APC 2004 Annual Report Download - page 48

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Commodity risk
Certain metals traded on organized commodity mar-
kets are used in the manufacture of Group products.
Schneider Electric is therefore exposed to commodity
risk arising from changes in market prices of copper,
aluminum, silver, nickel and zinc.
The purchasing departments of the operating units
report their purchasing forecasts to the Corporate
Treasury Center twice a year. Purchase commitments
are hedged using forward contracts, swaps and, to a
lesser extent, options.
Counterparty risk
Transactions involving foreign currency and long- and
short-term interest rate hedging instruments are
entered into with selected counterparties. Banking
counterparties are chosen according to the custom-
ary criteria, including the credit rating issued by an
independent rating agency.
Group policy consists of diversifying counterparty
risks and periodic controls are performed to check
compliance with the related rules.
Equity risk
Exposure to equity risk primarily relates to treasury
stock and shares in Finaxa. These positions are not
hedged.
Liquidity risk
Liquidity is provided by the Group's cash and cash
equivalents and commercial paper programs. These
programs are backed by undrawn confirmed lines of
credit.
The Group's credit rating enables it to raise significant
long-term financing and attract a diverse investor
base.
Currency and interest rate risks are generally man-
aged at Group level, with the aim of limiting the impact
on results of changes in exchange and interest rates
without entering into any trading transactions.
Hedging decisions are made by the Finance &
Control - Legal Affairs Department and are reviewed
at monthly intervals based on changes in financial
market conditions.
Claims,
litigation and other risks
In 2001, Schneider Electric made a public offer to pur-
chase Legrand in exchange for shares as part of a pro-
posed merger project. When the offer closed in July
2001, the Company held 98.1% of Legrand. In an ini-
tial decision dated October 10, 2001, the European
Commission vetoed the merger, and in a second deci-
sion dated January 30, 2002, it ordered the two com-
panies to separate as quickly as possible. As a result,
Schneider Electric sold its interest in Legrand to the
KKR-Wendel Investissement consortium even though
the Court of First Instance of the European
Communities overruled the Commission's decisions
on October 22, 2002. Schneider Electric launched pro-
ceedings against the European Commission to obtain
damages for the prejudice caused.
In 1996, Schneider Electric became aware that a com-
ponent in the electronic cards of the tripping system of
Masterpact and Compact circuit breakers manufac-
tured between 1987 and 1992 occasionally malfunc-
tioned. In 1997, the Group determined that a third
party manufactured the electronic component. In
1998, in cooperation with its insurance companies, the
Group initiated a broad-based product recall campaign
that ended in 2004.
In September 2004, Schneider Electric accepted a
23 million payment from the third-party manufactur-
er, to cover the cost of the recall campaign, in full set-
tlement of the dispute. In addition, Schneider Electric
should benefit from a 2 million insurance settlement
under its product recall costs policy.
In April 2001, Schneider Electric became aware that
an emergency pushbutton in the Harmony range
installed on a wide range of machines failed to function
in certain circumstances. The Group initiated a com-
prehensive product recall program in cooperation with
its insurance companies. When the recall expired on
December 31, 2004, the Group had located and
repaired approximately 25% of the 2.2 million installed
pushbuttons.Total provisions of 18.3 million were set
aside for the entire product recall program and were
fully used when the program expired.
In September 2004, Square D became aware that
one of its AFI Breaker circuit breakers malfunctioned
due to a defect in a component manufactured by a
subcontractor. A recall campaign was launched and
a provision of $27 million was set aside in 2004. The
remaining provision at December 31, 2004 totaled
$21 million.
VA Technologie AG, VA Tech T&D GmbH & CoKG and
VA Tech Schneider High Voltage GmbH initiated an
arbitration procedure against Schneider Electric SA
and Schneider Electric Industries SAS in connection
with claims against the seller's warranty granted dur-
ing the creation of a high-voltage joint venture. On
June 17, 2004, the parties signed an agreement to halt
the arbitration procedure in exchange for the payment
by Schneider Electric of an amount of 9.5 million in
full settlement of all outstanding claims except for two
claims representing small amounts.
Belgium has initiated proceedings against former
Schneider Electric executives in connection with the
former Empain-Schneider Group's management of its
Belgian subsidiaries. The proceedings began when
SPEP (the Group holding company at the time)
launched public offers for its Belgian subsidiaries
Cofibel and Cofimines in 1993.