Risk management​

Risk: An important part of Hexagon’s current and future growth strategy is to actively pursue strategic acquisitions of companies and businesses. 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, or at all. A lack of acquisition financing or suitable acquisition targets 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 by the acquisition. 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. An acquisition of a company that is not conducting its business in a sustainable way or in compliance with Hexagon’s Code of Business Conduct and Ethics may have a negative impact on Hexagon’s reputation.

Risk management: Hexagon monitors many companies to find acquisitions that can strengthen the Group’s product portfolio or improve its distribution network. Potential targets are regularly evaluated based on financial, technology and commercial grounds. Every acquisition candidate’s potential place in the Group is determined based on synergy simulations and implementation strategies. Every effort to comlete a thorough due diligence is made in order to evaluate potential risks.

From 2000 to date, Hexagon completed more than 170 acquisitions. Based on its extensive experience in acquisitions and integration and clear strategies and goals, Hexagon is strongly positioned to successfully integrate acquired companies into the Group. In Hexagon’s standard due diligence process, a number of sustainability elements are included, such as detailed consideration about the internal controls of the target company, quality business practices, environmental matters, employee matters, ISO (International Organisation for Standardisation), LEED (Leadership in Energy and Environmental Design) or other industry certifications, and anti-corruption/FCPA (Foreign Corrupt Practices Act) and export controls. Hexagon also evaluates whether target companies are following a robust code of conduct and whether the target companies’ corporate responsibility and sustainability programmes are effective.

Risk: Hexagon engages in worldwide operations that are dependent on global economic and financial market conditions, as well as conditions that are unique to certain countries or regions. General economic and financial market conditions affect the inclination and the capabilities of Hexagon’s existing and potential customers to invest in design, measurement and visualisation technologies. Weak macroeconomic conditions globally or in part of the world may therefore result in lower market growth that falls below expectations and lower revenues for Hexagon.

The Covid-19 pandemic has caused significant disruption to the global economy, including in all of the regions in which Hexagon, its suppliers, distributors, business partners and customers do business and in which Hexagon’s workforce is located. The Covid-19 pandemic and efforts to manage it, including those by governmental authorities, have had, and could continue to have, significant impacts on global markets. The continuing or resurgence of Covid19 pandemic or new variants could have an impact on important Hexagon customer industries, and an increase of raw material and intermediate goods costs could impact Hexagon’s sales potential and cost structure. While the duration and severity of those impacts on Hexagon’s business are highly uncertain, they have had, and could continue to have, an adverse effect on the business, financial condition and results of operations in many ways. 

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.

While Hexagon have developed and continue to develop plans intended to help mitigate the negative impact of the pandemic on the business, a protracted economic downturn may limit the effectiveness of those mitigation efforts.

Risk: Understanding geopolitical risk, how geography and economics influence politics and the relations between countries, is important in a world that has become more closely intertwined due to the rise of globalisation. 

Current geopolitical risks include the current crisis in Ukraine resulting from the invasion of the region by Russian forces and the corresponding global sanctions now facing Russian business, political and economic uncertainty surrounding the vulnerability of the interconnected global economy to pandemics and the potential for further escalation of the trade issues between the US and China. Although it is difficult to assess the evolution and impact of intensification of war hostilities, ongoing political tensions and international economic sanctions could have significant negative impacts on the global, international and European economy and the performance of financial markets and on the markets for raw materials (energy section, prices and availability of electricity and gas).

Understanding how these geopolitical risks may affect Hexagon’s organisation, operating results and strategies is critical to making accurate projections about Hexagon’s future growth and profitability. However, what impact the Ukraine crisis, pandemics and/or an escalating trade war between the US and China will have on world trade and the global markets, and the demand for Hexagon’s products, over the coming years is still fairly uncertain and will to some extent depend upon resolution of any crises and whether agreements regarding access to the markets can be settled.

Risk management: In order to eliminate risks that may occur due to geopolitics, such as sanctions and/or global perception and reputational risk resulting from doing business in Russia in response to the Ukraine crisis, disruption to international commerce or the global economy, Hexagon is following developments closely while evaluating different strategies in order to prepare for and handle possible scenarios that may affect Hexagon’s organisation and the ability to do business in different parts of the world in the near term and over the coming years

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 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. Other inherent risks exist with competitors, such as consolidation or entry into Hexagon’s markets by companies with significant resources. R&D efforts are costly and new product development always entails a risk of unsuccessful product launches or commercialisation, which could have material adverse consequences on Hexagon. Further, technological innovation and changing trends, such as disruptive technologies, supply chains, new market entrants or novel business models, creates inherent risks that are difficult to foresee.

Risk management: Hexagon invests annually approximately 10–12 per cent of its net sales in R&D. In total more than 5,000 employees are engaged in R&D at Hexagon. The objectives for Hexagon’s R&D division are to transform customer needs into products and services and to detect market and technology opportunities early on. Introducing new products and technologies requires active intellectual property management to secure Hexagon’s technological position.

Risk: Hexagon’s business activities are conducted in a large number of markets with multiple customer categories. In 2022, Surveying was the single largest customer category and accounted for 20 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 Electronics and Manufacturing with 17 per cent, Infrastructure and Construction with 15 per cent and 10 per cent and Power and Energy with 12 per cent. Changing demand of Hexagon’s customers is possible as technology needs and consumption change over time.

Hexagon may face risks, including reputational risks, while global conflicts persist, such as the Ukraine crisis (even though Hexagon’s business in Russia is frozen) due to unauthorized use or misuse of the company’s products. Further, the continuing or resurgence of the Covid-19 pandemic or any assimilated pandemic could result in delays, cancellations, or changes to user and industry conferences and other marketing events relating to Hexagon’s solutions, including its own customer and partner events, which may negatively impact the ability to obtain new and retain existing customers, and effectively market Hexagon’s solutions.

Risk management: Hexagon has a favourable risk diversification in products and geographical areas, and no single customer or customer category is decisive for the Group’s performance. The largest customer represents approximately 1 per cent of the Group’s total net sales. Credit risk in customer receivables accounts for the majority of Hexagon’s counterparty risk. Hexagon believes there is no significant concentration of counterparty risk. Further, in response to the Ukraine crisis, Hexagon has suspended new business in Russia. If any services are required to support and maintain those Russian customers who are not subject to sanctions, Hexagon will continue to provide such minimal support activities.

Hexagon’s compliance programme addresses all principles contained in the Code of Business Conduct and Ethics, including export controls. Hexagon is committed to complying with appropriate export controls, and the company’s compliance efforts aim to safeguard peace and security by preventing the unlawful trading of items (i.e., goods, software or technology) or diversion to destinations where they may be used for illegal purposes.

Risk: Hexagon’s hardware 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 reduced sales. Supply chain, transportation and logistics availability are increasingly difficult and costly due primarily to Covid-19 pandemic related factors and shortages. Further, Hexagon uses subcontractors, distributors, resellers and other representatives. Hexagon may face risks, including reputational risks, if suppliers are operating in ways that negatively impact human rights. The continuing or resurgence of the Covid-19 pandemic could temporarily result in an inability to meet in person or otherwise effectively communicate with current or potential vendors, suppliers, and partners, which may negatively affect current and future relationships with such vendors, suppliers, and partners and Hexagon’s ability to generate demand for solutions.

If there were to be unmanaged negative impacts following a supplier’s noncompliance with Hexagon’s Code of Business Conduct and Ethics and/or Hexagon’s Supplier Code of Conduct, it may result in reputational risks for Hexagon.

Risk management: Hexagon has a favourable risk diversification, and no single supplier is decisive for the Group’s performance. The largest supplier accounted for approximately 1 per cent of Hexagon’s total net sales in 2022. To minimise the risk of supply shortages 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.

Hexagon also has a sustainability risk assessment and supplier audit process in place, including handling the risk of breaches in human rights. Hexagon has a compliance programme in place for suppliers to manage social and ethical risks. Hexagon regularly conducts supplier audits to ensure suppliers are compliant with the Hexagon’s Code of Business Conduct and Ethics and Hexagon’s Supplier Code of Conduct.

Risk: Hexagon’s production and distribution units are exposed to risks (fire, explosion, natural hazards, machinery damages, cyber threats, infrastructure failures, power outages, etc.) that could lead to property damage and business interruption. This risk is further accentuated by climate change, which has a direct impact on the frequency and severity of these events.

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 with each subsidiary in accordance with a long-term plan. Hexagon has implemented ISO 9001 at the majority of the largest production sites.

Risk: The resignation of key employees or Hexagon’s failure to attract skilled and diverse personnel to all different levels within the organisation may have an adverse impact on the Group’s operations. Further, maintaining Hexagon’s company culture is critical to attracting and retaining top talent.

Hexagon’s workforce was and continues to be in various parts of its organisation, unable or unwilling to work on-site or travel as a result of event cancellations, facility closures, shelter-inplace, travel and other restrictions and changes in industry practice due to the Covid-19 pandemic, or if they, their co-workers or their family members become ill or otherwise require care arrangements. These workforce disruptions have adversely affected and could continue to adversely affect Hexagon’s ability to operate, including to develop, manufacture, generate sales of, promote, market and deliver hardware and software products, solutions and services, and provide customer support. Adoption of new laws or regulations, or changes to existing laws or regulations, that may be imposed as a result of the continuing or resurgence of the Covid-19 pandemic, may cause risks in the company’s ability to hire and retain skilled professionals.

Risk management: Since future success is largely dependent on the capacity to retain, recruit and develop skilled staff, being an attractive employer to both potential and existing employees is an important success factor for Hexagon. Group and business area management jointly handle risks associated with human capital. Hexagon works with a structured approach to HR and market-based remuneration to ensure employee satisfaction. Hexagon uses employee engagement as the overall measure in the employee survey.

In order to attract skilled employees, Hexagon cooperates with multiple universities and colleges around the world, aiming at training and hiring students with industry-ready skills.

Risk: Hexagon provides sensors, software and data to its customers. 60 per cent of the revenues are from software and services. Hexagon does not operate any business that require carbon credits. However, stricter regulation of environmental matters can result in increased costs or further investments for the companies within Hexagon which are subject to such regulation. Climate change can result in natural disasters and increase the risk of physical damage on assets and supply shortages. Hexagon is impacted by such legislation in a manner similar to other companies operating in these fields.

Risk management: Hexagon believes that it is in material compliance 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. Hexagon routinely assesses the risk of climate change on its operations as part of its Insurance Programme. Hexagon has implemented ISO 14001 at the majority of the largest production sites and has implemented a sustainability programme to reduce its carbon impact in its own operations and in its value chain.

Risk: Corruption negatively impacts communities and overall global economic development and erodes the trust necessary to build a stable business environment. Additionally, businesses such as Hexagon may be held liable for the corrupt actions taken by employees, strategic or local partners or other representatives. If Hexagon or its intermediaries fail to comply with anti-corruption laws, governmental authorities could seek to impose civil and/or criminal fines and penalties which could have an adverse effect on Hexagon’s business.

Risk management: For Hexagon, anti-corruption compliance is of utmost importance, as it helps Hexagon advance its financial interests and brand value. Hexagon has a robust Code of Business Conduct and Ethics and Anti-Corruption Compliance Programme in place, covering the entire Group, including policies, processes and training. The anti-corruption compliance documents include policies in such areas as gifts and entertainment (both to and from third parties), hiring candidates with government connections and engaging in and transacting business with third parties.

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 parties. The Covid-19 pandemic has presented security challenges as employees and those of Hexagon’s partners, customers and service providers work remotely from non-corporate managed networks during the Covid-19 pandemic and potentially beyond.

Incidents may also lead to data privacy infringements such as unauthorised access, leakage or loss of data. Data security and integrity are critical issues for the Hexagon Group. Under the GDPR, and other analogous legislation in various jurisdictions, and ePrivacy regulations, Hexagon has firm legal requirements to protect against personal information (PI) data breaches. The regulations extend to all vendors that Hexagon uses to collect, store and process PI data on its behalf. In China, there is a similar law recently adopted to protect various data types, including PI data. It is critical for Hexagon to protect and secure all data as the costs of remediating a serious breach are high and can also be damaging to Hexagon’s reputation.

Risk management: Cyber security risks are increasing in society in general and Hexagon works continuously to keep the company’s IT systems protected. In addition, Hexagon invests in enhanced disaster recovery and data storage capabilities, cyber security expertise, and adequate insurance protection. Hexagon also mitigates IT-related risks through contracts with external parties.

Hexagon has mandated that all divisions must implement a recognised cybersecurity framework. Hexagon has set the minimum standard of implementing the NIST-800-171 framework as the entry-level approach. Divisions will assess their needs as they relate to customer requirements and may need to implement more stringent frameworks such as ISO27001/NIST-800-53.

Risk: Hexagon’s operations are mainly conducted internationally. During 2022, total operating earnings, excluding adjustments, from operations in currencies other than EUR amounted to an equivalent of 1,232.7 MEUR (975.1). Of these currencies, CHF, CNY and USD 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 the 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 transaction exposure. Translation exposure arises when the income statement and balance sheet 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 2022.

¹Compared to EUR and 2021

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 much as possible, currency transaction exposure is concentrated in the countries where the manufacturing entities are located. This is achieved by invoicing the sales entities in their respective functional currency by the manufacturing entities. According to the Group’s financial policy, currency transaction exposure should not be hedged using external financial instruments. The rationale for this is that the vast majority of transactions entail a short period of time from order to payment. Moreover, a transaction hedge only postpones the effect of a change in currency rates.

The translation exposure can be mitigated 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 rate 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 the year, interest rate derivatives were used to manage the interest rate risk..

Risk: Credit risk, i.e., the risk that customers may be unable to fulfil their payment obligations, accounts 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 has entered into forward exchange contracts or other financial instruments.

Risk management: Through a combination of geographical and industry diversification of customers, the risk for significant credit losses is reduced. 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 cash resources.

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 2022, cash and unutilised credit limits totalled 1,429.7 MEUR (1,341.5).

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 to provide additional credit 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 generate necessary capital from sales or from third party financing arrangements. In this regard, the general development of 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 of the Group, combined with active measures to ensure access to credit. There is no guarantee that Hexagon will be able to raise sufficient funds in order to refinance maturing debt.

Risk management: In order to ensure that appropriate financing is in place and to decrease 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. 

Hexagon’s main sources of financing consist of:

• A multicurrency revolving credit facility (RCF) established during 2021. The RCF amounts to 1,500 MEUR with a tenor of 5+1+1 years.
• A Swedish Medium-Term Note Programme (MTN) established during 2014. The MTN programme amounts to 20,000 MSEK and gives Hexagon the option to issue bonds with tenors of up to 6 years.
•  A Swedish Commercial Paper Programme (CP) established during 2012. The CP programme gives Hexagon the option to issue commercial paper for a total amount of 15,000 MSEK with tenor up to 12 months.

Risk: Hexagon’s operations, assets and staff are to a certain degree exposed to various risks 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 owned risk and insured risk are optimally balanced.

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, and pricing and currency controls, as well as other government legislation and restrictions in the countries where Hexagon is active. For example, more stringent regulations have been passed or are being developed in several jurisdictions, causing increased responsibilities for companies regarding the privacy and processing of personal data. These changing requirements and more stringent rules impose a risk of non-compliance with these data protection regulations, which could result in substantial legal fees and damage to Hexagon’s reputation. Additional areas of regulatory uncertainty include laws and regulations related to environmental sustainability (including climate change). For example, new laws and regulations in response to climate change could result in increased energy efficiency for Hexagon’s products and increased compliance and energy costs.

Risk management: Hexagon closely monitors legislation, regulations and applicable ordinances in each market and seeks to adapt the business to identified future changes in each market. To manage countryspecific risks, Hexagon observes local legislation and monitors political developments 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. Further, with respect to the Ukraine crisis, Hexagon will continue complying with all applicable export control restrictions and sanctions laws relevant to our operations and with the rules of ethics and international standards.

Risk: Intellectual property infringement and plagiarism by third parties 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. Additionally, third parties may assert that Hexagon’s products infringe their intellectual property rights.

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 rights through legal proceedings when warranted. Such intellectual property rights can generally only be enforced in jurisdictions that have granted such protections or recognise these rights.

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 follow their own local transfer pricing rules and authorities interpret transfer pricing guidelines differently. Hexagon frequently interacts with local taxing authorities and frequently has several ongoing tax audits in progress.

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 adverse effect on the Group’s tax position. Furthermore, a change in 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. Risks are also presented by new accounting rules or interpretations by the applicable governing bodies.