Principal risks and uncertainties

Effective management of risks is essential to the delivery of the Group's objective of creating superior shareholder returns. The Board is responsible for the Group's risk management and the review of risk activities has been delegated to the Audit Committee. Under the leadership of the Vice President of Risk, Bodycote has developed the risk management framework to identify, report and manage its business critical risks. During the year a Risk Committee was established, represented by senior managers from each of the operating divisions. The role of the Risk Committee is to embed risk management and facilitate the implementation of risk management measures at a divisional level.

A variety of approaches is used to identify and report risks, which are aggregated first at a sub-divisional level and then at Group level. For each business critical risk, assurance activities have been documented in risk assurance maps and this is used to direct assurance activity.

The Vice President of Risk provides an update to the Audit Committee on the Group's risk activities at every meeting and a comprehensive review of the Group's business critical risks is presented in December. In addition, the Board examines a specific risk topic at each Board meeting.

The table below highlights the major risks that may affect Bodycote's ability to deliver the strategy, as laid out in Strategy and Objectives. 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. Furthermore, 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 more effort has been directed at measures to recover from a situation where a significant risk does crystallise. These include a comprehensive review of the Group's business continuity planning measures and the development of crisis management planning.

Risk Description and ImpactMitigation
Market and Customer Risks
Bodycote's exposure to macroeconomic performance means that it suffers from a high level of sales volatility. A substantial proportion of Bodycote's sales are closely linked to the economic cycle: Sales in the markets served by the AGI businesses (63% of the total Group) tend to develop in line with or ahead of the economic cycle, whereas aerospace and defence sales (23%) tend to track behind the economic cycle. Sales to the energy sectors (14%) are closely linked to energy prices, which in turn can be affected by general economic activity. The high proportion of fixed costs in the business means that a drop in sales will have a significant impact on profitability. However, Bodycote's presence in 26 countries in a wide variety of end-markets acts as a natural hedge to neutralise localised economic volatility. Nevertheless, the Board is mindful of the potential impact on demand for the Group's services while uncertainty around the Eurozone debt and the US fiscal problems continues.
  • Implement strategic plan with medium term objective of "above-market" sales growth, a focus on targeted "growth-premia" business segments and a more balanced geographic spread.
  • Maintain flexibility of cost base e.g. by ensuring that a proportion of the workforce is employed on temporary contracts.
  • Respond quickly to changes in customer demand on a local or a Group-wide level.
  • Wide geographical and market sector spread of Group sales.
Loss of key customers 
Bodycote benefits from many long-term relationships with key customers. Damage to, or loss of, any of these relationships would be detrimental to Group results and could affect the viability of one or more of Bodycote's facilities. However, the Board believes this is unlikely as Bodycote strives to provide a high level of customer service and the Group's network of strategically located facilities ensures that it is the supplier of choice to these major manufacturers. Furthermore there is no significant customer dependency, with the Group's top ten customers accounting for less than 14% of sales and the balance made up by many thousands of customers.
  • Continue focus on customer service and quality processes to maintain excellent relationships with major customers. Use key account management to monitor customer satisfaction with the Group's service levels.
  • Ensure there is no significant customer dependency.
Corporate and Community Risks
Human resources 
Bodycote is reliant on its ability to attract, develop and retain staff of the right calibre to support its growth strategy. Competition for capable resources is high and there is a risk that Bodycote may not be able to attract or retain skilled individuals. As a market leader Bodycote is seen as a source of talent by competitors, while the Group competes with employers from a wide range of sectors to attract staff into the business.
  • Continue the development of an HR strategy to address the long-term development and retention of staff.
  • Develop succession plans.
  • Ensure performance management processes are properly implemented and used effectively.
Safety and health 
Bodycote is committed to providing a safe work environment for its employees. The nature of Bodycote's activities presents safety and health risks which can 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.
  • ISO 18000 compliant SHE management systems being implemented by Group Head of Safety, Health and Environment with the support of divisional safety and health teams.
  • Programme in place to focus on reduction of incidents which could have a high impact.
  • Safety compliance audits at all plants at least once a year.
  • Oversight of safety and health framework provided by the Group SHE Committee.
Bodycote is committed to providing the highest level of protection to the environment. Environmental contamination could lead to health risks, disruption of business, financial costs and loss of reputation.
Historical use of solvents and other hazardous chemicals by plants operated by Bodycote or by plants acquired by Bodycote could have led to ground contamination. The environmental regulations in many of the jurisdictions that Bodycote operates in impose actual or potential obligations on Bodycote to remediate contaminated sites. Bodycote incurs costs annually (2012: £1.5m) in meeting its obligations and maintains a provision of £13.9m. If the provision is insufficient to meet the cost of remediation, then this could have an impact on the Group's results. Some of the Group's heat treatment plants continue to use solvents and hazardous chemicals in small quantities.
  • Remediation of contaminated sites as required by local legislation.
  • Reduction in the use of hazardous substances, such as chlorinated solvents.
  • Environmental procedures and measures in place conforming to ISO 14001 (2012: 78% of plants).
  • Environmental due diligence of businesses for acquisitions.
Operational Risks
Service quality 
The Bodycote brand is reliant on the repeatable delivery of parts to agreed specification to an agreed timescale. 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. Bodycote has stringent quality systems in place managed by qualified staff. Where necessary plants have relevant accreditations, such as ISO 9001, Nadcap and TS 16949.
  • Maintain industry relevant accreditations.
  • Quality systems and processes operated at plant level with oversight by divisional quality teams.
  • All plants subjected to internal and external quality audits and inspections at least once a year.
Major disruption at a facility 
Bodycote's business processes are inherently risky and there is a possibility that a major fire 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. As a result there is a possibility that service to Bodycote's customers from the affected site could be disrupted. However Bodycote's global network of 186 plants creates a framework to provide back-up capability for any affected facility.
  • ISO 18000 compliant SHE management systems are being implemented by Group Head of Safety, Health and Environment with support of divisional safety and health teams.
  • Programmed equipment maintenance and inspections.
  • Independent insurer inspections to assess hazard and business interruption risks.
  • Overhaul of business continuity and crisis management plans.
Information technology projects 
The efficient operation of the Group will rely increasingly on the proper development and operation of its IT systems. Bodycote is currently undergoing a group-wide implementation of a new ERP system. The impact of the re-engineered business processes will have significant long-term benefits on Bodycote's operational effectiveness. However, failure to manage the implementation programme successfully could result in cost overruns and, potentially, disruption to the business.
  • Project approval and progress subject to Board review.
  • Project teams made up of skilled subject matter experts supplemented with third party advisors.
  • Best practice project management processes in place with assurance provided by third parties.
Regulatory Risks
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.
  • Establish business processes supported by HR policies and the Group Code of Conduct.
  • Implement whistleblower facility managed by a third party: the Open Door Line.
  • Training and awareness programmes.
  • Engage local specialists to support Bodycote at local, divisional and Group level.
  • Regular audit of the effectiveness of implemented procedures.