Risk Management

Risk Management

Organization of risk management
Vaisala has a risk management policy that has been approved by the Board of Directors and that covers strategic, operating and financial risks relating to the company. Vaisala's Corporate 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 personnel and the company's operations and products and the continuity of operations. The policy also covers intellectual capital, corporate image and brand protection. An appropriate and up-to-date risk concept is integrated in decision-making.

Near-term risks and uncertainties
Vaisala regularly assesses risks and uncertainties relating to its business. To increase the transparency of its activities, Vaisala has further developed its reporting relating to risks. The effort is to describe risks and uncertainties in more detail.

The 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 and hence in purchasing activities, currency exchange rates (with particular respect to the U.S. dollar), supply network management and production activities. Vaisala uses subcontractors. Significant changes in subcontractor relations, activities or operating environment may have an impact on Vaisala's business. Vaisala monitors these risks and prepares for them in accordance with the company's risk management policy.

Group-level insurance programs and risk-management methods have been established to deal with manageable operating risks. The insurance programs cover risks relating to property damage, business interruption, different liabilities, transport and business travel.

The company is currently introducing some major organizational changes in support of its new strategy. Substantial efforts are also being carried out regarding the sales organization, research and development, and new enterprise resource planning system development. These efforts may constitute a short-term risk regarding Vaisala's net sales and result.

The net sales and operating profit estimates are based on the assumption that the order intake will remain at the current level and deliveries will be completed as planned.

Interest rate risk
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, as the existing interest-bearing liabilities and receivables are but marginal compared with the scope of the company's business. The liabilities have floating rates. The returns on invested capital entail a minor risk relating to interest rate changes. A change of one percentage point in the level of interest rates would result in a change of EUR 78,500 (101,800) in the total value of investments. 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.

Currency risk
The international nature of Vaisala's operations exposes the company to Group-level transaction risks, as the Group carries out sales in a number of foreign currencies, of which the most significant are the U.S. dollar, the Japanese yen, and the pound sterling. 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 table below 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 before taxes and the consolidated equity. The SA calculation does not incorporate the effects of parent company purchases in other currencies during the financial year, or the effect of hedging measures.

The Group's other currency risks are transaction risks arising mainly from commercial accounts receivable and accounts payable. Approximately half of the consolidated net sales are denominated in U.S. dollars. A substantial part of the Group's procurement is euro-denominated. The resulting net position is hedged with currency forwards, to which the Group does not apply hedge accounting as per IAS 39. The hedging level is at approximately 50 percent of the order book and the accounts receivable. The hedging is done by the parent company.

Liquidity risk
The 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.

With the company's current balance sheet structure, liquidity risks are non-existent.

Counterparty risk
Liquid assets are directed, within set limits, to investments whose creditworthiness is good. The investments and investment limits are redefined annually.

Credit risk
The 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 0.3 million (0.5), and the total net credit loss for the financial year was EUR 0.1 million (0.3). 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 assets
Management 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, or it may decide to sell or divest asset items to reduce its liabilities.

Internal audit
The company does not have a separate internal audit function. Duties relating to internal audit are undertaken by implementing control measures incorporated in the company's operating processes and by assigning the partnering firm of auditors to undertake any duties as necessary.