Schneider Electric SA Annual Report 2002 Building a New Electric World Annual report 2002 Contents Chairman’s Message Key Figures Board of Directors, Management 1 2 4 Business Presentation 7 12345678- Background (industrial background, ownership background, current business) 7 Operations 8 Strengths 8 Strategy 8 Products, equipment and services 10 Markets 11 Product distribution and customer base 13 Production 14 General Presentation of Schneider Electric SA 1234567- General information Capital Ownership structure Employee profit-sharing and stock purchase plans Stock buybacks Stock market data Investor relations Corporate Governance 1- Board of Directors 2- Organizational and operating procedures of the Board of Directors 3- Board meetings in 2002 4- Committees of the Board of Directors (members, operating procedures and meetings) 5- Interests and compensation of corporate officers and executives 6- Agreements involving Directors 7- Auditors 8- Shareholders’ rights and obligations Business Review 1234567891011- Economic environment Highlights of the year Research and Development Quantitative and Qualitative Disclosures about Market Risk Claims, litigation and other risks Insurance Sustainable Development Outlook for 2003 Consolidated financial statements Company financial statements Subsidiaries Consolidated and Parent Company Financial Statements 1- Consolidated statement of income 2- Consolidated statement of cash flows 3- Consolidated balance sheet 4- Consolidated statement of changes in shareholders’ equity 5- Notes to the consolidated financial statements 6- Auditors’ report on the consolidated financial statements 7- Financial statements of Schneider Electric SA 8- Auditors’ report on the financial statements 9- Subsidiaries and affiliates 10- List of Securities at December 31, 2002 11- Five-year financial summary Combined Annual and Extraordinary Shareholders’ Meeting of May 16, 2003 1234- Report of the Board of Directors to the Annual General Meeting Auditors' special reports Resolutions Person responsible for the reference document and persons responsible for the audit of the accounts 5- Cross references to COB regulations 15 15 15 18 18 21 22 24 25 25 28 29 29 31 33 33 34 36 36 36 40 40 45 46 47 54 55 59 59 60 60 61 62 64 65 107 108 121 122 124 125 126 126 129 132 139 140 Chairman’s Message 1 In 2002, Schneider Electric turned in a good operating performance in a difficult environment. We begin 2003 in a particularly strong and solid position. Henri Lachmann Business slowed significantly at the beginning of the year, especially in North America where we generate 30% of our sales, and then stabilized at a very low level in the developed countries. During 2002, Schneider Electric successfully maintained a good operating performance thanks to the responsiveness and hard work of all our team members. The gross margin widened by 1.3 points to 41.5% from 40.2% in 2001. Net cash provided by operating activities totaled € 968 million, or 10.7% of sales versus 9.8% the year before, demonstrating our strong ability to generate cash. And free cash flow was up 10% to € 592 million thanks to tight control over capital spending and a reduction in working capital requirement. We have weathered the recession much better than most of our competitors thanks to the continuous improvement programs initiated in 1999 and accelerated through our NEW2004 program. Today, Schneider Electric is one of the most profitable companies in its industry. The year was shaped by the introduction of NEW2004, our ambitious and motivating company program focused on growth and efficiency. The program’s headline goal is an operating margin of 14% in 2004. The Company is committed to achieving annual savings of € 325 million over a full year in 2004. We are already halfway there with savings of € 174 million recorded in 2002. To achieve our target, we have taken measures to adapt our organization and cost structures by closing units in the United States, reducing medium voltage capacity in Western Europe, outsourcing manufacturing in certain cases and enhancing our most competitive sites, notably in Mexico, Poland and high-growth regions like China. At the same time, we have rightsized our workforce and taken measures to improve quality and industrial and supply chain productivity across the enterprise. Backed by shareholders’ equity of nearly € 8 billion and net cash of € 844 million at December 31, 2002, we are in a position to take advantage of the best acquisition opportunities. Our finances were strengthened by the divestment of Legrand, which, although unfortunate, was concluded under good conditions. The Company ended the year with a particularly solid balance sheet. Chairman and Chief Executive Officer We are also prepared to pragmatically pursue our share buyback program to enhance our shareholders’ investment. In light of the uncertainty clouding the global economy, Schneider Electric has decided to focus on organic growth in 2003. Our main strategic priorities will be to maintain a strong pace of innovation, notably through technological partnerships, enhance our lineup and enter new market segments by capitalizing on our experience and skills. At the same time, we will continue our policy of selective acquisitions in the promising areas of ultraterminal distribution, industrial and building automation, secure power supply and high value-added services to optimize our customers’ equipment and electrical networks. Acquisitions of this type will help widen our potential available market. This assertive strategy is designed to position us as the leader in Power & Control through our three main brands: Merlin Gerin, Telemecanique and Square D. We intend to leverage our good financial situation to get the most out of our vibrant teams, excellent geographic coverage and strategically aligned portfolio of products and services. In 2003, we will step up measures to improve our gross margin, adapt our manufacturing resources, reduce base costs and enhance profitability. Today, we are midway through our NEW2004 program dedicated to growth and efficiency. Our teams will continue to advance in 2003 to fulfill our mission of giving the best of the New Electric World to everyone, everywhere at any time. Henri Lachmann Chairman and Chief Executive Officer Key Figures 2 A solid business and operating performance in a difficult environment Consolidated sales Gross profit Operating income (€ billion) (€ million and as % of sales) (€ million and as % of sales) 42.1% 43.1% 9.70 7.63 9.83 8.38 43.1% 4,083 9.06 3,612 3,950 12.6% 3,755 1999 2000 2001 2002 Sales declined 7.8% in 2002 due to difficult business conditions and an unfavorable exchange rate to the euro. At constant scope of consolidation and exchange rates, sales decreased 5.2%. 1998 11.5% 11.4% 1,298 11.2% 3,284 1998 13.4% 41.4% 40.2% 1,057 1,116 1,040 2001 2002 853 1999 2000 2001 2002 As part of the NEW2004 program, Schneider Electric is committed to improving its gross margin by one point each year. Thanks to the initial effects of the productivity plans launched at the beginning of the year, we met this target in 2002. 1998 1999 2000 Schneider Electric achieved an operating margin of 11.5% in 2002, demonstrating our ability to deliver good operating results despite the unfavorable environment. Schneider Electric remains one of the most profitable companies in its industry. Forefront positions worldwide 2002 sales by core business 2002 sales by geographic division 2002 workforce by geographic division (€ billion) (Average full-time and temporary employees) 1.82 30% 4.64 70% 2.60 ● Electrical distribution ● Industrial control and automation 17% ● Europe ● North America ● International 59% 24% ● Europe (44,078 employees) ● North America (17,625 employees) ● International (13,111 employees) 3 Resources for aggressive growth A strong ability to generate free cash Net cash provided by operating activities Net income (loss) Free cash flow* (€ million) (€ million and as % of sales) (€ million and as % of sales) 10.2% 9.7% 11.1% 929 991 6.5% 10.7% 9.8% 5.6% 968 966 4.0% 625 491 741 5.5% 422 409 424 333 (986) 1998 1999 2000 2001 2002 In 2002, Schneider Electric again demonstrated its strong ability to generate cash despite lower sales. Net cash provided by operating activities was on a par with 2001 and represented 10.7% of sales. This is a crucial advantage for deploying our growth strategy. 1998 1999 2000 2001 2002 Net income remained solid in 2002 at € 422 million. This compares with a loss of € 986 million in 2001 stemming from an exceptional € 1,400 million provision on our Legrand shares. 1998 538 592 2001 2002 2.5% 1999 243 2000 Free cash flow rose 10% in 2002 thanks to good control over capital spending and reduced working capital requirement. Free cash flow represented 6.5% of sales. * Before dividend payment. Net cash 2002 operating margin by core business 2002 operating margin by geographic division Debt to equity (%) 47% 12.5% 8.7% 12.2% 13.5% 12.6% 13.6% 12.6% 27% 28% 9.6% 8.2% 8% 7% 2001 2002 ● Electrical distribution ● Industrial control and automation 2001 ● Europe ● North America ● International (11%) 2002 1998 1999 2000 2001 2002 High cash flow combined with the proceeds of the Legrand divestment has given Schneider Electric a particularly solid balance sheet, with net cash of € 844 million at December 31, 2002. 4 Corporate Governance Board of Directors Henri Lachmann, 64 Willy R. Kissling, 58 Chairman and Chief Executive Officer Independent non-executive Director* Chairman and Chief Executive Officer of Unaxis Corporation Claude Bébéar, 67 Chairman of the Supervisory Board of Axa Gérard de La Martinière, 59 Daniel Bouton, 52 Independent non-executive Director* Chairman and Chief Executive Officer of Société Générale Executive Vice-President, Finance, Budget Control and Strategy of Groupe Axa René Barbier de La Serre, 62 Thierry Breton, 48 Independent non-executive Director* Chairman and Chief Executive Officer of France Telecom Independent non-executive Director* Corporate Director James Ross, 64 Alain Burq, 49 Member of the Supervisory Board of the “Schneider Actionnariat” corporate mutual fund Independent non-executive Director* Chairman of National Grid Transco Piero Sierra, 68 Michel François-Poncet, 68 Vice-Chairman of the Board of BNP-Paribas Hans Friderichs, 71 Independent non-executive Director* Special Advisor for the administration of Pirelli’s international companies Independent non-executive Director* Corporate Director Board Secretary James F. Hardymon, 68 Philippe Bougon Independent non-executive Director* Corporate Director Remunerations and Appointments Committee Michel François-Poncet, Chairman Claude Bébéar James F. Hardymon Henri Lachmann René Barbier de La Serre * Independent non-executive Director as defined in the Bouton report on corporate governance. Audit Committee Gérard de La Martinière, Chairman René Barbier de La Serre James Ross Piero Sierra Auditors Statutory Auditors Barbier Frinault et Autres / Ernst & Young PricewaterhouseCoopers Audit Substitute Auditors Jean de Gaulle Dominique Paul Schneider Electric Management Corporate Divisions Developments - Industry Strategy and Market Development Bernard Delvallée Claude Ricaud Claude Breining Joël Karecki Purchasing Science and Technology Business Development Strategy and Planning Noël Girard Laurent Vernerey Pascal Charriau Jean Kieffer Electrical Distribution Manufacturing and Logistics Residential Buildings Energy and Infrastructure Steve Little Daniel Victoir Michel Crochon Patrice Lagarde Information Systems Quality Industry Services Alain Marbach Philippe Crolet Automation Buildings 5 Executive Committee Henri Lachmann Antoine Giscard d’Estaing Jean-François Pilliard Eric Pilaud Marcel Torrents Chairman and Chief Executive Officer Executive Vice-President Finance and Control Legal Affairs Executive Vice-President Human Resources and Communication Executive Vice-President Strategy and Market Development Executive Vice-President Developments – Industry Chris Richardson Jean-Pascal Tricoire Christian Wiest Executive Vice-President North American Division Executive Vice-President International Division Executive Vice-President European Division Functional Divisions Operating Divisions Dominique Bellot Guy Dufraisse Gaël de La Rochère Jean-Pierre Chardon Gérard Fauconnet Germany Africa United Kingdom France Communication Jacques Billiard Hal Grant Guy Lemarchand Julio Rodriguez Jean Netter Middle East Southeast Asia Spain and Portugal Schneider Electric Ventures Christian Wiest Amy Huntington Russell Stocker Pedro Salazar Nordic Countries, Benelux, Ireland and Switzerland Schneider Global Business Development Specialist Business Units (Bergher Lahr, Crouzet, Ensys, Infra+, Num, Selectron) Greater China Legal Affairs Carlos Siria Rune Johansson René Orlandi Pierre Tabary Dominique Devinat Italy Pacific NEW2004 program Greater India Central and Eastern Europe/CIS Jean-Pascal Tricoire Flemming Tomdrup Gilles Vermot-Desroches South America and Caribbean Lexel Sustainable Development Guy de Place Northeast Asia 7 Business Presentation 1 - Background In December 2002, Schneider Electric acquired Japan’s Digital Electronics Corporation, the world leader in human-machine Industrial background interface. Schneider Electric is now specialized in the manufacture Schneider Electric SA is a Société Anonyme (joint-stock corporation) incorporated in France on December 2 and 4, 1871. However, the Company traces its history back to 1836, when Adolphe and Joseph-Eugène Schneider acquired steel foundries in Le Creusot, France that were experiencing financial difficulties. In 1838, they formed Schneider & Cie. and sale of products and equipment for electrical distribution, industrial control and automation. Ownership background By 1981, the Company’s ownership structure consisted of a long chain of holding companies, interlocked via numerous From that point until the mid-twentieth century, the Company steadily built a presence in heavy mechanical engineering and transportation equipment, with interests in shipbuilding, railroad equipment and bridge and tunnel building. By the end of the nineteenth century, Schneider had also established a position in electricity. cross-shareholdings, that separated the parent company, Gradually, however, the Company grew into a huge conglomerate that lacked strategic direction. From 1981 to 1997, it refocused on electricity and pulled out of a number of businesses, including steel, machine tools, shipbuilding, railways, private telephone systems and engineering. At the same time, it pursued a strategy of acquisitions in electricity and automation, bringing in Telemecanique in 1988 and Square D in 1991. The refocusing process was completed in 1997 with the sale of Spie Batignolles. the Company changed its name to Schneider Electric SA, SPEP, from its operating subsidiaries. This system had been set up over the preceding decade. Over the next fourteen years, the ownership structure was rationalized by merging the various holding companies to create a single parent company, Schneider SA. In 1999, which owns all outstanding shares of Schneider Electric Industries SAS. Schneider Electric SAS has foreign subsidiaries of its own. Current business Schneider Electric is the worldwide specialist in electrical distribution, with a focus on medium, low and final low voltage, and in industrial control and programmable logic controllers. In 1999, the Company acquired Lexel A/S, Europe’s second largest supplier of low voltage final distribution products and systems, with operations primarily in Northern Europe. It operates in 130 countries and has 74,814 employees. In 2000, Schneider Electric acquired Crouzet Automatismes, a French leader in electronic control and small automation devices, and Positec, a European leader in motion control. Telemecanique and Lexel brand names. In 2001, Schneider Electric made a public offer to purchase Legrand in exchange for shares as part of a proposed merger project. When the offer closed in July 2001, the Company held 98.1% of Legrand. In an initial decision dated October 10, 2001, the European Commission vetoed the merger, and in a second decision dated January 30, 2002, it ordered the two companies to separate as quickly as possible. As a result, Schneider Electric sold its interest in Legrand to the KKR-Wendel Investissement consortium even though the Court of First Instance of the European Communities overruled the Commission’s decisions on October 22, 2002. The Company manufactures electrical switchgear and equipment under the Merlin Gerin, Modicon, Square D, The Company enjoys leading global positions in the large majority of its businesses. The competition breaks down into two categories: • Large non-specialist manufacturers with diversified business bases that offer little or no synergy. These include ABB, General Electric, Mitsubishi Electric and Siemens. • Smaller specialist manufacturers, such as Eaton, Hager and Legrand in electrical distribution and Omron and Rockwell Automation in industrial control and automation. Schneider Electric is the largest player in this second category. It is not dependent on any single patent, license or supply contract. Business Presentation 8 2 - Operations Schneider Electric is one of the world’s leading manufacturers of equipment for electrical distribution, industrial control and automation, with operations in 130 countries, 192 production sites, 150 service centers and some 13,000 sales outlets through its distributors. In 2002, the Company generated total sales of € 9,060 million with an average weighted workforce of 74,814 employees. As the world’s Power & Control specialist, Schneider Electric is involved in all stages of the electrical transmission and distribution process, offering products, equipment and services to control, monitor, protect and supervise machines and installations in industry, infrastructure, and industrial, commercial and residential buildings. Operations are divided into three geographic divisions: Europe, North America and International. The financial statements and quarterly sales reports are also presented by division, in keeping with French generally accepted accounting principles. Schneider Electric primarily operates under the Merlin Gerin, Square D and Telemecanique brand names. These brands’ high global recognition and excellent reputations are a critical strength for the Company. Square D is extremely well-known in the United States, where it generates most of its sales, while Telemecanique and Merlin Gerin are flagship brands in France and the rest of Europe. 3 - Strengths Significant specialization and market share. Schneider Electric is the only company worldwide focused exclusively on electrical distribution, industrial control and automation. This specialist profile has allowed us to win market share and penetrate new markets around the globe. The Company ranks among the world leaders in low voltage switchgear and equipment and holds forefront positions in medium voltage and industrial automation. Solid reputation. Merlin Gerin, Telemecanique and Square D, with their strong reputations for quality and safety, are among the most powerful brands in our industry. Because using electricity always carries some risk, we have put together a highly professional lineup that has won over a wide array of loyal customers around the world. We have successfully leveraged this reputation to attract new customers, sell considerable volumes (including replacement products) and develop a broad range of innovative products, equipment and services for consumers worldwide. Growth potential. Based on a vast study to assess the power and control needs of end users in our core markets (residential, buildings, industry, energy and infrastructure), we estimate our potential market at around € 210 billion. We have seen high demand for increasingly intelligent products that can communicate with each other or be operated remotely via the Internet. Strong partnerships with distributors. We market a significant percentage of our products through distributors to reach a broad customer base. We have close partnerships with large international distributors, as well as with local distributors, wholesalers and non-specialized retailers. Global presence. Schneider Electric has operations worldwide to support its increasingly international business. We benefit from a strong presence in most of our main markets. In continental China, for example, we have expanded rapidly from sales of € 91 million in 1995 to € 547 million in 2002. This global coverage gives us three major competitive advantages, by allowing us to 1) seize market opportunities as they arise and maximize our sales, 2) reduce our exposure to economic cycles in our local markets, and 3) serve multi-national companies who require product platforms that can be deployed anywhere in the world. International lineup. Increasingly, we work to develop and patent products that can be sold worldwide. Merlin Gerin low voltage circuit breakers and Telemecanique contactors, for example, are sold in virtually all our main markets and, like other global products, enjoy a solid reputation for reliability and technological excellence. In addition, we try to standardize base components as much as possible. Product design and esthetics are then adapted to suit local requirements. This internationalization strategy allows us to reach a maximum number of markets while optimizing production costs. 4 - Strategy Electrical distribution, industrial control and automation will play a growing role in the 21st century. A new era has dawned in which electricity, automation and communication technologies are converging. Smart buildings, with electrical devices that can be remotely programmed and monitored and that can communicate with each other and users via the Internet, are 9 gradually becoming commonplace. The same is true for transparent factories and infrastructure, in which electrical equipment can communicate and be operated remotely. In response, we have made it our mission to supply customers in our various markets with reliable, high quality products to help them create value in their core businesses. We also want to offer them comprehensive, personalized solutions and services to met their needs in more complex areas of power and control. Our ambition is to expand the use of our products and carve out a position as the unrivaled global leader in this growing market. To make this vision reality, we have deployed our strategy in several key directions: Expand our product lineup. Demand is high for new products and services in our main markets. According to our estimates, electrical distribution, industrial control and automation could represent a potential market of at least € 210 million. As a result, we are working to expand our product lineup to better serve the building, industry, energy and infrastructure markets. We have also identified an entire range of new products and services to extend our current offer. We are convinced that we can considerably increase our sales and market share by developing products internally, making strategic acquisitions and adding services to our products. Develop Transparent Ready™ products, equipment and services. Leveraging innovative products to widen our market share means developing the Transparent Ready™ concept, which harnesses the power of the Internet for electrical distribution, industrial control and automation. In the Building market, Transparent Building™ applications are revolutionizing building management by making it possible to monitor buildings and all the functionalities of existing systems via a local area network (LAN). Solutions have been designed to cover all functions, from electricity, lighting and shade management, access control and intruder alert, to air conditioning, elevators, and fire detection and alarms. In the Industry and Infrastructure markets, Transparent Factory™ solutions use automation systems to enhance the processing and communication capabilities of industrial system components. Preventive maintenance can be carried out remotely, making for less downtime and greater efficiency and flexibility. In addition, virtually real-time harvesting of data on energy consumption in one or several sites allows users to manage their energy costs even more effectively. Enhance our approach with Global Strategic Accounts. Our focus on Global Strategic Accounts is a key part of our strategy. Through our dedicated Schneider Global Business Development (SGBD) unit, we supply our main international customers with technological, logistic and contracting solutions that can be deployed around the world. SGBD’s mission is to help make us the benchmark for power and control with a selected group of international customers. We currently leverage our skills in a wide range of sectors, from microelectronics to pharmaceuticals to automobiles, to continuously enhance the productivity of 85 Global Strategic Accounts. In this way, SGBD serves as a springboard for getting the most out of the potential offered by the power and control market around the world. Forge partnerships and alliances. We have entered into partnerships and alliances with companies outside our industry to enhance our innovation capabilities, speed development of new products and penetrate new markets. Our joint venture with Thomson Multimedia, for example, is involved in developing power line carrier technologies to transmit digital data over electrical wires. We also have an agreement with Toshiba that gives us access to the traditionally closed Japanese market and makes us the world leader in speed drives. We intend to pursue this strategy of joint ventures, partnerships and alliances to extend our lineup and enter new markets. Focus on targeted acquisitions. Schneider Electric makes selective acquisitions to penetrate new markets, expand its lineup and develop synergies with its existing product portfolio. The acquisition of Lexel, for example, strengthened our position in the ultraterminal segment and opened the door to the fast-growing Voice-Data-Image market. The acquisition of Crouzet, a French leader in electronic control and small automation devices, and of Germany’s Berger Lahr (formerly Positec), a European leader in motion control, allowed us to expand our automation lineup. Backed by these three companies, we will support the development of our lineup in our main markets with new targeted acquisitions. In late 2002, we acquired a majority interest in Japan’s Digital Electronics Corporation, the world leader in human-machine interface products such as industrial PCs and graphic and touch terminals. These products are a critical component in Business Presentation 10 the networked, web-enabled architectures that we offer to all our markets. With this acquisition, we have gained a foothold in a new fast-growing market segment and improved our access to OEMs, notably in Japan. Combine a global vision and local deployment. As we pursue a comprehensive strategy of achieving rapid growth and developing our lineup, we also intend to strengthen our local skills in sales, marketing and management. This way, local teams can make the necessary decisions to select the best partners and enter into important contracts in keeping with the Company’s profitability targets, while ensuring customer satisfaction and product and service safety. Although products for the international market represent some 40% of our sales, we will continue to differentiate the rest of our lineup to meet local specifications and standards. Projects require the deployment of a comprehensive, customized set of products, systems and/or equipment. We also offer and develop three types of services: Traditional services that support our products (warranties, after-sales service, training, on-line assistance and maintenance). The scope of these services varies depending on the market access channel. More sophisticated services concerning the technical side of our offer, such as retrofits, capacity extension, upgrading, etc. High value-added services to enhance the performance of industrial installations and power grids. Electrical distribution Improve our competitiveness. One of the objectives of our NEW2004 program is to enhance competitiveness by shortening time to market, globalizing sourcing and improving quality. Our electrical products and equipment are generally classified by voltage. The portfolio currently includes high, medium and low voltage products and equipment. Strengthen our products’ image. We are committed to Low voltage: Electrical distribution products up to 1 kV for industrial, commercial and residential buildings. This sub-category includes wiring products and final low voltage/ultraterminal equipment such as circuit breakers, switches and sockets. strengthening the image and brand awareness of our products to differentiate ourselves even more clearly from our rivals. 5 - Products, equipment and services Our lineup of products and equipment covers all stages of electrical transmission and distribution, as well as industrial control and automation. The portfolio breaks down into five broad categories: Catalog products, such as contactors and miniature circuit breakers, that do not need to be adapted to specific requirements. Customized products, such as certain types of switchgear. These products are assembled from core catalog components to suit each customer’s needs. Systems, such as busbar trunking used for electrical transmission and distribution in ceilings and raised floors. These systems are built from groups of products offering similar functions. Equipment, such as medium voltage substations and switchboards, that combine a set of related products with different functions in a single enclosure or casing. Projects, such as designing and implementing an electrical distribution network for a commercial or industrial building. Medium voltage: Electrical switchgear and equipment from 1 kV to 52 kV. The products in this sub-category are generally used to transform and manage high voltage electricity from the distribution grid. The medium voltage power is then sent directly to end users in industrial buildings and large commercial installations or transformed into low voltage power for small commercial buildings and homes. High voltage: Electrical switchgear and equipment from 52 KV to 800 kV. The equipment in this sub-category is generally used by electric companies for power generation, transmission and distribution. In January 2001, we transferred our highvoltage business to VA Tech Schneider High Voltage GmbH, a joint venture in which we hold a 40% interest. Industrial control and automation This category includes industrial control products for controlling and supplying power to industrial equipment and automation solutions, notably programmable logic controllers, which are generally used for end-to-end control of assembly lines. 11 Sales by product category Category % sales 2000 % sales 2001 % sales 2002 Electrical distribution Low voltage (inc. Ultraterminal) 48% Medium voltage 18% High voltage and other 5% 51% 19% 0% 51% 19% 0% Industrial control and Automation 30% 30% 29% Schneider Electric is committed to constantly improving and extending its lineup of products, equipment and services. Recent developments include: (1) The Ikeos “all in one” solution launched in 2001 for controlling and monitoring commercial and residential buildings. This solution combines nine key functions (programmer, timer, counter, etc.) in a single, easy-toprogram product. (2) The Clario Helios modular circuit breaker, also introduced in 2001. This product was specifically designed to meet the needs of customers in southern Europe. (3) The Masterpact NT and NW power circuit breakers and the Merlin Gerin Evolis circuit breakers, launched in 1999 and 2000, respectively. Masterpact NT is the world’s smallest 1,600 A circuit breaker while the Masterpact NW is the most powerful in the market, with an interrupting rating of up to 200 kA without fuses. The Merlin Gerin Evolis MV vacuum circuit breaker was developed to replace traditional circuit breakers and to meet the needs of increasingly environmentally-conscious users in Western countries and emerging economies such as China. (4) The new TeSys range of circuit breakers, contactors and overload relays for motor starters, launched in 2000. TeSys’ patented technology cuts installation time in half, since no tools or wires are required for connection. (5) The Okken switchboard, introduced in 2000. Okken was designed for power distribution up to 6,300 A and for motor control and monitoring. Users can control distinct portions of industrial processes without shutting down the whole system. In addition, the distribution and motor control feeders can be combined in the same column and feeders can be added easily and safely without cutting the power supply. (6) Products and equipment that leverage web technologies to optimize performance in electrical distribution, industrial control and automation. With our new Transparent Ready™ solutions, operators can access all the information they need about an installation using an ordinary browser, anywhere, anytime. The solution enhances competitiveness by creating closer and broader links between the different people involved, as well as among major corporate functions such as management, production, services and cost accounting. By facilitating access to information, Transparent Ready™ creates a real competitive advantage for customers because they can make better decisions and get the greatest return out of their electrical distribution, industrial control and automation investments. (7) New generation programmable logic controllers. Schneider Electric has recently implemented a redeployment plan to enhance our PLC lineup with new software, interface products and variable speed drives. When the program is completed, we will be able to help customers optimize automation device operation by leveraging Internet resources and connections to remotely control, manage, maintain, operate and monitor automated production lines. The systems will use open, rather than proprietary standards. We also plan to gradually extend this function to all smart products for automation systems. In 2002, for example, we launched the Twido PLC for automating simple installations and small repetitive machines. (8) Services. The lineup is being rapidly expanded, particularly in online services. We support our customers for the entire life of installed products and equipment by providing high value-added services such as on-line training and assistance, remote diagnostics, technical support, and on or off-site maintenance and management contracts. We also help them evaluate and optimize their energy consumption and offer networked and on-site management services for spare parts, as well as inventory and quality control management. 6 - Markets In response to changing demand, we have decided to adjust our approach to provide a more comprehensive service to customers, who increasingly want to work with a single worldclass supplier. This end-to-end approach that takes local characteristics into account is designed to meet all of our Business Presentation 12 customers’ related needs in four core markets: residential, buildings, industry and energy and infrastructure. Residential, commercial and industrial buildings are our biggest market, representing some 51% of sales in 2001 and 2002. This market covers our entire lineup for electrical distribution, management and optimization, as well as networks for transmitting data in homes, apartment buildings, offices, hotels, hospitals, shopping centers, sports and cultural centers and industrial facilities. Renovation and retrofitting account for around 50% of demand. In 2002, products and equipment for commercial and industrial buildings represented around 42% of total sales, versus 9% for residential buildings. The Company offers building owners, contractors, systems integrators, electricians, panelbuilders and distributors a broad range of products and services covering all aspects of electrical distribution, including low voltage equipment, medium voltage distribution equipment, building management and safety systems, control, monitoring and automation equipment, and wiring and connection systems for Voice-Data-Image (VDI) technology. Our customers work exclusively or primarily in local markets. Our most attractive growth opportunities lie in home renovation in Europe and the United States and in large complexes in Eastern Europe, Asia, Latin America and other developing economies. Commercial buildings (notably heating, air conditioning and lighting systems), building control and related services are another growth avenue. Industry, our second-largest market, accounted for around 32% of sales in 2001 and 2002. We offer companies in a large number of sectors a wide range of products, equipment and services to distribute and manage electricity, control and monitor machines, automate industrial processes, and supervise and manage industrial sites and their consumption. Our main customers are large multinational manufacturers, systems integrators, OEMs, small businesses, electricians, panelbuilders and distributors. Our principle growth levers are global accounts and OEMs, notably in the food and beverage, pharmaceuticals, automobile, semi-conductor and packaging industries. These customers offer strong potential for new generations of our products and services.Strengthening partnership ties with our main customers is a priority objective in this market. With this in mind, we have created application centers to design and develop new products with OEMs and their customers. In addition, we plan to set up skills centers to provide high-value added support to help enhance the performance of customers who use our products and equipment. We are convinced that this collaborative approach will become a major growth driver. The energy and infrastructure market accounted for around 17% of sales in 2002 and 2001. Infrastructure covers all of our products, equipment and services for communication, air, rail, road and maritime transportation, water, gas and oil transport and water and wastewater treatment. A number of products, such as surveillance cameras, leverage web technologies to identify failures wherever uninterrupted service and safety are a priority. We also offer Transparent Ready™ solutions that allow products to communicate with each other and be operated remotely, thereby improving infrastructure performance, competitiveness and profitability. Our customers are infrastructure operators, engineering firms, systems integrators, panelbuilders, OEMs and contractors. The energy market covers the generation, transmission and distribution of electricity. Schneider Electric serves power companies, contractors, systems integrators, OEMs and panelbuilders with a lineup that integrates new web technologies and network innovations designed to optimize the quality and cost of each distributed kilowatt hour. Growth in the energy market should be driven by deregulation of the electricity and gas markets, the development of renewables and rising demand for products and services that improve electrical distribution performance and cost. In addition, distributed generation, supported by new technologies such as fuel cells and the weakening of centralized grids (notably in North America), should continue to enjoy very strong growth. To get the most out of this situation, we offer comprehensive solutions by leveraging our leadership in medium and low voltage, our automation lineup and our partnership with VA Tech GmbH in high voltage transmission. The global infrastructure market should continue to expand, especially with rising demand for voice and data transmission and Internet-related infrastructure. Growth will also be supported by stepped-up privatization of public infrastructure and the increasing use of new information and communication technologies, which open up new markets such as systems operation and maintenance, metering and remote payment. 13 7 - Product distribution and customer base Product distribution Electrical equipment distributors rank among our major customers. We are a key partner to distributors worldwide, who account for around 60% of our total sales and offer a network of 13,000 sales outlets. This close relationship gives us a real competitive advantage, as distributors provide a single point of access for customers and can combine products into packages. In addition, they use their own sales forces to negotiate individual transactions, freeing up the Schneider Electric sales team to concentrate on customers’ general needs. In addition to local and independent distributors, who represent some 70% of all locally managed flows, Schneider Electric works with seven international distribution groups: Rexel and Sonepar, two French companies that rank among the world’s largest distributors; Netherlands-based Hagemeyer; Graybar and Grainer in the United States; Ced-Edmundson in the United Kingdom and Solar Nordic in the Netherlands. We also sell products through large home improvement chains such as Home Depot and Lowes in the US and Kingfisher in the UK for the non-specialist building renovation market. We use specialist distribution channels for our highly technical products such as human machine interface and VDI transmission equipment, PLCs and industrial software. The remaining 40% of sales are handled by: Panelbuilders, OEMs and systems integrators. Contractors, ranging from large firms specialized in installing equipment and systems to small specialized and general electricians. Specifiers, including design and engineering firms, consultants and architects, and systems specialists. Lastly, we also sell directly to end customers. Customer base Distributors Around the world, Schneider Electric is a leading supplier to distributors. Our main customers in this segment are distributors of electrical equipment and industrial automation devices. The diversity of the customer base is a major strength. Orders placed with distributors by electricians, contractors and panelbuilders significantly influence demand for electrical distribution products. Specifiers, such as architects and building designers, represent an indirect customer group in that the functionalities in their recommendations and specifications channel demand towards our products. We also sell equipment, services and projects directly to large customers, notably contractors, building owners, electric utilities and major end users such as public services and multinational firms. Contractors Contractors who install electrical distribution, industrial control and automation products only switch to a new supplier when they see an obvious advantage such as quality, ease of installation or efficiency. To promote new products, we train and support the people who install them. In all our host countries, we have help desks that take orders and give advice by telephone. We also talk regularly with local associations and professional groups and have set up an Internet portal to circulate information about new products. In the front lines, our sales force and marketing teams around the world keep customers abreast of product innovations and upgrades and help them get the most utilization value out of our products. Lastly, we make our new products or upgrades as easy to install as possible. Global Strategic Accounts While distributors are critical to our business, we also sell directly to a wide range of end users and international OEMs. Our dedicated Schneider Global Business Development (SGBD) unit was created to serve these customers. In 2002, they represented around 7.4% of total sales. Our top SGBD accounts are DaimlerChrysler, Renault, General Motors, Procter & Gamble, Bristol-Myers Squibb, Nestlé, IBM, Motorola, Caterpillar, Emerson, Areva, Faurecia, Chevron Texaco, Telefonica, Texas Instruments and Thyssen Krupp. The number of accounts has grown steadily, from 20 in 1999 to 85 in 2002, and we will continue to add new customers to the list. To ensure that each global account receives the same quality of service around the world, we have set up an organization in which our subsidiaries and regional agencies can cooperate to standardize the design, production and installation of the products, equipment, projects and services that our customers need. In addition, each Executive Committee member Business Presentation 14 oversees one or several global accounts as part of SGBD. The sponsor meets with a senior executive from the customer company at least once a year to guarantee that Schneider Electric understands and responds to the account’s specific needs. In most cases, the relationship is formalized in a comprehensive Program Alliance that sets out agreements concerning prices and/or services, development and product modifications. SGBD allows us to meet our global accounts’ needs more effectively, support our worldwide presence and optimize sales with these major customers. 8 - Production Schneider Electric has 192 production sites worldwide. Of these, 55 are global facilities that manufacture products, equipment and components for our three operating divisions. We have 29 global plants in France, 19 in other European countries, two in North America and five in the rest of the world. In each country, production units are located as close as possible to the markets they serve. Decisions on where to set up local and global plants are generally based on criteria such as access to suppliers, production costs, availability of a trained workforce and logistics. Although most of our products are built from standardized components so that they can be sold around the world, they are also adapted to local standards and requirements. Most of our products and switchgear also include key functions such as smart capabilities that allow for the transfer of images or data. Design and esthetics are sometimes adapted to local needs, but we focus heavily on standardizing key components to achieve scale economies in production. A switch’s contact mechanism, for example, will be standard but the outer shell, which affects appearance and ergonomics, will vary from region to region. This global/local approach helps us optimize profitability. While we do tailor our products and equipment to local standards, the majority of our lineup complies with worldrecognized International Electrotechnical Commission (IEC) standards. In North America, our products generally meet standards set by the National Electrical Manufacturers Association (NEMA) or American National Standards Institute (ANSI), which are more widely used in the United States. Since our products comply with the dominant standards in our host markets, we are able to meet most of our customers’ needs. Raw materials We use raw materials such as carbon steel, aluminum, carbon and thermoplastics, as well as electronic components to manufacture our products. Materials such as carbon steel are sourced from major international suppliers like Nippon Steel, Lati and Mitsubishi, while components are supplied by large or medium sized companies like Hussey Copper and Nypro. In 2002, raw material and component purchases totaled € 2.8 billion. The prices of the raw materials we use have been somewhat volatile. 15 General Presentation of Schneider Electric SA 1 - General information Schneider Electric SA is a Société Anonyme (joint-stock corporation) governed by the French Commercial Code, with issued capital of € 1,830,503,240. Its head office is located at 43/45, boulevard Franklin-Roosevelt – 92500 RueilMalmaison, France. The Company is registered in Nanterre under no. 542 048 574, business identifier code (APE) 741J. Schneider Electric SA was founded in 1871. The Company, which was called Spie Batignolles, changed its name to Schneider SA when it merged with Schneider SA (formerly SPEP) in 1995, and then to Schneider Electric SA in May 1999. Its term is up to July 1, 2031, and its summarized corporate purpose is to operate, directly or indirectly, in France and abroad, any and all businesses related to electricity, industrial control and general contracting, as well as to carry out any and all commercial, securities, real estate and financial transactions (Article 2 of the bylaws). Schneider Electric’s fiscal year runs from January 1 to December 31. The bylaws, minutes of Annual Meetings, Auditors’ Reports and other legal documents concerning the Company are available for consultation at the Company’s head office (Board of Directors’ Secretariat) located at 43/45 boulevard Franklin-Roosevelt – 92500 Rueil-Malmaison, France. 2 - Capital Capital stock and voting rights The Company’s capital stock at December 31, 2002 amounted to € 1,926,503,240, represented by 240,812,905 shares with a par value of € 8.00, all fully paid up. A total of 250,425,558 voting rights were attached to the 240,260,029 shares outstanding at December 31, 2001, as approved by the Annual Shareholders’ Meeting of May 27, 2002 (information published in the “BALO” legal gazette dated June 7, 2002). General Presentation of Schneider Electric SA 16 Changes in capital stock The following table shows changes in Schneider Electric SA’s capital stock and additional paid-in capital over the past five years, through the exercise of warrants and stock options, the conversion of bonds, the issuance of shares to the Employee Stock Purchase Plan, the May 5, 2000 cancellation of shares and the tender in August 2001 of 98.1% of outstanding Legrand shares to the public exchange offer initiated by Schneider Electric SA. Five-Year Summary of Changes in Capital Number of shares Issued or cancelled Capital at Dec. 31, 1997 Conversion of bonds Conversion of Square D bonds Exercise of stock options Capital at Dec. 31, 1998 Conversion of bonds Conversion of Square D bonds Exercise of stock options Shares issued to the ESPP (2) (3) euros 153,417,118 1,169,414,443 euros 161,423,578 1,291,388,624 euros 155,787,643 1,246,301,144 euros 240,260,029 1,922,080,232 euros 240,812,905 1,926,503,240 euros 84,241,055 3,026 228,305 (4) Conversion of Square D bonds Exercise of stock options Capital at Dec. 31, 2002 1,159,893,842 (6,000,000) 152,275 211,790 Shares issued in exchange for Legrand shares Conversion of Square D bonds Exercise of stock options Capital at Dec. 31, 2001 152,168,097 3,495,796 2,272,282 704,300 1,534,082 Cancellation of shares Conversion of Square D bonds Exercise of stock options Capital at Dec. 31, 2000 New capital 759,848 247,273 241,900 (1) Capital at Dec. 31, 1999* Total shares outstanding 179,511 373,365 (5) * The Company’s capital stock was converted into euros on January 14, 2000. The FF 399.8 million difference arising on conversion was charged against additional paid-in capital. (1) (2) (3) (4) (5) € € € € € 9.52 million 121.97 million 45.09 million 675.80 million 4.42 million increase in capital stock, increase in capital stock, decrease in capital stock, increase in capital stock, increase in capital stock, € € € € € 33.72 million 252.72 million 284.87 million 4,358.7 million 15.0 million increase in additional paid-in capital. increase in additional paid-in capital. decrease in additional paid–in-capital. increase in additional paid–in-capital. increase in additional paid–in-capital. 17 Potential capital Aside from stock options, no share equivalents were outstanding at December 31, 2002. Stock options granted under the stock option plans in force at February 5, 2003, represent 7,848,465 shares, of which 3,518,025 correspond to options to either subscribe new shares or purchase existing shares. The Board of Directors will determine the nature of the options (subscription or purchase) at a later date. Details of the stock options plans are provided on pages 20 and 21. Authorizations to issue shares At the Combined Annual and Extraordinary Shareholders’ Meeting of June 11, 2001, the Board of Directors was authorized to issue new shares under the provisions of article L 225-III of the French Commercial Code. At the Combined Annual and Extraordinary Shareholders’ Meeting of May 6, 1999, the Board of Directors was authorized to grant options to purchase new or existing shares in the Company. At the Combined Annual and Extraordinary Shareholders’ Meeting of May 5, 2000, the Board of Directors was authorized to issue new shares to Group employees who are members of the Employee Stock Purchase Plan. The number of shares issued may not exceed 5% of the Company’s capital stock over a period of five years. At the Annual Shareholders’ Meeting of May 16, 2003, shareholders will be asked to renew, within a limit of € 750 million, authorizations to issue shares with or without pre-emptive subscription rights. These authorizations are due to expire on August 11, 2003. Shareholders will also be asked to renew the authorization to issue new shares to Group employees, within a limit of 5% of the Company’s capital stock. The authorizations currently in force are as follows: Maximum aggregate par value of shares that may be issued I - Issues with pre-emptive subscription rights Shares, warrants and other securities convertible, exchangeable, redeemable or otherwise exercisable for shares € 750 million (1) II - Issues without pre-emptive subscription rights Shares, warrants and other securities convertible, exchangeable, redeemable or otherwise exercisable for shares, including shares issued in connection with a tender offer initiated by the Company € 1,443 million (1) III - Employee share issues Share issues restricted to employees (ESPP) 5% of the capital Options to purchase new shares 5% of the capital Authorization date Authorization expires Amount used June 11, 2001 Aug. 11, 2003 – June 11, 2001 Aug. 11, 2003 May 5, 2000 May 5, 2005 May 6, 1999 May 6, 2004 € 674 millions (2) – 1.3% (3) (1) The ceilings for issues with and without pre-emptive subscription rights are not cumulative. (2) On August 7, 2001, the Chairman of the Board of Directors set the amount of the capital increase to pay for the Legrand shares tendered to the public exchange offer initiated by Schneider Electric SA. (3) Stock option plans 19 and 20. The Board of Directors will determine the nature of Plan 19 (subscription or purchase) by April 4, 2004 at the latest. General Presentation of Schneider Electric SA 18 3 - Ownership structure Interest % Historical shareholders Caisse des Dépôts et Consignations Employees Treasury stock (2) Intragroup cross shareholdings Public (1) Total Dec. 31, 2002 Number Voting of shares rights % Number of voting rights Dec. 31, 2001 Interest Voting % rights % Dec. 31, 2000 Interest Voting % rights % 5.73 13,821,870 10.23 25,087,156 7.20 12.65 10.55 18.46 3.99 3.11 0.89 9,609,467 7,500,924 2,150,352 5.21 5.85 – 12,784,467 14,353,006 – 3.92 3.00 0.89 5.06 5.68 – 6.28 4.51 1.38 5.88 7.57 – 6.73 79.55 16,195,736 191,534,556 – 78.71 – 192,851,256 3.94 81.05 – 76.61 5.00 72.28 – 68.09 100.00 240,812,905 100.00 245,075,885 100.00 100.00 100.00 100.00 (3) (1) AGF, AXA, BNP Paribas, Société Générale. (2) Primarily via Cofibel. (3) Excluding treasury stock held by Legrand. Ownership structure at December 31, 2002 Historical shareholders 5.73% Caisse des Dépôts et Consignations 3.99% Employees 3.11% Treasury stock - Intragroup cross shareholdings 7.62% Public France (of which 8% Legrand founding families) 43.95% Public (International) 35.60% As of December 31, 2002, Schneider Electric had approximately 149,000 shareholders (TPI estimate). Disclosure thresholds To the best of the Company’s knowledge, no shareholders other than Caisse des Dépôts, listed above, hold, either directly or indirectly, more than 5% of Schneider Electric’s capital or voting rights. Shareholders’ pact Under the terms of the shareholders’ pact signed on September 16, 1993 by Axa, AGF, Comipar, Compagnie Financière de Paribas, Elf, Euris and Société Générale (Société des Bourses Françaises notice no. 93-3184 dated November 15, 1993), as amended on October 19, 1995 (Société des Bourses Françaises notice no. 95-3069 dated October 27, 1995), the signatories of the pact gave each other pre-emptive rights to acquire their respective shareholdings. On October 16, 2001, the pact was tacitly renewed for a further two-year period by three of the signatories, AGF, Axa and BNP Paribas (Conseil des Marchés Financiers notice no. 200C1432). The other signatories had either withdrawn from the pact or sold their Schneider Electric SA shares. The signatories withdrew from the pact in December 2002 (Conseil des Marchés Financiers notice no. 202C1644) The Legrand founding families promised not to sell more than one third of the Schneider Electric shares they received during the public exchange offer for Legrand for a period of one year from the date of delivery (August 9, 2001). This commitment expired on August 9, 2002. 4 - Employee profit-sharing and stock purchase plans a. Profit-sharing plans Profit-sharing and other profit-based incentive plans have been in effect at Schneider Electric Industries SAS since 1994. The amounts allocated over the past three years were as follows : € 39.9 million in 2000 (profit-based incentive plan); € 16.1 million in 2001 (profit-based incentive plan and profit sharing); € 2.2 million in 2002 (profit-based incentive plan and profit sharing). 19 b. The “Schneider Electric” corporate mutual fund Description Schneider Electric has long been committed to developing employee stock ownership. Employees who are members of the Employee Stock Purchase Plan have an opportunity to purchase new or existing Schneider Electric SA shares through corporate mutual funds. The latest employee share issue took place in 1999 and was open to employees in 46 countries. The exercise price is equal to the average share price of the twenty trading days prior to the date of grant by the Board of Directors. No discount is applied. The options have an eight year life. Options granted under plans 12 through 19 may be exercised as from the fourth year, as long as the grantee holds the shares subscribed or acquired in registered form until the end of a five-year period following the date of grant. In certain cases, however, the options may be exercised without condition as from the third year. Options granted under plans 20 and 21 may be exercised without condition as from the fourth year or, in certain cases, as from the third year. Exceptionally, options granted under plan 22 may be exercised as from the first year. As of December 31, 2002, employees held a total of 7,500,924 Schneider Electric SA shares through the corporate mutual funds, representing 3.11% of the capital and 5.85% of the voting rights, taking into account double voting rights. The Company intends to carry out a share issue for employees who belong to the corporate savings plan in 2003. The issue would correspond to 2% of the Company’s capital stock. c. Stock option plans Grant policy Stock option plans are approved by the Board of Directors following a review of the plans by the Remunerations and Appointments Committee. No options were granted in 2002. At its meeting of February 5, 2003, the Board of Directors set up two option plans. The first, number 21, was decided as part of the annual policy to grant stock options. It has 433 grantees. The second, number 22, is designed to reward the 2002 winners of the NEW2004 Trophies. This awards program is part of the NEW2004 company program. The plan has 111 grantees, members of the six winning teams. Each member was granted 1,000 options. Options may only be exercised by Group employees. In addition, the exercise of options granted under plans 10, 11, 13 through 18 and plans 20 and 21 is fully or partially dependent on specific targets being met concerning income, value creation, sales or operating margin, as described in the following table. Because these targets were only partially achieved, 1,320,219 options granted under plans 15, 16 and 17 were cancelled in 2001 and 710,600 options granted under plan 18 were cancelled in 2002. Options granted to and exercised by corporate officers and the top grantees during the year No options were granted in 2002. Henri Lachmann, who was granted options under plans 15 through 20, did not exercise any options during the year. General Presentation of Schneider Electric SA 20 Stock option plan details Plan no Date of Board Meeting Number of initial grantees Number of options granted Price in euros 9 10 11 12 13 14 15 16 17 07.04.95 07.04.95 13.06.96 24.01.97 10.06.97 28.01.98 22.12.98 01.04.99 01.04.99 47 134 233 53 273 287 1 337 542 575,200 626,800 862,800 1,360,000 970,800 1,208,000 60,000 1,259,300 2,123,100 24.93 24.93 35.37 35.67 44.52 50.77 50.86 50.73 50.73 18 19 20 21 24.03.00 04.04.01 12.12.01 05.02.03 1,037 1,050 180 433 1,421,200 1,557,850 1,600,000 2,000,000 65.88 68.80 51.76 45.65 22 05.02.03 111 111,000 45.65 15,736,050 Exercise criteria None All options: ROE for 1993 -1995 All options: ROE for 1994-1996 None All options: ROE for 1995-1997 All options: ROE for 1996-1998 50% of options: value creation for 1999-2001 50% of options: value creation for 1999-2001 All options: sales, base costs and operating income for 2001 50% of options: value creation for 2000-2002 None All options: 2004 sales and operating income 50% of options: operating margin and operating income to capital employed None (reserved for winners of the NEW2004 Trophies) % Number Number of targets of options of options met cancelled outstanding at (1) Feb. 5, 2003 N/A 54.4 62.5 N/A 74.9 85.4 55.36 55.36 N/A 279,600 339,700 N/A 239,400 164,300 13,300 245,900 362,800 50,870 353,940 1,198,200 653,630 1,001,800 46,700 937,700 71.6 (2) – N/A – 1,078,600 710,600 N/A – – – 2,000,000 N/A N/A 111,000 963,200 660,075 (3) 1,518,025 (3) 1,600,000 11,457,940 (1) Because targets were not met. (2) In light of the plan’s rules, 50.81% of the options were cancelled as a result of the percentage of achievement. (3) The difference between the number of options granted and the number of options outstanding stems from the cancellation of options granted to employees who have left the Group. 21 Outstanding options Plan Date no of Board Meeting 9 10 11 12 13 14 15 16 17 18 19 20 21 22 07.04.95 07.04.95 13.06.96 24.01.97 10.06.97 28.01.98 22.12.98 01.04.99 01.04.99 24.03.00 04.04.01 12.12.01 05.02.03 05.02.03 Type S S S S S P P P P P S ou P S S ou P S Number of options outstandin at Dec. 31, 2001 (1) Options granted to corporate officers 476,200 174,380 411,945 1,251,000 685,600 1,014,200 46,700 1,013,400 1,044,500 1,421,200 1,557,850 1,600,000 2,000,000 111,000 – – – – – – 46,700 85,600 107,400 63,000 205,500 100,000 150,000 – (2) Options Starting granted to date the top 10 of exercise employee period grantees (2) – – – – – – 0 118,200 124,000 87,900 163,600 333,000 345,000 100,000 07.04.00 07.04.00 13.06.01 24.01.00 10.06.00 28.01.01 22.12.01 01.04.02 01.04.02 24.03.03 04.04.05 12.12.04 04.02.07 05.06.03 Expiration date Price (in euros) Options exercised in 2002 06.04.03 06.04.03 12.06.04 23.01.04 09.06.04 27.01.05 21.12.05 31.03.07 31.03.07 23.03.08 03.04.09 11.12.09 04.02.11 04.02.11 24.93 24.93 35.37 35.67 44.52 50.77 50.86 50.73 50.73 65.88 68.80 51.76 45.65 45.65 113,400 123,510 56,185 52,800 27,470 3,500 – – – – – – – – Options Number of cancelled options in 2002 outstanding at Dec. 31, 2002 – – 1,820 – 4,500 8,900 – 75,700 81,300 761,125 39,825 – – – (1) S = Options to subscribe new shares. P = Options to purchase existing shares. (2) After cancellations because targets for plans 16-18 were only partially met and before any cancellations in relation to plans 20 and 21. 5 - Stock buybacks The Annual Shareholders’ Meeting of June 11, 2001 authorized the Board of Directors to buy back shares on the open market. Pursuant to this authorization, the Company purchased 172,909 shares at an average unit price of € 51.42 in 2002 and sold 50,000 shares at an average unit price of 57.29 euros. The Annual Shareholders’ Meeting of May 27, 2002 authorized the Board of Directors to buy back shares on the open market. Pursuant to this authorization, the Company purchased 6,637,487 shares at an average unit price of € 48.80 in 2002. The related transaction costs amounted to € 245,859. At December 31, 2002, the Company held 16,195,736 of its own shares in treasury. 362,800 50,870 353,940 1,198,200 653,630 1,001,800 46,700 937,700 963,200 660,075 1,518,025 1,600,000 2,000,000 111,000 General Presentation of Schneider Electric SA 22 6 - Stock market data The Schneider Electric SA share is listed on the Euronext First Market in Paris, where it is traded in lots of one under Euroclear code 12197. It is part of the market’s benchmark CAC 40 index of France’s largest stocks. 18-Month Trading Data Year Month 2001 2002 2003 Trading volume (in thousands of shares) Value (in millions of euros) September October November December January February March April May June July August September October November December 36,404 34,357 24,894 14,052 21,208 23,045 22,556 23,465 19,346 19,150 28,768 22,067 18,268 25,555 25,571 23,345 1,677.72 1,449.50 1,245.78 750.09 1,114.67 1,242.06 1,304.00 1,315.99 1,048.23 1,008.90 1,348.67 1,064.35 832.86 1,114.80 1,233.54 1,109.33 Total 2002 272,344 13,737.40 24,259 22,615 1,101.49 907.56 January February Price (in euros) High Low 62.20 46.50 57.20 58.15 57.25 58.00 59.50 59.85 56.60 55.30 54.65 51.20 50.05 48.78 50.00 50.35 38.10 39.41 43.30 49.49 48.28 48.75 55.85 51.25 51.80 49.14 40.95 43.02 41.10 37.16 44.55 43.11 49.89 43.00 39.69 38.42 Five-year Summary of Share-Price Performance Average daily trading volume Euronext Paris - Thousands of shares - Millions of euros High and low share prices (in euros) - High - Low Year-end closing price (in euros) Yield including tax credit (%) 2002 2001 2000 1999 1998 1997 1,068.17 53.87 1,206.92 72.82 528.64 38.50 590.42 35.31 517.23 30.09 472.89 22.67 59.85 37.16 45.09 3.33 79.20 38.10 54.00 2.41 85.80 57.35 77.70 3.09 78.00 44.40 77.95 2.58 80.65 39.10 51.68 3.34 59.15 35.67 49.82 2.98 23 The Schneider Electric SA share vs. the CAC 40 index (Euronext data) Schneider Electric share CAC 40 Index 7,000 6,000 90 5,000 75 60 77.95 45 49.82 77.70 4,000 54.00 51.68 45.09 30 44.77 3,000 15 2,000 0 Dec. 31, 1997 ■ in euros Dec. 31, 1998 Dec. 31, 1999 ● Schneider Electric share Dec. 30, 2000 Dec. 31, 2001 Dec. 31, 2002 March. 15, 2003 ● CAC 40 index (base: Schneider Electric on December 31, 1997) Monep Options on Schneider Electric SA shares have been traded on the Monep market since December 20, 1996. Ordinary bonds On April 14, 1999, Schneider Electric SA issued € 750 million worth of 3.75% bonds due April 14, 2004. On May 28, 1999, a further € 250 million 3.75% bond issue was carried out, also due April 14, 2004. The second issue is treated as an extension of the first. Both are traded on the Euronext Paris and the Luxembourg bond markets under Euroclear code 49231. As part of the Euro Medium Term Notes program initiated on December 21, 1999, Schneider Electric SA issued two tranches of 6.1275% bonds due in October 2007, worth an aggregate € 450 million. The first, worth € 400 million, was issued on October 9, 2000 and the second, worth € 50 million, was issued on October 10, 2000. Together they comprise 450,000 bonds with a face value of € 1,000 each, which are traded on the Euronext Paris and the Luxembourg bond markets under Euroclear code 48309. General Presentation of Schneider Electric SA 24 7 - Investor relations Shareholder documents Investor Relations Officer In addition to the annual report and a summary report, the following documents are published for shareholders: Antoine Giscard d’Estaing 43-45, boulevard Franklin-Roosevelt 92500 Rueil-Malmaison, France Tel.: +33 (0)1 41 29 71 34 Contacts Institutional investors, financial analysts and private shareholders calling from outside France may request information and documents from: Alexandre Brunet At tel.: +33 (0)1 41 29 70 71 or fax: +33 (0)1 41 29 71 42 Shareholders’ Relations Committee The Committee is made up of ten individual shareholders appointed by Schneider Electric for a two-year term. Members may serve a maximum of two terms. The Committee is designed to relay shareholders’ concerns in the area of financial communication to the Company. It gives an opinion and makes suggestions on financial communication actions and resources for individual shareholders. In 2002, the members met four times to discuss the Letter to Shareholders, the Company’s financial communication policy towards individual shareholders, the presentation of the Company’s businesses, site tours and the organization of the Annual Shareholders’ meeting. The Company has followed up on a number of Committee suggestions, such as reducing the number of shares required to receive the Letter to Shareholders to 100, making changes to the Letter’s layout and content, organizing plant tours and preparing a summarized Annual Report. A Shareholders’ Letter (three times a year). General, economic and financial information concerning the Company, available on the corporate website (www.schneider-electric.com). Press releases are also available at www.prline.com. 25 Corporate Governance 1 - Board of Directors (at February 5, 2003) Chairman and Chief Executive Officer Henri Lachmann First elected: 1996 Term ends: 2005 64 years old. Other directorships and functions: Chairman of Schneider Electric Industries SAS and Director of a number of Schneider Electric subsidiaries. Director of Finaxa, various Axa subsidiaries, Vivendi Universal and ANSA; Member of the Supervisory Board of Axa and Norbert Dentressangle. A graduate of Hautes Etudes Commerciales (HEC), Henri Lachmann began his career in 1963 with Arthur Andersen. In 1970, he joined Compagnie Industrielle et Financière de Pompey. In 1971 he became Chief Executive Officer of Financière Strafor (later Strafor Facom), where from 1981 to 1997 he served as Chairman and Chief Executive Officer. He has served as a Director of Schneider Electric SA since 1996 and was appointed Chairman on February 25, 1999. Mr. Lachmann owns 12,000 Schneider Electric SA shares. Directors Claude Bébéar First elected: 1986 Term ends: 2005 67 years old, Chairman of the Supervisory Board of Axa and Chairman of Finaxa. Other directorships and functions: Director of a number of Axa subsidiaries, including Axa Financial; Director of BNP Paribas and Vivendi Universal. A graduate of Ecole Polytechnique, Claude Bébéar joined the mutual insurance company that would later become Axa in 1958. He was appointed Chairman and Chief Executive Officer of the company in 1975. From late 1996, when Axa merged with UAP, until 2000, when he was appointed Chairman of the Supervisory Board, Mr. Bébéar served as Chairman of Axa’s Management Board and Chairman of its Executive Committee. He is Chairman of Schneider Electric SA’s Remunerations and Appointments Committee. Mr. Bébéar owns 250 Schneider Electric SA shares. * Independent Director, as defined in the Bouton report on corporate governance. Daniel Bouton* First elected: 1995 Term ends: 2004 52 years old, Chairman and Chief Executive Officer of Société Générale. Other directorships and functions: Director of TotalFinaElf SA and Arcelor; Member of the Supervisory Board of Vivendi Environnement. A graduate of Ecole Nationale d’Administration with the title of Inspecteur Général des Finances, Daniel Bouton held several positions in the French Finance Ministry, including Budget Director, from 1988 to 1991. He joined Société Générale in 1991, becoming Chief Executive Officer in 1993 and Chairman in 1997. Mr. Bouton owns 250 Schneider Electric SA shares. Thierry Breton* First elected: 2000 Term ends: 2004 48 years old, Chairman and Chief Executive Officer of France Telecom, Chairman of the Board of Orange, Chairman of the Board of Thomson SA. Other directorships and functions: Director of Dexia (a Belgian company) and of Thomson SA; Chairman of Thomson’s Strategic Committee; Member of the Supervisory Board of Axa. A graduate of Supelec, Thierry Breton served as Chairman of Forma Systèmes from 1981 to 1986, Advisor to the French Ministry of National Education, in charge of information technology and new technologies from 1986 to 1988; Managing Director of the Futuroscope Teleport business park in Poitiers from 1986 to 1990; Executive Vice President of the CGI Group from 1990 to 1993; Executive Chairman of the Bull Group from 1993 to 1997; and Chairman of Thomson SA and Thomson multimedia from 1997 until October 2002. He is currently Chairman and Chief Executive Officer of France Telecom. Mr. Breton owns 370 Schneider Electric SA shares. Corporate Governance 26 Alain Burq First elected: 2000 Term ends: 2004 49 years old, Chairman of the Supervisory Board of the “Schneider Actionnariat” corporate mutual fund. A graduate of Ecole Supérieure de Commerce de Paris, Alain Burq also has an MBA from the Wharton School of the University of Pennsylvania. In 1982, he joined Schneider Electric, where he has been in charge of special projects for the Corporate Services department since 2001. Mr. Burq owns 250 Schneider Electric SA shares. Hans Friderichs, a German citizen, holds degrees in Law and Political Science. Soon after graduating, he joined Germany’s Free Democratic Party (FDP), serving as Deputy Chairman from 1974 to 1977. Mr. Friderichs was a member of parliament from 1965 to 1969, then secretary of state for the Rhineland Palatinate Agriculture and Environment Ministry. In 1972, he was appointed Federal Minister of the Economy. He left the federal government in 1977 and joined the Management Board of Dresdner Bank AG in 1978. In 1985, he became a consultant and corporate director. Mr. Friderichs owns 500 Schneider Electric SA shares. Michel François-Poncet First elected: 1986 Term ends: 2004 68 years old, Vice-Chairman of the Board of BNP Paribas. Other directorships and functions: Chairman of BNP Paribas (Switzerland); Vice-Chairman of Pargesa Holding SA (Switzerland); Director of LVMH, Finaxa, Erbé (Belgium), Power Corporation (Canada), BNP Paribas UK Holdings Limited (UK) and Vittoria Assicurazioni (Italy); Member of the Supervisory Board of Axa. A graduate of Institut d’Etudes Politiques and the Harvard Business School, Michel François-Poncet joined Banque Paribas in 1961. He became Chairman of Compagnie Financière de Paribas and Banque Paribas in 1986 and Chairman of the Supervisory Board of Compagnie Financière de Paribas and Banque Paribas in 1990. From 1998 to 2000, he served as Chairman of the Compagnie Financière de Paribas Supervisory Board. In 2000, he was appointed Vice-Chairman of the Board of BNP Paribas. Mr. François-Poncet owns 300 Schneider Electric SA shares. James F. Hardymon* First elected: 1998 Term ends: 2004 68 years old, Corporate Director. Other directorships and functions: Director of Air Products & Chemicals Inc., American Standard Inc., Circuit City Stores Inc., Championship Auto Racing Teams Inc. and Lexmark International Inc.; Member of the Supervisory Boards of Investicorp International, Inc. and Proudfoot Consulting Company. James F. Hardymon, a United States citizen, has an engineering degree from the University of Kentucky. He spent most of career at Emerson Electric Co., where he held several positions before becoming Director and Chief Executive Officer. In 1989, Mr. Hardymon joined US-based Textron Inc., which has a worldclass reputation in aerospace and automation technology. He served as Chairman and Chief Executive Officer of Textron from January 1993 to January 1999. Mr. Hardymon owns 1,247 Schneider Electric SA shares. Hans Friderichs* First elected: 1997 Term ends: 2005 71 years old, Corporate Director. Other directorships and functions: Chairman of the Supervisory Boards of Goldman Sachs Investment Management GmbH, Leica Camera AG and Swatch Deutschland GmbH; Vice-Chairman of the Supervisory Board of Adidas-Salomon AG. Willy R. Kissling* First appointed: 2001 Term ends: 2004 58 years old, Chairman and Chief Executive Officer of Unaxis Corporation. Other directorships and functions: Chairman of the Board of Unaxis Corporation; Vice Chairman of Holcim Ltd. (cement), SIG Holding Ltd. (packaging machines and systems), Forbo Holding AG (flooring, belting and adhesives); and Director of the Swiss-American Chamber of Commerce. * Independent Director, as defined in the Bouton report on corporate governance 27 Mr. Kissling, a Swiss citizen, holds diplomas from the University of Bern and Harvard University. He began his career at Amiantus Corporation and then joined Rigips, a plasterboard manufacturer, in 1978. He was appointed to the Rigips Executive Committee in 1981 and subsequently became Chairman. From 1987 to 1996, Mr. Kissling served as Chairman and Chief Executive Officer of Landis & Gyr Corporation, a provider of services, systems and equipment for building technology, electrical contracting and payphones. From 1998 to May 2002, Mr. Kissling was Chairman of Unaxis Corporation. Mr. Kissling owns 250 Schneider Electric SA shares. Gérard de La Martinière First elected: 1998 Term ends: 2004 59 years old, Executive Vice-President, Finance, Budget Control and Strategy of Axa. Other directorships and functions: Member of the Axa Management Board; Managing Director of Finaxa; Chairman of Ateliers de Construction du Nord de la France ANF; Director or Chairman of several Axa subsidiaries; Director of Crédit Lyonnais. A graduate of Ecole Polytechnique and Ecole Nationale d’Administration, Gérard de La Martinière held several positions in the French Finance Ministry before serving as Secretary General of Commission des Opérations de Bourse and General Manager of Société des Bourses Françaises. In 1989, he joined Axa, where he was appointed Executive Vice-President, Holding Companies and Corporate Functions in 1993 and Executive Vice-President, Finance, Budget Control and Strategy in 2000. Mr. de La Martinière owns 606 Schneider Electric SA shares. René Barbier de La Serre* First appointed: 2002 Term ends: 2005 62 years old, Corporate director. Other directorships and functions: Director of Crédit Lyonnais and Sanofi-Synthélabo; Managing Director of Harwanne Compagnie de participations industrielles et financières SA (Geneva); Member of the Supervisory Board of Pinault Printemps-Redoute, Compagnie Financière * Independent Director, as defined in the Bouton report on corporate governance Saint-Honoré, Compagnie Financière Edmond de Rothschild Banque and Euronext NV; Chairman of the Board of Directors of Tawa UK Ltd. (London). After graduating from Ecole Polytechnique and l’Institut d’Etudes Politiques de Paris, Mr. Barbier de La Serre joined Banque de l’Union Européenne in 1963, later becoming Deputy Director. In 1973, he moved to Crédit Commercial de France (CCF), where he was appointed Managing Director in 1987 and Vice Chairman and Chief Executive Officer in 1993. He left CCF in 1999. From 1988 to 1998, Mr. Barbier de La Serre was a member of Conseil des Marchés Financiers (formerly Conseil des Bourses de Valeurs), serving as Chairman from 1994 to 1998. In this capacity, he was a member of the Collège de la Commission des Opérations de Bourse. Mr. Barbier de La Serre owns 1,000 Schneider Electric SA shares. James Ross* First elected: 1997 Term ends: 2003 64 years old, Vice Chairman of National Grid Transco. Other directorships and functions: Director of McGraw-Hill Inc. and Datacard Inc. James Ross, a British subject, is a graduate of Oxford University. In 1959 he joined BP, where he held several positions before becoming a Managing Director in 1991. He served as Managing Director of Cable & Wireless Plc. from 1992 to 1995. Mr. Ross owns 300 Schneider Electric SA shares. Piero Sierra* First elected: 1997 Term ends: 2003 68 years old, Special Advisor for the administration of Pirelli SpA’s international companies. Piero Sierra, an Italian citizen with a degree in humanities from the University of Lyon, joined Milan-based Pirelli SpA in 1962. He held management positions in Italy and abroad before becoming Director and Chief Executive Officer of Pirelli SpA from 1991 to 1995. Mr. Sierra owns 500 Schneider Electric SA shares. Corporate Governance 28 2 - Organizational and operating procedures of the Board of Directors meetings a year and the attendance of the Executive VicePresident, Finance and any line executives concerned by the major issues put before the Board. The Board of Directors defines the Company’s business strategy and ensures that it is properly implemented. Its members are nominated by the Board and elected by shareholders in Annual Meeting. Article 4 defines the status of Directors and their responsibilities. These include: - Representing all shareholders and acting in the corporate interest. Based on a review by the Remunerations and Appointments Committee, the Board considers that eight of its thirteen members are independent directors, as defined in the Bouton report on corporate governance. Foreign representation is also significant as the Board includes five non-French Directors. Employee shareholders are represented by a Director who sits on the Supervisory Board of the “Schneider Actionnariat” corporate mutual fund. The average age of the Board members is 61. - Submitting their resignation when they have not participated in more than half the Board meetings. On March 5, 2003, after analyzing the findings of its internal review, the Board approved a set of operating rules and procedures. These rules replace previous Board proceedings that, in particular, limited the powers of the Chairman and defined the role and organization of Board Committees. - Complying with rules governing trading in Schneider Electric shares. The new rules comprise eight articles. Schneider Electric has adopted a code of ethics for Directors and employees designed to prevent insider trading. Under the terms of this code, both Directors and employees are barred from trading shares in companies for which they have information that has not yet been made public. In addition, they may not trade Schneider Electric SA shares during the 30 days preceding publication of the annual and interim financial statements, nor may they engage in any type of speculative trading involving Schneider Electric SA shares. This includes margin trading, trading in options and warrants and purchasing and re-selling securities in a period of less than four months. Article 1 defines the Board’s role and powers. To enable the Board to fulfill its duties, the Chairman must submit to its prior authorization all proposals to acquire or sell assets exceeding € 100 million as well as all transactions involving a commitment by the Company above this amount. In addition, the Board must carry out an annual review of its membership, organization and operating procedures. Article 2 defines the principles the Board shall apply concerning the renewal of its membership. These include assuring international representation by maintaining a significant number of non-French Directors, maintaining independence through a majority of independent Directors as defined in the Bouton report, ensuring continuity through the annual renewal of one quarter of the Directors and enabling representation of employee shareholders by a Director who is a member of the Supervisory Board of a mutual fund invested in Company stock. Article 3 defines procedures for organizing Board meetings. In addition to the legal provisions for calling Board meetings, participation of Directors, minutes, etc., this article reflects Schneider Electric practices in calling for a minimum of six - Respecting an obligation of confidentiality. - Requesting any documents needed to fulfill their responsibilities and meeting with Company executives as required. - Reporting conflicts of interest. - Owning at least 250 shares of Company stock. - Attending the Annual Shareholders’ Meeting. Articles 5 to 7 apply to the Board Committees and are described in the corresponding section below. 29 3 - Board meetings in 2002 Six meeting were scheduled in 2002 and seven were held. These meetings were primarily devoted to strategic issues, including the resolution of the Legrand project, as well as to reviewing the financial statements and the Company’s corporate governance. In particular, the Board examined Schneider Electric’s vision concerning global trends in the use of electricity, the strategy being proposed to leverage these growth opportunities and the NEW2004 company program designed to align corporate actions with this strategy. In light of the European Commission’s decision blocking the Schneider-Legrand merger and ordering that the two companies be quickly separated, Legrand’s future was discussed at each meeting. Experts were invited to address these meetings, to assist the Board in making the right decision in this matter. Following the Audit Committee’s report, the Board closed the accounts for 2001 and reviewed the 2002 interim financial statements. The meeting that closed the 2001 accounts also set the dividend to be submitted to shareholder approval at € 1.30 per share, noting that because it would be charged against additional paid-in capital, the dividend would not give rise to a tax credit. However, it would not taxable as income nor subject to CSG-RDS compulsory social security levies. In the area of corporate governance, a number of measures were taken to harmonize Schneider Electric’s bylaws with France’s new NRE business legislation, the results of which were presented to the Annual Meeting on May 27. Separately, and pursuant to the report by the Remunerations and Appointments Committee, the Board of Directors decided not to separate the functions of Chairman and Chief Executive Officer. It also co-opted René Barbier de La Serre and appointed him to the Audit Committee. It accepted the resignation of Jean-René Fourtou from the Board on August 27, in order to comply with provisions concerning the holding of multiple directorships. It also revised the membership of the Remunerations and Appointments Committee by electing Michel François-Poncet as Chairman and appointing two new members, James F. Hardymon and René Barbier de La Serre, both of whom are independent Directors. The Board examined its membership, organization and operating procedures in light of the recommendations of the Viénot and Bouton reports. It decided to conduct an internal review and comply with the COB recommendation concerning the disclosure of related-party transactions by corporate officers. Throughout the year, the Board monitored business performance and progress in implementing the NEW2004 program. It ensured consistent compliance with market disclosure requirements, notably through an analysis of market consensus and the issuance of press releases. Directors and corporate officers hold 0.007% of the Company’s capital and 0.009% of the voting rights. No related-party agreements have been entered into between the Company and its Directors or officers. No loans or guarantees have been granted to Directors or officers by the Company. 4 - Committees of the Board of Directors (members, operating procedures and meetings) The Board of Directors has drafted internal rules governing the operating procedures and missions of the Audit Committee and the Remunerations and Appointments Committee. Their members are appointed by the Board, based on recommendations from the Remunerations and Appointments Committee. Audit Committee a. Members In 2002, the Audit Committee comprised MM. Gérard de La Martinière, Chairman, Barbier de La Serre, Piero Sierra. It currently comprises MM. Gérard de La Martinière, Chairman, René Barbier de La Serre, James Ross, Piero Sierra. In line with recommendations in the Bouton report, at least two-thirds of the Committee’s members are independent directors (three out of four). b. Responsibilities The Audit Committee is responsible for preparing the decisions of the Board of Directors, making recommendations to the Board and issuing opinions on financial, accounting and risk management issues. Corporate Governance 30 As a result, it: Prepares the Board’s review of the annual and interim financial statements. In particular, it: - Ensures that accounting methods used to prepare the consolidated and parent company financial statements are appropriate and applied consistently, that all significant transactions are properly reflected in the consolidated financial statements and that the rules governing the scope of consolidation are correctly applied. - Analyzes risks, off-balance sheet commitments and the cash position. Reviews draft versions of the annual and interim reports. Makes recommendations, following consultation, concerning the renewal or appointment of the Auditors. Examines the scope of audit engagements and the results of audits. It makes sure the Auditors have acted independently, notably when reviewing fees paid by the Group to their firm and network. Reviews the internal audit organization and resources, as well as the internal audit program and the general summary of reports submitted by the internal auditors. Examines proposed distributions and the amount of financial authorizations submitted for approval to shareholder approval at the Annual Meeting. The Audit Committee examines all financial, accounting and risk management issues submitted to it by the Board of Directors or its Chairman. In addition, every year, before the Committee has reviewed the financial statements, the Audit Committee Chairman meets with the Auditors alone, without any Company representatives present. The Audit Committee presents its findings and recommendations to the Board. c. Meetings in 2002 In 2002, the Audit Committee met three times under the chairmanship of Gérard de La Martinière, with an attendance rate of 100%. Each meeting was also attended by members of the Finance Department and the Auditors. When reviewing the proposed ruling on the 2001 financial statements, the Committee was also addressed by the accounting firm Salustro Reydel, responsible for exercising Schneider Electric’s equity claims in Legrand. The Audit Committee reviewed the annual and interim financial statements and the internal audit process. The Committee also examined and verified the appropriateness of the accounting rules applied by Schneider Electric in respect to the scope of consolidation and off-balance sheet commitments, in light of lessons learned from the Enron case. It analyzed the treatment of goodwill (valuation and accounting principles) and the impact of pension and post-retirement healthcare commitments, primarily in respect to US employees. The Committee reviewed procurement principles and procedures. It examined Company actions in the area of sustainable development and their presentation in the annual report. Lastly, it was informed of the measures taken by the Auditors in response to the COB’s recommendation concerning the rotation of audit partners. The Committee presented its findings to the Board on February 26, 2002, September 4, 2002 and February 5, 2003. Remunerations and Appointments Committee a. Members From January 1 to October 23, 2002, the Remunerations and Appointments Committee comprised: MM. Claude Bébéar, Chairman, Jean-René Fourtou, Michel François-Poncet, Henri Lachmann. The Committee’s current members are: MM. Michel François-Poncet, Chairman, Claude Bébéar, René Barbier de La Serre, James Hardymon, Henri Lachmann. b. Responsibilities The Committee is regularly informed of the Group’s compensation policies, especially executive compensation. It reviews stock option plans and employee stock ownership plans decided by the Board. It also makes recommendations to the Board concerning the nomination of Directors, the appointment of members of Board Committees and the compensation of the Chairman, which comprises a variable component partially linked to the achievement of personal and performance objectives. In the last case, it meets without the Chairman. 31 It sets the criteria of independence for Directors and examines their situation in respect to these criteria. It recommends the amount of attendance fees for approval at the Annual Meeting and their allocation among Directors. It is also responsible for preparing a succession plan for the Chairman and examines solutions to provide for the replacement of Executive Committee members. c. Meetings in 2002 The Remunerations and Appointments Committee met three times in 2002, with an attendance rate of 100%. It informed the Board of Directors of its findings on February 16 and October 25, 2002. It made recommendations to the Board concerning the Chairman’s compensation. It also proposed that the Board co-op René Barbier de La Serre as Director and appoint him to the Audit Committee, as well as revise the Committee’s membership by adding two new members, James Hardymon and René Barbier de La Serre, and by appointing Michel François-Poncet to serve as Chairman. 5 - Interests and compensation of corporate officers and executives goodwill, as well as individual objectives based on quantitative and qualitative criteria. The bonuses are paid following approval of the financial statements for the year to which they relate. To involve senior executives more closely in the growth and development of Schneider Electric’s business, their variable bonuses represent a greater proportion of their total compensation than is the practice among other manufacturing companies. In addition, Executive Committee members also benefit from stock option plans (see above, page 19). Executive compensation in 2002 In 2002, total gross compensation paid to the members and the Chairman of the Executive Committee amounted to € 6.1 million, of which € 2.3 million in variable bonuses. The total includes the Executive Committee members’ fixed salaries and benefits for 2002 and their variable bonuses for 2001, paid in 2002. The amount of the variable component was based on corporate financial criteria, as well as on each member’s individual quantitative and qualitative objectives. The corporate financial criteria were as follows: 2001 sales, with no bonus if sales did not exceed € 9.63 billion. Compensation of corporate officers and members of the Executive Committee Net income before goodwill, with no bonus if net income did not exceed € 803 million. The Remunerations and Appointments Committee makes recommendations to the Board of Directors concerning the Chairman’s compensation. It also reviews compensation for senior executives, particularly the members of the Executive Committee. Growth in the share price. Since reorganizing in October 2001, General Management has been represented by a nine-member Executive Committee chaired by Henri Lachmann. Its members are paid a fixed salary plus a variable bonus representing a certain percentage of their fixed salary. Each component of this compensation package is calculated to be competitive with the compensation paid to executives in similar companies in other countries, based on analyses and comparisons performed by international compensation consulting firms. The amount of the variable component depends on the degree to which objectives set at the beginning of the year are met and can therefore vary significantly. The objectives concern targets based on consolidated sales and net income before Compensation of the Chairman Compensation paid by Group companies, including Director attendance fees, to Henri Lachmann, is as follows: - Fixed salary and benefits: : € 735,600 - Attendance fees: € 54,000 - Variable compensation: € 91,800 Corporate Governance 32 Compensation of board members: attendance fees and other compensation At the combined Annual and Extraordinary Shareholders’ Meeting of June 11, 2001, the maximum attendance fees payable to Directors was set at € 640,000. The Board of Directors decided that the fees would be allocated among Directors as follows: Each Director is awarded one half of the theoretical fee per Director. Each Director who is a member of one or more Committees of the Board of Directors is awarded an additional one-half of the theoretical fee. The balance of the total attendance fees is then shared among all the Directors based on the number of Board Meetings attended during the year. In application of these rules, attendance fees paid to members of the Board for the year ended December 31, 2002 totaled € 552,000. By Director, this amount was paid as follows (in thousands of euros): Claude Bébéar: 43.9 - Daniel Bouton: 32.0 Thierry Breton: 38.8 - Alain Burq: (none) Jean René Fourtou: 30.4 - Michel François-Poncet: 50.6 Hans Friderichs: 32.0 - James F. Hardymon: 38.8 Willy R. Kissling: 38.8 - Gérard de La Martinière: 54.0 René Barbier de La Serre: 48.9 - James Ross: 35.4 Piero Sierra: 54.0 Alain Burq has an employment contract with Schneider Electric Industries SAS, through which he receives compensation comprising a fixed salary and a variable component (bonus and profit-linked incentive plan). He has relinquished his share of attendance fees. 33 6 - Agreements involving Directors (See auditors’ special report). No agreements involving directors were entered into during 2002 or after the close of the year. 7 - Auditors Appointed Appointment expires Statutory auditors Barbier Frinault et Autres / Ernst & Young 41, rue Ybry - 92576 Neuilly-sur-Seine Cedex represented by Pierre Jouanne and Christian Chochon 1992 2004 PricewaterhouseCoopers Audit, 32, rue Guersant - 75017 Paris Represented by Anne Monteil 1995 2004 Substitute auditors Jean de Gaulle, 6, rue de Buzenval - 92210 Saint-Cloud Dominique Paul, 11, rue Margueritte - 75017 Paris 1995 1995 2004 2004 Fees paid to the auditors in 2002 (€ thousands) Audit - Statutory accounting, certification, review of individual and consolidated financial statements - Related missions PricewaterhouseCoopers Audit 2,545 Other services - Legal, fiscal and labor issues - Information technology - Internal audit - Other Total 5,781 708 3,253 Barbier Frinault et Autres Ernst & Young 2,243 94% 161 0 0 0 8,024 95% 437 0 0 0 161 6% 437 5% 3,414 100% 8,461 100% Corporate Governance 34 8 - Shareholders’ rights and obligations a) Annual Shareholders’ Meetings (article 18 of the bylaws) All shareholders are entitled to attend Annual Meetings, regardless of the number of shares held. The notice of meeting is sent directly by the Company to holders of registered shares. Holders of bearer shares are sent the notice of meeting by the bank or broker that holds their share account. Holders of both registered and bearer shares are required to provide evidence of their ownership of the shares at the time of the Meeting. The following represent proof of ownership: Registered shares: an entry in the Company’s share register, made at least five days prior to the date of the Meeting. Bearer shares: a certificate issued by the custodian stating that the shares have been placed in a blocked account, to be deposited at the address indicated in the notice of meeting at least five days prior to the date of the Meeting. The Board of Directors may shorten these deadlines up until the date of the Meeting, which may be held at the Company’s head office or at any other location indicated in the notice of meeting. b) Voting rights 1 - Double voting rights (article 19 of the bylaws) Voting rights attached to shares are proportionate to the equity in the capital represented by each share, assuming that they all have the same par value. Each share carries one voting right, unless there are any unavoidable legal restrictions on the number of voting rights that may be held by any single shareholder. Notwithstanding the foregoing, double voting rights are attributed to fully paid-up shares registered in the name of the same holder for at least two years prior to the end of the calendar year preceding the one in which the Annual Meeting takes place, subject to compliance with the provisions of the law. In the case of a bonus share issue paid up by capitalizing reserves, earnings or additional paid-in capital, each bonus share allotted in respect of shares carrying double voting rights will also have double voting rights. The shares are stripped of their double voting rights if they are converted into bearer shares or transferred to another person, except in the case of an inheritance or family gift, with the transfer from one registered holder to another. Double voting rights may also be stripped by a decision of the Extraordinary Shareholders’ Meeting, ratified by a special meeting of shareholders benefiting from double voting rights. The minimum holding period to qualify for double voting rights was reduced from four to two years by decision of the combined Annual and Extraordinary Shareholders’ Meeting of June 27, 1995. 2 - Ceiling on voting rights (article 19 of the bylaws) At the Annual Meeting, no shareholder may exercise more than 10% of the total voting rights attached to the Company’s shares. The 10% ceiling is calculated on the basis of the single voting rights and proxies held by the shareholder concerned. If the shareholder owns shares carrying double voting rights, the limit may be raised to 15%, provided that the 10% ceiling is exceeded solely by virtue of the double voting rights. The above ceilings will no longer apply, without it being necessary to put the matter to the vote at a further Annual Meeting, if any individual or legal entity, acting alone or jointly with one or other individuals or legal entities, acquires or increases its stake to at least two-thirds of the Company’s capital through a public tender offer for all the Company’s shares. In this case, the Board of Directors will place on record the lifting of the above ceilings and will amend the bylaws accordingly. The ceiling on voting rights was approved by the combined the Annual and Extraordinary Shareholders’ meeting of June 27, 1995. c) Income appropriation (article 21 of the bylaws) Net income for the year less any losses brought forward from prior years is appropriated in the following order: 5% to the legal reserve (this appropriation is no longer required once the legal reserve represents one tenth of the capital, provided that further appropriations are made in the case of a capital increase). To discretionary reserves, if appropriate, and to retained earnings. To the payment of a dividend. The Annual Meeting may decide to offer shareholders the opportunity to receive the dividend in cash or in the form of new shares of common stock. Dividends not claimed within five years from the date of payment become time-barred and are paid over to the State in accordance with the law. 35 d) Disclosure thresholds (article 7 of the bylaws) In addition to the legal disclosure thresholds, the bylaws stipulate that any individual or legal entity that owns or controls (as these terms are defined in article L 233-9 of the Commercial Code) directly or indirectly, shares or voting rights representing at least 0.5% of the total number of shares or voting rights outstanding, or a multiple thereof, is required to disclose said interest to the Company by registered letter with return receipt requested, within five trading days of the disclosure threshold being crossed. In the case of failure to comply with these disclosure obligations, the shares in excess of the disclosure threshold will be stripped of voting rights at the request of one or several shareholders owning at least 2.5% of the Company’s capital, subject to compliance with the relevant provisions of the law. These disclosure thresholds were approved by the combined Annual and Extraordinary Shareholders’ Meetings of June 27, 1995 and May 5, 2000. e) Identifiable holders of bearer shares (article 7.3 of the bylaws) As approved by the combined Annual and Extraordinary Shareholders’ Meetings of June 30, 1988 and May 5, 2000, the Company may at any time request that Euroclear identify holders of bearer shares carrying voting rights either immediately or in the future. Business review 36 Business Review 1 - Economic environment The global economy was on a downtrend for the second year running. Consumer spending helped yield a positive rate of growth globally (up 1.7% for global GDP in 2002), but corporate capital spending fell again, particularly in the developed countries. A group of factors led companies to cut their spending in 2002: September 11, the ensuing geopolitical developments and the threats of war in Iraq since May 2002 have undermined manufacturers’ confidence and affected the outlook for business, both of which are vital if corporate spending is to recover. Company tinkering with accounting rules and the collapses of Enron (December 2001) and Worldcom (August 2002) accentuated the fall in the stock market and repercussions on spending. The public building market (schools, public services and hospitals) continued to grow. The Industry market was also down in 2002, though less than the previous year. This market was the first to experience the consequences of the recession beginning in 2001 – a decrease in capital spending in industry, the sector most exposed to international trade, itself negatively affected by the US recession. As regards the infra-annual trend, the market declined throughout 2001 and leveled off in all divisions as from the second quarter of 2002, but without the expected upturn. The residential building market was the only one of the Schneider Electric markets to continue to grow on a worldwide level in 2002. Companies wished to restore their accounts to healthier positions, hurt as they were by economic slowdown and acquisitions made in previous years. The fall in interest rates, the rise in assets value in the construction industry, tax incentives, the fall in stock markets (encouraging investment in real estate) – all promoted residential building. It has also emerged that companies in Europe overinvested and overstocked in 2000. Although not on such a vast scale as in the US, this excess spending resulted in capacity build-up which will make current additional investment less necessary. 2 - Highlights of the year Among the major Schneider Electric markets, the building market (spending in non-residential buildings) recorded the most marked fall in 2002, representing the sharpest decrease in many years, particularly in the US. The market in Europe declined slightly. American and European cycles were synchronized for the first time. In both regions, the worsening situation hit the industrial building segment first of all, followed by the offices and commercial building segment. The causes were: - the unfavorable economic situation; - the uncertain outlook; - the wish on the part of companies to restore accounts to healthier positions; - excess capacity built up over the last few years leading to poor use of production capacity in industry; - high rate of buildings unoccupied. a) Legrand Schneider Electric decided to sell its 98.1% stake in Legrand, in execution of the July 26, 2002 contract of sale agreed with the KKR-Wendel Investissement consortium. This decision resulted, on the one hand from the position of the European Commission, who ruled on November 29, 2002 that the corrective measures proposed by Schneider Electric were not sufficient to approve the merger and, on the other hand, the hostility to the project from Legrand management. The year 2002 therefore saw the end of the merger project with Legrand, in spite of the favorable ruling of the European Communities Court of First Instance (October 22, 2002), which overturned the European Commission veto. The sale of this holding, for € 3.6 billion, bolstered the financial strength of the Company and provided margins for financial maneuver enabling a policy of selective acquisitions in highgrowth businesses. 37 b) The NEW2004 program A unique multi-market Power & Control specialist The year 2002 was, in particular, marked by the launching of the new company program at Schneider Electric, picking up where Schneider 2000+ – which spanned the years 1999 to 2001– left off. This program, known as NEW2004 – New Electric World, covers the years 2002 to 2004. NEW2004 falls within a continuous improvement process for the Company. Dedicated to growth and efficiency, the program relies on a clearly-defined Vision, Mission and Strategy. Schneider Electric’s goal is therefore to implement a strategy based on competitive advantages, by reinforcing what makes it the unique multi-market leader in Power & Control. The Vision With the increasing convergence of electricity, automation and communication technologies, a new era is dawning – one in which the future will be more and more electric, powered by growing demand for comfort, reliability, safety, productivity, new types of generation, fresh applications, and increasingly integrated and networked systems. Electricity – flexible, safe and clean – is now more than ever the energy of the future. This is the Company’s Vision of the new electric world, which holds enormous potential for developing its core businesses – electric distribution and industrial automation. The Mission “Give the best of the New Electric World to everyone, everywhere, at any time.” Schneider Electric’s goal is to give its customers more performance, more comfort and more safety everywhere in the world through its employees, partners, competencies and innovation in its products and services. The Strategy Our strategy is based on leveraging competitive advantages, growth and operational excellence satisfy customers’ performance expectations and meet the challenges of our NEW2004 company program. This Strategy is supported by a disciplined financial policy and an innovative human resources policy. To make this Vision come true and to attain NEW2004 objectives, the Company is aiming to push back the limits in all aspects of its business: by capitalizing on its strengths and its strategic fundamentals, by clearly identifying its worldwide strategic priorities, by deploying consistent strategies and policies across the organization, and by thus meeting its customers’ performance challenges. Unique in its access to market with: - core products adapted to local standards; - specially dedicated organizations for Key Accounts; - a leading network of distributors and sales partners, offering the services that customers need, worldwide; - tools and services that improve sales partners’ competitiveness. Unique in its products with: - a constantly expanding lineup of intelligent, networked products, for developing integrated and scalable solutions for all customer applications, designed to facilitate the work of its partnering installers, panel-builders and integrators. Unique in its services with: - high value services to support customers throughout the lifetime of their installations, and to help them to optimize them directly, through selected partners and via the Internet. Unique in its brands with: - a portfolio of recognized global and local brands. Pushing back the limits NEW2004 reflects Schneider Electric’s commitment to a strategy focusing on growth by extending its approach to its markets – Residential, Buildings, Industry, Energy & Infrastructure. In order to tap into their outstanding potential, Schneider Electric has decided to address four strategic focus areas that combine internal growth, alliances and acquisitions: draw more value out of its current offering, expand its geographic reach, develop its lineup of products and services, and enhance its activity portfolio. The NEW2004 program is also based on strategy focusing on operational excellence, aiming to continuously improve product and process quality, while optimizing costs and efficiency. The Company in this way deploys consistent policies throughout the entire organization to increase efficiency and fund its growth objectives. They are geared towards: Business review 38 - Improving manufacturing and logistics quality and productivity worldwide; Creating a stimulating work environment for employees - Optimizing product development; Finally, Schneider Electric’s NEW2004 is intended to favor the development and sharing of employees’ skills, by encouraging their mobility and adaptability in a worldwide network, inciting good performance, respect of the environment and community responsibility. - Accelerating the Company’s e-transformation; - Developing first-class partnerships in all areas to maximize growth at less cost. The six challenges of the NEW2004 program Schneider Electric intends to create wealth for its four stakeholders: customers, shareholders, employees and the community. The NEW2004 has been developed around six challenges: c) Alliances, acquisitions and partnerships In Japan - Develop Corporate community responsibility. Following a friendly takeover bid, the Company acquired a 98.7% stake in Digital Electronics, the worldwide leader in man-machine dialogue products: industrial PCs, graphics terminals and touch terminals. Digital Electronics, with sales of 196 million euros and 1,200 employees, holds leading positions in Japan, Korea, the United States and Europe. Man-machine interfaces integrate a growing number of automated features and are key components in networked, web-enabled architectures, such as the Transparent Ready™ range that the Company offers in all of its markets. Indicators have been defined for each of the program’s challenges and are tracked each quarter, resulting in additional actions to ensure alignment with targets set for 2004. Schneider Electric thus obtained a position in a new, fast-growing market segment, while gaining greater access to OEMs, particularly in Japan. Financial targets Greater presence in China and Malaysia The Company has set ambitious financial targets for itself in its new program. The Company raised its holding in Schneider Swire Ltd., which manufactures and markets low-voltage electrical distribution equipment in Hong Kong and in mainland China, to 100%. - Be more Customer-centric. - Be committed to Quality. - Be more Global. - Increase our People’s commitment. - Think Innovation. - Achieve organic growth two points above the market every year and add 2 billion euros in sales from acquisitions. - Achieve a 43.5% gross margin on sales in 2004. - Achieve a 14% operating margin in 2004. Schneider Electric implements a disciplined financial policy, aimed mainly to: - Ensure growth in net earnings per share, by avoiding, in particular, any diluting effect relating to acquisitions over more than two years. Its 2001 sales were € 15.7 million. Schneider Electric also raised its interest to 100% (from 49% previously) in Schneider Scott & English, founded in 1996 with a local partner to distribute low-voltage electrical equipment and automated devices in Malaysia. The goal is to reinforce the subsidiary’s organization and sales resources to accelerate development. In Denmark and Russia - Increase operating earnings faster than capital employed and maintain low capital intensity to preserve its flexibility and its ability to generate strong free cash flow (net cash provided by operating activities, after change in working capital and capital expenditure). The Company took over Hano Elektroteknik A/S and Digimatic Aps, two companies specializing in automation controls. They now make up the technical support center for the Company’s industrial automation applications in Denmark, and are especially directed at services for OEMs. - Maintain a balanced debt policy to minimize interest expenses and maintain its high rating. The Company acquired a 90% stake in Uralelektro Contactor, specializing in the manufacture and marketing of 100-250A 39 contactors and motor-starters. In Russia, Uralelektro Contractor, with 105 employees and a strong distribution network, posted sales of close to € 4 million in 2002. Partnerships in the Gulf countries To strengthen its positions in major projects, Schneider Electric concluded a partnership with Danway, a wholly-owned subsidiary of Emirates Holdings. Emirates Holdings is a key player in the electrical engineering industry in the Gulf region, with strong positions in the water, energy, oil and gas markets. The objective is to manufacture low- and medium-voltage equipment locally to offer more local-content solutions and to thus improve flexibility and responsiveness. Schneider Electric Ventures A Schneider Electric venture capital fund of € 50 million was set up to finance technologically innovative startups. In April, Schneider Electric Ventures invested in a Swedish company, ConnectBlue, specializing in comprehensive, Bluetooth-based wireless solutions. Schneider Electric Ventures acquired a 13.1% interest in Open Wide, alongside Thalès. Open Wide is a solutions architect and integrator for the manufacturing world. d) Sale Schneider Electric sold its nuclear power business to an American corporation, Data Systems and Solutions, specializing in the supply of information systems for equipment management in the aerospace and nuclear power markets. The nuclear unit based in Grenoble, France, and with 200 employees, recorded sales of € 20 million in 2001. Extension of the product lineup with new ranges in 2002 Electrical Distribution In 2002, the Company renewed its low-voltage Compact C and Masterpact power circuit-breaker lineup. The new ranges allow Schneider Electric to offer a comprehensive set of solutions in low-voltage electrical distribution (products, switchboards and services). Schneider Electric also launched a new range of transformer substations called Satia, which are more compact and offer improved transformer protection features. Automation In 2002, the Company launched six new ranges of industrial control and automation products. These intelligent and networked products can be integrated into open and collaborative architectures. These projects required € 120 million of investment. The products meet current international standards (IEC, UL, CSA, etc.). Business review 40 3 - Research and Development Schneider Electric devoted € 472.7 million, or 5.2% of sales, to research and development in 2002. As part of its business activities, Schneider Electric uses patents, brands and trade names belonging to the Company, or in some cases, licensed by third parties, to manufacture products, perform services and market its products and services. In addition, the Company is constantly developing new technologies, products and processes that it tries to protect with patents. The Company filed 130 patents in 2002 and more than 121 in 2001. The patents filed during the past two financial years can be broken down per major category as follows: 50% electromechanical, 35% electronics and 15% software. Given the Company’s current types of products and services, the Management believes that the business does not significantly depend on any patent, set of patents or related licenses. The Management moreover considers the business not to depend on a single brand nor on a single trade name. Even though brands and trade names are closely linked to Company products and services, and they play a major role in the marketing of products and services concerned, the Management finds the risks relating to the diverted or unauthorized use of its brands and trade names not to be significant. The Company’s main brands are Merlin Gerin, Telemecanique and Square D. Nevertheless, as the product portfolio is expanded through the addition of new products with extended electronic, computing and communication functionality, the business will have higher dependence on intellectual property rights. Consequently, the risks of counterfeits or of infringement of these rights are likely to become greater. In addition, the Company holds patents of a high commercial value, especially in these new technologies. The Company therefore decided to draw value out of these intellectual property rights. 4 - Quantitative and Qualitative Disclosures about Market Risk The Company’s cash and funds comprise cash provided by operating activities, revenue from bond and commercial paper issues, borrowings, and the proceeds from the sale of our interest in Legrand SA. Thanks to this divestment, we ended the year with a positive net cash position. The main borrowings at December 31, 2002 included three euro-denominated bond issues (€1 billion at 3.75% due in 2004, € 450 million at 6.1275% due in 2007 and a € 148.3 million perpetual bond issue indexed to the Euribor + 0.7%, due in 2006). We also have various syndicated and non-syndicated loans totaling € 177.1 million, most of which mature in 2005. At year-end, outstanding commercial paper issued at fixed rates and with very short maturities totaled € 395 million. In addition, the Company can draw on confirmed lines of credit from a number of banks. The unused balance available at December 31, 2002 amounted to € 769 million, of which € 221 million will expire in 2003. Unit financing and cash management The Company has implemented a centralized cash pooling and currency risk management system via wholly-owned subsidiary Boissière Finance. All operating subsidiaries have access to this system. Boissière Finance also provides short-term facilities to certain subsidiaries. In certain cases, operating subsidiaries have sought and obtained financing outside our general Group-based financing system. In particular, Lexel has maintained borrowings that were contracted before it became part of Schneider Electric. The confirmed line of credit granted by a banking syndicate in 1997 to finance Lexel’s acquisition of Thorsman was reimbursed in 2002. Our main North American subsidiary, Square D Company, has a sale of receivables agreement under which it sells fractional interests in a pool of eligible short-term trade receivables, in an amount not to exceed € 284 million. Of this, € 21 million had been used at December 31, 2002, leaving a balance of € 263 million. 41 The Company had a positive net cash position of €844 million at December 31, 2002 compared with net indebtedness of €2,292.5 million at year-end 2001. Net indebtedness corresponds to long and short-term borrowings minus cash and short-term investments. The reduction in net indebtedness is primarily attributable to the proceeds from the sale of Legrand SA. As of Dec, 31 (€ millions) 2002 2001 2000 Net cash provided/(used) by: Operating activities Purchases of property, plant and equipment and intangible assets, net of disposals Financial investments, net Investing activities (Reduction)/increase in long-term debt and other borrowings Augmentation de capital Purchase of Company shares Dividends paid Financing activities Net effect of exchange rate and other changes Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at end of year (1) 932.8 942.6 710.6 (340.5) 3,165.8 (404.5) (363.4) (467.7) (596.1) 2,825.3 (767.9) (1,063.8) (463.3) 11.0 (329.1) (315.9) 135.9 7.2 (73.9) (315.2) 289.8 11.9 (159.5) (285.1) (1,097.3) (246.0) (142.9) 2.7 2,663.5 3,070.4 14.1 (57.2) 406.9 25.9 (470.2) 464.1 (1) Cash and cash equivalents consist of cash, bank accounts, short-term deposits, treasury shares to be used to cover stock options, and other liquid marketable securities, net of bank overdrafts. Business review 42 Operating activities On a current basis, operating requirements are primarily financed by cash provided by operating activities, although certain capital-intensive operations may be financed by bond or share issues at the Group level. Intra-Group loans are also used to finance the purchase of plant and equipment, as well as to finance the related investments. Net cash provided by operating activities totaled €932.8 million at December 31, 2002, versus €942.6 million the year before. Net cash provided by operating activities before changes in operating assets and liabilities amounted to €967.5 million compared with €966.4 million in 2001, reflecting a stable situation after items related to the divestment of Legrand SA. The decrease in working capital came to €35 million versus €24 million in 2001 as a result of slower business and the resulting decline in inventories, accounts receivable and accounts payable. Investing activities This item includes acquisitions and disposals of businesses, acquisitions of additional interests and acquisitions and disposals of tangible and intangible assets. Due to the divestment of Legrand SA, investing activities provided net cash of €2,825.3 million in 2002. In 2001, they used €767.9 million. Net cash provided by financial and other long-term investments came to €3,165.8 million, reflecting the divestment of Legrand SA. In 2001, financial and other longterm investments used net cash of €363.4 million. Net cash used by investment in operating assets – acquisitions and disposals of tangible and intangible assets – came to €340.5 million versus €404.5 million in 2001. The decline is attributable to the full or partial cancellation of certain projects in response to slower business and to industrial reorganization plans. Financing activities This item covers loan repayments, new borrowings on the financial markets or from banks, the sale, purchase or issue of Company shares and dividend payments. Net cash used by financing activities increased by €851.3 million to €1,097.6 million from €246 million in 2001, due primarily to the decrease in debt at year end made possible by the proceeds from the divestment of Legrand SA and to the stepped-up share purchase program. Dividends paid in 2002 totaled €315.9 million, on a par with 2001. Short, medium and long-term borrowings amounted to €2,370 million at year-end 2002, compared with €2,872 million at December 31, 2001. Around 3% of the total was guaranteed in 2002 versus 4% in 2001. Bonds, including perpetual bonds, represented €1,598.3 million, or 67.4% of the total, in 2002 compared with €1,638.4, or 57% of the total, in 2001. The maturity on these items runs from April 2004 to October 2007. Long-term bank loans accounted for 7.5% of total debt at December 31, 2002, versus 9.5% a year earlier. Total outstandings declined by €96 million to €177.1 million from €273.1 million at year-end 2001, following the repayment Lexel’s bank debt. Commercial paper issues were the second largest source of financing in 2002. Outstanding issues declined by €262 million to €395 million from €657 million in 2001 as a result of partial repayment using the proceeds from the divestment of Legrand SA. Outstanding issues represented 16.7% of total debt in 2002 compared with 22.9% the year before. Taking into account the impact of rate swaps, the effective interest rate paid on the €745 million in variable rate debt was 4.15%, while that on the €1,625 million in fixed-rate debt was 4.75% at December 31, 2002. In calculating the effective interest rate, fixed-rate commercial paper with very short maturities is treated as a variable rate borrowing. The effective interest rate is calculated on the basis of debt at December 31 and is provided for information only. Due to the difference between debt at December 31 and average debt for the year, this rate is not representative of the year’s average interest rates. In September 2001, short-term eurodenominated borrowings were swapped for dollardenominated borrowings in an amount of $300 million. This reduced the effective interest rate at December 31, 2001. 43 Additional information on contractual obligations, commitments and raw material hedging contracts Contractual obligations at December 31, 2002 (€ millions) Long-term debt, including current portion Short-term debt (1) (1) Total minimum payments required under operating leases (2) Irrevocable purchase commitments Other long-term commitments (1) (2) (3) (4) Total Less than 1 year 1 to 2 years 3 to 4 years Beyond 4 years 1,797 73.2 1,077.8 113.1 532.9 573 573 325.6 78.1 73.2 54.3 120.0 45.7 – 45.7 – – (3) (4) Long and short-term debt is presented as shown in Note 17 to the Consolidated Financial Statements. Total minimum payments required under operating leases are presented in Note 5.3 to the Consolidated Financial Statements. Not applicable. As a general rule, supply contracts do not include any firm commitments concerning minimum volumes or value. Firm commitment to buy Infra+ shares representing the 61.50% of the capital not held by Schneider Electric. Off balance sheet commitments at December 31, 2002 Total (€ millions) Contract counterguarantees Letters of credit (2) (1) 203,7 74,4 (1) Contract counterguarantees granted to customers totaled €203.7 million versus €225.7 million at December 31, 2001. A reserve for contingencies is recorded when the risk of a claim is considered probable. (2) Letters of credit represent a guarantee, governed by certain conditions, that a customer will fulfill its commitments towards a third party. Virtually all letters of credit in issue expire in less than one year. Raw material hedging contracts Fair value at December 31, 2002 (€ millions) Prices obtained from external sources Fair value determined according to other valuation techniques (1) Total Less than 1 year (7.9) (7.9) Néant (1) Fair value of contracts in force at January 1 was (€24.2 million). 1 to 2 years 3 to 4 years Beyond 4 years Business review 44 Net effect of exchange rate and other changes Substantially all subsidiaries are consolidated on the basis of financial statements established in their local currencies, with the exception of those operating in hyperinflationary economies. The consolidated financial statements, however, are presented in euros. Balance sheet items of non-euroland subsidiaries are translated at official year-end exchange rates while income statement amounts and cash flow items are translated at weighted-average annual exchange rates. In the cash flow statement, cash and cash equivalents at the end of the year are originally translated at the official yearend exchange rate. A difference arises when they are retranslated using the average annual exchange rate. In 2002, the net effect of exchange rate and other changes came to €2.7 million, versus €14.1 million in 2001 and €25.9 million in 2000. Seasonal variations Schneider Electric’s sales are affected by seasonal variations, as the construction business is busier in the summer than in the winter. Quite logically, this affects demand for electrical products used in this market. The high season for construction runs from June to October in North America and the rest of Europe, but is concentrated in June and July in France. Impact of inflation and price changes Business is affected by inflation in certain markets, but the majority of sales, expenses and income are generated in countries that have enjoyed low inflation rates over the last several years. In hyperinflationary environments, the Company can generally increase selling prices to offset the impact of higher costs and thereby generate sufficient cash flow to preserve its productive capacity. Short-term interest rate exposure Our risk policy for short-term rate exposure and cash is to minimize the cost of borrowing, depending on market conditions. The Company uses swaps to hedge its commercial paper exposure. Interest rate risk on long-term debt At December 31, 2002, financial debt mainly comprised fixed-rate borrowings and variable-rate borrowings swapped for fixed-rate debt. Since most of our debt is essentially fixed-rate, we are exposed to the risk of a decline in interest rates. Depending on the conditions of the financial market, we determine whether to use derivative instruments to hedge our interest rate exposure in order to minimize the cost of borrowing. The choice of issuing fixed or variable rate debt depends on (i) the overall exposure of the Group, and (ii) overall market conditions, as we tend to issue fixed rate debt when interest rates are low. Foreign currency risk We have international operations and thus we are exposed to foreign exchange risk arising from various currency combinations. The exposure to exchange rate fluctuations concerns some twenty currencies, with the US dollar and the British pound now the most significant sources of currency risk. Most of our operations around the world are carried out by subsidiaries that trade primarily in their home country. With the exception of some operating subsidiaries domiciled in highly inflationary environments, the functional currency of each of our companies is considered to be its local currency. We are thus exposed to the currency risk associated with translating our functional currency financial statements into our reporting currency, the euro. In addition, we have foreign exchange transaction exposures related to our global operating activities in currencies other than the functional currency in which our entities operate. This exposure arises from intercompany transactions between “global plants” or “international distribution centers” and local subsidiaries, as well as from direct export sales and purchases. It is our policy to identify and manage transactional foreign exchange exposure to reduce risk. Our subsidiaries are responsible for identifying accounts receivable and accounts payable denominated in currencies other than their local currency and entering into intercompany hedge contracts with the Corporate Treasury Center. The intercompany hedge contracts have the effect of transferring the currency risk from 45 operating subsidiaries to the Corporate Treasury Center, but do not create any additional market risk to our consolidated results. Under our policy, net material currency exposure is hedged. Exposure is primarily hedged with forward exchange contracts with a maturity of less than twelve months. Commodity risk We are exposed to commodity risk arising from changes in the prices of purchased raw materials (copper, silver and aluminum). The purchasing departments of our operating entities are responsible for assessing and reporting their forecasted purchases to the Corporate Treasury Center twice a year. The Corporate Treasury Center is responsible for hedging the risk and periodically uses forward contracts, commodity swaps and to a lesser extent options, to hedge commitments to purchase raw materials. Counterparty risk Transactions involving foreign exchange hedging, interest rate management or short-term investments are carried out using selected counterparties. Our standards for determining appropriate bank counterparties are based on an assessment of the counterparty’s financial soundness as demonstrated by shareholders’ equity, the availability of state guarantees, a qualitative assessment of the counterparty’s importance in our global relationships, and the counterparty’s short and long-term rating. An overall authorized credit limit is set for each counterparty, and all the counterparty limits are reviewed periodically. 5 – Claims, litigation and other risks In 2001, Schneider Electric made a public offer to purchase Legrand in exchange for shares as part of a proposed merger project. When the offer closed in July 2001, the Company held 98.1% of Legrand. In an initial decision dated October 10, 2001, the European Commission vetoed the merger, and in a second decision dated January 30, 2002, it ordered the two companies to separate as quickly as possible. As a result, Schneider Electric sold its interest in Legrand to the KKRWendel Investissement consortium even though the Court of First Instance of the European Communities overruled the Commission’s decisions on October 22, 2002. Following the Court of First Instance’s ruling, the Commission re-examined the Schneider-Legrand merger project and decided to launch an in-depth (phase 2) review on December 4, 2002. Schneider Electric contests the Commission’s refusal to approve the merger project on the basis of corrective measures proposed during the new phase 1 investigation in November 2002 and has filed a petition to annul the December 4, 2002 decision. In addition, Schneider Electric is preparing proceedings against the European Commission to obtain damages for the prejudice caused. In 1996, the Group became aware that an electronic component contained in its Masterpact circuit breakers used principally in large industrial installations and in other facilities with substantial electricity requirements occasionally malfunctioned. In 1997, the Group determined that a third party manufactured the electronic component. In 1998, the Group initiated a broad-based product recall campaign. Because of its complexity, the Group created a special company, Spring, to manage the recall program. Since 1998, the Group has incurred product recall costs of € 38.5 million in addition to administrative costs associated with the management of Spring of € 6.7 million. The Group has replaced or repaired a substantial number of the defective components and anticipates that it will incur an additional € 4.0 million before terminating the recall program some time during 2003. In April 2001, the Group became aware that an emergency pushbutton installed on a wide range of machines, failed to function in certain circumstances. The Group initiated a comprehensive product recall program in cooperation with its insurance companies. As of December 31, 2002, the Group Business review 46 had located and repaired approximately 14% of the 2.2 million installed pushbuttons. The Group reserved a total of € 18.3 million for the entire product recall program. At December 31, 2002, a reserve of € 4.4 million remained to cover replacement costs until the end of 2004, when the program will expire. Part of this cost, not to exceed € 3 million, will be borne by the insurance companies. VA Technologie AG, VA Tech T&D GmbH & COKEG and VA Tech Schneider High Voltage GmbH have initiated an arbitration procedure against Schneider Electric SA and Schneider Electric Industries SAS in connection with claims against the seller’s guarantee granted during the creation of a high-voltage joint venture. Schneider Electric considers that most of the claims covered by the arbitration procedure are either time-barred or without any clearly demonstrated legal basis. Belgium has initiated proceedings against former Schneider Electric executives in connection with the former EmpainSchneider Group’s management of its Belgian subsidiaries. The proceedings began in 1993, when SPEP (the Group holding company at the time) launched public offers for its Belgian subsidiaries Cofibel and Cofimines. Certain minority shareholders filed suit. Schneider Electric is paying the legal expenses not covered by insurance of the former executives involved. In connection with the divestment of Spie Batignolles, Schneider Electric SA booked contingency reserves to cover the risks associated with certain major contracts and projects. Most of the risks were extinguished during 1997. Reserves for the remaining risks were booked to cover management’s estimate of the risk involved. To the best of the Company’s knowledge, no other exceptional event has occurred and no claims or litigation are pending or in progress that are likely to have a material adverse impact on the Group’s business, assets and liabilities, financial position or results. 6 – Insurance Schneider Electric has a pro-active risk management strategy designed to defend the interests of employees and customers and to protect the environment, the Company’s assets and its shareholders’ investment. This strategy entails: Identifying and quantifying risk using different reporting systems. Preventing risks. Schneider Electric has always sought to prevent major accidents at its industrial sites and has reviewed its systems and procedures to reduce risk even further. The new Triple A approach applied since January 1, 2003 aims to enhance processes to control and monitor risk by identifying vulnerable areas and implementing appropriate solutions to preserve the long-term sustainability of the Company’s manufacturing resources and business. This approach builds on preventive measures already in place such as regular inspections, danger and vulnerability studies, safety management for people and equipment and security plans. The Company also has ongoing programs to prevent traffic accidents and reduce transportation risk. Organizing and deploying crisis management resources, notably for technical risks and natural disasters. Ensuring the necessary insurance cover. The main risks facing Group companies (civil liability, property damage and operating losses, environmental accidents, automobile accidents and transportation risk) are covered by global contracts with insurance and reinsurance companies of good standing, with the same type of terms and limits applied to companies of similar size. In addition, Schneider Electric has taken out specific cover in response to certain local conditions, regulations or the requirements of certain risks, projects and businesses. 47 7 - Sustainable Development Sustainable development – at the core of our strategy 2002 marked Schneider Electric’s commitment to sustainable development, including development of the “Principles of Responsibility”, listing on the ASPI, Dow Jones Sustainability World and Stoxx Europe indexes, creation of a dedicated department, etc. The most significant of these commitments was the integration of sustainable development as one of the six challenges in the New Electric World 2004 company program. There were two main reasons for this strategic decision: • Our vision to “Give the best of the New Electric World.” We can’t give the “best” if we aren’t concerned about the environment, the communities we serve and the need to provide them with quality products that are safe and clean. We can’t give everyone the best if we don’t get mobilized to research and discover how electricity can contribute to development. The acquisition and growth of Conlog, a leader in prepayment chips, is an example. in company management. This policy emphasized four priority focus areas: reduce consumption of natural resources, control electrical consumption, implement environmental management and develop an eco-design initiative. - 1998 : : the Schneider Electric Youth Opportunities Foundation was created under the aegis of Fondation de France with the mission of promoting young people’s success by: - providing assistance to associations that support disadvantaged youth, - sponsoring young business entrepreneurs, and - supporting general interest causes. b. A continuous improvement approach Sustainable development is an incentive and an opportunity to make and clarify all decisions, to audit general policy implementations in each sphere, and to pay attention to practices in order to enhance avenues for action. Our sustainable development policy is based on a structured approach that aims to: 1 - Respect regulatory obligations • The second reason is the great motivational source that shared values represent for company employees. Among these values, responsibility is a key value. This means making sure that Schneider Electric respects, in each country where it has operations, the social and environmental regulations enacted by the country. Moving towards more responsible practices 2 - Select an environmentally and socially conscious management a. Roots Quality and social responsibility are two values deeply rooted in the history of the brands that make up Schneider Electric. Examples include Telemecanique’s pioneering policy of employee profit sharing and Merlin Gerin’s strong involvement with youth. The indicators discussed below provide a good example of this initiative, which is in the process of being implemented. 3 - Have its core business activity contribute to sustainable development So that Schneider Electric is an active player in: Major recent steps include: - limiting energy consumption, - 1994 : : the first management charter was developed. Primarily intended for company managers, this document set out the management rules used to guide decisions and actions. - choosing electrical distribution that is safe and increasingly comfortable, - 1995 : : the environmental policy was defined. The goal was to get all employees, customers, suppliers and shareholders to subscribe to this policy by integrating environmental protection For Schneider Electric, operating in such a manner reflects the Company’s willingness and deliberate choice to be anticipatory in its approach. - meeting the challenge to provide electricity to people that still don’t have access to it today. Business review 48 Our principles of responsibility for a New Electric World Through the company program NEW2004, the Company clearly affirms its desire to reinforce its responsibility to the community. It adopted principles of responsibility in 2002 to guide each person in their decisions and actions regarding other company stakeholders: employees, customers and suppliers, shareholders, the community and the environment. - 600 employees, representing all nationalities and management levels, helped develop Our Principles of Responsibility. - Each manager is responsible for implementing them, promoting them, giving them substance and enhancing them locally. - Each Company employee employee can make their own contribution. - Newly hired employees employees undertake contractually to respect them. - The Sustainable Development Committee is responsible for advancing these principles to take into consideration the actual situations in the field. An initiative that is an integral part of the company program b. Dedicated resources The sustainable development department was formed at the beginning of 2002. It relies on the skills of existing teams (human resources, finance, environment, products, markets, purchasing, sales, Foundation, etc.). Its role consists in assisting general management in defining and implementing commitments, coordinating development work and initiating, promoting and tracking Schneider Electric initiatives. It is also responsible for relations with all stakeholders including, in particular for 2002, raising awareness of and circulating the process among employees worldwide, as well as relations with involved parties (NGOs, rating agencies, students, etc.). c. The social challenge: employability, equality and health Our company’s broad-based concern for equality expressed itself primarily through the promotion of two indicators centered on human resource management and social responsibility. NEW2004 objective: Introduce a variable salary component linked to both local and global company results for 100% of employees. Performance as a % a. Sustainable development challenges in the company program 100% Sustainable development is one of the challenges in the company program: “Develop corporate community responsibility.” 52,5% 17,8% The approach is pragmatic, measuring progress against global target indicators by late 2004 and sector-specific indicators, some of the more illustrative of which are shown below: • In 2002, we have: - defined Our Principles of Responsibility and related implementation commitments; - created a campaign to highlight local community organization commitments on behalf of youth integration in order to increase, qualify and make these commitments commonplace; - initiated a supplier awareness-raising and commitment approach through contracts. As part of this initiative, the General Terms of Purchase document of Schneider Electric Industries SAS was amended. 2001 2002 Objective 2004 NEW2004 objective: Survey 100% of employees every two years. Performance as a % 100% 43,7% 33% 2001 2002 Objective 2004 49 Workforce and training data Age* A set of Human Resources performance indicators has been used to consolidate data worldwide since 1999. 9.50% 7.10% The following information was extracted from this data. 25.40% 27.20% 2002 headcount 74,814 Turnover/ins Turnover/outs 30.80% 8,810 10,655 Men/Women Breakdown* ● Age –25 ● Age 25/34 ● Age 35/44 ● Age 45/54 ● Age +55 Seniority* 2.30% 29.60% 26.60% 36% 64% ● Men ● Women 14.90% 26.60% ● - 5 years ● 5/15 years ● 16/24 years ● 25/34 years ● +35 years Professional Category* 27% Training 46% Number of training days per person 27% ● Engineers and managers ● Non-exempt - technicians ● Workers Number of people who underwent training 2.8 days 71628 * calculations based on spot headcount (contract, permanent and temporary) employees as at December 31, 2002. Business review 50 A few examples of our accomplishments in 2002 In France Increase the number of for-credit internships completed each year 1,000 1,000 1,100 2001 1,123 2002 ● Target ● Number of internships filled d. The community challenge: integration into local communities, social integration, education NEW2004 objective: Ensure that 80% of sites have a sustainable commitment program with the Schneider Electric Foundation Schneider Electric has about 400 sites worldwide with more than 30 employees. The goal is to build a partnership with local associations working in youth education, training and social integration in more than 80% of these sites. Each employee is encouraged to volunteer their time or to participate financially. Performance as a % 80% 74% 50% 2001 Handicapped worker integration The 2002 overall rate reached 6.6% vs. an objective of 6% in spite of the low level of hiring. A downtrend in subcontracting to French Work Assistance Centers (CATs) and protected workshops was halted. Aggressive work-study training policy for young people 2002 was an excellent year with 296 new contracts signed (25% with qualifications below the high school diploma –baccalaureate, and 6% handicapped youth), representing 480 work-study trainees working in the company in France. In Turkey and Argentina 2002 2004 objective Train tomorrow’s employees In China, Argentina, Saudi Arabia, etc. Many young people want to continue their studies, but lack the means to do so. In a dozen or so countries, Schneider Electric sites have decided to offer scholarships. In China, for example, one hundred students are helped during their last year of university. In Argentina, where the drastic crisis has reduced budgets, equipment donations were used in 2002 to outfit electricity labs in 13 vocational schools. In Saudi Arabia, the subsidiary opened a training center in the Riyadh plant. 35 young technical university graduates started a one-year program with the promise of a job for all those who successfully complete the course. In South Africa Retain today’s talents The objective of the Fidelity program is to retain talent when a country is undergoing a crisis, through inter-country mobility. In 2001 Turkey was experiencing difficulties. Consequently, it “loaned” marketing experts for a few months to Russia, which was experiencing fast-paced growth. In 2002 several Argentinean managers were sent to Brazil. The company is committed to combat employee illiteracy. Some manufacturing plants offer English courses to workers. In South Africa, where 30% of the people over 20 years of age are illiterate, 26 of the subsidiary’s 70 workers have returned to school in the company at the rate of two classes per week to learn to read, write, count and communicate in English. 51 e. . The environmental challenge: safety, energy savings and quality of life Our environmental policy is based on anticipating regulations and standards so we can offer our customers risk-free products. For example, regarding heavy metal elimination, in the 70s we launched studies to eliminate cadmium oxide from contactors’ contact material. In France it was replaced by tin oxide several years ago. Today, we are carrying out multiple projects to find substitution solutions for lead, chromium-6 and PBB / PBDE flame retardants. Regarding end-of-life product processing, we anticipated the requirements of the European Directive and launched a new service in France that was operational at the beginning of 2003. NEW2004 objective: Ensure that 100% of our manufacturing units and logistics sites comply with the ISO 14001 standard The objective is to control the impact of our activities on the environment and to implement, in all our French and foreign manufacturing units, an environmental management system based on continuous improvement, certified by a third party in accordance with the ISO 14001 international standard. In addition, certain product development sites have also obtained ISO 14001 certification. Performance As a % 100% Industrial and environmental risks It should be noted that the Company is neither a power generating company nor a distributor. Our products are used between generation and distribution to transmit, meter and make electricity safe and reliable and qualify it. Consequently, it is less complex and costly to control risks than in other business sectors. Therefore, the manufacturing activities primarily use assembly and control techniques. The environmental analyses each site carried out during the ISO 14000 certification process showed that: - atmospheric discharges are not significant; they are below the regulatory thresholds, 60% 67% 2001 2002 2004 objective NEW2004 objective: Ensure that 100% of our new global products comply with Eco-design methodology Eco-design is a continuous improvement process with the objective of maximizing customer satisfaction with products that impact the environment less throughout their life cycle. - all wastes and effluents are processed in standard recycling channels. In addition to the progressive elimination of hazardous substances, the main thrusts of our work are based on three priorities: No plant is classified “Seveso.” - miniaturize to economize natural resources, The environmental policy in force since 1995 clearly set out how local and national regulations should be respected and anticipated. The environmental management initiative led to implementation of BAT processes (Best Available Technologies) in all plants worldwide. - minimize power consumption of operating products, and - facilitate processing end-of-life products, especially by making it easy to dismantle components that require special treatment like LCD screens and PCBs. In the case of Masterpact, for example, eco-design has resulted in a 20 to 50% reduction in raw materials depending on the product line, reduced electricity consumption by 20% during the use phase and facilitated end-of-life processing. A win-win situation for everyone. Business review 52 b. Sales Institute launch Main accomplishments in 2002 a. A sustainable approach recognized by others Created in 2002, the purpose of the Sales Institute is to develop country organizations’ sales skills by encouraging the exchange of best practices, developing training programs and making new tools available on the Intranet. The first meeting in Lisbon, Portugal, brought together some sixty Schneider Electric sales managers worldwide on the theme: “How to give our customers more value?” Since 2001, Schneider Electric has been listed on the ASPI Eurozone sustainability index. For the 2003 edition, the Company was selected for two major sustainable development indexes: the Dow Jones Sustainability World Index (DJSI World), which includes 315 companies worldwide, and the Dow Jones Sustainability Stoxx Index (DJSI Stoxx), which includes 183 European companies. c. Luli: committed employees Schneider Electric Extra-financial rating 2002 Launched in June 2002 by the Schneider Electric Foundation, the international campaign known as “Luli” mobilized Company employees in 60 countries. 63% of company sites participated. The campaign’s objective was to help disadvantaged youth in the education and training fields through local community associations that are located near our facilities and selected by the sites’ employees. ASPI* Eurozone® index by Arese (today Vigeo) 300 250 200 150 100 50 For one week the Company’s employees mobilized to offer their work and talents. Many of them extended their commitment throughout the year, participating actively in the associations. Nearly € 2.2 million were raised to support 145 projects. Luli will be continued, taking place again in June 2003. 0 Human Resources Environment ● Schneider Electric ** Customers & Suppliers ● Max sector Shareholders Community ● Min sector Highly rated financial relations Total Score As a % ● Industry Average on a Global Basis ● Schneider Electric SA ● Best company on a Global Basis 0% 0% 50% 100% Economic Dimension Environmental Dimension Social dimension As a % As a % As a % 50% 100% 0% 50% 100% 0% 50% 100% 53 Compressed air: ADEME rewards ALEO d. Products that are more environmentally-friendly throughout their life cycle In 2002, ADEME (France’s Environment and Energy Control Agency) rewarded Air Liquide for its “ALEO” innovation that was developed in partnership with Schneider Electric. This innovation involves optimizing compressed air energy use (up to 10 to 20% savings of power consumption) by implementing a variable speed drive on a multiple-compressor installation. Schneider Electric is committed to participating in winning partnerships with its customers. Public lighting with Lubio: 30% energy savings The Lubio line offers an “all in one service,” including: managing turning lights on and off, regulating and varying voltage and measuring network parameters like power consumed or the number of hours operated. Lubio is modular, functions on all lighting networks with all types of lamps, and can deliver energy savings in excess of 30% while reducing operating costs. Thanks to these characteristics, Lubio won the largest public lighting renovation contract ever awarded in France: the supply of 138 lighting devices to France’s Ain departmental authorities. Helping customers dispose of their end-of-life equipment In France, Schneider Electric has launched an end-of-life recycling service that customers can use to meet their legal obligations at best cost. The service covers electrical distribution and automation products. It includes inventorying the equipment to scrap, packaging and shipping it to the dismantling site, eliminating it, decontaminating and recycling equipment and devices, destroying hazardous substances and special components, administratively tracking all steps and providing completed legal documents. This service has met with widespread interest. The SEPAM line goes green The SEPAM series 20 and 40 line of Merlin Gerin brand protection relays, which has been marketed for a few years, benefited from a number of environmental enhancements: - the volume of material consumed was divided by a factor of 4, and - end-of-life product recycling was improved (e.g.; the number of mechanical links has been reduced, clips have replaced various screws, recyclable and marked thermoplastics are used and an end-of-life advisory notice has been created). e. Sites’ environmental performance The following indicators were established based on information provided by each manufacturing unit in the world. The consolidated data is representative of more than 80% of the Company’s manufacturing operations in 2002. Production workforce Quantity of waste In metric tons Waste / production workforce Share of waste recovered Equivalent energy consumption as a % in metric tons MWh Energy consumption/ production workforce Water consumption in m3 in m3/people MWh 36,983 109,357 3.0 53% 538,111 Water consumption/ production workforce 14.6 1,805,608 49 Business review 54 f. Environment and development Progress report Waste recovery at the Sumaré plant Publication of the first progress report on the Company’s Sustainable Development policy in 2003 will be an opportunity to communicate on Schneider Electric’s continuous improvement commitments and initiatives. The Sumaré plant in Brazil manufactures medium and low voltage products. Certified ISO 14001, it entrusts an aid association for families of mentally handicapped persons to recycle all its paper, cardboard, plastic, glass and metal waste. The association recovers the reusable value from this waste, which is used to assist some 20 families. Prepayment Schneider Electric develops innovative products that facilitate our water and energy distributor customers’ commitment to provide low-income families access to water and electricity. The operators can better control their distribution thanks to the prepayment meters from Schneider Electric’s Conlog subsidiary in South Africa. Without these meters, thousands of homes in poor neighborhoods would not be connected to the distribution grid. On a broader scale, Schneider Electric invests in international reconstruction projects financed by international organizations (World Bank, Inter-American Development Bank, US AID, European banks, etc.). The Company recently participated in Kosovo and Albania with comprehensive rural electrification and distribution projects, including renovation of existing installations. 2003 objectives Implement the principles of responsibility The principles of responsibility will be substantially deployed throughout the Company. Each new employee will commit to respect these principles in their employment contract. For all employees, the principles of responsibility will be specifically addressed during their annual performance review. Sustainable development week at Schneider Electric The sustainable development week from June 2 to 8, 2003 will be a great opportunity to increase some of our stakeholders’ awareness and increase our commitments. In particular, the week will be an opportunity to engage employees around local commitments to disadvantaged youth as well as around the inaugural session of the world committee of stakeholders. 8 - Outlook for 2003 The global economy is characterized by an unprecedented lack of visibility, making any real recovery unlikely before the end of 2003. Even though corporate capital spending and non-residential construction trends appear to have stabilized at a low level in developed countries, no noticeable sign of improvement has been identified during the first quarter of 2003. In this context, Schneider Electric’s objective is to favor organic growth and it plans to: capitalize on its experience to develop high value added solutions that meet growing customer expectations; combine its skills in dedicated structures intended to improve targeting of promising business segments; continue to encourage innovation by maintaining high investment in R&D as well as developing technical partnerships. These actions will be complemented by pursuing a selective acquisition policy with the objective of increasing the Company’s positions in consumer final low voltage, industrial and building automation, safe power supply and comprehensive manufacturing performance and power grid management services. These acquisitions will help expand Schneider Electric’s markets. The Company intends to leverage its outstanding geographic coverage, the quality of its products and the characteristics of its business model to confront the uncertain market conditions in 2003. Schneider Electric will intensify its actions to improve gross margins, adapt its manufacturing operations and reduce its base costs as a means of continuing to improve its profitability. Its strong cash flow and solid balance sheet constitute unquestionable strengths in the implementation of this strategy. 55 9 - Consolidated Financial Statements Consolidated statement of income Consolidated sales totaled € 9,061 million at December 31, 2002, down 7.8% from the year before at current scope of consolidation and exchange rates. The decline came to 5.2% at constant scope of consolidation and exchange rates. The currency effect had a negative impact of €309 million, corresponding to 3.1% of sales, and was attributable to the euro’s rise against the dollar and other currencies, notably in the second half of the year. The decrease in sales from low and medium voltage electrical distribution and from industrial control and automation was in line with the Company’s overall performance. A breakdown by operating division gives a more detailed picture of total sales. All changes described below are at constant scope of consolidation and exchange rates, unless otherwise specified. In the European Operating Division, sales declined 6.1% year-on-year to €4.64 billion, with mixed trends among the member countries. - Sales in Spain and Portugal continued to expand, by 1.8%, thanks to strong growth in electrical distribution driven by the vibrant building, energy and infrastructure markets. This was partially offset by a decrease in industrial control and automation sales. - Sales growth also remained positive in Central and Eastern Europe and the CIS at 0.8%. Business recovered in the second half in Central Europe and Greece after a noticeable decline in the first six months of the year. The CIS, Romania and Bulgaria achieved high growth rates. Generally speaking, both electrical distribution and industrial control were on a good trend. - The “Nobis” zone (Scandinavia/Benelux) recorded a 2.8% decrease in sales due primarily to a downturn in the industrial and commercial buildings market. Scandinavia weathered the general slowdown better thanks to final low voltage (Lexel) and the strength of this business’ main outlet, the residential market. - Sales in France declined 8.8% as demand weakened in all markets except residential buildings. Business was also impacted by reduced investments by national electricity utility EDF in the electrical distribution and energy markets. - In Italy, the UK and Germany, sales were down by around 9% to 15%. German sales in particular were also affected by the closure of the Gülstein medium voltage plant and the May & Stevens panelmaking business. In all three countries, the decline in electrical distribution sales was particularly noticeable in industrial and commercial buildings. The manufacturing recession and reduced machine building resulting from lower capital spending hurt sales in industrial control and automation. In the North American Operating Division, comprising the US, Canada and Mexico, sales were down 9.8% to €2.60 billion. Sales decreased in the US and Mexico but were stable on the whole in Canada. The slowdown in capital spending drove a similar trend in low voltage electrical distribution and industrial control and automation, where sales contracted by 8% and 9%, respectively. The medium voltage business recorded an even larger decline, as power distributors held off on investments and Schneider Electric implemented a more selective sales policy. Sales in the International Operating Division rose 4.5% to € 1.83 billion. The Division’s main zones all recorded growth during the year. - Greater China, comprising the People’s Republic, Hong Kong and Taiwan, enjoyed sustained growth of 8.5% and accounted for 30% of Division sales. Sales of industrial control and automation and medium voltage equipment increased considerably, lifted by the region’s ongoing drive to develop capital investment and infrastructure. Low voltage sales also increased, but at a more modest pace. - Sales in the Pacific region jumped 14.3% as sustained investment boosted demand for both industrial control and automation and electrical distribution products. - Latin American sales rose 0.4% from the year before despite continuing economic difficulties in Argentina, Colombia and Venezuela. Growth was strong in Brazil. As in other developing economies, industrial control and automation and medium voltage led the expansion, with sales up 12% in both segments thanks to high investment. Business review 56 - Africa/Near East achieved growth of 5.6%, with mixed results throughout the zone. Sales rose strongly in Africa, led by medium voltage (a sign of good contract business for equipment), industrial control and automation and low voltage. - The Middle East, on the other hand, saw a sharp decline in business due to the political crises that clouded the economic outlook and shifting investment priorities. - South Korea/Japan were on a similar trend, with sales down more or less across the board. - Full-year sales declined 1.5% in Southeast Asia but showed signs of a recovery in the fourth quarter. In the coming years, the Division’s growth potential should be enhanced by its strong market positions, the impact of alliances made in 2001 with PDL in New Zealand, STI in Japan and Samwha in South Korea, and the December 2002 acquisition of Digital Electronics Corporation. Operating income Operating income declined 6.9% to € 1,039.6 million from € 1,116.3 million in 2001. The decrease was smaller than for sales, reflecting good margin resistance in a difficult business environment. The operating margin widened to 11.5% from 11.4% the year before. Breakdown by Operating Division The European Operating Division maintained a high operating margin of 12.6%. The zone has a mixed profile, with regions like France, Spain, Portugal and the UK sustaining high margins and others, such as Italy and Central and Eastern Europe, remaining at lower levels. In North America, the operating margin increased slightly to 8.2% from 8.0% in 2001. The margin is significantly lower than in Europe due to our weak performance in the US, reflecting the sharp decline in sales since 2001. Improvements in Canada and Mexico, no matter how large, cannot reverse the trend given these two countries’ weight within the zone. The International Operating Division’s operating margin edged up to 13.6% from 13.5% the year before. Excluding Greater China, which outperformed the Group as a whole at the operating level, the Division’s zones fell within the average. South Korea/Japan was the only exception, with a below-average result. The operating margin remained high at 12.2% in electrical distribution and rose to 9.6% from 8.7% in industrial control and automation. Financial expense Net financial expense totaled € 157.8 million versus € 120.9 million in 2001. The change reflects: A € 15.8 million (11.4%) decline in net interest expense to € 122.5 million stemming from lower interest rates, an improvement in working capital requirement and the initial impact of the divestment of Legrand SA. Other components Net currency effect Dividends received Gains on the disposal of marketable securities Provisions, commissions and discounts (24.2) 36.9 3.1 (51.1) (35.3) - The net currency effect reflects the euro/dollar exchange rate’s unfavorable impact on cash flows, as well as hyperinflation in Argentina and Turkey. - Dividends received in 2002 include € 30 million on Legrand SA shares, as in 2001. Exceptional items Exceptional items represented a net charge of € 509.2 million. In 2001, this item included an exceptional € 1.4 billion provision on the Company’s interest in Legrand SA. Excluding the impact of Schneider Electric’s divestment of Legrand SA in 2001 and 2002, exceptional items represented a net charge of € 111.5 million versus € 163.9 million in 2001. Main components: Restructuring provisions in an amount of € 107 million at December 31, 2002. This includes € 72 million for US operations in connection with plant closures and measures to optimize production lines within the scope of Square D, as well as the reorganization of the North American automation business (production has been refocused on Europe and research 57 functions have been reallocated). Another € 30.5 million has been set aside for European operations in connection with site and production line rationalization in Telford (UK) and Rieti (Italy) and the closure of the medium voltage site in Gülstein (Germany). The balance covers local plans, notably in Argentina. Provisions for tax disputes. Taking into account the resolution of current tax disputes before the courts and the final tax deficiency notices after verification, Schneider Electric reversed earlier provisions in an amount of € 12.9 million. The disposal of nuclear unit SES to Data Systems and Solutions, which generated a gross capital gain of € 15.6 million at December 31, 2002. Related expenses totaled € 3 million. Specific transactions (€ 7.7 million for devaluation of the Argentine peso) and additional provisions for contingencies and various losses (€ 22.3 million). Income tax At December 31, 2002, Schneider Electric recorded a tax benefit of € 295 million compared with a charge of € 206.9 million in 2001. The change reflects the tax impact of the divestment of Legrand SA in 2002, as described below. The current tax charge in France and abroad came to € 189.2 million at December 31, 2002 versus € 201.7 million the year before. This amount includes a € 59 million gain arising from group relief in France, corresponding to the utilization of tax losses generated by the sale of Legrand SA. Based on the historical performance of the companies in the tax group, the € 1.79 billion total loss will give rise to future tax benefits for the tax group estimated at € 350 million over the five year-period starting in 2003. In addition, the Group has a € 103 million carryback credit and evergreen tax losses of € 2 million. Analysis of income tax in 2002 Current taxes Deferred taxes: France International (189.2) Total tax benefit 295.0 444.4 39.8 Amortization of goodwill, equity investments and minority interests Amortization of goodwill represented a charge of € 192.6 million, an increase of € 23.3 million or 13.8% from the € 169.3 million recorded in 2001. Most of the change is attributable to exceptional goodwill amortization, in an amount of € 29.5 million, related to the acquisition of Positec at end-2001. Aside from this, the reduction stemming from the dollar’s decline against the euro and the sale of Positec subsidiary Selectron offset additional amortization in connection with 2002 acquisitions (minority interests in Swire Ltd., Scott and English). The Group’s share of losses of equity investments increased by € 8.9 million to € 28.2 million from € 19.3 million in 2001. The main components were as follows: Les composantes essentielles sont les suivantes (en millions d’euros) : 2002 Share of income (loss) from: VA Tech Schneider MGE Finance SAS Entivity Other 2001 (9.4) (5.2) (10.2) (12.7) (8.9) (1.9) 0.3 0.5 (28.2) (19.3) Minority interests rose 11.1% to € 24.9 million from € 22.4 million in 2001 and correspond to the share of income attributable to minority partners in Feller AG, EPS Ltd and a number of Chinese companies. Net income attributable to Schneider Electric SA came to € 422 million. This compares with a loss of € 986.4 million in 2001. Balance sheet Shareholders’ equity (excluding minority interests) totaled € 7.78 billion versus € 8.38 billion at December 31, 2001. The decrease reflects income for the year of € 0.42 billion, versus a loss of € 0.99 billion the year before; the issuance of € 0.02 billion worth of new shares in connection with the exercise of options and conversion of Square D bonds; the translation adjustment, in an amount of € 0.46 billion; the dividend paid in 2001, in an amount of € 0.30 billion and share buybacks, in an amount of € 0.29 billion. Business review 58 Minority interests stood at € 0.08 billion, including minority interests in 2002 net income. The Group ended 2002 with a positive net cash position of € 0.84 billion compared with net indebtedness (borrowings less cash) of € 2.30 billion at December 31, 2001. Cash and cash equivalents came to € 3.21 billion versus € 0.58 billion at year-end 2001, due primarily to proceeds of the divestment of Legrand SA (€ 3.4 billion net of the € 150 million vendor line of credit). Short-term debt (commercial paper, bank overdrafts and current maturities of long-term debt) declined by €0.45 billion as part of the proceeds from the Legrand SA divestment were used to redeem commercial paper coming due. Net cash and cash equivalents (cash and short-term investments less bank overdrafts) improved to €3.16 billion from a negative €0.46 billion in 2001 due to the divestment of the company’s Legrand SA shares. Long-term debt declined by € 0.05 billion reflecting loans that were repaid or that matured. Working capital stood at €4.61 billion at year-end 2002 versus €0.65 billion the year before. The €3.96 billion increase can be analyzed as follows: Change (_ billions) Change in working capital Change in property, plant and equipment, net of depreciation and disposals Change in net goodwill and other intangible assets Change in investments at cost and other investments – – – 0.18 0.38 3.90 Total changes in fixed assets – 4.46 – + 0.05 0.15 Change in net assets - issuance of shares - payment of dividends - change in retained earnings (including net income for the year) Change in minority interests + – – 0.02 0.30 0.32 N.S. Total changes in long-term liabilities and equity + 0.50 Net change in working capital + 3.96 Change in long-term debt Change in provisions for contingencies and pensions 59 10 - Company Financial Statements 11 - Subsidiaries Schneider Electric SA posted total portfolio revenues of €545 million in 2002 compared with € 558.1 million the previous year. Income from continuing operations before tax came to € 563.8 million versus € 589.8 million in 2001. Schneider Electric Industries SAS In 2002, the Company had an income tax benefit of € 158.1 million compared with € 29.2 million the previous year, taking into account tax consolidation and the carryback credit. This item reflects the effect of the loss realized on the divestment of Schneider Electric’s interest in Legrand SA. Net income stood at € 221.1 million versus a net loss of € 811.2 million in 2001. Shareholders’ equity before appropriation of net income declined to € 7,043.3 million at December 31, 2002 from € 7,082.8 million at the previous year-end. This reflects 2002 income, changes stemming from the recognition of the 2001 loss, income appropriation decided by the AGM and premiums on shares issued on the exercise of options and conversion of bonds. Sales declined 5% to € 3.02 billion from € 3.19 billion in 2001. Operating income decreased by 17.7% to € 235.7 million from € 286.5 million and represented 7.8% of sales. Net income came to € 398.9 million compared with € 485.2 million the year before. Cofibel Cofibel’s portfolio consists entirely of Schneider Electric SA shares. Income from continuing operations before tax came to € 4.37 million compared with € 6.52 million in 2001. Income after tax stood at € 3.70 million versus € 5.40 million the year before. Cofimines In 2002, income from continuing operations before tax amounted to € 1.93 million compared with € 1.84 million in 2001. After taking into account corporate income tax, net income stood at € 1.34 million versus € 1.18 million in 2001.
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