APC 2009 Annual Report Download - page 34

2009 REGISTRATION DOCUMENT SCHNEIDER ELECTRIC32
DESCRIPTION OFTHEGROUP, ITSMARKETS ANDITSBUSINESSES
1RISK FACTORS
If the Group fails to conduct its businesses in full compliance with
the applicable environmental laws and regulations, the judicial
or regulatory authorities could require the Group to conduct
investigations and/or implement costly clean-up measures to deal
with the current or past contamination of current or former facilities
or off-site waste disposal facilities, and to scale-back or temporarily
or permanently close facilities in accordance with the applicable
environmental laws and regulations.
Information systems risk
The Group operates, either directly or through service providers,
a wide range of highly complex information systems (servers,
networks, applications, databases, etc.) that are essential to the
effi ciency of its sales and manufacturing processes. Failure of any of
these hardware or software systems, a fulfi llment failure by a service
provider, human error or computer viruses could adversely affect the
quality of service offered by the Group.
The Group regularly examines alternative solutions to protect against
this type of risk and has developed contingency plans to mitigate
the effects of any information system failure. Dedicated governance
structures have been set up to manage relations with service
providers responsible for outsourced IT systems operations.
Problems may also be encountered during the deployment of new
applications or software. In particular, a project was launched in
2004 to design, develop and build a Group-wide SAP-based ERP
system. The initial vision and detailed design phases were completed
in July2005 and the core system was built and deployed at several
pilot sites in 2008. The system was rolled out in several countries
in 2009 and will be extended across the Group over several years.
In view of the project’s complexity, extensive functionalities and its
worldwide deployment, a dedicated governance and cost control
structure has been set up to track attainment of project milestones
and limit the related risks.
However, despite the Group’s policy of establishing governance
structures and contingency plans, there can be no assurance that
information systems projects will not be subject to technical problems
or execution delays. While it is diffi cult to accurately quantify the
impact of any such problems or delays, they could have an adverse
effect on inventory levels, service quality and, consequently, the
Group’s fi nancial results.
Market risks
Interest rate risk
The Group is exposed to risks associated with the effect of changing
interest rates. Interest rate risk on borrowings is managed at
Group level, based on consolidated debt and according to market
conditions. The core aim of interest rate management policies is to
optimise overall borrowing costs. Most bond debt is fi xed rate. At
December 31, 2009, 84% of gross debt was fi xed rate.
Maturities of fi nancial assets and liabilities are presented in Note26
to the consolidated fi nancial statements.
A 1% change in interest rates would have an impact of around
EUR 25million on the Group’s fi nancial expense.
The fi nancial instruments used to hedge the exposure of the Group
to fl uctuations in interest rates are described in Note26 to the
consolidated fi nancial statements for the year ended December 31,
2009.
The Group’s international operations expose it
to the risk of fluctuations in foreign exchange
rates
Because a signifi cant proportion of transactions are denominated in
currencies other than the euro, the Group is exposed to risk arising
from changes in exchange rates. If the Group is not able to hedge
them, fl uctuations in exchange rates between the euro and these
currencies can have a signifi cant impact on its results of operations
and distort year-on-year performance comparisons.
The Group actively manages its exposure to currency risk to reduce
the sensitivity of earnings to changes in exchange rates. Hedging
programmes mainly concern foreign currency receivables, payables
and operating cash fl ows, which are generally hedged by means of
forward purchases and sales.
Depending on market conditions, risks in the main currencies may
be hedged based on recurring forecast fl ows using contracts that
expire in 12months or less.
The Group’s currency hedging policy is to protect subsidiaries against
risks on all transactions denominated in a currency other than their
functional currency. More than twenty currencies are involved, with
the US dollar, Hong Kong dollar and British pound representing the
most signifi cant sources of risk.
The fi nancial instruments used to hedge the exposure of the Group
to fl uctuations in exchange rates are described in Note26 to the
consolidated fi nancial statements for the year ended December 31,
2009 (see Chapter5).
In 2009, revenue produced in foreign currencies amounted to
EUR 11.2billion, including around USD 4.5billion and CNY1.5 billion .
The main exposure of the Group in terms of currency exchange
risks is related to the US dollar and to currencies infl uenced by the
US dollar. The Group estimates that in the current structure of its
operations, a 5% increase of the euro compared to the US dollar
would have a negligible impact on operating margin (translation effect
of EUR 45million on the EBITA ).
Equity risk
Exposure to equity risk primarily relates to treasury stock and shares
in AXA. These positions are not hedged. At December 31, 2009, the
AXA shares’ market value exceeded their acquisition cost.
An increase in raw material prices could have
negative consequences
The Group is exposed to fl uctuations in energy and raw material
prices (in particular steel, copper, aluminum, silver, lead, nickel, zinc
and plastic). If the Group is not able to hedge, compensate or pass
on our increased costs to customers, this could have an adverse
impact on its fi nancial results.
The Group has, however, implemented certain procedures to limit
its exposure to rising non-ferrous and precious raw material prices.
The purchasing departments of the operating units report their
purchasing forecasts to the Corporate Treasury Centre . Purchase
commitments are hedged using forward contracts, swaps and, to
a lesser extent, options.
The fi nancial instruments used to hedge the exposure of the Group
to fl uctuations in raw material prices are described in Note26 to
the consolidated fi nancial statements for the year ended December
31, 2009.