APC 2011 Annual Report Download - page 40

38 2011 REGISTRATION DOCUMENT SCHNEIDER ELECTRIC
DESCRIPTION OFTHEGROUP, ANDITSSTRATEGY, MARKETS ANDBUSINESSES
1RISK FACTORS
the US dollar, Hong Kong dollar and UK 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, 2011 (Chapter5).
In 2011, revenue in foreign currencies amounted to EUR16.1billion,
including around USD5.7billion and 2.6billion in Chinese yuans.
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 EUR30million on EBITA).
Equity risk
Exposure to equity risk primarily relates to treasury stock and shares
in AXA. These positions are not hedged. At December31, 2011,
the market value of AXA shares were slightly below 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, aluminium, silver, lead, nickel, zinc
and plastics). 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 Finance and Treasury
Department. 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,
2011.
In 2011, purchases of raw materials totalled around
EUR1,800 million, including around EUR1,100 million for non-
ferrous and precious metals, of which roughly 55% was for copper.
The Group enters into swap and options agreements in order to
hedge all or part of its non-ferrous and precious metals purchases.
Decisions to hedge such purchases depend on Group forecasts of
changes in market prices. At December31, 2011, the Group had
hedged positions with a nominal value of EUR171million on these
transactions.
Counterparty risk
Financial transactions are entered into with carefully selected
counterparties. Banking counterparties are chosen according
to the customary 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.
In addition, the Group takes out substantial credit insurance and
uses other types of guarantees to limit the risk of losses on trade
accounts receivable.
Liquidity risk
Liquidity is provided by the Group’s cash and cash equivalents
and commercial paper programs. These programs are backed by
undrawn confi rmed lines of credit. At December31, 2011, the Group
had access to cash and cash equivalents totalling EUR2.8billion. As
of December31, 2011, the Group had EUR2.8billion in undrawn
confi rmed lines of credit, of which EUR2.3 billion matures after
December2012.
The Group’s credit rating enables it to raise signifi cant long-term
fi nancing and attract a diverse investor base. The Group currently
has an A- credit rating from Standard & Poor’s and an A3 credit
rating from Moody’s. The Group’s liabilities and their terms and
conditions are described in note24 of Chapter5.
In line with the Group’s overall policy of conservatively managing
liquidity risk and protecting its fi nancial position, when negotiating
new liquidity facilities the Group resists the inclusion of clauses that
would have the effect of restricting the availability of credit lines,
such as covenants requiring compliance with certain fi nancial ratios
and material adverse change clauses. As of December31, 2011,
no fi nancing or confi rmed lines of credit were subject to covenants
requiring compliance with fi nancial ratios.
The loan agreements or lines of credit for some of the Group’s
liquidity facilities include cross default clauses. If the Group were to
default on any of its liquidity facilities, it could be required to repay
the sums due on some of these facilities.
Moreover, anticipated reimbursement provisions exist for certain
fi nancing and lines of credit in case of change of control. Under
these provisions, the debt holders may demand repayment if a
shareholder or shareholders acting together hold more than 50% of
the Company’s shares, for the majority of contracts, and this event
triggers a downgrading of the Company’s rating. At December31,
2011, the amount of fi nancing and lines of credit with these types of
provisions came to EUR5.5billion.