing the number of shares required to...

  • Page 26
    ...Chairman and Chief Executive Officer of France Telecom. Mr. Breton owns 370 Schneider Electric SA shares. Claude Bébéar First elected: 1986 Term ends: 2005 67 years old, Chairman of the Supervisory Board of Axa and Chairman of Finaxa. Other directorships and functions: Director of a number of Axa...

  • Page 27
    ... owns 500 Schneider Electric SA shares. James F. Hardymon* First elected: 1998 Term ends: 2004 68 years old, Corporate Director. Other directorships and functions: Director of Air Products & Chemicals Inc., American Standard Inc., Circuit City Stores Inc., Championship Auto Racing Teams Inc...

  • Page 28
    ... of services, systems and equipment for building technology, electrical contracting and payphones. From 1998 to May 2002, Mr. Kissling was Chairman of Unaxis Corporation. Mr. Kissling owns 250 Schneider Electric SA shares. Gérard de La Martinière First elected: 1998 Term ends: 2004 59 years old...

  • Page 29
    ... with rules governing trading in Schneider Electric shares. - Attending the Annual Shareholders' Meeting. Articles 5 to 7 apply to the Board Committees and are described in the corresponding section below. Schneider Electric has adopted a code of ethics for Directors and employees designed to...

  • Page 30
    ..., a number of measures were taken to harmonize Schneider Electric's bylaws with France's new NRE business legislation, the results of which were presented to the Annual Meeting on May 27. Separately, and pursuant to the report by the Remunerations and Appointments Committee, the Board of Directors...

  • Page 31
    ... presents its findings and recommendations to the Board. c. Meetings in 2002 The Audit Committee reviewed the annual and interim financial statements and the internal audit process. The Committee also examined and verified the appropriateness of the accounting rules applied by Schneider Electric...

  • Page 32
    ... the growth and development of Schneider Electric's business, their variable bonuses represent a greater proportion of their total compensation than is the practice among other manufacturing companies. In addition, Executive Committee members also benefit from stock option plans (see above, page 19...

  • Page 33
    ... of the total attendance fees is then shared among all the Directors based on the number of Board Meetings attended during the year. In application of these rules, attendance fees paid to members of the Board for the year ended December 31, 2002 totaled â,¬ 552,000. By Director, this amount was paid...

  • Page 34
    ... Paris Fees paid to the auditors in 2002 (â,¬ thousands) 1992 2004 1995 1995 1995 2004 2004 2004 PricewaterhouseCoopers Audit Barbier Frinault et Autres Ernst & Young Audit - Statutory accounting, certification, review of individual and consolidated financial statements - Related missions...

  • Page 35
    ... legal entities, acquires or increases its stake to at least two-thirds of the Company's capital through a public tender offer for all the Company's shares. In this case, the Board of Directors will place on record the lifting of the above ceilings and will amend the bylaws accordingly. The ceiling...

  • Page 36
    ... least 0.5% of the total number of shares or voting rights outstanding, or a multiple thereof, is required to disclose said interest to the Company by registered letter with return receipt requested, within five trading days of the disclosure threshold being crossed. In the case of failure to comply...

  • Page 37
    ... the wish on the part of companies to restore accounts to healthier positions; - excess capacity built up over the last few years leading to poor use of production capacity in industry; - high rate of buildings unoccupied. The public building market (schools, public services and hospitals) continued...

  • Page 38
    ... it the unique multi-market leader in Power & Control. Unique in its access to market with: - core products adapted to local standards; - specially dedicated organizations for Key Accounts; - a leading network of distributors and sales partners, offering the services that customers need, worldwide...

  • Page 39
    ... States and Europe. Man-machine interfaces integrate a growing number of automated features and are key components in networked, web-enabled architectures, such as the Transparent Readyâ„¢ range that the Company offers in all of its markets. Schneider Electric thus obtained a position in a new, fast...

  • Page 40
    ... and integrator for the manufacturing world. d) Sale Schneider Electric sold its nuclear power business to an American corporation, Data Systems and Solutions, specializing in the supply of information systems for equipment management in the aerospace and nuclear power markets. The nuclear unit...

  • Page 41
    ..., to research and development in 2002. As part of its business activities, Schneider Electric uses patents, brands and trade names belonging to the Company, or in some cases, licensed by third parties, to manufacture products, perform services and market its products and services. In addition, the...

  • Page 42
    ... Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at end of year (1) (1) Cash and cash equivalents consist of cash, bank accounts, short- term deposits, treasury shares to be used to cover stock options, and other liquid marketable securities, net of bank overdrafts.

  • Page 43
    Business review 42 Operating activities On a current basis, operating requirements are primarily financed by cash provided by operating activities, although certain capital-intensive operations may be financed by bond or share issues at the Group level. Intra-Group loans are also used to finance ...

  • Page 44
    ... are presented in Note 5.3 to the Consolidated Financial Statements. Not applicable. As a general rule, supply contracts do not include any firm commitments concerning minimum volumes or value. Firm commitment to buy Infra+ shares representing the 61.50% of the capital not held by Schneider Electric...

  • Page 45
    ...and thereby generate sufficient cash flow to preserve its productive capacity. Short-term interest rate exposure Our risk policy for short-term rate exposure and cash is to minimize the cost of borrowing, depending on market conditions. The Company uses swaps to hedge its commercial paper exposure.

  • Page 46
    ... Group created a special company, Spring, to manage the recall program. Since 1998, the Group has incurred product recall costs of â,¬ 38.5 million in addition to administrative costs associated with the management of Spring of â,¬ 6.7 million. The Group has replaced or repaired a substantial number...

  • Page 47
    ...covered by global contracts with insurance and reinsurance companies of good standing, with the same type of terms and limits applied to companies of similar size. In addition, Schneider Electric has taken out specific cover in response to certain local conditions, regulations or the requirements of...

  • Page 48
    ... Schneider Electric Youth Opportunities Foundation was created under the aegis of Fondation de France with the mission of promoting young people's success by: - providing assistance to associations that support disadvantaged youth, - sponsoring young business entrepreneurs, and - supporting general...

  • Page 49
    ...(human resources, finance, environment, products, markets, purchasing, sales, Foundation, etc.). Its role consists in assisting general management in defining and implementing commitments, coordinating development work and initiating, promoting and tracking Schneider Electric initiatives. It is also...

  • Page 50
    ...35 years â- Men â- Women Professional Category* 27% 46% Training Number of training days per person 27% â- Engineers and managers â- Non-exempt - technicians â- Workers 2.8 days 71628 Number of people who underwent training * calculations based on spot headcount (contract, permanent and...

  • Page 51
    ... has reduced budgets, equipment donations were used in 2002 to outfit electricity labs in 13 vocational schools. In Saudi Arabia, the subsidiary opened a training center in the Riyadh plant. 35 young technical university graduates started a one-year program with the promise of a job for all those...

  • Page 52
    ... that require special treatment like LCD screens and PCBs. In the case of Masterpact, for example, eco-design has resulted in a 20 to 50% reduction in raw materials depending on the product line, reduced electricity consumption by 20% during the use phase and facilitated end-of-life processing...

  • Page 53
    .... The campaign's objective was to help disadvantaged youth in the education and training fields through local community associations that are located near our facilities and selected by the sites' employees. For one week the Company's employees mobilized to offer their work and talents. Many of them...

  • Page 54
    ...). In France, Schneider Electric has launched an end-of-life recycling service that customers can use to meet their legal obligations at best cost. The service covers electrical distribution and automation products. It includes inventorying the equipment to scrap, packaging and shipping it to the...

  • Page 55
    ...of increasing the Company's positions in consumer final low voltage, industrial and building automation, safe power supply and comprehensive manufacturing performance and power grid management services. These acquisitions will help expand Schneider Electric's markets. The Company intends to leverage...

  • Page 56
    ...high growth rates. Generally speaking, both electrical distribution and industrial control were on a good trend. - The "Nobis" zone (Scandinavia/Benelux) recorded a 2.8% decrease in sales due primarily to a downturn in the industrial and commercial buildings market. Scandinavia weathered the general...

  • Page 57
    Business review 56 - Africa/Near East achieved growth of 5.6%, with mixed results throughout the zone. Sales rose strongly in Africa, led by medium voltage (a sign of good contract business for equipment), industrial control and automation and low voltage. - The Middle East, on the other hand, saw ...

  • Page 58
    ... connection with site and production line rationalization in Telford (UK) and Rieti (Italy) and the closure of the medium voltage site in Gülstein (Germany). The balance covers local plans, notably in Argentina. Provisions for tax disputes. Taking into account the resolution of current tax disputes...

  • Page 59
    Business review 58 Minority interests stood at â,¬ 0.08 billion, including minority interests in 2002 net income. The Group ended 2002 with a positive net cash position of â,¬ 0.84 billion compared with net indebtedness (borrowings less cash) of â,¬ 2.30 billion at December 31, 2001. Cash and cash ...

  • Page 60
    ... in 2001. In 2002, the Company had an income tax benefit of â,¬ 158.1 million compared with â,¬ 29.2 million the previous year, taking into account tax consolidation and the carryback credit. This item reflects the effect of the loss realized on the divestment of Schneider Electric's interest in...