APC 2004 Annual Report Download - page 47

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Income tax
The effective tax rate stood at 29% in 2004, or 29.9%
restated for non-recurring items. In 2003, the effective
rate of 16.1% reflected the impact of non-recurring
deferred tax benefits stemming from the elimination in
France of the five-year time limit for using tax losses.
Restated for this effect, the tax rate was 30.6% in
2003.
Amortization of goodwill
Amortization of goodwill represented a charge of
217 million in 2004 versus 191 million in 2003.
2004 acquisitions added 51 million to the total, off-
set by the fact that there was no exceptional amorti-
zation in 2004 and by the decline in the goodwill
amortization charge denominated in US dollars and
related currencies.
Group's share of losses of equity
investments
The Group's share of losses of equity investments
decreased to 4 million from 18 million in 2003,
thanks to the divestment of the VA Tech joint venture,
the change in consolidation method for MGE UPS
Systems as of January 1, 2004, and first-time consol-
idation of the Clipsal Asia joint venture.
Minority interests
Minority interests came to 30 million versus 21
million in 2003 and correspond primarily to the share
of income attributable to minority partners in MGE
UPS Systems, Feller AG, EPS Ltd., and a number of
Chinese companies.
Net income attributable
to Schneider Electric SA
Net income rose 30.4% to 565 million in 2004.
Excluding amortization of goodwill, net income totaled
782 million, an increase of 25.4% from 2003.
Earnings per share
Earnings per share rose 32% to 2.56 from 1.94 in
2003. This reflects growth in net income and share
buybacks in 2004.
Business Review
Financial policy
Quantitative and Qualitative
Disclosures about Market Risk
Currency risk
Because a significant proportion of transactions are
denominated in currencies other than the euro,
Schneider Electric is exposed to risk arising from
changes in exchange rates. The Group's currency
hedging policy is to protect subsidiaries against risks
on all transactions denominated in a currency other
than their accounting currency. These mainly consist
of intercompany transactions between global plants or
international distribution centers and local sub-
sidiaries, but they also include direct exports and pur-
chases. More than twenty currencies are involved,
with the US dollar, Hong Kong dollar and British
pound representing the most significant sources of
risk.
Fluctuations in exchange rates between the euro and
these currencies can have a significant impact on
Group operating margin and distort year-on-year per-
formance comparisons.
The Group actively manages its exposure to currency
risk to reduce the sensitivity of earnings to changes in
exchange rates. Hedging programs mainly concern
foreign currency receivables, payables and operating
cash flows, which are generally hedged by means of
forward sales.
Depending on market conditions, risks in the main
currencies may be hedged based on recurring fore-
cast flows using contracts that expire in 12 months or
less.
Schneider Electric also hedges intercompany loans
and borrowings in foreign currencies. However, no
other foreign currency assets and liabilities carried in
the consolidated balance sheet are hedged.
Interest rate risk
Interest rate risk on borrowings is managed at Group
level, based on consolidated debt and according to
market conditions.The main goal of interest rate man-
agement policies is to optimize Group financing costs.
All bond debt is fixed rate. Where long-term variable
rate debt is swapped for fixed rate, the swap contracts
only apply to the long-term portion and the current
portion is left at variable rate.
Depending on market conditions, interest rate risk on
cash equivalents may be hedged using interest rate
swaps.
Schneider Electric no longer has a cash surplus, as
was the case in 2002 and 2003 following the sale of
its Legrand shares. Net debt is low, however, repre-
senting just 6.3% of equity.
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