Risks

Uncertainty about future developments and the course of events is a natural risk for any business. Risk-taking in itself provides opportunities for continued economic growth, but naturally the risks may also have a negative impact on business operations and company goals. It is therefore essential to have a systematic and efficient risk assessment process and an effective risk management program in general.

The purpose of risk management at ASSA ABLOY is not to avoid risks, but to take a controlled approach to identifying, managing and minimizing the effects of these risks. This work is based on an assessment of the probability of the risks and their potential impact on the Group.

ASSA ABLOY is an international group with a wide geographical spread, involving exposure to various forms of strategic, operational and financial risks. Strategic risks refer to changes in the business environment with potentially significant effects on ASSA ABLOY’s operations and business objectives. Operational risks comprise risks directly attributable to business operations, entailing a potential impact on the Group’s financial position and performance. Financial risks mainly comprise financing risk, currency risk, interest rate risk, credit risk, and risks associated with the Group’s pension obligations.

ASSA ABLOY’s Board of Directors has overall responsibility for risk management within the Group and determines the Group’s strategic focus based on recommendations from the Executive Team. In view of the decentralized structure of the Group, and to keep risk analysis and risk management as close as possible to the actual risks, a large proportion of operational risk management takes place at division and business unit level.

Strategic risks

Changes in the business environment with potentially significant effects on operations and business objectives.

  • Customer behavior
  • Competitors
  • Brand positioning
  • Country-specific risks etc.

Operational risks

Risks directly attributable to business operations with a potential impact on financial position and performance.

  • Legal and environmental risks
  • Acquisition of new businesses
  • Restructuring measures
  • Availability and price fluctuations of raw materials
  • Customer dependence etc.

Financial risks

Financial risks with a potential impact on financial position and performance.

  • Financing risks
  • Currency risks
  • Interest rate risks
  • Financial credit risks
  • Risks associated with pension obligations

Strategic risks

The risks of this nature encountered by ASSA ABLOY include various forms of business environment risks with an impact on the security market in general, mainly changes in customer behavior, competitors and brand positioning. In addition, there are country-specific risks.

ASSA ABLOY has global market penetration, with sales and production in a large number of countries. The emphasis is on western Europe and North America, but the proportion of sales in Asia and in central and eastern Europe has increased in recent years. The Group is therefore naturally exposed to both general business environment risks and country-specific risks, including political decisions and comprehensive changes in the regulatory framework etc. Changes in customer behavior in general and the actions of competitors affect demand for different products and their profitability.

Customers and suppliers, including the Group’s relationships with them, are subject to continuous local review. As regards competitors, risk analyses are carried out both centrally and locally.

The Group owns a number of the strongest brands in the industry, including several global brands that complement the ASSA ABLOY master brand. Local product brands are gradually being linked increasingly to the master brand.

Activities to maintain and further strengthen ASSA ABLOY’s good reputation are constantly ongoing. These include ensuring compliance with ASSA ABLOY’s Code of Conduct. The Code is an expression of the Group’s high ambitions with regard to social responsibility, commitment and environmental considerations.

Operational risks

Operational risks comprise risks directly attributable to business operations, with a potential impact on the Group’s financial position and performance. They include legal and environmental risks, acquisition of new businesses, restructuring measures, availability and price fluctuations of raw materials, customer dependence etc. Risks relating to compliance with laws and regulations and to financial reporting and internal control are also included in this category.

The table below describes in more detail the management of these risks.

Financing risks

Group Treasury at ASSA ABLOY is responsible for the Group’s short- and long-term financing, financial cash management, currency risk and other financial risk management. Financial operations are centralized in a Treasury function, which manages most financial transactions as well as financial risks with a group-wide focus.

A financial policy, which is approved by the Board, regulates the allocation of responsibilities and control of the Group’s financing activities. Group Treasury has the main responsibility for financial risks within the framework established in the financial policy. A large number of financial instruments are used in this work. Accounting principles, risk management and risk exposure are described in more detail in ASSA ABLOY's Annual Report 2014 Notes 1 and 34, as well as Note 24 regarding post-employment employee benefits.

The Group’s financial risks mainly comprise financing risk, currency risk, interest rate risk, credit risk, and risks associated with the Group’s pension obligations.

Financing risk

Financing risk refers to the risk that financing the Group’s capital requirements and refinancing outstanding loans become more difficult or more expensive. It can be reduced by maintaining an even maturity profile for borrowing and a high credit rating. The risk is further reduced by substantial unutilized confirmed credit facilities.

Currency risk

Since ASSA ABLOY sells its products in countries worldwide and has companies in a large number of countries, the Group is exposed to the effects of exchange rate fluctuations. These fluctuations affect Group earnings when the income statements of foreign subsidiaries are translated to Swedish kronor (translation exposure), and when products are exported and sold in countries outside the country of production (transaction exposure). Translation exposure is primarily related to earnings in USD and EUR. This type of exposure is not hedged. Currency risk in the form of transaction exposure, i.e. the relative values of exports and imports of goods, is relatively limited in the Group, even though it is expected to increase over time due to rationalization of production and purchasing. In accordance with financial policy, the Group only hedged a very limited part of current currency flows in 2014. As a result, exchange rate fluctuations had a direct impact on business operations.

Exchange rate fluctuations also affect the Group’s debt-equity ratio and equity. The difference between the assets and liabilities of non-Swedish subsidiaries in their respective foreign currency is affected by exchange rate fluctuations and causes a translation difference, which affects the Group’s comprehensive income. A general weakening of the Swedish krona leads to an increase in net debt, but at the same time increases the Group’s equity. At year-end, the largest foreign net assets were denominated in USD and EUR.

Interest rate risk

With respect to interest rate risks, interest rate changes have a direct impact on ASSA ABLOY’s net interest expense. The net interest expense is also impacted by the size of the Group’s net debt and its currency composition. Net debt was SEK 22 327 M (19,595) at year-end 2014. Debt was mainly denominated in SEK, USD and EUR. Group Treasury analyzes the Group’s interest rate exposure and calculates the impact on income of interest rate changes on a rolling 12-month basis. In addition to raising variable-rate and fixed-rate loans, various interest rate derivatives are used to adjust interest rate sensitivity.

Credit risk

Credit risk arises in ordinary business operations and as a result of the financial transactions carried out by Group Treasury. Trade receivables are spread across a large number of customers, which reduces the credit risk. Credit risks relating to operational business activities are managed locally at company level and monitored at division level.

Financial risk management exposes ASSA ABLOY to certain counterparty risks. Such exposure may arise, for example, as a result of the placement of surplus cash, borrowings and derivative financial instruments. Counterparty limits are set for each financial counterparty and are continuously monitored.

Pension obligations

At year-end 2014, ASSA ABLOY had obligations for pensions and other post-employment benefits of SEK 7,049 M (534). The Group manages pension assets valued at SEK 4,103 M (3,425). Provisions in the balance sheet for defined benefit and defined contribution pension plans and post-employment medical benefits totaled SEK 2,946 M (2,015). Changes in the value of assets and liabilities from year to year are due partly to the development of equity and debt capital markets and partly to the actuarial assumptions made. Significant revaluations of obligations and plan assets are recognized on a current basis in the balance sheet and in other comprehensive income. The assumptions made include discount rates, as well as anticipated inflation and salary increases.

Operational risks Risk management Comments
Legal risks The Group continuously monitors anticipated and implemented changes in legislation in the countries in which it operates.

A group-wide legal policy has been implemented, specifying the legal framework in which business operations may be conducted.

Ongoing and potential disputes and other legal matters are reported regularly to the Group's central legal function.

Guidelines and policies on compliance with current competition, export control and anti-corruption legislation have been implemented. Legal risks associated with property and liability issues are continually evaluated.
At year-end 2014 there are considered to be no outstanding legal disputes that may lead to significant costs for the Group.
Environmental risks  Ongoing and potential environmental risks are regularly monitored in the operations. External expertise is brought in for environmental assessments when necessary. Prioritized environmental activities and other information on sustainable development are reported in the Group's Sustainability Report.
Acquisition of new businesses Acquisitions are carried out by a number of people with considerable acquisition experience and with the support of, for example, legal and financial consultants.

Acquisitions are carried out according to a uniform and predefined group-wide process. This consists of four documented phases: strategy, evaluation, implementation and integration.
The Group's acquisitions in 2014 are reported in the Report of the Board of Directors and in Note 30, Business combinations.
Restructuring measures

The Group is implementing specific restructuring programs, which entail some production units changing direction mainly to final assembly while certain units are closed.
The restructuring programs are carried on as a series of projects with stipulated activities and schedules.

The various projects within the respective restructuring program are systematically monitored on a regular basis.
The scope, costs and savings of the restructuring programs are presented in more detail in the Report of the Board of Directors.
Price fluctuations and availability of raw materials Raw materials are purchased and handled primarily at division and business unit level.

Regional committees coordinate these activities with the help of senior coordinators for selected material components.
For further information about procurement of materials, see Note 7, Expenses by nature..
Credit losses Trade receivables are spread across a large number of customers in many markets. No individual customer in the Group accounts for more than 10 percent of sales.

Commercial credit risks are managed locally at company level and monitored at division level.
Receivables from each customer are relatively small in relation to total trade receivables. The risk of significant credit losses for the Group is considered to be limited.
Insurance risks A group-wide insurance program is in place, mainly relating to property, business interruption and liability risks. This program covers all business units.

The Group's exposure to the risk areas listed above is regulated by means of its own captive insurance company.
The Group's insurance cover is considered to be generally adequate, providing a reasonable balance between assessed risk exposure and insurance costs.
Risks relating to internal control of financial reporting The organization is considered to be relatively transparent, with a clear allocation of responsibilities.

Instructions about the allocation of responsibilities, authorization and other internal control procedures are laid down in an internal control manual. Compliance with internal control is evaluated annually for all operating companies.
Internal control and other related issues are reported in more detail in the Report of the Board of Directors, section on Corporate governance.
Risks relating to financial reporting A well-established Controller organization at both division and Group level analyzes and monitors financial reporting quality.

An annual internal audit of financial reporting is performed for selected group companies on a rotating basis.
See also the section 'Basis of preparation' in Note 1.

Further information on risk management relating to financial reporting can be found in the Report of the Board of Directors, section on Corporate governance.