Siemens 2010 Annual Report Download - page 189

113 Report on post-balance sheet date events
114 Report on expected developments and associated
material opportunities and risks
128 Information required pursuant to § () and
§ () HGB and explanatory report
133 Information required pursuant to § () and
§ () no.  HGB and explanatory report
135 Compensation and declaration pursuant to §a HGB
135 Additional information for supplemental
financial measures
138 Siemens AG (Discussion on basis of HGB)
147 Consolidated Financial Statements
261 Additional information

ample, we face the risk that we must satisfy technical require-
ments of a project even though we may not have gained expe-
rience with those requirements before we win the project. The
profit margins realized on such fixed-priced contracts may vary
from original estimates as a result of changes in costs and
productivity over their term. We sometimes bear the risk of
unanticipated project modifications, shortage of key person-
nel, quality problems, financial difficulties of our customers,
cost overruns or contractual penalties caused by unexpected
technological problems, unforeseen developments at the proj-
ect sites, performance problems with our suppliers, subcon-
tractors and consortium partners or other logistical difficulties.
Certain of our multi-year contracts also contain demanding
installation and maintenance requirements, in addition to
other performance criteria relating to timing, unit cost require-
ments and compliance with government regulations, which, if
not satisfied, could subject us to substantial contractual penal-
ties, damages, non-payment and contract termination. There
can be no assurance that contracts and projects, in particular
those with long-term duration and fixed-price calculation, can
be completed profitably. For additional information, see “Notes
to Consolidated Financial Statements.”
Financial risks
We are exposed to currency risks and interest rate risks: We
are exposed to fluctuations in exchange rates, especially be-
tween the U.S. dollar and the euro, because a high percentage
of our business volume is conducted in the U.S. and as exports
from Europe. In addition, we are exposed to currency effects
involving the currencies of emerging markets such as China,
India and Brazil. As a result, a strong euro in relation to the U.S.
dollar and other currencies can have a material impact on our
other revenues and results. Certain currency risks as well as
interest rate risks are hedged on a Company-wide basis using
derivative financial instruments. Depending on the develop-
ment of foreign currency exchange rates, our hedging activi-
ties can have significant effects on our cash flow. Our Sectors
and Cross-Sector Businesses engage in currency hedging ac-
tivities which sometimes do not qualify for hedge accounting.
In addition, our Corporate Treasury has interest rate hedging
activities which also do not qualify for hedge accounting, and
are subject to changes in interest rates. Accordingly, exchange
rate and interest rate fluctuations may influence our results
and lead to earnings volatility. A strengthening of the euro
(particularly against the U.S. dollar) may also change our com-
petitive position, as many of our competitors may benefit from
having a substantial portion of their costs based in weaker cur-
rencies, enabling them to offer their products at lower prices.
We are exposed to volatile credit spreads: Regarding our
Corporate Treasury activities, widening credit spreads due to
uncertainty and risk aversion in the financial markets might
lead to changing fair market values of our existing trade receiv-
ables and derivative financial instruments. In addition, we also
see a risk of increasing refinancing costs if the recent stabiliza-
tion and improvement in the global financial markets does not
persist. Furthermore, costs for buying protection on credit de-
fault risks could increase due to a potential increase of coun-
terparty risks.
Our future financing via Corporate Treasury may be affect-
ed by the uncertainties of economic conditions and the
development of capital and bank markets: Our Corporate
Treasury is responsible for the financing of the Company and
our Sectors and Cross-Sector Businesses. Negative develop-
ments in the foreign exchange, money or capital markets, such
as limited availability of funds (particularly U.S. dollar funds),
may increase our overall cost of funding. The worldwide finan-
cial market crisis has had a global impact on the capital mar-
kets. These developments and the higher risk awareness of
investors and of governments, in particular, may lead to fur-
ther politically influenced regulation of the financial sector,
could influence our future possibilities of obtaining debt fi-
nancing, and may significantly increase credit spreads. Regard-
ing our Corporate Treasury activities, deteriorating credit
quality and / or default of counterparties may adversely affect
our results.
Downgrades of our ratings could increase our cost of capital
and could negatively affect our businesses: Our financial
condition and results of operations are influenced significantly
by the actual and expected performance of the Sectors and
Cross-Sector Businesses, as well as the Company ’s portfolio
measures. An actual or expected negative development of our
results of operations or cash flows or an increase in our net
debt position could result in the deterioration of our credit rat-
ing. Downgrades by rating agencies could increase our cost of
capital, may reduce our potential investor base and may nega-
tively affect our businesses.
Our financing activities subject us to various risks, including
credit, interest rate and foreign exchange risk: We provide
our customers with various forms of direct and indirect financ-
ing in connection with large projects such as those undertaken
by our Energy Sector. We finance a large number of smaller
customer orders, for example the leasing of medical equip-
ment, in part through SFS. SFS also incurs credit risk by financ-