Risk Management

Identified risks are discussed and the progress reviewed at both Rotork Management Board and divisional board meetings during the year. Senior management, in association with the Board, meets twice a year to consider the Group risk matrix and progress with mitigating actions. The external Auditor is invited to attend one of the meetings each year.

     
STRATEGIC RISKS     
Description Potential Impact Mitigation
Competition on price, for example as a result of an existing competitor moving to manufacture in a lower cost area of the world. Where a competitor decides to use cost savings to reduce their selling prices, this could lead to a reduction in the general market price. Rotork might need to respond to a change in market price levels whilst still maintaining the price premium currently enjoyed for some products. This could impact our market share and would impact our ability to grow the Group revenue. Rotork already has a direct presence, in terms of production, sales and service support, in many low cost locations and regularly reviews opportunities in other countries. There is a constant drive to maintain differentiation from the competition both in terms of the quality of our products and of the service we provide and thus ensure that price is not the only means of gaining a competitive advantage.
     
Not having the appropriate products, either in terms of features or costs. In order to be able to compete on a project, our products must meet both the necessary specification and pricing level. A failure on either count could harm our competitive position and result in us not winning the project.  Development of products, or acquisition of companies with products, to meet the required market driven specifications and broaden our product portfolio is an ongoing activity as is the drive to take cost out of our products to meet target pricing levels. 
     
Lower investment in Rotork’s traditional market sectors.  A reduction in capital or maintenance expenditure in one of Rotork’s key market sectors would result in a smaller addressable market, which in turn could lead to a reduction in revenue from that sector.  Identification of potential new end markets or ones which are becoming more active takes place in each location and is coordinated at divisional level. This is supported by product development and innovation to address new markets and new applications in existing markets. At a Group level our geographic and end market diversification provides resilience to a reduction in any one area or market but, as we have seen this year, may not fully mitigate a change in the larger end markets. 
     
OPERATIONAL RISKS    
Description  Potential Impact  Mitigation 
Major in field product failure arising from a component defect or warranty issue which might require a product recall. Replacement of defective components or complete units would give rise to a direct financial cost and there could also be a reputational risk. This in turn could impact our ability to achieve premium pricing.  A comprehensive set of quality control and new product introduction procedures operates over suppliers. These include supplier visits, audits and a scorecard system to measure their performance. In some markets, legislation determines that this risk is entirely passed to the end-user. Our global service coverage ensures that any product failure issues could be dealt with quickly and efficiently to minimise any reputational impact. 
     
Failure of a key supplier or a tooling failure at a supplier causing disruption to planned manufacturing.  Where customer delivery expectations are not met, this could lead to financial penalties and damage customer relationships.  Dual sourcing for key components wherever possible provides the best mitigation for key suppliers. Regular monitoring and replacement of tooling at all suppliers reduces the risk of a tooling failure. Inventory levels are maintained at a sufficient level to protect against short-term disruption. 
     
Failure of an acquisition to deliver the growth or synergies anticipated, due to incorrect assumptions or changing market conditions, or failure to integrate an acquisition to ensure compliance with Rotork’s policies and procedures. Whilst growth opportunities, cost savings and synergies are identified prior to completion, these may not always be delivered at the levels anticipated or to the timetable expected following the acquisition. Although these benefits are usually not priced into the purchase consideration, a significant underperformance could lead to an impairment write down of the associated intangible assets.  During the due diligence process a 100 day plan is prepared to manage the important initial stages of integration. Consideration is given to the composition and skills of the management team with the necessary training and support provided by a variety of Rotork personnel. This should ensure an effective integration and communication of Rotork’s policies and procedures, whilst monitoring delivery of the financial plan. 
     
Failure of IT security systems to prevent penetration by unauthorised people and access to commercially sensitive data.  Sensitive data is stored and transmitted electronically around the world. The Group is therefore exposed to the risk of data loss by cyber attack. This data might contain technically or commercially sensitive information which would provide a competitor with an advantage.  Rotork has a range of measures in place to monitor and mitigate this risk. 
     
FINANCIAL RISKS    
Description  Potential Impact  Mitigation 
Volatility of exchange rates would impact Rotork’s reported results and competitive position. Significant fluctuations in exchange rates could have an adverse impact on Rotork’s reported results and adversely affect the pricing point of our products in other currencies.  A clear treasury hedging policy addresses short-term risk and this works together with the natural hedging provided by the geographical spread of operations, sourcing and customers. Whilst this will protect against some of the transaction exposure our reported results would still be impacted by the translation of our non-UK operations. 
     
Political instability in a key end-market. Disruption of normal business activity would impact our sales in that country and might ultimately lead to loss of any assets located in that country as well.  The wide geographic spread of Rotork’s operations and customers diminishes the impact of any one market on the results of the Group as a whole. 
     
Growth of the defined benefit pension scheme deficit.  The amount of the deficit may be adversely affected by a number of factors including investment returns, long-term interest rates, price inflation and members’ longevity. This in turn might lead to a requirement for the Company to increase cash contributions to the schemes.  Both defined benefit schemes are closed to new members, with the UK scheme closed in January 2003. The Group and trustees monitor the performance of the scheme regularly, taking actuarial and investment advice as appropriate. The results of these reviews are discussed by the Board. 
     

For further details about risk management view our Annual Report & Accounts 2015.