APC 2005 Annual Report Download - page 22

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In 1992, we published a formal environmental policy,
which was recently redefined to take account of
changes both inside and outside the Company. It is
designed to improve manufacturing processes, pro-
mote eco-design and integrate customer concerns in
the area of environmental protection.
Our international operations expose us to
the risk of fluctuation in currency exchange
Because a significant proportion of transactions are
denominated in currencies other than the euro, we are
exposed to risk arising from changes in exchange
rates. If we are not able to hedge them, fluctuations in
exchange rates between the euro and these curren-
cies can have a significant impact on our operating
margin and distort year-on-year performance compar-
isons.
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 forecast flows using contracts that expire in
12 months or less.
The Group’s currency hedging policy is to protect sub-
sidiaries against risks on all transactions denominated
in a currency other than their accounting currency.
More than twenty currencies are involved, with the US
dollar, Hong Kong dollar and British pound represent-
ing the most significant sources of risk.
Interest rate risk
We are exposed to risks associated with the effect of
changing interest rates. Interest rate risk on borrow-
ings is managed at Group level, based on consolidat-
ed debt and according to market conditions. The main
goal of interest rate management policies is to opti-
mize 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.
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 customary
criteria, including the credit rating issued by an inde-
pendent rating agency.
Group policy consists of diversifying counterparty
risks and periodic controls are performed to check
compliance with the related rules.
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. Hedg-
ing decisions are made by the Finance & Control -
Legal Affairs Department and are reviewed at month-
ly intervals based on changes in financial market con-
ditions.
Equity risk
Exposure to equity risk primarily relates to treasury
stock and shares in AXA. These positions are not
hedged.
Our products are subject to varying national
and international standards and regulations
Our products, which are sold in national markets
worldwide, are subject to regulations in each of those
markets, as well as to various supranational regula-
tions. Those regulations include trade restrictions, tar-
iffs, tax regimes and product safety standards.
Changes to any of these regulations or standards and
their applicability to our business could lead to lower
sales or increased operating costs, which would result
in lower profitability and earnings.
Our products are also subject to multiple quality and
safety controls and regulations, and are governed by
both national and supranational standards, though the
majority of our lineup complies with world-recognized
International Electrotechnical Commission (IEC) stan-
dards. Costs of compliance with new or more stringent
standards and regulations could affect our business if
we are required to make capital expenditures or imple-
ment other measures.
Since our products comply with the dominant stan-
dards in our host markets, we are able to meet most
all of our customers’ needs.
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
proposed merger project. When the offer closed in
July 2001, the Company held 98.1% of Legrand. In an
initial 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 Communi-
ties overruled the Commission's decisions on October