Siemens 2014 Annual Report Download - page 235

247 D. Consolidated Financial Statements
337 E. Additional Information
213 C. Overall assessment of the economic position
214 C. Subsequent events
215 C. Sustainability and citizenship
225 C. Report on expected developments and
associated material opportunities and risks
242 C. Compensation Report and legal disclosures
242 C. Siemens AG (Discussion on basis
of German Commercial Code)

risk of delays and interruptions of the supply chain as a conse-
quence of natural disasters in case we are unable to identify
alternative sources of supply or ways of transportation in
a timely manner or at all. A general shortage of materials, com-
ponents or sub-components as a result of natural disasters also
bears the risk of unforeseeable fluctuations in prices and
demand, which might adversely affect our business, financial
condition and results of operations.
Our former Sectors purchase raw materials including so-called
rare-earth metals, copper, steel, aluminum and oil, which ex-
pose them to fluctuations in energy and raw material prices. In
recent times, commodities prices have been subject to volatile
markets, and such volatility is expected to continue. If we are
not able to compensate for our increased costs or pass them on
to customers, price increases could have an adverse impact on
our business, financial condition and results of operations. In
contrast, in times of falling commodity prices, we may not fully
profit from such price decreases as we attempt to reduce the
risk of rising commodity prices by several means, such as long-
term contracting or physical and financial hedging. In addition
to price pressure that we may face from our customers expect-
ing to benefit from falling commodity prices or adverse market
conditions, this could also adversely affect our business, finan-
cial condition and results of operations.
C... FINANCIAL RISKS
We are exposed to market price risks: We are exposed to fluc-
tuations in exchange rates, especially between 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, in particular the Chinese
Yuan. A strengthening of the euro (particularly against the U.S.
dollar) may change our competitive position, 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. As a result, a strong euro in rela-
tion to the U.S. dollar and other currencies could have an
adverse impact on our revenues and results of operations.
Certain currency risks as well as interest rate risks are hedged
using derivative financial instruments. Depending 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 operations.
Changes in the fair value of warrants issued together with
US$  billion bonds in fiscal  depends mainly on the under-
lying Siemens and OSRAM share prices as well as their respec-
tive volatilities, irrespective of the fact that our potential
obligation related to the warrant writer position to physically
deliver Siemens and OSRAM shares could be covered out of
existing stock. Accordingly, exchange rate, interest rate and
share price fluctuations may lead to higher volatility and
adverse effects on our business, financial condition and results
of operations.
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 instru-
ments. In addition, widening credit spreads could lead 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, contin-
ues or even worsens. Any such development could also further
increase the costs for buying protection against credit risks due
to a potential increase of counterparty risks.
Our future financing via Corporate Treasury may particu-
larly be affected by the uncertainty of economic condi-
tions and the developments of capital and financial mar-
kets: Our Corporate Treasury is responsible for the financing
of the Company. Negative developments in 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 ongoing Euro zone sovereign debt crisis con-
tinues to have an impact on global capital markets. The result-
ing higher risk awareness of governments led to more regula-
tions on the use of financial instruments through () the
Regulation on OTC derivatives, central counterparties and
trade repositories (European Market Infrastructure Regula-
tion) 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 regulations of the financial sector
as well as to the use of financial instruments that could
adversely influence our future possibilities of obtaining debt
financing, and / or may increase our refinancing costs. Deterio-
rating credit quality or even default of business partners may
adversely affect our business, financial condition and results
of operations.
Downgrades of our rating could increase our cost of capital
and therefore could negatively affect our business: Our
business, financial condition and results of operations are influ-
enced significantly by the actual and expected performance of
the former Sectors and SFS, as well as our portfolio measures.
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 agen-
cies could increase our cost of capital, may reduce our potential
investor base and may negatively affect our business, financial
condition and results of operations.