Other important risks
|Volatile economic conditions||Commodity markets||Treasury|
|Project management||Product laibility||Tax|
|Intellectual property||Environmental liabilities|
Volatile economic conditions
Deteriorating economic conditions could be detrimental to Kendrion’s financial results and the company’s ability to achieve its strategic goals. The likelihood is significant and vulnerability is moderate to low. Kendrion has a flexible organisation to enable the company to move in tandem with the economic tides. Flexibility not only relates to working with temporary staff and focusing on the reduction of variable operating expenses, it also includes the ability to communicate up-to-date financial information efficiently to decision-makers throughout the organisation, make justifiable insourcing and outsourcing decisions, adjust supplier contracts, implement performance-dependent employee benefits, work with flexible hour contracts and utilise opportunities for reducing working hours in specific countries.
Kendrion furthermore has a solid financial position and sufficient financial resources to continue its investments in growth, both in terms of competent staff and appropriate production equipment. All accounts receivable departments and purchasing departments devote specific attention to the financial position of the company’s customers and suppliers.
Adequate project management is essential if new products are to enter the production phase with success, and the risks associated with inadequate project management can exert a significant effect on the results.
Customers request the company to develop products complying with specific functional requirements that can, on occasion, come close to the limits of the technologically achievable. Project teams and the requisite disciplines assess the feasibility, since an incorrect estimation of the technical feasibility can result in the loss of the project. In addition, the risk that Kendrion’s engineers succeed in developing a technologically acceptable solution, but that the customer nevertheless decides not to proceed with Kendrion also needs to be managed. In order to avoid such circumstances, Kendrion is continually aiming for sole suppliership. In general, the majority of the development costs are borne by the customer, either in instalments during the development phase or as part of the selling price per unit.
Intellectual Property (IP)
The technological know-how Kendrion has accrued regularly results in inventions that can be utilised to improve existing products or develop new high-quality products which in turn enable the company to obtain an edge on the competition. There is a risk of this know-how ending up in the hands of the competition, which could ultimately put Kendrion’s leading position in jeopardy.
Kendrion mitigates this risk by the strict implementation of its IP policy. An important element of this policy is that Kendrion applies for a patent for each of the company’s most important technological innovations.In other instances the know-how acquired from projects for specific customers can be protected by concluding confidentiality agreements with the relevant customers. For this reason confidentiality agreements may also be concluded with Kendrion developers. Kendrion protects itself from the risk of infringing patents itself by cooperating with a specialised patent agency. This agency carries out studies of potential infringements of Kendrion’s rights by third parties and vice versa.
Kendrion’s results could suffer from the reduced availability of raw materials and fluctuations in their price. Steel and copper are Kendrion’s most important raw materials, followed by permanent magnets. Raw materials are purchased from reputable suppliers. Steel is Kendrion’s number-one raw material, although a large proportion of it is contained in purchased components such as turning parts. Where feasible, Kendrion concludes fixed-price arrangements with steel suppliers. These prices also govern a large number of Kendrion’s component suppliers. For copper, when the copper price risk is not passed on to the customer, Kendrion usually fixes the purchase price for the next quarters on a rolling basis. Kendrion closely monitors developments in prices for permanent magnets. The agreements Kendrion has concluded with the majority of customers who buy components containing permanent magnets provide for automatic price adjustments based on movements in the price of permanent magnets.
As far as is feasible, Kendrion actively endeavours to increase the number of alternative sources for its most important raw materials. Obviously, Kendrion aims to minimise the effects of price fluctuations on the group’s results. Raw materials are purchased separately by each business unit on the basis of their individual requirements but in accordance with the group policy reviewed periodically to exploit knowledge across business units and economies of scale.
Claims under product liability can be detrimental to Kendrion’s operations and operating results due to the resultant damage to the company’s reputation. In addition to all quality requirements and procedures, Kendrion has taken out liability insurance at group level for its operating companies to reduce the financial risks arising from possible claims under product liability. The amount and scope of the cover are comparable to those of other companies in Kendrion’s sectors and is benchmarked periodically. Kendrion also aims to limit the group’s liability exposure by employing up-to-date general terms and conditions and mandatory reviews of material or long-term contracts by legal advisors.
The nature of Kendrion’s operations and business are such that they give cause to limited environmental risks. Most Kendrion companies have been awarded ISO 14001 certification.
Please refer to page 138 and following of the 2018 Annual Integrated Report (financial statements) for an outline of Kendrion’s financial market risks and the policy to mitigate these risks or their impact.
In most countries the responsibility for accurate tax returns has been assigned to local management, who receive assistance from reputable local tax consultants. Kendrion carries out an annual inventory at corporate level, in close collaboration with renowned international tax consultants, to assess whether fiscal developments could have an effect on the company’s subsidiaries. Corporate reviews of the tax expenses and tax positions of the company’s subsidiaries are carried out once a quarter. Kendrion has developed and implemented a tax compliance audit programme. This programme serves as the basis for reviews and assessments of the operating companies’ compliance with the regulations governing a variety of taxes. The tax compliance audit programme has been incorporated in the internal audit programme.
Kendrion strongly believes that pursuing a transparent tax policy is a part of doing good business. Kendrion’s aim is to manage tax risks effectively and to comply with all applicable rules, regulations and disclosure requirements. The business is leading in setting up international structures: we declare profits and we pay tax in the jurisdictions in which the economic activity occurs. Our tax planning strategy is based on the spirit of the law. This means that we do not seek to avoid taxes through structures in tax haven jurisdictions, we strive to pay our fair share of tax in the countries in which we operate, we aim at filing accurate and timely tax returns and we strive to maintain strong and transparent relationships with tax authorities in the various countries. These values have been formalised in the Kendrion Group tax policy, which is distributed to all operating companies and is updated periodically.