Annual report 2011 - Trelleborg

32
GOVERNANCE AND RESPONSIBILITY – RISKS AND RISK MANAGEMENT
Financial risks, cont.
Risk description and policy Exposure and comments
Translation risks – Income statement
Exchange-rate fluctuations impact the Group’s
earnings in connection with the translation of
foreign subsidiaries’ income statements to sek.
Policy. The Group does not normally hedge this
risk.
Translation risks – Balance sheet
When translating the Group’s investments in
foreign subsidiaries to sek, there is a risk that
the Group’s balance sheet will be impacted by
changes in exchange rates. The Group has
significant net investments in foreign
subsidiaries and associated companies.
Policy. Investments in foreign subsidiaries and
associated companies may be hedged in a
range of between 0 and 100 percent of the
investment’s value (which, because of the tax
effect, implies a maximum hedge ratio of
approximately 70 percent of the investment’s
value). The decision regarding possible hedging
measures is taken following an overall evaluation
of foreign exchange rate levels and the effects
on net financial items, liquidity and taxes,
as well as on the Group’s debt/equity ratio.
Interest-rate risks
Because most of Trelleborg’s net debt bears
variable interest, the Group focuses on managing
the cash-flow risk related to interest rate
fluctuations, meaning the risk that movements
in market interest rates could have an impact
on the financial cash flow and earnings. The
scope of the impact depends on the fixed
interest term of the borrowing and investment.
The Group seeks a balance between a reasonable
current cost of borrowing and the risk of
having a significantly negative impact on earnings
in the event of a sudden major movement
in interest rates. Trelleborg employs interestrate
hedging when it is considered appropriate.
Policy. Borrowing – The average fixed-interest
term on the Group’s gross borrowing, including
the impact of derivative instruments, may not
exceed four years.
Investments – The average fixed-interest
term on interest-bearing investments, including
the impact of derivative instruments, may not
exceed two years on a maximum amount of sek
2,000 m, or the equivalent amount in other
currencies.
Annual Report 2011 Trelleborg AB
Trelleborg’s earnings are largely generated outside Sweden. Accordingly, the impact of exchange-rate fluctuations
on the Group’s sales and earnings can be significant. In 2011, operating profit for continuing operations
was affected by a total of neg. sek 165 m (neg: 122) and net profit in an amount of neg. sek 102 m
(neg: 65), due to exchange-rate fluctuations upon translation of the income statements of foreign
subsidiaries.
Translation effects: foreign exchange effects on income statement (sek m)
Currency Net sales Operating profit Net Profit/loss
EUR –698 –51 –33
GBP –139 –15 –11
USD –612 –46 –20
Other –314 –53 –38
Total 2011 –1,763 –165 –102
Total 2010 –1,707 –122 –65
At year-end 2011, net investments in Trelleborg’s foreign operations amounted to approximately
sek 20,766 m (18,876). In 2011, Trelleborg’s translation differences amounted to negative sek 30 m
(neg: 1,223), calculated after hedging with deductions for estimated taxes.
At year-end 2011, 45 percent (47) of net investments were hedged.
If sek appreciates by 1 percent in relation to all currencies in which the Trelleborg Group has foreign net
investments, there would be a change in shareholders’ equity of neg. sek 137 m (neg: 120) after tax effects.
Sensitivity analysis: translation risk in balance sheet, after consideration
of possible tax effects (sek m)
Currency Net investment,
sek m
Hedging,
%
Effect on equity, if sek 1%
stronger, sek m
EUR 10,479 53% –64
GBP 1,963 60% –11
USD 2,520 45% –17
Other 5,804 24% –45
Total 2011 20,766 45% –137
Total 2010 18,876 47% –120
The Group’s average interest-bearing net debt amounted to sek 6,775 m (7,847) during the year. Net financial
items corresponded to 3.1 percent (2.8) of the average net debt, while net interest items corresponded
to 2.2 percent (2.2).
At December 31, 2011, the Group’s interest-bearing debt totaled sek 7,623 m (7,505). The average
fixed-interest term, including derivatives, was approximately 16 months (15 months). At December 31,
outstanding interest-bearing investments amounted to sek 1,198 m (1,096), with an average period of fixed
interest of approximately 11 months (3.5). At year-end, the Group’s net interest-bearing debt amounted to
sek 6,425 m (6,409) with an average remaining period of fixed interest of about 17 months (17 months).
Based on the level of interest-bearing net at year-end, a one percent point rise in market interest rates
in all currencies in which the Group has loans or investments would generate a net cost increase of approximately
sek 24 m (22) after tax effects in net financial items for 2012. The currencies with the greatest
impact are eur, usd and gbp. Taking into account the interest-rate hedges in place at year-end, and for which
hedge accounting has been applied, an increase in the market interest rates of one percentage point in
currencies that have been hedged would have a positive impact on other comprehensive income of sek 67 m
(66) after tax effects.
Impact in 2012 on consolidated interest expenditure
of a one percent point increase in market interest rates
SEK M
10
0
-10
-20
-30
-40
-50
EUR USD GBP
Risk after hedging
Risk before hedging
An analysis of the Group’s interest-bearing debt is reported in Note 27.
Outstanding interest-bearing investments are reported in Notes 16, 22 and 24.