Electrolux 2004 Annual Report Download - page 109

Electrolux Annual Report 2004 105
Risk Factors
layoffs of employees, consolidation of manufacturing operations and
other cost-cutting measures. Electrolux has also put substantial effort
into driving down costs and complexity throughout the supply chain
by improving integration of the supply chain and demand flow man-
agement. There can be no assurances that these measures, or the
further expected restructuring measures of approximately SEK 8–10
billion in respect of the years 2005–2008, will generate the level of
cost savings that Electrolux has estimated going forward.
Electrolux is dependent on third party suppliers to deliver
key components and materials for its products.
Electrolux manufacturing process depends on the availability and
timely supply of components and raw materials, generally from third
party suppliers. While supply problems can affect the performance of
most of Electrolux business sectors, Electrolux is particularly sensitive
to supply problems related to electronic components, compressors,
steel, plastics, aluminum and copper. Electrolux works closely with
its suppliers to avoid supply-related problems and is increasing its
supply of sourced finished products, but there can be no assurances
that it will not experience problems in the future. Such problems could
have material adverse effects on the business, results of operations
or financial condition of Electrolux. In addition, unanticipated in-
creases in the price of components or raw materials due to market
shortages could also adversely affect the financial results of Electrolux
businesses.
Electrolux is subject to risks related
to changes in commodity prices.
Electrolux is subject to risks related to changes in commodity prices
as the ability to recover increased cost through higher pricing may be
limited by the competitive environment in which Electrolux operates.
The recent development in many commodity markets has resulted
in higher prices, particularly for steel and plastics. This has had an
adverse affect on the Group’s operating results in 2004 and is
expected to negatively affect the Group’s operating result in 2005.
Electrolux uses commodity futures to hedge immaterial amounts of
commodity purchases, primarily related to copper and aluminum.
Electrolux is exposed to foreign exchange
risks and interest rate risk.
Electrolux operates in approximately 60 countries around the world
and as a result is subject to the risks associated with cross-border
transactions. In particular, Electrolux is exposed to foreign currency
exchange rate risks and risks relating to delayed payments from
customers in certain countries or difficulties in the collection of
receivables generally. Electrolux is also subject to risks arising from
translation of balance sheets and income statements of foreign
subsidiaries. The major currencies that Electrolux is exposed to are
the Euro, the U.S. dollar (including currencies correlating with the
dollar) and the British pound. While Electrolux geographically wide-
spread production and its hedging transactions reduce the effects
of changes in exchange rates, there can be no assurances that
these measures will be sufficient.
In addition, Electrolux holds assets and liabilities to manage the
liquidity and cash needs of its day-to-day operations. These interest
rate sensitive assets and liabilities are subject to interest rate risk.
While these interest rate exposures are minimized to some extent by
the use of derivative financial instruments, there can be no assur-
ances that these hedging activities will be effective or sufficient.
Electrolux business is affected by global economic conditions.
Current conditions in many of the economies in which Electrolux
operates and the global economy remain very uncertain. As a result,
it is difficult to estimate the global and regional economic develop-
ment for the foreseeable future. In addition, the business environment
and the economic condition of Electrolux markets are also influenced
by political uncertainties, including the current political situation in
the Middle East. A lengthy recession or sustained loss of consumer
confidence in the markets in which Electrolux operates could trigger
a significant industry-wide decline in sales and could also lead to
slower economic growth and a corresponding significant reduction
in demand. Electrolux generates a substantial portion of its net sales
from North America and Europe, both of which have experienced a
slow economy in the past. In the last two years, North America has
demonstrated a rebound in its economy. Recent years' terrorist
attacks have had a negative impact also on tourism, which has neg-
atively affected the performance of Electrolux Professional Indoor
business operations. These global and regional conditions could
have an adverse impact on the operations of Electrolux, with a result-
ing material adverse effect on results of operations and financial
condition.
Electrolux is subject to regulatory risks
associated with its international operations.
As a result of its worldwide operations, Electrolux is subject to a wide
variety of complex laws, regulations and controls, and various non-
binding treaties and guidelines, such as those related to employee
safety, employee relations, product safety and exchange controls.
Electrolux expects that sales to, as well as manufacturing in, and
sourcing from, emerging markets, in particular in China, Southeast
Asia, as well as Eastern Europe and Mexico, will continue to be an
increasing portion of its total operations. Changes in regulatory
requirements, economic and political instability, tariffs and other
trade barriers and price or exchange controls could limit its opera-
tions in these countries and make the repatriation of profits difficult.
In addition, the uncertainty of the legal environment in certain of the
countries in which it operates could limit Electrolux ability to enforce
effectively its rights in those markets. Electrolux products are also
affected by environmental legislation in various markets, which prin-
cipally involves limits for energy consumption (which relate to certain
of its white goods products) and emissions (which relate to certain
of its outdoor products that are powered by gasoline) as well as the
obligation to recycle waste of electrical products.
Electrolux is subject to certain environmental risks.
Electrolux operations are subject to numerous European Union, or
EU, national and local environmental, health and safety directives,
laws and regulations, including those pertaining to the storage,
handling, treatment, transportation and disposal of hazardous and
toxic materials, the construction and operation of its plants and
standards relating to the discharge of pollutants to air, soil and water.
Although Electrolux believes its operations are in substantial com-
pliance with presently applicable environmental, health and safety
laws and regulations, violations of such laws and regulations have
occurred from time to time and may occur in the future. In addition,
risks of substantial costs and liabilities, including for the investigation
and remediation of past or present contamination, are inherent in
Electrolux ongoing operations and its ownership or occupation of
industrial properties, and may arise specifically from its planned
closure of certain of its manufacturing plants.