SKF Risk matrix As is typical for a large, global and diverse business such as SKF's, the Group is subject to a variety or risks and uncertainties. The table below provides a brief overview of the most significant risks and the company's approach to managing them. Financial risk Currency risk SKF is subject to both transaction and translation exposure. The Group's principal commercial flows of foreign currencies pertain to exports from Europe to North America and Asia as well as intra- European business. SKF hedges 75% of the estimated net USD exposure for one to six months. At year-end, the hedging with derivatives conformed to the Group policy. Translation exposure on Group accounts is hedged to some extent by borrowing in foreign currencies. Interest rate risk Credit risk Liquidity risk SKF's interest costs are impacted by market rates. SKF customers ability to pay can have an impact on the financial result of the Group. Acceptable liquidity levels are required in order to achieve desired financial results. Liquidity and borrowing are managed at Group level. By matching the duration of investments and borrowings, the interest rate exposure of the Group can be reduced. The Group policy states that only wellestablished financial institutions will be approved as counterparties. Exposure per counterpart is continuously monitored. In addition to its own liquidity, AB SKF had committed credit facilities of SEK 3,000 million with a due date in 2017 and EUR 500 million with a due date in 2017. Market risk Competitor risk Competitors find ways to produce better functioning products or competing products with dramatically lower cost. SKF aims to be the cost and value leader, meaning striving to innovate and bring new and increased value through the Group s R&D activities to our customers while at the same time working to assure that SKF operations and those of suppliers are world class in terms of efficiency, cost and waste avoidance. SKF's diverse customer base (in terms of regions, sectors and industries) means that this risk is highly spread and the impact of the risk at Group level risk is thereby minimized. Economic downturn SKF customers could be impacted by a major economic downturn resulting in lower demand for SKF products and services. SKF has a highly diversified and well balanced global customer base. The risk is therefore spread very widely in both regional and industrial sector/segment perspective. SKF has focused on making manufacturing operations flexible in the face of changing customer demands. SKF uses sales and market data intelligence to follow and anticipate developments allowing proactive management of changing market conditions. 1
Supply chain risks Raw material and component cost fluctuations Significant changes in raw material (and therefore component) costs can impact on the Group profitability (see sensitivity study). SKF has established a globalised supply chain which assures components and materials are purchased in a highly completive manner. Raw material cost indexes are often included in SKF customer agreements. Code of conduct deviations in the supply chain. The Group expects and requires its suppliers and sub-supplier to work with high ethics in accordance with the SKF code of conduct for suppliers and sub-contractors. Deviations from this code could have an adverse impact on the environment, and society and could damage the reputation of SKF. SKF has established a responsible sourcing approach which includes supplier training and development, auditing and follow up as well as corrective action procedures.targets for suppliers regarding social and environmental performance have been defined and are followed up.» Read more about purchasing on pages 78-81 in SKF Annual Report 2014. Supply chain disruption External factors such as fires, extreme weather events, natural disasters, water stress, war or pandemic illness to mention a few, could result in disruption of supply to SKF and impact on revenue and profit. SKF has intentionally set up a flexible and global supply chain and works to avoid dependence on a single source or production location. The global supply chain tracks issues of risks such as social unrest, terrorist or drug activity, or high levels of corruption as these may impact the supply. In addition SKF focus on working with suppliers that have adequate insurance for both production and transports. Material source or type compliance risks SKF aims to avoid the use of hazardous substances in it's products and processes, the company also strives to avoid negative social impacts within the extended supply chain. Legislations have been and are being introduced in these aspects, failure to meet with direct or customer requirements of these legislations could result in costs as well as loss of business for SKF. SKF has established a product environmental compliance approach» see pages 87 in SKF Annual Report 2014. As part of SKF's responsible sourcing activities, SKF is working to effectively address the conflict minerals issues as defined in the US Dodd-Frank ac etc. In addition, SKF s Environmental Design Guidelines are part the Group s product development process, taking environment, health and saftey risks into consideration. Production risks Labour disputes Industrial disputes lead to industrial action with impacts SKF's ability to meet customer demands. SKF has maintained an open and positive relationship with the Unions, as exemplified by Group s global framework with the World Union Council.» Read more about World Union Council on page 90 and 92 in SKF Annual Report 2014. 2
Loss of a major production site Fire, flood or natural disaster could result in the temporary loss of a production facility, in addition to the reconstruction and remediation costs, this could put customer deliveries and revenues at risk. SKF has globalised manufacturing operations, with more that 130 separate facilities around the world. SKF's manufacturing strategy aims to assure a high degree of flexibility, so that if one unit is taken out of action, others could provide support production. SKF Reinsurance Co. Ltd is the SKF Group's internal insurance company. It is Group policy to have centrally purchased insurance lines as well as loss prevention programmes, the mission is to protect the SKF Group's tangible and intangible assets through active risk management. Environmental risks Major incident at an SKF facility A major incident during which a significant amount of local environmental damage occurs leading to fines, loss of reputation etc. SKF's Environmental managements systems is certified to ISO 14001 and works to assure that all such material risks are identified and effective counter-measures are implemented in order to mitigate them. This includes actions to mitigate the risk as well as emergency response plans to assure the impacts of any incident are minimised. Water risk Water scarcity in the supply chain or at SKF facility leads to reduced production. SKF direct processes are not water intensive, most water systems are closed loop. Those SKF facilites which are located in areas of water scarcity are identified and required to drive strong water reduction programs. SKF has a diversified supply chain with requirements for suppliers to follow environmental norms, implement certfied management systems this facilitates risk reduction and avoidance for water risks and other environmental risks. Risk of SKF products causing environmental damage SKF products result in environmental damage during use or disposal by customer. SKF Environmental Design Guidelines exist as part of the Group s overall product development process. Using lists of restricted substances and the compliance monitoring of relevant legislation e.g. REACH, RoSH etc, facilitates proper use phase and end-of-life management.» Read more on Environmental compliance of SKF's products on 87 in SKF Annual Report 2014. Climate change risks extreme weather events Extreme weather events disrupt SKF facilities, distribution or supply chain. Requirements for emergency response plans at all sites include flood risks etc. See also Production risks and Supply chain disruption above. 3
Climate change risks energy & carbon costs Increased energy and other environmental cost due to legislation leading to increased material and production costs and or impacting certain market segments. SKF focus on energy efficiency at its own facilities and suppliers - reducing energy demand and therefore related risks. SKF's highly diversified customer base and strong focus on developing solutions that deliver or enable improved energy and carbon performance enables a mitigated risk at the Group s customers Safety risks Safety at SKF operations SKF employees are hurt or killed by an accident at work. SKF's Safety management system is certified to OHSAS 18001 The Group s Zero accident program supported by proactive near miss reporting aims at the avoidance of all workplace accidents.» Read more about Safety on page 91 in SKF Annual Report 2014. Safety related to SKF products and services Person or persons are hurt or injured as a result of SKF product failure, mall-function or defect. SKF follows strict design and validation rules for all products, and fully adheres to industry specific requirements for safety critical applications such as aerospace, rail and automotive. SKF provides detailed instruction on the correct use, fitting and application of products. SKF's overall approach to quality management assures product conformance and performance to the highest level. Safety at supplier and business partner operations Employees of SKF suppliers or business partners are hurt or killed. SKF has defined within its code of conduct for suppliers, specific requirements for the assurance of health and safety for the employees of suppliers and sub suppliers. See also Code of conduct deviations in the supply chain above. 4
Human Rights risks (and other Code of Conduct risks) Human rights non-compliances at SKF Human rights of SKF employee not respected. SKF adheres to international standards and guidelines such as the United Nation s Global Compact s Ten principles, the ILO Declaration on Fundamental Principles and Rights at Work, the OECD Guidelines for Multinational Companies and the International Chamber of Commerce (ICC) Charter. SKF enforces the SKF Code of Conduct policy in all its operations regardless of their size, geographical locations and types of operations. The policy is communicated via intranet, printed format and training (e-learning and classroom) to raise awareness. Whistle-blowing process is available both at the local and global level. SKF also performs periodic Code of Conduct compliance audits at the different units.» Read more on page 92 in SKF Annual Report 2014. Inherited human rights and other Code of Conduct risks. Human rights or other non compliances to Code of Conduct on newly acquired companies. As part of the due diligence process for major acquisitions, SKF evaluates various issues such as human rights and labour rights among all other code of conduct aspects. Adherence to code of conduct is also covered in contract clauses. Code of Conduct non-compliances or abuses in the supply chain Human rights and labour lights of suppliers employee (extended supply chain) not respected. SKF Quality Standards for Suppliers include mandatory compliance of the SKF Code of Conduct. See also code of conduct deviations in the supply chain above.» Read more about purchasing on pages 78-81 in SKF Annual Report 2014. Product and service related risks Product failure conformance Product does not conform to SKF/ISO or customer specifications. SKF Global quality management system ISO 9001 is implemented to ensure that products and services conform to specified requirements and to continuously improve processes, products and services through: - Identification and minimisation of potential risk - Predictable results - Robust and capable processes and organisation Product failure performance Product does not perform according to SKF standards / customer requirements. In addition to SKF ISO 9001 quality management system, SKF design rules and guidelines for product development, SKF product simulation and product testing works to ensure the fulfilment of customer requirements and SKF quality standards. 5
Applications failure Product does not perform in the specific application according to customer expectations. SKF applications engineering methods and knowledge are core competences for the Group. One of SKF's most extensive technical programmes Application Technology, exists to strengthen SKF application engineering competence globally.» Read more about SKF quality work including Business Excellence and Six Sigma on page 201 in SKF Annual Report 2014. Loss of technological advantage A new and disruptive technology becomes available from an external party which can replace existing SKF platform solutions leading to loss of revenues. SKF performs technical megatrend analyses, utilizes pacing technology activities and collaorates with academic community e.g. via SKF University Technology Centres» Read more about R & D and University Technology Centres on page 72 in SKF Annual Report 2014. Corruption and fraud risks Corrupt of fraudulent actions carried out by SKF representatives. SKF's employee or employees fail to adhere to the Group s Code of Conduct and related policies and requirements and act in a fraudulent or corrupt manner leading to financial penalties and reputation damage. SKF takes a proactive approach to assure awareness of demanded ethical standards by education, compliance programmes including anti-corruption, antifraud and antitrust. The work to follow up adherence is faciliteted by the whistle blower function and a risk-and incident based audit system.» Read more on page 114 in SKF Annual Report 2014. Brand risks Other companies or counterfeiters use SKF Brands to market their products. SKF is one of the strongest global industrial brands and subject to counterfeit globally. Counterfeit products of all types pose a risk to people and the global economy. SKF focuses on protecting customers, safeguarding health and safety of machine operators, avoiding unexpected downtime, environmental and financial damage. Fake products are universally recognized as a major risk and continuous support to law enforcement, customs and other authorities makes up the majority of SKF s anticounterfeit work. In addition to arranging customer events to make customers aware of the importance to safeguard authenticity, SKF runs anticounterfeit e-learnings designed for the Group s personnel and distributors.» read more about SKF Brand protection s work on page 65 in SKF Annual Report 2014. 6
Legal risks Non-compliance with applicable laws The global and diverse nature of SKF's business and operations means that the Group is required to adhere to numerous laws and regulations related to all aspects of its activities. Failure to meet these requirements could lead to legal and financial consequences as well as damage to the Group s reputation. SKF has put in place comprehensive and robust compliance programme which is based on the SKF Code of Conduct. The compliance programme is put in place to ensure that applicable laws and regulations are identified, understood and adhered to. Legal risks relating to our business activities In connection with the sale of SKF's products and services and in the purchase of products and services from our suppliers, large potential liabilities may occur in case of e.g. late delivery, delivery of defective products, unfulfilled service commitments and incorrect advice. Therefore, it is important that all such risks are identified, that risk decisions are taken on the appropriate level and that carefully worded contractual provisions aiming at reducing SKF's liabilities are included in contracts. SKF has put in place policies, procedures and training programs in order to make sure that legal risk relating to our business activities are identified and that risk decisions are taken on the appropriate level. In addition, SKF legal counsels support the SKF units in identifying and handling legal risks. The legal counsels work closely with the SKF units and provide contract drafting and negotiation support, claim and litigation management, support, training and general advice.» Read more on compliance programme on page 114 in SKF Annual Report 2014. 7