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Building a New Electric World
2005 Annual Report
Schneider Electric SA

Table of contents

  • Page 1
    Schneider Electric SA 2005 Annual Report Building a New Electric World

  • Page 2

  • Page 3
    ... 53 56 59 67 2 / General Presentation of Schneider Electric SA 1 - General information 2 - Capital 3 - Ownership structure 4 - Employee profit-sharing and share ownership and stock option plans 5 - Stock market data 6 - Investor relations 3 / Corporate Governance 1 - Board of Directors (at December...

  • Page 4
    ..." Was 2005 a good year for Schneider Electric? Yes, 2005 was a very good year, with revenue up 13%, operating profit up 22%, earnings per share up 22% and our dividend up 25%. These are the best results we've seen in several years. 2005 was also the first full year of our new2 company program, which...

  • Page 5
    .... At the Annual Meeting, you will recommend that shareholders approve a new corporate governance system for Schneider Electric. Does this mean a change in strategy? No. A two-tier Supervisory Board/Management Board system is the best solution for ensuring a seamless succession and continuation of...

  • Page 6
    ... 49% Europe North America Asia-Pacific Rest of the world 26% * Asia-Pacific, Rest of the World, Eastern Europe. 24% 2005 sales by region Emerging economies in Asia-Pacific, South America, Africa, the Middle East and Eastern Europe accounted for 30% of consolidated sales and generated half of our...

  • Page 7
    ...profit and a 1.2% reduction in the average number of shares outstanding. Debt to equity Gradual optimization of the balance sheet resulted in a debt-to-equity ratio of 20% at end-2005, compared with 7% the year before. A â,¬1.1 billion increase in financial debt, combined with solid cash generation...

  • Page 8
    ...at the Annual and Extraordinary Meeting of May 3, 2006. The system would comprise a Supervisory Board, chaired by Mr. Lachmann and made up of the current members of the Board of Directors, and a Management Board, made up of JeanPascal Tricoire, currently Chief Operating Officer of Schneider Electric...

  • Page 9
    ...Control - Deployment Legal Affairs & Services Jean-François Pilliard Executive Vice-President Human Resources and Communication Michel Crochon Executive Vice-President Customers & Markets Hal Grant Executive Vice-President Globalization & Industry Alain Marbach Executive Vice-President Products...

  • Page 10
    8

  • Page 11
    ... Schneider Electric is an international company that designs, manufactures and sells products, solutions and services for Electric Distribution and Automation & Control. We make installations safer, monitor equipment and protect people with a lineup devised to save energy, enhance performance...

  • Page 12
    ... in 2005. In the Energy market, Schneider Electric offers products, equipment and systems to optimize the generation, transmission, distribution and sale of electricity. Our solutions are designed to enhance the quality and reduce the cost of each distributed kilowatt-hour. We serve power companies...

  • Page 13
    ... end users in industrial buildings and large commercial installations or transformed into low voltage power for small commercial buildings and homes. * This document provides information on Schneider Electric's businesses and competitive position. To the best of our knowledge, no exhaustive report...

  • Page 14
    ... Automatismes, Kavlico and BEI Technologies, a manufacturer of customized sensors for application positioning and monitoring systems acquired in 2005, we offer the most complete lineup in the market. Schneider Electric enjoys leadership positions in angular speed sensors (we rank first worldwide in...

  • Page 15
    ..., networked products and market access through dedicated and specialized sales forces, global accounts, specifiers and other partners, differentiates us from the competition. To forge close contacts with customers and present the extremely diverse range of solutions offered by Schneider Electric and...

  • Page 16
    ...some 11,000 electric companies around the world. They use our products and services in power generation (electricity for power plant equipment, automation and control), distribution (medium and low voltage networks) and marketing (pre-payment meters, related services). We take a specific approach to...

  • Page 17
    ... of net profit and an optimized balance sheet with a debt-to-equity ratio of 30% to 40% in the next two years. Enhance operating efficiency To become more efficient and effective every day in all areas, we will deliver outstanding customer service; re-balance our manufacturing base and supply chain...

  • Page 18
    ...to the COO new2 Company Program Quality Corporate Divisions Customers & Markets Products & Technology Globalization & Industry Services Operating Divisions Europe North America Asia-Pacific International & Iberian Growth Platform Departments Building Automation and Security Secured Power Sensors for...

  • Page 19
    ... of Asia. Lastly, we are improving productivity by extending the application of our Six Sigma, Lean Manufacturing and Quality and Value Analysis programs. Their global deployment and sharing of best practices should allow all our plants to achieve the same level of operating performance. 8 Human...

  • Page 20
    .... Elearning modules are available for marketing, sales and English as a foreign language training. Nearly 53,000 team members have access to e-mail and the Company's various intranet sites. Schneider Electric University develops programs for high-level managers and experts. These courses, which...

  • Page 21
    .... Schneider Electric is covered by a global liability insurance program. Specific liability programs have been set up in the United States, Canada and Mexico to take account of the specific requirements and characteristics of the North American market. Insured values under these programs adequately...

  • Page 22
    ... agency. Group policy consists of diversifying counterparty risks and periodic controls are performed to check compliance with the related rules. In 2001, Schneider Electric made a public offer to purchase Legrand in exchange for shares as part of a proposed merger project. When the offer closed in...

  • Page 23
    ... 2005, external auditors prepared a report on the impact of a major event causing an interruption of business. Insurance Schneider Electric's strategy for managing insurable risks is designed to defend the interests of employees and customers and to protect the environment, the Company's assets and...

  • Page 24
    22

  • Page 25
    ...Combined Annual and Extraordinary Shareholders' Meeting of May 12, 2005, the Board of Directors was also authorized to issue new shares to members of the Employee Stock Purchase Plan, within a limit of 5% of the Company's capital stock over 5 years. 23 General Presentation of Schneider Electric SA...

  • Page 26
    ...225-197.1 et seq. of the French Commercial Code. 4 - At the Combined Annual and Extraordinary Shareholders' Meeting of May 6, 2004, the Board of Directors was authorized to grant options to purchase new or existing shares to employees and corporate offices of the Company and its affiliates under the...

  • Page 27
    ...million increase in additional paid-in-capital. Stock buybacks The Annual Shareholders' Meeting of May 6, 2004 authorized the Board of Directors to buy back shares on the open market. Pursuant to this authorization, the Company purchased 6,658,783 shares at an average unit price of â,¬54.37. At its...

  • Page 28
    ... members of the Employee Stock Purchase Plan have an opportunity to purchase new or existing Schneider Electric SA shares through corporate mutual funds. 26 The last employee share issue took place in 2004. As of December 31, 2005, employees held a total of 7,586,325 Schneider Electric SA shares...

  • Page 29
    ...ten employees exercising the largest number of options during the year (not including corporate officers) (1) Weighted average price. Price (in euros) Expiration date 300,000 293,000 60.78 72.10 2013 2013 222,300 52.00 (1) - Stock option plan details Plan Date of no. Board Meeting Number of...

  • Page 30
    ... one under ISIN code FR0000121972. It is part of the market's benchmark CAC 40 index of France's largest stocks. Five-year summary of share price performance 2005 Average daily trading volume Euronext Paris - Thousands of shares - Millions of euros High and low share prices (in euros) - High 77.15...

  • Page 31
    ...2005 Feb. 10, 2006 n Share price in euros l Schneider Electric share l CAC 40 index (based on Schneider Electric share on Dec. 31, 2000) 29 Monep Options on Schneider Electric SA shares have been traded on the Monep market since December 20, 1996. General Presentation of Schneider Electric SA

  • Page 32
    ...Shareholder documents In addition to the annual report and a summary report entitled "In Brief", the Company also publishes: A Shareholders' Letter (three times a year). General, economic and financial information (presentations, press releases). 30 A corporate website (www.schneider-electric.com...

  • Page 33
    ... companies Currently: Director of Schneider Electric SA; Member of the Supervisory Board of the "Schneider Actionnariat" corporate mutual fund; responsible for special projects at Schneider Electric's Finance Department. Previous directorships and functions held in the past five years: Chairman...

  • Page 34
    Noël Forgeard * Age: 59 Professional address: EADS 37 Boulevard Montmorency - 75016 Paris, France 250 Schneider Electric SA shares First elected: 2005 / Term ends: 2008 (pending approval by shareholders at the 2006 Annual Meeting) an advisor to the Secretary General of the interministerial ...

  • Page 35
    ... foreign companies Currently: Director of Schneider Electric SA. Previous directorships and functions held in the past five years: Former Executive Vice-President of Schneider Electric's North American Division; Director of Square D, Financière MGE, MGE Finances SAS, MGE-UPS Systems, and Schneider...

  • Page 36
    ... * Age: 55 Professional address: Weinberg Capital Partners 40 rue de la Boëtie, 75008 Paris, France 500 Schneider Electric SA shares First elected: 2005 / Term ends: 2009 Other directorships and functions in French or foreign companies Currently: Non-voting Director of Schneider Electric SA...

  • Page 37
    Cathy Kopp Age: 58 Professional address: Accor 33 Avenue du Maine - 75015 Paris, France 250 Schneider Electric SA shares First elected: 2005 / Term ends: 2009 2 Organizational and operating procedures of the Board of Directors ** The Board of Directors defines the Company's business strategy and ...

  • Page 38
    ... to meet informally with key members of senior management prior to Board meetings. In addition, new Directors attend training and information sessions dealing with the Company's strategy and businesses. Schneider Electric has adopted a code of ethics for Directors and employees designed to...

  • Page 39
    ...over the year, plus a portion of shares held in treasury, to serving the stock option plans. The Board of Directors also carried out the procedures required by law. These include reviewing budgets and business plans and placing on record capital increases. Directors and corporate officers hold 0.004...

  • Page 40
    ... any duties to Schneider Electric SA of the members of the Board of Directors and their private interests. In line with these terms of reference, it: Prepares the Board's review of the annual and interim financial statements. In this respect, it particularly: - Ensures that accounting methods used...

  • Page 41
    ... standards and rules. Obtain assurance that statutory and management accounting data presented to the Board of Directors of Schneider Electric SA and Group senior management present fairly the sales, results of operations and financial position of the Group. No system of internal control designed...

  • Page 42
    ... special requests from senior management. In light of Schneider Electric's core businesses, internal audit procedures focus mainly on revenue recognition, cash and asset management processes, wages and benefits, financial reporting, information systems, manufacturing operations, purchasing and...

  • Page 43
    ... have access to the reports. In 2005, the internal auditors performed 21 audits, including: Full audits of medium-sized units. Audits of a number of operating processes (purchasing, supply chain, IT, etc.). Post-acquisition audits for newly acquired companies. Analyses of control self-assessments...

  • Page 44
    .... Financial review meetings The financial position of all Group companies is reviewed once a year by Group Finance and Control Legal Affairs. The process includes, for each unit: An analytical review of the balance sheet and of capital employed. An analytical review of working capital and customer...

  • Page 45
    ..., and track the asset's use over time. IT systems have been deployed to track project development costs and measure the profitability of new products more accurately. The carrying value of trademarks is determined based on an assessment of the economic value of the underlying business at the time of...

  • Page 46
    ... in accordance with Group accounting principles and policies. The accounting and reporting system The Corporate Management Control and Accounting Department of the Finance & Control - Legal Affairs Department has launched a project to standardize management reporting processes among the various...

  • Page 47
    ...A Group statutory and management accounting standards manual, which includes details of debit/ credit pairings in the consolidation system. A Group reporting procedures manual. A manual describing the procedures to be followed to integrate newly-acquired businesses in the Group reporting process. An...

  • Page 48
    ...60,000 by Schneider Electric SA. In 2005, he was paid attendance fees for 2004 of â,¬55,400. Benefits Mr. Lachmann's benefits include a chauffeur-driven Company car. He is also covered by the Company's pension plan for senior executives, under the plan's general terms and conditions (see above). On...

  • Page 49
    ... held 149,000 options under plans 16 through 21, of which 30,000 are contingent on Group performance targets being met. 7 Regulated agreements (See Auditors' special report). No regulated agreements were entered into during 2005. 8 Auditors Appointed Appointment expires Statutory Auditors...

  • Page 50
    ... two years prior to the end of the calendar year preceding the one in which the Annual Meeting takes place, subject to compliance with the provisions of the law. In the case of a bonus share issue paid up by capitalizing reserves, earnings or additional paid-in capital, each bonus share allotted...

  • Page 51
    ..., and to retained earnings. To the payment of a dividend. The Annual Meeting may decide to offer shareholders the opportunity to receive the dividend in cash or in the form of new shares of common stock. Dividends not claimed within five years from the date of payment become time-barred and are paid...

  • Page 52
    50

  • Page 53
    ... companies and energy-hungry manufacturers. Power Measurement Inc. generated revenue of $59 million in 2005. In building automation, we acquired ABS EMEA, Invensys' advanced buildings systems business in Europe and the Middle East. ABS EMEA reported revenue of â,¬132 million for the year ended...

  • Page 54
    ... applications. More than 5,000 Schneider Electric team members are involved in installed base support services and high performance services, which represented revenue of around â,¬900 million in 2005, up 14% from the year before. A new Services Department was set up at the corporate level in 2005...

  • Page 55
    ...Strategy. Lastly, international knowledge management consultancy Teleos listed Schneider Electric among the Most Admired Knowledge Enterprises in 2005 in recognition of our knowledge-sharing methodology. 2 Operating performance Trends in Schneider Electric's core markets Energy & Infrastructure The...

  • Page 56
    ...2005. On July 29, 2005, Schneider Electric acquired ABS EMEA, Invensys' building automation division in Europe and the Middle East. The company has been fully consolidated since that date. The year's acquisitions added â,¬286.4 million to annual revenue and â,¬40.1 million to annual operating profit...

  • Page 57
    ... costs. In North America, operating margin also widened by 0.7 point, to 13.3%. Operating margin in the Asia-Pacific region improved by 1.6 point to end the year at 12.9%. The Rest of the World reported an operating margin of 14.0%, versus 12.5% in 2004. Operating margin by business Electrical...

  • Page 58
    ... January 1, 2005. The Group acquired these companies at the end of 2004. Other non-current financial assets declined to â,¬281 million from â,¬288 million the year before due to the payment of a â,¬17 million receivable on the divestment of VA Tech Schneider HV GmbH and capitalization of Goodwill...

  • Page 59
    ... recorded under marketable securities and a â,¬29 million increase from fair value adjustments to financial assets. Payment of the 2004 dividend, in an amount of â,¬395 million. Profit for the period of â,¬994 million. Changes in treasury stock, which reduced equity by â,¬69 million. The impact...

  • Page 60
    ... to cover programs announced in 2005. The year's acquisitions added â,¬25 million to provisions in the balance sheet, while translation adjustments added â,¬28 million and the discounting effect added â,¬5 million. Parent company financial statements Schneider Electric SA posted total portfolio...

  • Page 61
    ...2005 Performance People > Reduce the number of lost days from work accidents by 20%, per employee and per year > Ensure that all employees have basic health insurance > Ensure that 30% of the top managers have been in their positions for less than one year Environment > Ensure that all manufacturing...

  • Page 62
    ... to diversity, health and safety, and local development were set up in 2005. ment. In medium voltage, we are doing work on sensors and software to give devices advanced diagnostic functions. Our teams are also designing new electrical distribution products to feed energy from solar power, micro...

  • Page 63
    ... to draw up 120 PEPs offering information on products that represent more than 50% of our sales by end 2008. In 2005, the Vice President of Schneider Electric France and two National Education officials initiated the development of an eco-design training program to present the various aspects of an...

  • Page 64
    ...number of lost days from work accidents by 20%. Ensure that all employees have basic health insurance. Diversity A multicultural enterprise and Diversity Charter signatory, Schneider Electric has committed to fostering diversity in a key document entitled "Our Principles of Responsibility". In 2005...

  • Page 65
    ...Pacific Europe North America Rest of the world Age 2003 6.2% 28.3% 8.3% 29.1% Category 2004 11.9% 44% 28.1% 43.0% 41% 2005 2003 2004 2005 29.2% 29.0% 27.4% 29% 29.4% 29% 26.0% 10.3% 24.0% 9.6% 22.9% 9.3% 0.4% 35 - 44 45 - 54 55 - 64 > 64 27% 27.6% 30% 14 - 24 25 - 34 Line employees...

  • Page 66
    ... edge. Specialized institutes have been created for this purpose, covering sales, marketing and manufacturing operations. In 2005, 62 employees from 32 countries participated in the Felix program, designed to develop young, high-potential team members. Seven sessions to integrate new managers were...

  • Page 67
    ... DJ Euro Stoxx benchmark financial universe. Schneider Electric has been included since 2001. Vigeo ratings are used to select the listed stocks, in keeping with ASPI Eurozone ® guidelines. Investor-solicited rating - January 2005. Market sector: Electrical components and equipment. (Companies in...

  • Page 68
    ... used to collect the environmental and human resources data (employees and lost days) for 2005 published in the Business Review and Registration Document. Schneider Electric's senior management was responsible for preparing those procedures, as well as the social and environmental information...

  • Page 69
    ... business cycle. A 2% to 4% improvement in ROCE over 4 years. A payout rate equivalent to 50% of net profit and an optimized balance sheet with a debt-to-equity ratio of 30% to 40% in the next two years. Based on current economic conditions and exchange rates, we anticipate further growth in revenue...

  • Page 70
    ... (in millions of euros except for earnings per share) 2005* (note 22) 2004 10,349.3 (6,177.4) 4,171.9 (295.1) (2,549.7) (40.7) 1,286.4 (64.4) 5.1 (59.3) (3.6) 1,223.5 (365.2) 858.3 Revenue Cost of sales Gross profit Research and development expenses Selling, general and administrative expenses...

  • Page 71
    ... activities: Issuance of long-term debt (note 17) Repayment of long-term debt Sale/(purchase) of treasury shares (1) Increase/(reduction) in other financial debt Issuance of shares Dividends paid: Schneider Electric SA Minority interests IV - Net effect of exchange rate: Net increase/(decrease) in...

  • Page 72
    ... Balance Sheet Assets (in millions of euros) Dec. 31, 2005 Jan. 1, 2005 * Dec. 31, 2004 Non-current assets Goodwill, net Intangible assets, net Property, plant and equipment, net Assets held for sale Total tangible and intangible assets Investments in associates Available-for-sale financial...

  • Page 73
    ...-term debt Total non-current financial liabilities Deferred tax liabilities Other non-current liabilities Total non-current liabilities Current liabilities Trade accounts payable Accrued taxes and payroll costs Short-term provisions Other current liabilities Short-term debt Total current liabilities...

  • Page 74
    ... available-for-sale financial assets - Metal price hedges - Interest rate swaps - Put option granted to MGE minority shareholders - Translation adjustment January 1, 2005 - IFRS after application of IAS 32/39 Profit for the year Valuation gains/(losses) taken to equity (note 14) Exchange differences...

  • Page 75
    ..., the options used in first time adoption at January 1, 2004 were presented in the 2004 Annual Report, along with a description of the changes in accounting policies and methods and their impact on the opening and closing balance sheets and the statement of income for the year ended December 31...

  • Page 76
    ... measured using the cost model, in accordance with IAS 38 - Intangible Assets. Brands and other identifiable assets of acquired companies are recognized in the balance sheet at fair value, determined by qualified experts. The valuations are performed using generally accepted methods, based on...

  • Page 77
    ...of assets that generates cash inflows that are largely independent of those cash flows from other assets or groups of assets. At Schneider Electric, CGUs generally correspond to the Operating Divisions (Europe, North America, International and Asia-Pacific). Each of the Growth Platform businesses is...

  • Page 78
    ...value of defined benefit obligations is determined using the projected unit credit method. The amount recognized in the balance sheet corresponds to the present value of the obligation, adjusted for unrecognized past service cost and reduced by the fair value of plan assets at the balance sheet date...

  • Page 79
    ... Stock Appreciation Rights (SARs). IFRS 2 - Share-based payment - applies only to plans set up after November 7, 2002 that do not vest prior to January 1, 2005. In accordance with IFRS 2, these plans are valued on the date of grant, using the Cox, Ross, Rubinstein binomial option pricing model...

  • Page 80
    ...- Revenue recognition The Group's revenues primarily include merchandise sales and revenues from service and project contracts. Merchandise sales Revenue from sales is recognized when the product is shipped and title transferred (standard shipping terms are FOB). The Group offers rebates, calculated...

  • Page 81
    ... exercise of stock options outstanding at the balance sheet date. The dilutive effect of stock options is determined by applying the "treasury stock" method, which consists of taking into account the number of shares that could be purchased, based on the average share price for the year, using the...

  • Page 82
    ... companies Companies accounted for by the equity method Sub-total by region Total Acquisitions 80 On April 14, 2005, Schneider Electric acquired all outstanding shares in Canada's Power Measurement Inc., a leader in the design, production and marketing of energy management systems. Power...

  • Page 83
    ..., Schneider Electric acquired ABS EMEA, Invensys' building automation division in Europe and the Middle East. The company has been fully consolidated since the date of acquisition. On August 24, 2005, the Group acquired Juno Lighting Inc, leader in lighting equipment for the North American business...

  • Page 84
    ... (1) Cash Generating Unit to which goodwill has been allocated. EOD: European Operating Division; NAOD: North American Operating Division ; APOD: Asia-Pacific Operating Division; IIOD: International Operating Division; CSC: Customized Sensors & Controls; BA : Building Automation; SP : Secured Power...

  • Page 85
    ... time as of April 14, 2005. The difference between the cost of the shares and the Company's equity in the underlying net assets amounted to $192 million (â,¬162.7 million at December 31, 2005), calculated as follows: In millions In millions of dollars of euros * Acquisition price Net assets acquired...

  • Page 86
    ... at the end of the financial year, this amount was reduced to â,¬75.4 million. In addition, the price of shares acquired in 2004 was adjusted on the basis of MGE's financial results for the period ended September 30, 2005, in accordance with the earn-out clause in the current shareholders' pact...

  • Page 87
    ... as they are considered to be assets with indefinite lives. Impairment tests did not reveal any impairment of trademarks as of December 31, 2005. Note 6 - Property, plant and equipment 6.1 - Changes in property, plant and equipment Land Gross Value Dec. 31, 2004 Acquisitions Disposals Translation...

  • Page 88
    ... N/A - On January 12, 2006, the Group announced the acquisition of all outstanding shares in Clipsal Asia (see note 28 - Subsequent Events). 86 Schneider Electric's interest in Clipsal Asia Holdings was accounted for by the equity method at December 31, 2005 on the basis of provisional unaudited...

  • Page 89
    .... 31, 2005 % interest I - Listed available for sale financial assets AXA (1) Gold Peak Industries Holding Ltd Other listed AFS Total listed AFS II - Unlisted available for sale financial assets SE Relays LLC (2) Eb@se France (3) Abacus Engineered Systems (2) Comipar Legrand Easy Plug SAS (3) Paramer...

  • Page 90
    ... at December 31, 2005. Acquired under the mechanism for exchanging Schneider Electric shares for Legrand shares set up when Schneider Electric sold Legrand in 2002, these shares were sold back to Legrand SAS in January 2006. 8.2 - Other non current financial assets Dec. 31, 2005 Cost Vendor loan to...

  • Page 91
    ... tax Whenever possible, Group entities file consolidated tax returns. Schneider Electric SA files a consolidated tax return with its French subsidiaries held directly or indirectly through Schneider Electric Industries SAS. 12.1 Analysis of income tax expense for the year 2005 Current taxes France...

  • Page 92
    ... recognized directly in equity amounted to â,¬16.3 million at December 31, 2005 versus a negative â,¬11.5 million the year before. This charge primarily reflects the impact of IAS 32 and IAS 39 on the opening balance sheet (a negative â,¬20.3 million) and closing balance sheet (â,¬2.1 million) and...

  • Page 93
    ... Annual Shareholders' Meeting of May 12, 2005, a total of 242,626,977 voting rights were attached to the 226,199,677 shares outstanding (information published in the "BALO" legal gazette dated May 25, 2005). Changes in share capital The following table shows changes in Schneider Electric SA's share...

  • Page 94
    ... the year. 14.5 - Share-based payment 14.5.1 - Current stock option plans The Board of Directors of Schneider Electric SA has set up stock option plans for senior executives and certain employees. The main features of these plans were as follows at December 31, 2005: Plan no. Date of Board Meeting...

  • Page 95
    ... shares were issued on the exercise of currently vested stock options. 14.5.3 - Valuation of share-based payment In accordance with the accounting principles described in note 1.18, the stock option plans set up in 2005 have been valued on the basis of an average estimated life of seven years using...

  • Page 96
    ... up to eighteen months from May 12, 2005. Under the programs of May 6, 2004 and May 12, 2005, 2,747,887 shares were purchased during the year ended December 31, 2005, for a total of â,¬161.1 million. At December 31, 2005, the Group held 8,070,011 Schneider Electric shares which have been recorded as...

  • Page 97
    ... concern the Group's North American and European subsidiaries. For the most part, these are defined benefit plans. They feature either a lump-sum payment on the employee's retirement or regular pension payments after retirement. The amount is based on years of service, grade and end-of-career...

  • Page 98
    ... benefits Annual changes in obligations, the market value of plan assets and the corresponding assets and provisions recognized in the consolidated financial statements can be analyzed as follows: 1. Reconciliation of balance sheet items Pension assets Provisions for pensions and other post...

  • Page 99
    ...in the balance sheet 1.1 (52.2) 1.9 (8.8) 15.3 - Provision for other post-employment and long-term benefits Changes in provisions for other post-employment and long-term benefits were as follows: 1. Components of net cost reccgnized in the statement of income Service cost Interest cost (impact of...

  • Page 100
    ... cover losses at the end of various long-term contracts in an amount of â,¬12 million. (c) Product risks Provisions are recorded on a statistical basis for the residual cost of product warranties not covered by insurance. Such warranties may run up to 18 months. The application of EU directive 1999...

  • Page 101
    ... 11, 2005, Schneider Electric SA issued â,¬1.5 billion worth of bonds as part of its EMTN program. The issue comprises a â,¬900 million five-year tranche at 3.125% and a â,¬600 million twelve-year tranche at 4%. These bonds are traded on the Luxembourg stock exchange. 99 Consolidated Financial...

  • Page 102
    ... At December 31, 2005, Schneider Electric SA had unused confirmed credit lines of â,¬1,038 million. These lines of credit are available for the period. Note 18 - Other non-current liabilities Dec. 31, 2005 MGE UPS acquisition debt* Clipsal acquisition debt Magnecraft assets acquisition Abacus...

  • Page 103
    ...European IT functions and deploy shared management applications using SAP. The agreement is currently being implemented in the subsidiaries. Payments to Capgemini replace the cost of the IT function, which was previously managed internally. Schneider Electric has a ten-year reciprocal agreement with...

  • Page 104
    ... Jan. 1, 2005 Dec. 31, 2005 Dec. 31, 2005 Carrying Other financial Equity Cash Carrying Nominal value (2) amount income and cash amount Purchase Sales (1) and expense equivalents IFRS designation Foreign currency Futures contracts (3) Other futures contracts to hedge balance sheet items Options and...

  • Page 105
    ... (building automation and security, secured power and sensors for repetitive machines). Details are provided in Chapter 4 of the Annual Report (Business Review). Dec. 31, 2005 Revenue (1) Segment profit (Ebit) Balance sheet Property, plant and equipment and intangible assets Goodwill Working capital...

  • Page 106
    ...Segment profit (Ebit) Balance sheet Property, plant and equipment and intangible assets Goodwill Working capital requirement Capital employed (2) (1) Based on destination of sales. (2) Based on assets' location. Europe 5,266 672 North America 2,501 314 AsiaPacific 1,828 207 Rest of the world 754...

  • Page 107
    ... expense relating to financial assets (including cash and short-term investments) and debt. 2005 Interest income Interest expense Net gains/(losses) on the sale of marketable securities 2004 Payroll costs (1) Profit sharing and incentive bonuses Stock options Total employee benefits expense (3,485...

  • Page 108
    ...court and the company's shareholders. Lastly, the Group announced the signature of an agreement to acquire AEM SA in Spain on February 2, 2006. AME SA designs, manufactures and sells low voltage electrical distribution equipment and installation systems for the Residential and Buildings markets. 28...

  • Page 109
    ... long-term debt Total non-current financial liabilities Deferred taxes Other non-current liabiilities Total non-current liabilities Current liabilities Trade accounts payable Accrued taxes and payroll costs Short-term provisions Other current liabilities Short-term debt Total current liabilities...

  • Page 110
    ... assets Property, plant and equipment Assets held for sale Total Investments in associates Available-for-sale financial assets Other financial assets Total investments Deferred taxes Other non-current assets Total non-current assets Current assets Inventories and work in process Trade accounts...

  • Page 111
    ...Other long-term debt Total non-current financial liabilities Deferred taxes Other non-current liabilities Total non-current liabilities Current liabilities Trade accounts payable Accrued taxes and payroll costs Short-term provisions Other current liabilities Short-term debt Total current liabilities...

  • Page 112
    ...end of the year 946 The main impact on the cash flow statement is related to capitalized development expenses, which appear under cash used by investment in operating assets. Application of IAS 7 led to the reclassification of movements in certain operating provisions from change in working capital...

  • Page 113
    ...Changes in accounting principles and policies 29.3.1 - Intangible assets Intangible assets generated by development activities Development costs for new products and comprehensive product upgrades may be capitalized under IAS 38. In 2004, systems were set up to track and capitalize these costs. Only...

  • Page 114
    ... pricing model. Based on market data at the grant dates, the total stock option expense came to â,¬9 million in 2004. 112 In connection with the transition to IFRS, the Group has performed a comprehensive review of its employee benefit plans. Some plans that were previously qualified as defined...

  • Page 115
    29.4 - Standards with little or no impact on the Group accounts 29.4.1 - Consolidation scope and methods Application of the control criteria set out in IAS 27 - Consolidated Financial Statements And Accounting For Investments In Subsidiaries - has not led to any change in the companies fully ...

  • Page 116
    ... Lauritz Knudsen A/S (ex LK A/S) Schneider Electric Danmark A/S Schneider Nordic Baltic (ex Lexinvest A/S) TAC A/S EFI Electronics Europe SL Himel SA Mesa SA MGE UPS Espana SA Schneider Electric Espana Telenum (1) Accounted for by the equity method until May. 31 2005. 114 Germany Germany Germany...

  • Page 117
    ... Merlin Gerin Loire MGE Finances SAS MGE UPS MGE-UPS SYSTEMS SAS Muller & Cie Newall France Newlog SAS Normabarre Num SA Prodipact Rectiphase SA2E SAEI SAE Gardy Sarel Appareillage Electrique Satchwell SAS Scanelec (1) Accounted for by the equity method until May. 31 2005. Estonia Finland Finland...

  • Page 118
    ...Satchwell Controls Systems Ltd Schneider Electric (UK) Ltd Schneider Electric Ltd TAC Regional Ltd TAC UK Ltd Thorsman Ltd Walker Mainstay Ltd Westinghouse Systems Yorshire Switchgear Group Ltd MGE UPS Systems Hellas Abe Schneider Electric AE (1) Accounted for by the equity method until May. 31 2005...

  • Page 119
    ... Stiger A/S MGE UPS Systemer AS TAC Control Systems AS Crouzet BV Polam Holding BV Pro Face HMI (sub-group) Sandas Montage BV Sarel BV Schneider Electric BV Schneider Electric Logistic Centre BV Stago BV Andover Controls Sp Zo.o Elda Eltra S.A. (ex Eltra SA) ELDA Szczecinek SA MGE UPS Systems Polska...

  • Page 120
    ... Ltd Schneider Canada Inc. MGE Systems Mexico SA de CV Crouzet Automatismo Crouzet Mexique Industrias Electronicas Pacifico SA de CV Schneider Electric Mexico SA de CV Square D Company Mexico SA de CV Abacus Andover Controls Corp (1) Accounted for by the equity method until May. 31 2005. 118...

  • Page 121
    ... 50.00 Asia-Pacific Fully consolidated Clipsal Pacific Holdings Pty Ltd Clipsal Industries Pacific Pty Ltd Clipsal South Pacific Pty Ltd Clipsal Pacific Pty Ltd Australian Electrical Supplies Pty Ltd Blue Point Products Pty Ltd (1) Accounted for by the equity method until May. 31 2005. Australia...

  • Page 122
    ... Industries Australia Pty Ltd Power Measurement Ltd Pro Face Australia SE Australia Holding PTY Schneider Electric Australia Pty Ltd TAC Pacific Pty Ltd Team Security Solutions Pty Ltd Techrack Pty Ltd Beijing Merlin Great Wall Computer Room Equipment & Engineering MGE North Asia Shanghaï Pro Face...

  • Page 123
    ... Holdings Ltd New Zealand MGE UPS Philippines Inc. Philippines Schneider Electric Philippines Inc Philippines Andover Controls Singapore Pty Ltd Singapore MGE Asia Pte Ltd Singapore MGE Logistics South East Asia pacific Pte Ltd Singapore TAC Control Asia Singapore Schneider Electric Export Services...

  • Page 124
    .... 31, 2005 Dec. 31, 2004 Schneider Electric Chile SA Schneider de Colombia SA SEP Le Guavio Schneider Centroamerica SA Schneider Electric Distribution Company Schneider Electric Egypt SA Schneider Electric FZE Square D Foreign Sales Corporation LK India Private Ltd Schneider Electric India Private...

  • Page 125
    ... contingencies and charges Long-term debt: Ordinary and convertible bonds Perpetual bonds Other long-term debt Total long-term debt: Other long-term liabilities Total long-term liabilities Current liabilities: Customer prepayments Trade accounts payable Accrued taxes and payroll costs Deferred taxes...

  • Page 126
    ... cash (used)/provided by financing activities Increase in long-term debt Reduction of long-term debt (Purchase)/sale of Company shares (Decrease)/increase in other borrowings Common stock issued Dividends paid: Schneider Electric SA Minority interests Total III IV - Net effect of exchange rate and...

  • Page 127
    ... report in French To the Shareholders of Schneider Electric SA In accordance with the terms of our appointment at the Annual Shareholders' Meeting, we have audited the accompanying consolidated financial statements of Schneider Electric SA and its subsidiaries for the year ended December 31, 2005...

  • Page 128
    6 / Company Financial Statements at December 31, 2005 1 Balance Sheet Assets (â,¬ thousands) Depreciation amortization, Cost and provisions 2005 Net 2004 Net 2003 Net Non-current assets Intangible assets Intangible rights (note 1a) 27,474 (note 1b) (27,474) (206) (510) (28,190) (37,674) (16...

  • Page 129
    ... Accruals for pensions Total provisions Non-current liabilities Bonds Other borrowings Amounts payable to subsidiaries and affiliates Short-term bank loans and overdrafts and other debt Current liabilities Accounts payable - trade Accrued taxes and payroll costs Other liabilities 4,472 1,880 2,192...

  • Page 130
    ...,179 (88,255) 20,171 474,732 Sales of services and other Reversals of provisions, depreciation and amortization and expense transfers Operating revenues Purchases and external charges Taxes other than on income Payroll costs Depreciation, amortization and provision expense Other operating expenses...

  • Page 131
    ... bought back Schneider Electric SA shares in an amount of â,¬ 161.0 million. It also acquired ELAU and six companies comprising Invensys' Advanced Building Systems business in Europe and the Middle East for a total of â,¬ 141.8 million. Treasury stock Treasury stock is stated at cost. The unit cost...

  • Page 132
    ... SA acquired the six companies comprising Invensys' Advanced Buildings Systems business in Europe for â,¬ 109.4 million. Schneider Electric SA also finalized the acquisition of a 49.05% interest in ELAU in 2005 for a total â,¬ 32.4 million. Schneider Electric exercised a call option held at end...

  • Page 133
    ... in 2005. The exit tax will give rise to a tax credit in the same amount, which will be utilized or refunded in three equal installments over the next three years. Note 4 - Marketable securities Dec. 31, 2004 Number Value of shares Plan 14 Plan 16 Plan 24 Plan 26 Total Schneider Electric SA shares...

  • Page 134
    ...were issued on the exercise of 425,050 stock options, increasing the share capital by â,¬ 3.4 million. Schneider Electric SA shares In 2005, Schneider Electric SA bought back own 2,747,887 shares for â,¬ 161.0 million, bringing the total number of shares held in treasury to 5,919,759, with a cost of...

  • Page 135
    ...million twelve-year tranche at 4%, issued at a price corresponding to 99.225% of par. These bonds are traded on the Luxembourg stock exchange. The issue premium and issue costs are amortized according to the effective interest method. On October 31, 2003, Schneider Electric SA issued â,¬ 750 million...

  • Page 136
    ... Current assets Accounts receivable - trade Other accounts receivable Marketable securities Prepaid expenses Debt Bonds Other borrowings Amounts payable to subsidiaries and affiliates Short-term bank loans and overdrafts and other debt Accounts payable - trade Accrued taxes and payroll costs...

  • Page 137
    ...946) In 2005, capital gains stemmed primarily from the sale of Schneider Electric SA shares held under "Other investment securities" for allocation on exercise of stock options. Capital gains on the sale of Schneider Electric SA shares held under "Marketable securities" accounted for substantially...

  • Page 138
    ... terms of our appointment at the Annual Shareholders' Meeting, we hereby submit our report for the year ended December 31, 2004, on : Our examination of the accompanying financial statements of Schneider Electric SA. The basis of our opinion. The specific procedures and information required by law...

  • Page 139
    ... 45 132,774 1,766,238 B. Investments with a carrying value of less than â,¬ 15,000 C. Investments in real estate companies D. Investments in foreign companies Total Marketable securities 10,080 3,241,053 Total Geodis Schneider Electric SA shares (stock option plans no. 16, 24 and 26) 25 182,237 182...

  • Page 140
    ... (â,¬ thousands) Company Capital Reserves and retained earnings before appropriation of income for the year* % interest I. Subsidiaries and affiliates whose carrying value exceeds 1% of Schneider Electric SA's capital A. Subsidiaries (at least 50% owned) Schneider Electric Industries SAS 89...

  • Page 141
    Book value of shares Cost Net Loans and advances Guarantees Net sales for the year Income or loss for the year Dividends received 1,531,981 1,531,981 2,948,439 - 2,997,222 Holding Company Holding Company 582,539 325,469 136,896 136,896 - - 3,367 4,782 82,608 82,608 - - 1,566 ...

  • Page 142
    ...443 3 4,446 Total employee benefits paid over the year (payroll taxes, other benefits) (in thousands of euros) 914 668 416 534 690 (1) Dividends on shares held in treasury on the dividend payment date and the associated précompte tax are credited to retained earnings. (2) After cancellation...

  • Page 143
    ... given to the Company by shareholders at the Annual Meeting of May 12, 2005 to buy back its shares by any appropriate method, including through the use of derivatives, in accordance with the provisions of article L.225-209 of the Commercial Code. 141 Dividends Retained earnings Total â,¬ 509,893...

  • Page 144
    .... Our report on the use of the authorization given by the Annual Meeting of May 12, 2005, prepared in accordance with article L.225-200 of the Commercial Code, is presented on page 145. You are asked to authorize the Company to buy back shares representing at most 10% of the issued capital as of...

  • Page 145
    ...certain employees and officers of Schneider Electric SA and its subsidiaries and affiliates, as defined in article L.225-180 of the Commercial Code. Under the terms of the authorization, the total number of options outstanding at any time could not represent over 3% of the Company's capital. We used...

  • Page 146
    ... resolutions The General Meeting of May 12, 2005 gave the Board of Directors a five-year authorization to issue shares representing up to 5% of the capital to employees who are members of a Corporate Savings Plan. We did not use this authorization in 2005. Under the "NRE" Act, if a company asks...

  • Page 147
    ... shares purchased in 2005 pursuant to these two authorizations were used to serve stock option plans. At its meeting of December 1, 2005, the Board of Directors decided to reallocate the 826,692 shares bought back by the Company pursuant to authorizations granted by the Annual Shareholders' Meetings...

  • Page 148
    ...and legal management of contract disputes that remained at the level of Schneider Electric SA at the time of the merger. In 2005, Schneider Electric paid Amec Spie SA â,¬100,000 (excluding VAT) pursuant to this agreement. Auditors' report on the proposal to reduce the capital by canceling shares To...

  • Page 149
    ... and corporate officers of the Company and related entities within the meaning of Article L.225-180 of the Commercial Code. The Board of Directors is responsible for reporting to shareholders on the aims and objectives of the proposed stock option plans as well as on the method to be used to set the...

  • Page 150
    ... Statutory Auditors of Schneider Electric SA and pursuant to Article L.225-135 of the Commercial Code, we present below our report on the proposed issue of shares to employees who are members of a Corporate Savings Plan set up by French or foreign related companies, as presented to shareholders for...

  • Page 151
    ...of Schneider Electric SA and pursuant to Article L.225-135 et seq. of the Commercial Code, we present below our report on the proposal to issue shares to entities set up to hold shares on behalf of employees. Shareholders will be asked to waive their pre-emptive right to subscribe the issue(s). This...

  • Page 152
    ...the transactions and parent company financial statements for the year ended December 31, 2005, as presented by the Board of Directors. The General Meeting also approves the recording under retained earnings in the opening balance sheet of the effect of the change in accounting method relating to the...

  • Page 153
    ...conditions set down by law. Members of the Supervisory Board shall each hold at least 250 of the Company's shares throughout their term of office. b) Supervisory Board members shall be elected for renewable terms of four years. As an exception to this rule, the terms of office of half of the members...

  • Page 154
    ... of stock options or bonus shares to members of the Company's Management Board. Amendments to the Company's bylaws to be recommended to the Extraordinary Shareholders' Meeting. Profit appropriation and dividends to be recommended to the Annual Shareholders' Meeting. The payment dates for dividends...

  • Page 155
    ... Board shall appoint new members in accordance with the law. In addition, provided the overall limit on the number of members is not exceeded, the Supervisory Board may appoint one or two additional members during the term of office of the Management Board. The age limit for Management Board members...

  • Page 156
    ... of the Supervisory Board in his capacity as a member of the Supervisory Board of a corporate mutual fund invested in Schneider Electric SA shares, for a period of two years, expiring at the close of the Annual Shareholders' Meeting to be called in 2008 to approve the 2007 financial statements. 154

  • Page 157
    ...as a member of the Supervisory Board for a period of two years, expiring at the close of the Annual Shareholders' Meeting to be called in 2008 to approve the 2007 financial statements. Twenty-first resolution (Attendance fees payable to members of the Supervisory Board). The General Meeting, acting...

  • Page 158
    ... Meeting is not adopted, the Board of Directors - to grant to officers and employees of the Company and its subsidiaries and affiliates, as defined in article L.225-180 of the French Commercial Code, on one or several occasions, options to subscribe new Schneider Electric SA shares or to purchase...

  • Page 159
    ... be offered under the Corporate Savings Plan at 15% of the average of the opening prices quoted for Schneider Electric shares on Euronext Paris over the twenty trading days preceding the date on which the decision is made to launch the employee share issue. However, the General Meeting specifically...

  • Page 160
    ... any applicable foreign law, for the purpose of a stock purchase plan set up for employees of the Schneider Electric Group. 3 - That the issue price of shares issued under this resolution will be set by the Management Board - or, if the seventh resolution of this Meeting is not adopted, the Board of...

  • Page 161
    ... and general organization of the Company's internal control system and the internal control procedures covering the preparation and processing of accounting and financial information, as described in the Chairman's report. We have also examined the underlying documents. Based on our procedures, we...

  • Page 162
    160

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  • Page 164
    ...29 71 00 Internet : www.schneider-electric.com Incorporated in France with issued capital of â,¬1 812 953 816 Registered in Nanterre, RCS 542 048 574 Siret no. 542 048 574 01775 Printed on paper made from 100% recycled fibers, 100% chlorine free. All production waste has been recycled. April 2006...