Siemens 2013 Annual Report Download - page 239

253 D. Consolidated Financial Statements
357 E. Additional Information
245 C. Compensation Report, Corporate Governance
statement pursuant to Section a of the
German Commercial Code, Takeover-relevant
information and explanatory report
246 C. Siemens AG ( Discussion on basis of
German Commercial Code)
250 C. Notes and forward-looking statements
9
C... FINANCIAL RISKS
We are exposed to currency risks and interest rate risks:
We are exposed to fluctuations in exchange rates, especially
between the U.S. dollar and the euro, because a high percent-
age 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, in partic-
ular the Chinese Yuan. As a result, a strong euro in relation to
the U.S. dollar and other currencies could have an adverse
impact on our revenues and results of operations. Certain cur-
rency risks as well as interest rate risks are hedged on a Com-
pany-wide basis using derivative financial instruments. De-
pending on the development of foreign currency exchange
and interest rates, our hedging activities could have significant
effects on our business, financial condition and results of oper-
ations. Our Sectors and Financial Services (SFS) engage in cur-
rency 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 subject to changes in interest rates.
Accordingly, exchange rate and interest rate fluctuations may
lead to higher volatility and adverse effects on our business,
financial condition and results of operations. A strengthening
of the euro (particularly against the U.S. dollar) may change
our competitive position, as many of our competitors may ben-
efit 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 adverse changes of fair market values of our financial
assets, in particular concerning our derivative financial
instruments. In addition, we see a risk of widening credit
spreads leading to increasing refinancing costs if the Euro-
zone 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 develop-
ment could also further increase the costs for buying protec-
tion against credit risks due to a potential increase of coun-
terparty risks.
Our future financing via Corporate Treasury may particu-
larly be affected by the uncertainty of economic condi-
tions and the development of capital and financial mar-
kets: Our Corporate Treasury is responsible for the financing
of the Company. Negative developments in the foreign ex-
change, money or capital markets, such as limited availability
of funds (particularly U.S. dollar funds), may increase our
overall cost of funding. The ongoing Eurozone sovereign debt
crisis continues to have an impact on global capital markets.
The resulting higher risk awareness of governments lead to
more regulations on the use of financial instruments through
() the Regulation on OTC derivatives, central counterparties
and trade repositories (European Market Infrastructure Regu-
lation) and () other similar regulations in other jurisdictions,
which may have an impact on the future availability or the
costs of adequate hedging instruments for the Company. It
may even lead to further regulation of the financial sector and
the use of financial instruments. Such further regulations
could adversely influence our future possibilities of obtaining
debt financing, and / or may significantly increase our refi-
nancing costs. Deteriorating credit quality and / or default of
business partners may adversely affect our business, financial
condition and results 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 mea-
sures. An actual or expected negative development of our
business, financial condition or results of operations could
result in the deterioration of our credit rating. Downgrades by
rating agencies could increase our cost of capital, may reduce
our potential investor base and may negatively affect our busi-
ness, financial condition and results of operations.
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 credit
risk by financing third-party equipment or by taking direct or
indirect participation in financings, such as syndicated loans.
In part, we take a security interest in the assets we finance or
we receive additional collateral. Our business, financial condi-
tion and results of operations may be adversely affected 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 additional collateral
declines, if interest rates or foreign exchange rates fluctuate,
or if the projects in which we invest are unsuccessful. Potential
adverse changes in economic conditions could cause a decline
in the fair market values of assets, derivative instruments as
well as collateral, resulting in losses which could have an
adverse effect on our business, financial condition and results
of operations.