APC 2012 Annual Report Download - page 39

2012 REGISTRATION DOCUMENT SCHNEIDER ELECTRIC 37
OVERVIEW OF THEGROUP’S STRATEGY, MARKETS AND BUSINESSES
1
RISK FACTORS
We manage our exposure to currency risk to reduce the sensitivity of
earnings to changes in exchange rates through hedging programs
relating to receivables, payables and cash fl ows, which are primarily
hedged by means of forward purchases and sales.
Depending on market conditions, risks in the main currencies may
be hedged based on cash fl ow forecasting using contracts that
expire in 12months or less.
Schneider Electric’s currency hedging policy is to protect our
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,
British pound and Russian Rubles representing the most signifi cant
sources of risk. The fi nancial instruments used to hedge our
exposure to fl uctuations in exchange rates are described in
note26 to the consolidated fi nancial statements for the year ended
December31, 2012 (Chapter5).
In2012, revenue in foreign currencies amounted to EUR18.1 billion,
including around USD6.1 billion and 2.9 billion in Chinese yuan.
The main exposure of the Group in terms of currency exchange risk
is related to the US dollar, the Chinese yuan and to currencies linked
to 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 and a
translation effect of EUR4 0million on EBITA.
Equity risk
Exposure to equity risk primarily relates to treasury shares. The Group
does not use any fi nancial instruments to hedge thesepositions.
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 plastics. If we are not able to hedge, compensate for or pass on
to customers any such increased costs, this could have an adverse
impact on our fi nancial results.
The Group has, however, implemented certain procedures to limit
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 our exposure to fl uctuations
in raw material prices are described in note26 to the consolidated
fi nancial statements for the year ended December31, 2012.
In2012, purchases of raw materials totaled around EUR1,900million,
including around EUR1,100 million for non-ferrous and precious
metals, of which roughly 56 % was for copper. The Group enters
into swap and options agreements intended to hedge all or part
of its non-ferrous and precious metals purchases in order to limit
the impact of price volatility of these raw materials on our results.
At December 31, 2012, the Group had hedged positions with a
nominal value of EUR236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 undrawn confi rmed lines of credit. As of December31,2012,
the Group had access to cash and cash equivalents totaling
EUR3.7 billion. As of December 31, 2012, the Group had
EUR2.4 billion in undrawn confi rmed lines of credit, of which
EUR2.3billion matures after December2013.
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 our fi nancial position, when
negotiating new liquidity facilities the Group avoids 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, 2012, Schneider ElectricSA had no fi nancing
or confi rmed lines of credit that were subject to covenants
requiring compliance with fi nancial ratios.
The loan agreements or lines of credit for some of our liquidity
facilities include cross-default clauses. If we were to default on any
of our liquidity facilities, we 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. As of
December31, 2012, EUR5.7 billion of the Group’s fi nancing and
lines of credit had these types of provisions.