HEXAGON PRIMARY BUSINESSES
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Hexagon’s risk management activities are designed to identify, control and reduce risks
associated with its business. The majority of these activities are managed within each subsidiary
of Hexagon. However, certain legal, strategic and financial risks are managed at the Group level.
Market risk concerns risks such as economic trends, competition and risks related to acquisitions
and integration. Market risks are primarily managed within each subsidiary of Hexagon.
Risk: An important part of Hexagon’s strategy is to work actively
with acquisitions of companies and businesses. Strategic
acquisitions will continue to be part of Hexagon’s growth
strategy going forward. It cannot be guaranteed, however,
that Hexagon will be able to find suitable acquisition targets,
nor can it be guaranteed that the necessary financing
for future acquisition targets can be obtained on terms
acceptable to Hexagon. This may lead to a decreasing
growth rate for Hexagon.
Acquisitions entail risk. The acquired entities’ relations
with customers, suppliers and key personnel may be negatively
affected. There is also a risk that integration processes
may prove more costly or more time consuming than
estimated and that anticipated synergies in whole or in part
fail to materialise.
Risk Management: Hexagon monitors a large number of companies to find
acquisitions that can strengthen the Group’s product portfolio
or improve its distribution network. Potential targets
are regularly evaluated on financial, technology and commercial
grounds. Every acquisition candidate’s potential
place in the Group is determined on the basis of synergy
simulations and implementation strategies. Thorough due
diligence is performed to evaluate potential risks.
From 2000 to 2016, Hexagon made more than 120 acquisitions,
including the key strategic acquisitions of Brown &
Sharpe (2001), Leica Geosystems (2005), NovAtel (2007) and
Intergraph (2010). Based on extensive experience of
acquisitions and integration and clear strategies and goals,
Hexagon is strongly positioned to successfully integrate
acquired companies into the Group.
Risk: Hexagon engages in worldwide operations that are dependent
on general economic trends and conditions that are unique for
certain countries or regions. As in virtually all businesses, general
market conditions affect the inclination and the capabilities
of Hexagon’s existing and potential customers to invest in
design, measurement and visualisation technologies. A weak
economic trend in the whole or part of the world may therefore
result in lower market growth that falls below expectations.
Risk Management: Hexagon’s business is widely spread geographically, with a
broad customer base within numerous market segments.
Potential negative effects of a downturn in the developed
world may for example be partially off-set by growth in
emerging markets and vice versa.
Risk: Parts of Hexagon’s operation are carried out in sectors
which are subject to price pressure and rapid technological
change. Hexagon’s ability to compete in the market environment
by introducing new and successful products with
enhanced functionality while simultaneously cutting costs
on new and existing products is of the utmost importance
in order to avoid erosion of market share. R&D efforts are
costly and new product development always entails a risk of
unsuccessful product launches or commercialisation, which
could have material consequences.
Risk Management: Hexagon invests annually approximately 10-12 per cent
of net sales in R&D. A total of about 3,400 employees are
engaged in R&D at Hexagon. The objective for Hexagon’s
R&D division is to transform customer needs into products
and services and to detect market and technology opportunities
Operational risks concern risks related to reception of new products and services, dependence
on suppliers and risks related to human capital. Since the majority of operational risks are
attributable to Hexagon’s customer and supplier relations, ongoing risk analysis of customers
and suppliers are conducted to assess business risks. Operational risks are primarily managed
within each subsidiary of Hexagon.
Risk: Hexagon’s business activities are conducted in a large number
of markets with multiple customer categories. In 2016,
Surveying was the single largest customer category and
accounted for 22 per cent of net sales. For Hexagon, this
customer category may involve certain risks as a downturn
or weak development in the surveying sector can have
a negative impact on Hexagon’s business. Surveying is followed
by customer categories Power and Energy with 18 per
cent, Electronics and Manufacturing with 12 per cent and
Infrastructure and Construction with 12 per cent.
Risk Management: Hexagon has a favourable risk diversification in products
and geographical areas and dependence of a single customer
or customer category is not decisive for the Group’s
performance. The largest customer represents approximately
2 per cent of the Group’s total net sales. Credit risk in
customer receivables account for the majority of Hexagon’s
counterparty risk. Hexagon believes there is no significant
concentration of counterparty risk.
Risk: Hexagon’s products consist of components from several
different suppliers. To be in a position to sell and deliver
solutions to customers, Hexagon is dependent upon deliveries
from third parties in accordance with agreed requirements
relating to, for example, quantity, quality and delivery
times. Erroneous or default deliveries by suppliers can cause
delay or default in Hexagon’s deliveries, which can result in
Risk Management: Hexagon has a favourable risk diversification and dependence
of a single supplier is not decisive for the Group’s performance.
The largest supplier accounted for approximately
1 per cent of Hexagon’s total net sales in 2016. To minimise
the risk of shortages in the supply or of excessive price variations
among suppliers, Hexagon works actively to coordinate
sourcing within the Group and to identify alternative suppliers
for strategic components. Supplier risk surveys are performed
(by Hexagon’s external partner) in order to identify
and mitigate risks associated with the suppliers’ operations.
Risk: The resignation of key employees or Hexagon’s failure to
attract skilled personnel may have an adverse impact on
the Group’s operations.
Risk Management: Since future success is largely dependent on the capacity
to retain, recruit and develop skilled staff, being an attractive
employer is an important success factor for Hexagon.
Group and business area management jointly handle risks
associated with human capital.
Risk: Hexagon’s production and distribution units are exposed to
risks (fire, explosion, natural hazards, machinery damages,
etc.) that could lead to property damages and business
Risk Management: Risk grading surveys are performed (by Hexagon’s external
partner) in order to identify and mitigate risks as well as
support local management in their loss prevention work.
Surveys are conducted in line with a long term planning
together with each subsidiary.
Risk: Hexagon relies on IT systems in its operations. Disruptions
or faults in critical systems may have a negative impact
on Hexagon’s operations, including impact on production,
Hexagon’s tangible and intellectual property and, in some
cases, the intellectual property and operations of external
Risk Management: Cyber security risks are increasing in society in general and
Hexagon works continuously to keep IT systems protected.
In addition, Hexagon invests in enhanced disaster recovery
and data storage capabilities, cyber security expertise, as
well as adequate insurance protection. Hexagon also mitigates
IT related risks in contracts with external parties.
Financial risks are managed at Group level. The Group Treasury Policy, which is updated
and approved annually by the Board of Directors, stipulates the rules and limitations for the
management of financial risks throughout the Group. Hexagon’s internal bank coordinates the
management of financial risks and is also responsible for the Group’s external borrowing and its
Risk: Hexagon’s operations are mainly conducted internationally.
During 2016, total operating earnings, excluding non-recurring
items, from operations in currencies other than EUR
amounted to an equivalent of 465.9 MEUR (570.5). Of these
currencies, USD, CHF and CNY have the biggest impact on
Hexagon’s earnings and net assets. Currency risk is the risk
that currency exchange rate fluctuations will have an adverse
effect on income statement, balance sheet or cash flow.
Sales and purchases of goods and services in currencies
other than the subsidiary’s functional currency, give rise to
Translation exposure arises when the income statement and
balance sheets are translated into EUR. The balance sheet
translation exposure might substantially affect other comprehensive
income negatively. Furthermore, the comparability
of Hexagon’s earnings between periods is affected by
changes in currency exchange rates. The income statement
translation exposure is described in the table below for the
currencies having the largest impact on Hexagon’s earnings
and net assets including the effect on Hexagon’s operating earnings in 2016.
Risk Management: Hexagon’s reporting currency is EUR, which has a stabilising
effect on certain key ratios that are of importance to
Hexagon’s cost of capital.
As far as possible, transaction exposure is concentrated to
the countries where the manufacturing entities are located.
This is achieved by invoicing the sales entities in their respective
functional currency from the manufacturing entities.
According to the Group’s financial policy, transaction exposure
should not be hedged. The rationale for this is that the
vast majority of transactions concern a short period of time
from order to payment. Moreover, a transaction hedge of a
flow only postpones the effect of a change in currency rates.
The translation exposure can be hedged by denominating
borrowings in the same currency as the corresponding net
assets. But in order to have the volatility in net debt at an
acceptable level, currently, the majority of the borrowings
is denominated in EUR.
Risk: The interest rate risk is the risk that changes in market
interest rates will adversely affect the Group’s net interest
expense and/or cash flow. Interest rate exposure arises primarily
from outstanding loans. The impact on the Group’s
net interest expense depends, among other things, on the
average interest fixing period for borrowings.
Risk Management: In accordance with the Group Treasury Policy, the average
interest rate duration of the external debt is to be between
6 months and 3 years. During 2016 interest rate derivatives
were used to manage the interest rate risk.
Risk: Credit risk, i.e., the risk that customers may be unable to
fulfill their payment obligations, account for the majority of
Hexagon’s counterparty risk.
Financial credit risk is the exposure to default of counterparties
with which Hexagon has invested cash or with which
it has entered into forward exchange contracts or other
Risk Management: Through a combination of geographical and industry diversification
of customers the risk for significant credit losses
To reduce Hexagon’s financial credit risk, surplus cash is
only invested with a limited number of approved banks and
derivative transactions are only conducted with counterparties
where an ISDA (International Swaps and Derivatives
Association) netting agreement has been established. As
Hexagon is a net borrower, excess liquidity is primarily used
to repay external debt and therefore the average surplus
cash invested with banks is kept as low as possible.
Risk: Liquidity risk is the risk of not being able to meet payment
obligations in full as they become due or only being able to
do so at materially disadvantageous terms due to lack of
Risk Management: The Group Treasury Policy states that the total liquidity
reserve shall at all times be at least 10 per cent of forecasted
annual net sales. At year-end 2016, cash and unutilised
credit limits totalled 1,595.3 MEUR (1,242.5).
Risk: Refinancing risk refers to the risk that Hexagon does not
have sufficient financing available when needed to refinance
maturing debt, because existing lenders decline
extending or difficulties arise in procuring new lines of
credit at a given point in time. Hexagon’s ability to satisfy
future capital needs is to a large degree dependent on
successful sales of the company’s products and services.
There is no guarantee that Hexagon will be able to raise the
necessary capital. In this regard, the general development
on the capital and credit markets is also of major importance.
Hexagon, moreover, requires sufficient financing in
order to refinance maturing debt. Securing these requirements
demands a strong financial position in the Group,
combined with active measures to ensure access to credit.
There is no guarantee that Hexagon will be able to raise the
sufficient funds in order to refinance maturing debt.
Risk Management: In order to ensure that appropriate financing is in place and
to decrease the refinancing risk, no more than 20 per cent
of the Group’s gross debt, including committed credit facilities,
is allowed to mature within the succeeding 12 months,
unless replacement facilities have been entered into.
main sources of financing consist of:
During Q2 2016 Hexagon issued a private placement bond
to SEK (Swedish Export Agency) of 1.500 MSEK with a tenor
of 6 years.
Risk: Hexagon’s operations, assets and staff are to a certain
degree exposed to various risk of damages, losses and injuries
which could tentatively threaten the Group’s business
continuity, earnings, financial assets and personnel.
Risk Management: To ensure a well-balanced insurance coverage and financial
economies of scale, Hexagon’s insurance programme
includes among other things group-wide property and liability
insurance, travel insurance, errors and omissions
insurance and transport insurance combined with local
insurance coverage wherever needed. The insurance programme
is periodically amended so that own risk and
insured risk are optimally balanced.
Legal risks are primarily managed within each subsidiary of Hexagon. The Group legal function
supports the subsidiaries and manages certain legal risks at Group level.
Risk: Hexagon’s main markets are subject to extensive regulation.
Hexagon’s operations may be affected by regulatory
changes, changes to customs duties and other trading
obstacles, pricing and currency controls, as well as other
government legislation and restrictions in the countries
where Hexagon is active.
Risk Management: Hexagon closely monitors legislation, regulations and
applicable ordinances in each market and seeks to adapt
the business to identified future changes in the area. To
manage country-specific risks, Hexagon observes local
legislation and monitors political development in the countries
where the Group conducts operations. To this effect,
Hexagon has adopted a worldwide compliance programme
across the Group to ensure that its subsidiaries at all times
comply with all applicable legislation, rules and ordinances.
Risk: Patent infringement and plagiarism are risks to which
Hexagon is exposed. There is no guarantee that Hexagon
will be able to protect obtained patents, trademarks and
other intellectual property rights or that submitted applications
for registration will be granted. Furthermore, there
is a risk that new technologies and products are developed
which circumvent or replace Hexagon’s intellectual property
rights. Infringement disputes can, like disputes in
general, be costly and time consuming and may therefore
adversely affect Hexagon’s business.
Risk Management: Hexagon seeks to protect its technology innovations to
safeguard the returns on the resources that Hexagon
assigns to R&D. The Group strives to protect its technical
innovations through patents and protects its intellectual
property through legal proceedings when warranted.
Risk: Certain companies within Hexagon have operations that
have environmental impact. Stricter regulation of environmental
matters can result in increased costs or further
investments for the companies within Hexagon which are
subject to such regulation.
Risk Management: Hexagon complies with all applicable laws and obligations
and obtains relevant approvals where needed. Hexagon continuously
monitors anticipated and implemented changes in
legislation in the countries in which it operates.
Risk: Hexagon operates through subsidiaries in a number of
jurisdictions and all cross-border transactions are normally
a tax risk because there are no global transfer pricing
rules. Local tax authorities have their local transfer pricing
rules to follow and authorities interpret transfer pricing
Hexagon’s interpretation of prevailing tax law, tax treaties,
OECD guidelines and agreements entered into with foreign
tax authorities may be challenged by tax authorities in
some countries. Rules and guidelines may also be subject
to future changes which can have an effect on the Group’s
tax position. Furthermore, a change of the business or part
of the business can have an impact on agreements entered
into with tax authorities in some tax jurisdictions.
The tax rate may increase if large acquisitions are made in
high tax jurisdictions or if the corporate tax rates change in
countries where Hexagon carries out substantial business.
Risk Management: Transactions between group companies are carried out
in accordance with Hexagon’s interpretation of prevailing
tax laws, tax treaties, OECD’s guidelines and agreements
entered into with foreign tax authorities and are normally
at arm’s length.
Investor Relations Manager
Phone: +46 8 601 26 27