Organization of risk management
Vaisala has a risk management policy that has been approved by the Board of Directors and that covers the company's strategic, operating and financing risks. Vaisala’s strategic management group regularly assesses risk management policies, and the scope, adequacy and focus areas of related practices. The policy aims at ensuring the safety of the company's personnel, operations and products as well as the continuity of operations. The policy also covers intellectual capital, corporate image and brand protection.
Risk management is integrated into business processes and operations and each employee’s daily work. This is accomplished by the risk management process that was approved by Vaisala's strategic management group in May 2010. The deployment of the risk management process was started during the latter half of 2010 and is intended to cover most of the businesses and functions by the end of 2011.
The risk management process is a continuous tool for risk identification and management. The purpose of the process is to support the company’s strategy and planning process and to provide more information, supporting better decision making.
Vaisala’s risk management process consists of risk identification, risk assessment, risk management actions, follow-up and risk reporting. Risks are reported to the strategic management group quarterly. The most significant risks are reported to the board annually and whenever considered necessary.
Risk management in Vaisala is not a separate process, but it operates as part of the company’s operating calendar.
More detailed operational instructions are defined by the strategic management group. These include approval, bidding and procurement authorizations and terms of payments.
The main principles of the investment policy in the order of their priority are a) minimizing credit loss risks, b) ensuring liquidity, and c) maximizing return on investment. The maximum term of investment is 12 months.
Usual risks related to international business affect Vaisala’s operating environment. The most significant of these are risks relating to changes in the global economy, currency exchange rates (with particular respect to the U.S. dollar), supply network management and production activities. Vaisala monitors these risks and prepares for them in accordance with the company's risk management policy.
Group-level insurance programs have been established to deal with manageable operating risks. These programs cover risks relating to property damage, business interruption, different liabilities, transport and business travel. Vaisala's ability to tolerate risks is good and the company has a strong capital structure, ensuring capital adequacy.
Near-term risks and uncertainties
The most significant near term risks and uncertainties are estimated to relate to the company's ability to improve its delivery capability, availability of critical components, changes in the global economy, shifts of currency exchange rates, interruptions in manufacturing, customers' financing capability, changes in purchasing or investment behavior, and delays or cancellations of orders and deliveries. The changes in the competitive landscape may affect the volume and profitability of the business by introducing new competitors and price erosion in areas that traditionally have been strong for the company, which may constitute risks for both the net sales and profit.
Market development and the realization of projects in the industrial segments affect the net sales and operating result. The company has additionally expanded its project activities into emerging markets where the profitability of the projects is lower than normally, due to the market-making nature of the business. The share of project business out of the total business volume is also growing. Should the assumptions regarding the profitability and new business opportunities in the project business prove wrong, this may constitute risks for Vaisala's net sales and profit.
Changes in subcontractor relations, their operations or operating environment may have a negative impact on Vaisala's business. Vaisala monitors these risks and prepares for them in accordance with the company's risk management policy.
Vaisala is currently implementing significant development projects, which are building the foundation for a successful execution of Vaisala's strategy. A new Group-wide ERP system is in the implementation phase.
Vaisala has made acquisitions and their impact on net sales and operating result depends essentially on the success of integration activities. In case the assumptions about achievable synergies prove incorrect or the integration fails, these constitute a short-term risk regarding Vaisala's net sales and result.
Interest rate risk
The company has no significant interest-bearing liabilities. Interest rate risk arises from the effects of interest rate changes on interest-bearing receivables and liabilities in different currencies. According to the company’s management, the interest rate risk is small and it is included in the interest of the invested assets if the interest rate changes. Interest rate changes affect the fair value of both cash flows and investments. A change of one percentage point in the interest rate would affect the company’s result after taxes by around EUR 56 (358) thousand, calculated on an approximate investment position of EUR 7.5 (48.3) million. Further information on interest-bearing receivables is given in Note 21.
Market risk on investment activity
At the end of 2010 there were no significant investments. In 2008, the Group invested its cash reserves in short-term income funds and is therefore exposed in its operations to a price risk arising from fluctuations in the quoted market prices of income funds. The income fund investments were realized during 2009. Because issuers (states, municipalities and financial institutions) whose credit rating is very good are selected as the locations for fund investments, the credit risk connected with the funds was low. The funds invest in euro-denominated interest income products, so there was no currency risk. A rise in short-term market interest rates momentarily lowered the value of fund shares. A change in fair value of EUR 2,120 thousand loss (2,209) in 2009 was recognized in the income statement under ‘financial income and expenses’. Further information on assets recognized at fair value through profit and loss is given in Note 20.
Currency risk
The international nature of operations exposes the Group to risks that arise when investments in different currencies are converted into the parent company’s functional currency. The most significant currencies for the Group are the US dollar, the Japanese yen and the British pound. The Group has many investments in its foreign subsidiaries, whose net assets are exposed to currency risks. The Group does not hedge the currency risks related to its subsidiaries' net assets. The separate table features a sensitivity analysis (SA) on how changes in the rates of the most important currencies for the Group and in the euro, both in terms of average rate and balance sheet day rate, would affect the consolidated profit after taxes. The SA calculation does not incorporate the effects of parent company purchases in other currencies during the financial year.
| USD/EUR |
Exchange rate rise 10 % 699.0 |
Exchange rate fall 10 % -779.0 |
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| JPY/EUR |
Exchange rate rise 10 % 97.7 |
Exchange rate fall 10 % -79.9 |
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| GBP/EUR |
Exchange rate rise 10 % 333.1 |
Exchange rate fall 10 % -309.4 |
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| 2009 |
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| USD/EUR |
Exchange rate rise 10 % 459.1 |
Exchange rate fall 10 % -447.5 |
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| JPY/EUR |
Exchange rate rise 10 % 91.6 |
Exchange rate fall 10 % -75.0 |
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| GBP/EUR |
Exchange rate rise 10 % 209.3 |
Exchange rate fall 10 % -190.6 |
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The Group recognizes monetary items at net in accounting and hedges them with currency forwards to which the Group does not apply hedge accounting in accordance with IAS 39. Around 43% of the Group’s net sales arises in US dollars, 6% in Japanese yens and 4% in British pounds. A significant proportion of Group purchases takes place in euros. Currency forwards are used to hedge the net position arising from these. The degree of hedging is around 50 per cent of the order book and trade receivables. The degree of hedging at the end of the financial year was 54%. Hedging is arranged by the parent company (Note 11. Financial income and expenses).
Liquidity riskThe Group aims to continuously assess and observe the level of funding required to finance the business to ensure that the Group has sufficient liquid assets for financing its operations. Group financing is arranged through the parent company, and the financing of the subsidiaries is arranged through internal loans. The parent company also provides the subsidiaries with the necessary credit limit guarantees. The parent company assumes responsibility for financial risk management and for investing surplus liquidity. To fulfill the liquidity need, the parent company has EUR 20 million credit loan limit, which is currently unused. Additionally, the subsidiaries have EUR 1.3 million credit loan limit, currently unused. The company has no other external financial liabilities other than those related to finance leasing (Note 24. Interest-bearing liabilities).
With the company's current balance sheet structure, liquidity risks are non-existent.
Counterparty riskLiquid assets are directed, within set limits, to investments whose creditworthiness is good. The investments and investment limits are redefined annually. Further information on the classification of investments is given in Note 21. Cash and cash equivalents.
Credit riskThe Group applies a stringent credit issuance policy. Credit risks are hedged by using letters of credit, advance payments and bank guarantees as terms of payment. According to Group management, the company has no material credit risk concentrations, because no individual customer or customer group represents an excessive risk, thanks to global diversification of the company's customer pool. Total credit losses arising from accounts receivable and recognized for the financial year amounted to EUR 0.5 million (0.5), and the total net credit loss for the financial year was EUR 0.5 million (0.5). The credit losses resulted from an unexpected change in the financial environment of a customer. The maximum amount of the Group’s credit risk corresponds with the carrying amount of financial assets at the end of the financial year. The periodic distribution of accounts receivable items is presented in Note 20 in the Notes to the Financial Statements.
Management of capital assetsManagement of the Group’s capital assets aims at ensuring normal company operation and increasing shareholder value with an optimum capital structure. The goal is to attain the best possible returns over the long term. An optimum capital structure also ensures lower capital costs. Capital structure can be affected through dividend distribution and share issues, for example. The Group can alter or adjust the amount of dividend payable to shareholders, the amount of capital returned to them or the number of new shares issued. The company has no significant financial liabilities. The shareholders’ equity indicated in the consolidated balance sheet represents the capital assets managed. The Group does not apply external capital requirements.