Siemens 2011 Annual Report Download - page 230

6 A. To our shareholders
23 B. Corporate Governance 51 C. Combined management’s discussion and analysis
52 C. Business and operating environment
80 C. Fiscal  – Financial summary
83 C. Results of operations
101 C. Financial position
114 C. Net assets position
117 C. Overall assessment of the economic position
118 C. Report on post-balance sheet date events
119 C. Report on expected developments and
associated material opportunities and risks
135 C. Information required pursuant to Section  ()
and Section  () of the German Commercial
Code (HGB) and explanatory report

the U.S. dollar and other currencies can have a material im-
pact on our revenues and results. Certain currency risks as
well as interest rate risks are hedged on a Company-wide ba-
sis using derivative financial instruments. Depending on the
development of foreign currency exchange rates, our hedging
activities can have significant effects on our cash flow. Our
Sectors and SFS engage in currency hedging activities 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 sub-
ject 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 (partic-
ularly against the U.S. dollar) may change our competitive po-
sition, as many of our competitors may benefit from having a
substantial portion of their costs based in weaker currencies,
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 re-
ceivables and derivative financial instruments. In addition, we
also see a risk of increasing refinancing costs if the Eurozone
sovereign debt crisis with its ongoing significant impact on
global financial markets, and the European financial sector in
particular, continues or even worsens. Any such development
could also further increase the costs for buying protection on
credit risks due to a potential increase of counterparty risks.
Our future financing via Corporate Treasury may be affect-
ed by the uncertainty of economic conditions and the de-
velopment of capital and financial markets, in particular:
Our Corporate Treasury is responsible for the financing of the
Company. Negative developments 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 financial market crisis triggered by
Lehman’s bankruptcy as well as the ongoing Eurozone sover-
eign debt crisis continue to have an impact on global capital
markets. These developments and the resulting higher risk
awareness of investors and governments, in particular, may
lead to further regulation of the financial sector and the use
of financial instruments, could influence our future possibili-
ties of obtaining debt financing, and may significantly in-
crease credit spreads. Regarding our Corporate Treasury activ-
ities, deteriorating credit quality and / or default of counter-
parties may adversely affect our financial conditions and re-
sults of operations.
Downgrades of our ratings could increase our cost of capi-
tal and could negatively affect our businesses: Our busi-
ness, financial condition and results of operations are influ-
enced significantly by the actual and expected performance
of the Sectors and SFS, 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, includ-
ing credit, interest rate and foreign exchange risk: We pro-
vide our customers with various forms of direct and indirect
financing in connection with large projects. We also finance a
large number of customer orders, for example, the leasing of
medical equipment, mainly through SFS. SFS also incurs cred-
it risk by financing third-party equipment or by taking direct
or indirect participations in financings, such as syndicated
loans. In part, we take a security interest in the assets we fi-
nance or we receive additional collateral. Our business, finan-
cial conditions and results of operations may be adversely af-
fected if the credit quality of our customers deteriorates or if
they default on their payment obligation to us, if the value of
the assets in which we have taken a security interest or addi-
tional collateral declines, if interest rates or foreign exchange
rates fluctuate, or if the projects in which we invest are unsuc-
cessful. Potential adverse changes in economic conditions
could cause a further decline in the fair market values of as-
sets, derivative instruments as well as collateral, resulting in
losses which could have a negative effect on our business, fi-
nancial condition and results of operations.
Our financial condition and results of operations may be
adversely affected by several parameters influencing the
funded status of our pension benefit plans: The funded sta-
tus of our pension plans may be affected by an increase or de-
crease in the defined benefit obligation (DBO), as well as by
an increase or decrease in the value of plan assets. Pensions
are accounted for in accordance with actuarial valuations,
which rely on statistical and other factors in order to antici-
pate future events. These factors include key pension plan
valuation assumptions such as the discount rate, expected
rate of return on plan assets, rate of future compensation in-
creases and pension progression. Actual developments may
differ from assumptions due to changing market and econom-
ic conditions, thereby resulting in an increase or decrease in
the DBO. Significant movements in financial markets or a