Annual Report 2006 - Munters

Transaction exposureTransaction exposure consists of the net of operative (export/import) and financial (interest/amortization) incoming andoutgoing flows in various currencies.Munters’ policy is that currency hedging and tradingshall be concentrated to the subsidiaries with Group internalsales. The goal of the currency hedging policy is to hedge 100percent of contracted net flows in foreign currency.Translation exposureExchange-rate movements also affect the Group’s translation ofthe income statements and balance sheets of foreign subsidiaries,as well as any goodwill in conjunction with acquisitions.Munters’ sensitivity to variations in certain currencies intranslating EBIT is presented in the table below. The analysisis based on EBIT for 2006 and assumes that all other factors(such as changes in competition) that could affect earningsare unchanged.SEK +1% compared withEstimated effect on EBITSEK M %EUR –2.0 –0.4USD –2.6 –0.5NOK –0.3 –0.1GBP –0.6 –0.1AUD –0.4 –0.1JPY –0.1 –0.0DKK –0.4 –0.4The total translation effect on EBIT during 2006 comparedwith the preceding year’s exchange rates amounted to a lossof SEK 3 M (gain: 9), corresponding to 0.5 percent (2) of theyear’s EBIT. The effect on Munters’ equity in translating thenet assets of foreign subsidiaries to SEK amounted to a loss ofSEK 132 M (gain: 140) for the year.Interest riskMunters’ sources of funding are primarily equity, cash flow fromcurrent operations and borrowing. Borrowing, which is interestbearing,means that the Group is exposed to interest risk.Interest risk is the risk that changes in interest rates willnegatively affect consolidated interest net and/or cash flow.Munters’ finance policy establishes guidelines for fixedinterest for borrowing and the average maturity periods. TheGroup’s policy is that the interest periods for debt shouldnormally be between 3 and 9 months. Interest-bearing debtis presented in Note 19.Interest exposureMunters’ profitability is affected by interest-rate fluctuations.The expected effect on earnings after financial items of a changein interest rates of one percentage point is about SEK 3 M (3).Financing riskMunters’ borrowing from banks consists in part of generalcredit facilities and in part of individually approved bankloans to subsidiaries, of which the latter are generally in conjunctionwith acquisitions. Borrowing is mainly in SEK. Theaverage period for which capital is tied up in loans is normallybetween 3 and 9 months. When surplus liquidity arises, it isprimarily used to pay down loans.Counterparty riskMunters only accepts creditworthy counterparties for financialtransactions, such as currency swaps and other derivativetransactions.With respect to accounts receivable, counterparty risk isdistributed among a large number of customers, primarilycompanies in various industries. Within MCS, large insurancecompanies account for a major share of the counterparties.Insurable risksInsurance protection is regulated by central guidelines.Several insurance policies are managed at the global level andhandled annually by the Parent Company.Legal processesMunters’ subsidiary in the US, Munters Corporation, wascited as of 31 December 2006 as a co-defendant in 38 asbestosrelatedprocesses. To date, none of the plaintiffs has statedthat they were exposed to any specific Munters product. Inrecent years, Munters Corporation has won in two casesthrough summary judgments, cases that are in other wordsno longer pending, and a total of 36 plaintiffs have beendismissed out of the 38 asbestos-related processes mentionedabove. Munters Corporation firmly believes that the chargesare groundless and intends to contend each case vigorously.Munters Corporation has insurance protections for the asbestos-relatedclaims through several insurance policies. Withreservations for certain provisions, the insurance companieshave confirmed that until further notice they will cover asignificant portion of the defense costs.Munters does not consider that the stated claims will toany significant extent have an adverse effect on the Company’sfinancial position or operating results.M U N T E R S A N N U A L R E P O R T 2 0 0 6 31