Pallet-Management-Services - AFM

| ANNUAL REPORT 2006 | IFCO SYSTEMS N.V. |
Environmental risk
Our operations are subject to various environmental laws and
regulations, including those dealing with the handling and
disposal of waste products, fuel storage and air quality. Failure
to comply with such laws and regulations can have serious
consequences, including civil and criminal fines and penalties,
and orders to limit or shut down operations. We manage these
risks with strict internal procedures and through our internal
management reporting tools.
See Notes to the consolidated financial statements for further
discussion of existing environmental matters.
Foreign currency risk
Foreign currency risk is the risk that we will incur economic
losses due to adverse changes in foreign currency exchange
rates.
As currency exchange rates change, translation of the financial
statements of our international businesses into US Dollars
and Euros affects year-to-year comparability of our results of
operations. Appreciation of the US Dollar, our presentation
currency, against the Euro decreases our revenues and costs
as reported in our financial statements for those operations that
have a functional currency other than the US Dollar. Conversely,
depreciation of the US Dollar against the Euro increases our
revenues and costs. The appreciation or depreciation of the
US Dollar against the Euro, therefore, impacts our reported
results. Our operating subsidiaries in countries other than those
countries participating in the European Monetary Union and
adopting the Euro as their national currency use their local
currency as their functional currency.
During 2003, we entered into a forward exchange contract
in order to offset the cash flow variability related to changes
in exchange rates on certain intercompany transactions. The
forward exchange contract expired at December 31, 2006.
Aside from the US Dollar, our reporting currency, the Euro
is our other primary functional currency. The following table
summarizes the value of the Euro relative to the US Dollar.
As of December 31 Average for Fiscal Year
2006 2005 2006 2005
1 US Dollar
relative to 1 Euro 1.3197 1.1842 1.2560 1.2446
64
We incur currency transaction risk whenever one of our
operating subsidiaries enters into either a purchase or sales
transaction using a currency other than its functional currency.
Our currency risk arises from foreign currency receivables
as well as from firm commitments to purchase services and
supplies in the future in currencies other than the subsidiary’s
functional currency. Additionally, the intercompany financing
between IFCO SYSTEMS N.V. and IFCO SYSTEMS North
America is subject to currency transaction risk.
Interest rate risk
The Company’s exposure to the risk of changes in market
interest rates is limited and relates only to the working capital
facility. The majority of the Company’s interest bearing debt
(Senior Secured Notes) has fixed interest rates.
Commodity price risk
We are subject to market risk with respect to commodities
since granulate is a significant component of cost of goods
sold for our RPCs. To the extent that we purchase new RPCs
made from new, virgin material instead of recycled RPCs, any
increase in the cost of new granulate will increase cost of
goods sold resulting in decreased profitability unless there is a
corresponding increase in the prices we charge our customers.
We may be limited in how much of a cost increase, if any, we are
able to pass along to customers or how quickly we are able to
pass along a cost increase to customers. In addition, increases
in prices may result in a decrease in revenues.
We do not enter into futures contracts on commodity markets to
hedge our exposure to granulate prices.
Acquisitions and dispositions
During March 2006, a US subsidiary of IFCO SYSTEMS
completed the purchase of certain assets (RPCs and related
washing service center equipment) of the RPC Management
Services Business of CHEP USA.
During Q2 2005, we sold our non strategic Pallet Pooling
business in Canada. In accordance with IFRS and unless
otherwise noted, all group level income statement and cash
flow information included herein has been restated to separate
the results of our continuing operations from the results of our
discontinued operations, whereas balance sheet data prior to the
disposal has not been restated.