The Board is responsible for the Group's risk management and determining the Group's risk appetite. The review of financial risk has been delegated to the Audit Committee. The Group's risk framework, using a variety of top down and bottom up approaches, is used to identify, monitor and report risks. The risks are aggregated first at a divisional level and then at Group level. For each business critical risk, assurance activities have been documented in risk assurance maps and these are used to direct assurance activity including that of Internal Audit.
The Group Head of Risk is supported by the Risk and SHE Committee, which met three times during 2018, attended by a Vice President from each of the operating divisions, the Group Head of SHE and the General Counsel. The Risk and SHE Committee assists the Group Head of Risk in identifying critical risks, embedding risk management and facilitating the implementation of risk management measures throughout the Group. The Group Head of Risk provides an update to the Executive and Audit Committees on the Group's risk activities at every meeting and a comprehensive review of the Group's business critical risks is presented to the Board in June and in December. The Board concluded that an ongoing process of identifying, evaluating and managing the Group's significant risks has been in place throughout 2018 and a robust assessment of the principal risks had been undertaken.
The table below highlights the major risks that may affect Bodycote's ability to deliver the strategy, as laid out on in the Strategy and objectives. These risks have been reviewed throughout the year and no risks have been added or removed since 2017. The two risks added in 2017, Environmental and Capital Projects, have been subject to risk deep dives by the Board during 2018.
In July 2018, a fire occurred at the Syracuse facility in New York State resulting in the total loss of the facility. Bodycote personnel responded safely and quickly to ensure the continuity of service for customers. The Group's business continuity framework responded and customers' parts are being treated at other Bodycote facilities.
Per the criteria that the Board has agreed to assess potential risks, they may be classified as principal risks by virtue of their potential financial impact on the Group in the foreseeable future, in combination with the likelihood of this impact occurring.
The Board has examined and assessed the potential risks facing the Group as a result of the 2016 referendum on the future of the UK's membership in the European Union. These risks included potential impacts on future performance and business model considerations. The Board does not expect this will have a material impact on Bodycote as customers are served locally and therefore cross-border trading is not material.
In determining the Group's principal risks, The Board also examined and assessed the potential risks to the Group posed by the wider effects of climate change on Bodycote's business. The Board concluded that the effects of climate change do not qualify as a principal risk for the Group.
Details of the Group's financial risks (funding, foreign exchange, interest rate and counterparty risks), which are managed by the Group's treasury function, are provided in note 18 to the financial statements. The mitigating activities described below will help to reduce the impact or likelihood of the major risk occurring, although the Board recognises that it will not be possible to eliminate these risks entirely. The Board recognises that there could be risks that may be unknown or that may be judged to be insignificant at present but may later prove to be significant. For this reason business continuity plans have been prepared for all plants to provide for situations where specific risks have the potential to severely impact the business.
|Risk description||Impact||Mitigation and control||Relevance to strategy|
|Market and customer risks|
Bodycote operates in 23 countries and the Group's revenues can be expected if macroeconomic trends, as well as the life cycles of the different components at the Group . The result of the referendum on the future of the UK's membership of the European Union is not expected to have a material transactional impact as customers are typically served locally and cross-border trading is not material.
The high proportion of short-term fixed costs in the business means that a drop in sales will have a significant impact on profitability.
- Bodycote's presence in 23 countries servicing more than 40,000 customers across a wide variety of end-markets acts as a natural hedge to neutralise localised economic volatility and component life cyles.
- There is some short-term flexibility in the cost base (e.g. by ensuring that a proportion of the workforce is employed on temporary contracts) and changes in customer demand are responded to quickly.
- It should be noted that revenues for the UK represent only 8% of Group revenues, with the significant majority of its business coming from UK customers.
Loss of key customers
Bodycote benefits from many long-term relationships with key customers and the damage to, or loss of, any of these relationships would be detrimental to the Group.
Although the Group does not rely on any individual major customers, the loss of a key customer could adversely affect the Group's financial results and the viability of one or more of Bodycote's facilities.
- The Group has more than 40,000 customers and there is no significant customer dependency, with the Group's top ten customers accounting for less than 16% of revenues.
- There is an ongoing focus on customer service and quality processes to maintain excellent relationships with customers. Key account management is in place where this is required to deliver good customer service.
The entry of competitors into one or more of the Group's Specialist Technologies.
The erosion of market share resulting in loss of revenue and profit.
- The close control of proprietary knowledge.
- Rapid increase in the scale of the Group's offerings to maintain the position as supplier of choice.
- A focus on customer service to ensure that satisfied customers have no cause to seek alternative suppliers.
|Corporate and community risks|
Safety and health
The nature of Bodycote's activities presents safety and health risks.
Bodycote is committed to providing a safe work environment for its employees but Bodycote's operations, if not properly managed, could have a significant impact on individual employees. Furthermore, poor safety and health practices could lead to disruption of business, financial penalties and loss of reputation.
- Group-wide health and safety policies set by the Group Chief Executive.
- OHSAS 18001 and ISO 14001 compliant SHE management systems being used by Group Head of Safety, Health and Environment with support of divisional safety, health and environmental teams.
- Programme in place to focus on reduction of incidents which could have a high impact.
- Safety compliance audits at all plants at least every two years.
- Oversight of safety and health framework provided by the Group Risk and SHE Committee.
Actual or potential environmental contamination could lead to health risks, disruption of business, financial costs and loss of reputation.
Bodycote is committed to providing the highest level of protection to the environment. Environmental regulators in many jurisdictions in which Bodycote operates can impose obligations on Bodycote to investigate potential contamination and remediate where required.
- Environmental procedures and measures in place conforming to ISO 14001 (2018: 90% of plants).
- Environmental due diligence of businesses for acquisition.
- Remediation of contaminated sites or additional emission abatement as required by local legislation.
The Bodycote brand is reliant on the repeatable delivery of parts to agreed specification to an agreed time.
Deterioration in quality or service levels can cause serious long-term damage to Bodycote's reputation with financial consequences such as the loss of a customer and the cost of damages or litigation. Work that is released into use which is not in compliance with specification could arise as a result of system or human failure.
Customers are tending to demand higher liabilities in respect of any quality defects or delays on Bodycote's part.
- Bodycote has stringent quality systems in place managed by qualified staff.
- Quality systems and processes operated at plant level with oversight by divisional quality teams.
- Where necessary, plants maintain industry relevant accreditations, such as ISO 9001, Nadcap and IATF 16949.
- All plants subjected to internal and external quality audits and inspections at least once a year.
- Bodycote carefully negotitates terms and conditions associated with the supply of services to its customers, carefully managing potential liabilities.
Major disruption at a facility
Bodycote's business processes are inherently risky and there is a possibility that a major fire such as that suffered in 2018 at the Syracuse facility (USA) or utility outage could lead to closure of a facility's operation. In addition a number of sites are exposed to natural hazards, such as earthquakes, flooding and storms.
Any significant incident at a site could result in the service to Bodycote's customers from the affected site being disrupted.
- Bodycote has a global network of more than 180 facilities. These facilities create a framework to provide backup capability for affected facilities.
- Business continuity plans are in place for all plants. These are updated and tested annually. The Board reviewed the testing of Business Continuity plans in 2018. The fire in July 2018, which resulted in a total loss of the Group's Syracuse (USA) facility, highlighted the success of the Group's business continuity plans.
- Independent insurer inspections to assess hazard and business interruption risks.
- Insurance cover, including business interruption cover.
- Scheduled equipment maintenance and inspections.
The Group invests capital in developing existing plants as well as into Greenfield developments and acquisitions. This risk was reviewed by the Board during 2018 and additional controls will be implemented during 2019.
The Group is undertaking a higher number of capital projects. This may cause projects to be delivered late or at a higher cost than forecast. Market conditions may also change making a project less profitable than initially projected.
- There is a well established capital investment approval process that applies to all major capital projects.
- Project Management frameworks are being improved and additional resource being applied to deliver projects on time and on cost.
- All major projects are subject to post implementation reviews.
Information Technology projects
The efficient operation of the Group relies on the smooth operation of its IT systems. During 2018, the Group completed the roll-out of the finance and purchasing modules of its ERP project. The Group continues to work on its operations module to ensure that it responds to business requirements before rolling out. The Group currently uses a range of ERP solutions to manage its operations.
A significant failure of IT systems as a result of external factors, such as a cyber-attack, could disrupt service to our customers, and result in reputational loss and financial loss.
- The Group has robust governance processes to ensure that IT projects are properly reviewed and approved to ensure that they are consistent with the Group's IT Strategy
- Increased focus on IT security management processes.
- Well protected data centres with defined disaster recovery planning and data backup procedures.
Regulatory and legislative compliance
The global nature of Bodycote's operations means that the Group has to comply with a wide range of local and international legislative requirements, including anti-bribery and anti-competition legislation, taxation legislation, employment law and import and export controls.
Failure to comply with legislation could lead to substantial financial penalties, disruption to business, diversion of management time, personal and corporate liability and loss of reputation.
- Business processes are supported by HR policies and the Group Code of Conduct alongside training and awareness programmes.
- The 'Open Door Line' whistleblower facility which is managed by a third party.
- Engagement of local specialists to support Bodycote at local, divisional and Group level.
- Regular audit of the effectiveness of implemented procedures.
In preparing this statement of viability, the directors have considered the prospects of the Group over the three year period immediately following the 2018 financial year. This longer term assessment process supports the Board's statements on both viability, as set out below, and going concern (as in the Chief Financial Officer's report). A three year period was determined as it is a reasonable period over which the business could be restructured in the event that any material changes to demand for the Group's services transpired. As a result, the Board determined that a period of longer than three years would not be meaningful for the purpose of concluding on longer term viability.
The forecast used considers metrics which enable assessment of the Group's key performance indicators (including return on capital employed, headline earnings per share and headline operating cash flow) in addition to net debt, liquidity and financing requirements.
In conducting the review of the Group's prospects the directors assessed the three year plan alongside the Group's current position, the Group's strategy and the principal risks facing the Group (all of which are detailed in the Strategic Report). This assessment considered the impact of the principal risks on the business model and on future prospects and performance, including the possible impact of Brexit, liquidity and solvency and was mindful of the limited forward visibility that the Group has as it carries no order backlog. The directors' viability assessment included a review of the sensitivity analysis performed on the three year plan, whereby the principal risks were applied to the plan in a number of diverging scenarios. The developed scenarios were designed to be plausible, yet severe. Examples of scenarios reviewed were:
- A decrease in forecast revenue of similar magnitude to the largest year-on-year decrease suffered in the last ten years.
- A 10% decrease in revenue, debtor days and strengthening of sterling to reflect an economic downturn.
In making this viability statement the directors considered the mitigating actions that are taken by the Group in the event that the principal risks of the Company become realised. The directors also took into consideration the Group's financial position at 31 December 2018, with net cash of £36.2m, available committed facility headroom of £230m and a history of strong cash generation.
The directors have assessed the viability of the Group and, based on the procedures outlined above in addition to activities undertaken by the Board in its normal course of business, confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to 31 December 2021.