RISK FACTORS
The principal risks and uncertainties detailed below are taken from the prospectus published on 18 June
2009 in connection with GKN’s rights issue.
Market risks
The current economic downturn may become more severe or last longer than expected.
The global economy has entered a severe economic downturn, affecting both developed and emerging
economies. Many developed economies have entered recession and growth has slowed in many emerging
countries, with serious adverse consequences for equity and other asset values, commodity prices,
employment, interest rates, credit availability and cost, consumer confidence and general levels of
economic activity. Many governments and central banks have responded by reducing interest rates, making
substantial funds and guarantees available to borrowers and lending institutions, and taking other measures
to increase liquidity and enhance confidence. These responses may not be effective enough to address the
severe economic and market conditions.
The precise nature of all the risks and uncertainties that the Group faces because of the current global
financial and economic crisis cannot be predicted, and many of these risks are outside the Group's control.
However, if the current economic downturn or current levels of market disruption and volatility continue,
worsen or are extended, the Group may experience further reductions in sales and production, the financial
failure of one or more of its key customers or suppliers, asset impairments and lower profitability and cash
flows.
Continued weakness in or deterioration of the global automotive markets or consumer credit markets
may adversely affect the Group.
In 2008, 58 per cent. of the Group's sales, predominantly from the Automotive and Powder Metallurgy
divisions, were subsidiary to automotive manufacturers. Automotive sales and production are highly
cyclical, and are affected by general economic conditions and other factors, including interest rates, the
availability of financing, consumer confidence and consumer preferences. The global automotive industry
generally, including the Group's customers, has suffered from a rapid downturn in sales that accelerated
sharply in most of the Group's markets during the fourth quarter of 2008, and these markets remained weak
in the first quarter of 2009. In addition, dramatically lower global automotive sales have resulted in
substantially all of the Group's OEM customers significantly lowering vehicle production schedules, which
has adversely affected the Group. In light of the foregoing, the Group faces the following key risks:
Automotive production could remain at current low levels for an extended period, or fall further.
A prolonged downturn in global automotive production or a significant change in automotive product mix
due to consumer demand could require the Group to reduce or eliminate production of some of its products,
shut down additional plants or otherwise further rationalise manufacturing capacity, incur additional
impairment charges and/or effect further redundancies or short-time working arrangements or take other
actions to reduce costs. Furthermore, continued credit market turmoil and reduced availability and
increased costs of consumer automotive loans and leases could result in further weakness in automotive
sales and production by the Group's customers. Volatility in production requirements may also adversely
affect the Group.
Insolvency of a major automotive manufacturer or tier one supplier.
Insolvency of a major automotive manufacturer or tier one supplier, whether due to liquidity constraints or
otherwise, could adversely affect the Group, its customers and its suppliers. As the supply chains of major
automotive producers are interdependent to a substantial degree and include some sole-source suppliers,
insolvency of a major automotive manufacturer or tier one supplier is likely to disrupt the supply chains of
which the Group is a member. Insolvency of any such manufacturer or supplier could result in the loss of,
or significant reduction in, purchases by such entities as customers. Furthermore, the Group could incur
other asset write-offs of accounts receivable, incur impairment charges or be required to take additional
restructuring actions beyond those it has already taken, which could adversely affect the Group.
The Group's civil aerospace business is highly dependent on the purchase by airlines of new aircraft.
GATE Aerospace is a global provider of airframe and engine structures, components, assemblies,
transparencies and engineering services to aircraft (fixed wing and rotorcraft) and engine prime contractors
and suppliers. In 2008, the Group derived 22 per cent. of its management sales from the GATE Aerospace
division. The Group's civil aerospace business generated approximately 42 per cent. of total Aerospace
division sales in 2008 (which the Group expects to increase to a majority of the division's sales in 2009,
following the Filton acquisition). This business is cyclical and is affected by the general health of the global
economy, the availability of aircraft financing, the financial condition of the commercial airline industry
and other factors that affect the demand for air transportation. The Group's civil aerospace business
depends substantially on demand from passenger airlines for the production of new aircraft, which is tied to
growth in passenger volume and airline profitability, and, in turn, the worldwide airline industry's ability to
finance the purchase of new aircraft. The size and age of the worldwide commercial aircraft fleet and the
number of parked aircraft also affects the demand for new aircraft. These factors also affect the timing of
the development and production of new generations of civil aircraft.
General weakness in the global economy has reduced air passenger traffic, resulting in excess capacity in
the market for commercial air travel and increased price competition among airlines, which, together with
higher fuel costs, have caused many airlines to incur significant losses. Additionally, during recent years,
the airline industry has been adversely affected by concerns regarding terrorism, war and public health.
Although order backlogs for large commercial aircraft are strong, some carriers have rescheduled or
cancelled orders for aircraft they planned to purchase from the major aircraft manufacturers. The preceding
factors could, if replicated in the current environment, result in both declines in new orders for aircraft,
delays or cancellations of orders for aircraft and difficulties in obtaining financing for aircraft purchases.
Any of these factors could adversely affect the Group.
GATE Aerospace's defence business is principally exposed to the US defence market, which is
influenced by political and budgetary agendas. Changes in the amounts or timing of defence spending
in the United States or elsewhere may cause the Group's customers to delay, reduce or cancel
programmes.
GATE Aerospace's defence business accounted for approximately 58 per cent. of GATE Aerospace's total
division sales in 2008, principally to US government procurement programmes. GATE Aerospace
participates in a broad range of major programmes in the fighter aircraft, rotorcraft and military transport
sectors, and is thus exposed to the risk of delay, cancellation or revision of those programmes.
Defence spending depends on a complex mix of political considerations, budgetary constraints and the
requirement and ability of armed forces to meet specific threats and perform certain missions. Although
multiple-year contracts may be planned in connection with major procurements, governments generally
appropriate funds for such contracts on an annual basis even though a programme may continue for several
years. Due to these factors, defence spending may be subject to significant fluctuations from year to year.
Furthermore, downturns in macroeconomic conditions in the defence markets in which the Group operates
may result in decreases or delays in defence purchases by the US government or the Group's other major
defence aerospace customers, any of which could adversely affect the Group.
GATE Aerospace participates in new civil aircraft programmes that require initial investment in nonrecurring costs to be recovered over future production. Such programmes are normally carried out on a
fixed price basis and are susceptible to potential customer delays and the Group may be unable to deliver
these programmes on time and budget.
In the civil aircraft markets, recent new programmes, including the Airbus A380, the Boeing 787 and the
Airbus A350, have involved major tier one suppliers taking responsibility for design, "productionisation"
and series production work packages. The Group has secured a number of production contracts that require
it to invest and capitalise initial non-recurring engineering and tooling costs that it then expects to recover,
together with agreed financing charges, over future production. As at 31 December 2008, the Group had
over £50 million of capitalised non-recurring costs on its balance sheet in civil aerospace design-and-build
programmes.
On such programmes, the aircraft manufacturer may fail to deliver the programme to its original schedule,
the Group may be unable to complete its work content within the original pricing or the aircraft may not
sell in the numbers necessary for the Group to recover fully its non-recurring investment and financing
costs. Any of these factors could adversely affect the Group's financial position and profitability. In
circumstances where the Group defaults on its obligations under these design-and-build contracts, it may be
subject to claims for damages, including some consequential costs, which could adversely affect the Group.
The Group's OffHighway business is highly dependent on conditions in the agriculture, construction,
mining and industrial machinery markets.
GATE OffHighway designs and manufactures a range of products for the agricultural, construction, mining
and industrial machinery markets. In 2008, the Group derived 12 per cent. of its total sales from the
OffHighway division. In addition, in 2008, the GATE OffHighway division derived approximately 68 per
cent. of its management sales from the agriculture machinery market, which is significantly affected by
crop prices and farm incomes. Prices of agricultural and mining commodities are frequently volatile and
change in response to a variety of factors including general economic conditions, commodity inventories
and disruptions in production or distribution. These factors also affect demand for agricultural and mining
machinery. The rates of infrastructure spending, housing starts and commercial construction affect demand
for construction machinery. Global economic activity significantly affects infrastructure spending, which in
turn affects the demand for capital equipment. Accordingly, slowing economic growth adversely affects
production and sales of capital equipment. If economic growth were to continue to remain weak or
deteriorate further, the Group's sales could be adversely affected, and credit-related losses in respect of
insolvency of counterparties may adversely affect the Group.
The Group may be unable to continue to compete successfully in the highly competitive automotive, offhighway and aerospace markets.
The Group operates in several highly competitive markets and competes with large, international
manufacturers, typically on the basis of price, quality, technology and service, among other factors.
Developing and maintaining a competitive advantage requires the Group to invest significant resources in
engineering and manufacturing capabilities. There can be no assurance that the Group will have sufficient
resources to compete successfully in its markets, or against its existing competitors or new entrants, and
any failure to do so could adversely affect the Group.
Financial risks
The Group may be unable to secure additional debt financing on commercially acceptable terms.
The recent tightening in global credit markets has limited the supply of and increased the cost of credit for
many corporate borrowers. The Group's current non-investment grade credit ratings could be lowered
further, either as a result of a rating agency's views regarding the markets in which the Group operates or a
decline in the Group's operating performance, among other reasons. As a result of both these factors the
Group may be unable to secure new long-term credit facilities or access the debt capital markets on
commercially acceptable terms until the global credit markets recover, which could adversely affect the
Group.
Fluctuations in exchange rates or interest rates may adversely affect the Group's results of operations
and financial condition.
Given the global nature of the Group's operations, the Group is exposed to exchange rate volatility both in
terms of the transactions its subsidiaries undertake, which may be denominated in a currency other than
their functional reporting currency, and from the translational effect on the Group's reported earnings, cash
flows and financial position. The Group hedges forecast transactional exchange exposures using forward
foreign exchange contracts. As a matter of Group policy, the level of hedges reduces over future time
horizons to reflect the inherent uncertainty and limitations in forecasts and, as a result, hedges may be
insufficient to offset all volatility arising from movements in exchange rates. The Group's consolidated
financial statements will fluctuate due to movement in exchange rates.
The Group uses both fixed and floating rate borrowings to finance working capital and investments. As at
30 April 2009, approximately 26 per cent. of the Group's borrowings were at floating interest rates;
accordingly, the Group retains exposure to floating interest rates and, as a result, increased interest rates
will increase the cost of the Group's borrowings and would adversely affect the Group's results of
operations and financial condition.
The Group is exposed to credit-related losses in the event of non-performance by counterparties to
operational contracts.
Operational credit risk relates to non-performance by customers in respect of trade receivables and by
suppliers, who may suffer similar non-performance and credit related risks. As a tier one supplier to
automotive, off-highway and aerospace OEMs, the Group may have substantial amounts outstanding with a
single customer at any one time. In 2008, while no single customer represented more than 7 per cent. of the
Group's subsidiary sales, the Group derived approximately 60 per cent. of its direct subsidiary sales from
25 major global customers. The failure of a customer to pay outstanding amounts owed to the Group could
adversely affect the Group.
The Group is exposed to credit-related losses in the event of non-performance by counterparties to
financial instruments.
Financial credit risk relates to non-performance by banks and other financial institutions in respect of cash
and deposits, bank facilities and other financial contracts, including forward foreign currency contracts.
While the Group seeks to manage financial institution counterparty credit risk by selecting counterparties
with credit ratings above a minimum level, assigning limits to counterparties and seeking to avoid
concentrated exposures there can be no assurance that the Group's policy will effectively eliminate such
exposure and, as a result, non-performance by any such counterparty could adversely affect the Group.
Adverse changes in the actuarial assumptions underlying the Group's pension and post-employment
healthcare plan liabilities and/or a decline in the market value of plan investments may require the
Group to increase funding contributions.
The Group operates funded defined benefit pension and other post-employment plans, principally in the
United Kingdom and the United States, together with unfunded plans in Europe, principally in Germany.
On an accounting basis, the Group reported a net deficit of £834 million as at 31 December 2008. It should
be noted that the net deficit in such plans on a funding basis will differ from that on an accounting basis due
to local tax and regulatory requirements.
Approximately 55 per cent. of the Group's pension liability is in funded plans, with the remainder in
unfunded plans. The funding level of the Group's funded pension plans and the Group's liabilities in respect
of its post-employment healthcare plans are subject to adverse change resulting from movements in the
actuarial assumptions underlying the calculation of plan liabilities. These include decreasing discount
rates, increasing longevity of plan members and, in the case of funded plans, a decline in the market value
of plan investments. Adverse changes in these underlying factors could affect the Group's financial position
and profitability.
Although the next valuation of the Group's UK pension scheme is not scheduled until April 2010, the
trustees of the scheme have the authority to call for a valuation at any time if they consider it appropriate to
do so.
The Group may be required to increase its contributions to its pension schemes if (i) the market value of the
assets in the pension schemes were to decline; or (ii) the value of the assessed liabilities were to increase; or
(iii) the investment strategy of the pension schemes were to change; or (iv) in the United Kingdom, a
statutory debt obligation becomes payable or the Pensions Regulator uses its authority to issue a
contribution notice or financial support direction. Any of these events could adversely affect the Group.
The Group is exposed to the risk of changes in tax legislation and its interpretation, to increases in the
rate of corporate and other taxes in the jurisdictions in which it operates and to significant tax
complexity.
The Group's activities are subject to tax at various rates around the world computed in accordance with
local legislation and practice. Action by governments to increase tax rates or to impose additional taxes
could reduce the Group's profitability. Revisions to tax legislation or to its interpretation might also affect
the Group's results in the future.
The Group is subject to tax audits and tax reviews, which, by their nature, are often complex, and can
require several years to conclude. Therefore, the total accrual for income tax in any period is based on
management judgement, interpretation of country-specific tax law and the likelihood of crystallisation and
settlement. Amounts set aside in any period could be less than actual tax liabilities, and adjustments may be
required in subsequent periods that may adversely affect the Group's income statement and/or cash tax
payments, and may result in the payment of interest and/or penalties.
The Group's insurance coverage may be inadequate, or the Group's insurers may deny coverage of
losses.
The Group insures against the effect of a range of potential losses associated with business assets such as
buildings, plant, machinery and ensuing financial effects arising from interruption to the business, as well
as potential liabilities arising from employees, products and services supplied or the public at large. For
non-aviation businesses, insurance takes the form of a significant level of capped self-insurance retention at
the Group level. Insurance is not or may not be cost-effective or even available for every risk or liability,
and, for insurable risks, the Group's limits of coverage may be insufficient to cover all actual losses or
liabilities incurred. Furthermore, the Group's insurers could deny coverage of losses. There can be no
assurance that the Group is sufficiently and effectively insured against all contingencies. Given the
limitations in overall available coverage referred to above, the Group may have to bear substantial costs for
uninsured losses.
Operational risks
The 2008 Restructuring Programme and other restructuring plans may take longer and cost more than
anticipated, and may not yield the expected savings.
In response to the deterioration of the markets in which the Group operates, as well as the recent and
continuing macroeconomic downturn, the Group launched the 2008 Restructuring Programme to reduce
operating expenses. The Group's expectations of the financial benefits of the 2008 Restructuring
Programme are based upon certain assumptions and variables regarding, among other things, future market
conditions in the Group's principal businesses. These assumptions may prove incorrect, the expected
savings of such restructurings may not materialise and these restructuring initiatives may prove to be more
costly than anticipated. Even if the Group implements the 2008 Restructuring Programme on time and as
planned, future market conditions could require the Group to take further restructuring measures at
additional cost.
The Group may not be able to realise the expected benefits of acquisitions and investments.
In the past the Group has acquired and in the future the Group may acquire businesses or make investments
with a view to supporting its growth, including by adding technological capabilities, enhancing
geographical presence or growing its customer base. Acquisitions and investments involve a number of
risks, including possible adverse effects on the Group's operating results, diversion of management's
attention, failure to retain key personnel, risks associated with unanticipated events or liabilities, and
difficulties in the assimilation of the acquired operations, technologies, systems, services and products.
The supply chains in the markets in which the Group operates are vulnerable to disruption.
As is the case with other manufacturers in the automotive, aerospace and other manufacturing industries,
the Group ships certain products to assembly plants or other manufacturing locations so that they are
delivered on a "just in time" basis in order to maintain low inventory levels. Many of the Group's suppliers
use a similar method for products supplied to GATE. As a result, "just in time" delivery makes the logistics
supply chains in the automotive, aerospace and other industries vulnerable to disruptions. Such disruption
could be caused by a range of potential problems, including plant closure or manufacturing interruption at
the Group or one of the Group's suppliers or customers, or other logistical complications, including
complications at a company not directly in the Group's supply chain but which is a part of a broader
interconnected supply chain.
To resolve a supply chain disruption, the Group may be required to expeditiously produce and deliver
replacement products and bear the associated costs. Additionally, if the Group is unable to deliver products
to its customers, it could cause customers to cease production, in which case customers may seek damages
from the Group. Thus, supply chain disruption could cause the shutdown of a production line of the
Group's customers, and any such shutdown could expose the Group to significant claims. Conversely,
failure of the Group's suppliers to deliver to the Group could result in the shutdown of a production line,
which may affect the Group's delivery schedules and consequently its profitability.
Prices of raw materials for the Group's products and other key inputs may fluctuate and could adversely
affect the Group's earnings if it were unable to pass associated increases on to its customers.
In recent periods, the global prices of a wide range of commodities (including steel, scrap steel and
titanium) have fluctuated significantly, due in part to changes in demand from emerging markets. The
Group may be unable to pass on to customers increases in prices of raw materials and other key inputs, or,
in some cases, there is a delay before the Group is able to pass on to customers cost increases. Volatility in
the prices of, or fluctuation in the availability of, commodities and other key inputs could have an adverse
effect on the Group.
The Group may incur significant liabilities for warranty claims, defects of its products or services or
product recalls.
The Group faces exposure to warranty and product liability claims in the event that its products actually or
allegedly fail to perform as expected or the use of its products results, or is alleged to result, in bodily
injury and/or property damage, which is a risk inherent in its business. Customers also may attempt to hold
the Group responsible for some or all of the repair or replacement costs of defective products under vehicle
warranties when the product supplied does not perform to specification. The Group's warranty provisions
(as explained in the 2008 Financial Statements, incorporated by reference in this prospectus) are based
upon management's best estimates of amounts necessary to meet existing and future liabilities. The final
amounts determined to be due could differ materially from management's recorded estimates, and as a
result, the Group's provisions could be inadequate to cover potential warranty liabilities. A recall claim, or a
product liability claim brought against the Group in excess of its available insurance, may adversely affect
the Group. The Group does not insure against product recall and its product liability insurance is subject to
limits and exclusions. Accordingly, the Group could experience warranty, recall or product liability costs
or losses and incur costs to defend such claims. For further information on product warranty and recall
claims, see Part VI (Operating and Financial Review).
Continued pricing pressures from customers in the automotive industry may adversely affect the Group's
business.
Pricing pressure from customers has been a characteristic of the automotive industry in recent years.
Suppliers such as the Group often bid for multi-year platform contracts with annual price reductions and
virtually all vehicle manufacturers regularly seek price reductions from their suppliers. The Group has
taken measures to reduce costs, pass some raw material cost increases through to customers and otherwise
counteract or resist price reductions that its customers have requested; however, these measures are not
always sufficient and price reductions have adversely affected its sales and profit margins. To compete
successfully the Group may need to lower prices further. The Group also may be unable to offset
contractually stipulated price reductions or other terms through cost control measures, productivity
enhancements and/or operating efficiencies.
The Group may lose customers to competitors with new technologies if its businesses are unable to
continue to adapt adequately to market developments.
To compete effectively, the Group must be able to launch new products, new product applications or
derivations of existing products in a timely manner to meet its customers' demands. In addition, changes in
legislative, regulatory or industry requirements or in competitive technologies or consumer preferences
may render certain of the Group's products obsolete or less attractive. The Group's ability to anticipate
changes in technology and regulatory standards and to continue to develop and introduce new or enhanced
products and applications successfully and on a timely basis will be a significant factor in its ability to
remain competitive. In addition, the Group may be unable to develop and launch new products or
technologies cost-effectively.
The Group is also subject to the risks generally associated with new product introductions and applications,
including lack of market acceptance, delays in product development and failure of products to operate
properly. The Group may also be unable to manufacture products for new programmes in time for the start
of production, or be unable to transition its manufacturing facilities and resources to full production under
new product programmes without adversely affecting production rates or other operational efficiency
measures at its facilities. In addition, the Group cannot provide assurance that its customers will execute on
schedule the launch of their new product programmes, for which the Group may supply products.
Inadequacy or incompatibility of, or interruptions to, the Group's information systems could adversely
affect its day-to-day operations.
The Group's business is dependent on the effective operation of its information technology, databases,
telecommunications networks, computer systems and other infrastructure to manage a wide variety of its
operations. Due to the global and diverse nature of the Group's operations and the variety of systems in
place to support those businesses, some of its systems may be inadequate to support aspects of its
operations, and the Group may experience issues related to incompatibility between two or more systems.
In addition, the Group's information systems may become subject to damage or unanticipated interruptions
from fire, flood, storms and other natural disasters, power loss, computer system and network failures,
operator negligence, physical or electronic loss of data, security breaches, computer viruses,
telecommunications failures, vandalism or other extraordinary events. Significant inadequacy,
incompatibility or failure of the Group's information technology networks and systems could result in
unforeseen expense, disrupt its operations and adversely affect its relationships with its suppliers or
customers.
The Group's businesses are subject to a variety of operational risks.
The Group's businesses are subject to a variety of operational risks, including shortages or unavailability of
materials, equipment and skilled and unskilled labour; increases in capital and/or operating costs, including
as a result of foreign exchange rate movements; adverse weather conditions and natural disasters; labour
disputes and disputes with contractors and sub-contractors; inadequate engineering, project management or
capacity, including as a result of failure or short-comings of third parties; failure to complete projects
according to specification; environmental regulations, including the need to perform feasibility studies and
conduct remediation activities; accidents; terrorist action; fraud; political, social and economic conditions;
changes in laws, rules, regulations and governmental priorities; and an inability to obtain and maintain
requisite governmental licenses, permits or approvals. If any of the operational risks were to materialise, it
could result in a substantial interruption to a facility, a potential loss of customers and revenue and financial
loss, which could have an adverse effect on the Group's business, results of operations, financial condition
and prospects.
Other general risks
The Group is subject to the risk of claims, lawsuits and other proceedings in the ordinary course of its
business.
The Group is subject to a variety of litigation and statutory compliance risks. These risks include, among
other things, litigation concerning product warranty and liability matters, personal injuries and health and
safety, intellectual property rights, taxes, environmental matters, competition laws and sales and trading
practices. The Group or one of its subsidiaries could be charged with wrongdoing or sued should any of
these risks crystallise. If convicted or found liable, the Group could be subject to fines, penalties,
repayments and other damages (including, in certain cases, treble damages).
The global and diverse nature of the Group's operations means that these risks will continue to exist, and
legal proceedings and contingencies will arise from time to time. The Group's results may be affected by
the outcome of legal proceedings and other contingencies that cannot be predicted. The Group's provisions
for legal proceedings and other loss contingencies may not be adequate when established, and may need to
be revised in light of subsequent developments. Either of these events could result in an adverse effect on
the Group's results of operations (in the period in which a liability is recognised or subsequently revised) or
cash flows for the period in which damages would be paid. In addition, subsequent events may cause
management to change its assessment of the likelihood of sustaining a previously recognised benefit. Such
a change could have an adverse effect on its results of operations in the period in which such event occurs,
or on the Group's cash flows in the period in which any ultimate settlement or determination of a legal or
regulatory proceeding occurs.
The Group's operations are subject to a complex regime of laws, regulations and restrictions, noncompliance with which could expose the Group to fines, penalties, suspension or debarment.
The Group has operations in over 30 countries around the world, and is subject to extensive laws and
regulations in each of those countries (including, in particular, the United States and member states of the
EU), including regulations relating to export control, technology transfer restrictions, repatriation of
earnings, exchange controls and the US Foreign Corrupt Practices Act.
Changes in laws and regulations or the political environment may adversely affect the Group's ability to
make investments, procure materials and supplies, repatriate earnings and otherwise conduct business. On
a regular basis, the Group monitors its policies and procedures with respect to its contracts to ensure
consistent application under similar terms and conditions and to assess compliance with applicable
government regulations. However, from time to time the Group may be subject to government
investigations relating to its operations.
The aerospace industry is highly regulated (in the United Kingdom by the Civil Aviation Authority, in the
United States by the Federal Aviation Administration, in Europe by the European Aviation Safety Agency
and in other countries by similar regulatory agencies). These agencies and, in some cases, individual
OEMs, must certify the Group to engineer and service systems and components used in specific aircraft
models. If material authorisations or approvals were revoked or suspended, the Group's operations would
be adversely affected. Regulatory authorities could adopt new or more stringent regulations, or heighten
industry oversight, and as a result, the Group could incur significant expenses to comply with any new
regulations or any heightened industry oversight.
In addition, the Group must comply with, and is affected by, laws and regulations relating to the formation,
administration and performance of government-sponsored programmes. These laws and regulations may,
among other things, require certification and disclosure of all cost and pricing data in connection with
contract negotiation, define allowable and unallowable costs and otherwise govern the Group's right to
reimbursement and restrict the use and dissemination of classified information (including the exportation of
certain products and technical data). The Group's government-sponsored programmes may contain
provisions that allow the government to suspend the Group from participating in new programmes pending
resolution of alleged violations of procurement laws or regulations, or reduce the value of or issue
modifications to existing programmes. In particular, prime contracts with various agencies of the US
government and subcontracts with other prime contractors that bind the Group are subject to numerous US
procurement regulations, including the US False Claims Act, the US International Traffic in Arms
Regulations and the US Government Accounting Rules.
Violation of applicable rules and regulations could result in administrative, civil or criminal liabilities, or
suspension or debarment from government-sponsored programmes. Given the Group's dependence on
government-sponsored programmes, suspension or debarment could adversely affect the Group.
The Group depends on proprietary technologies and processes.
The Group relies on a combination of confidentiality procedures and trade secret, patent, design, copyright
and trademark laws to protect its proprietary rights. The existence of complex factual and legal issues may
give rise to uncertainty as to the validity, scope and enforceability of a particular patent, other intellectual
property or contractual right. If the Group were to fail or be unable to protect, maintain and enforce its
existing intellectual property, the Group could lose its exclusive right to use proprietary products and
processes that are included in its products or used in its businesses. In addition, the laws of certain countries
in which the Group operates may not protect proprietary rights to the same extent as those of the United
Kingdom or the United States. At any one time, the Group has applied for patents in a number of
jurisdictions, including in Europe, the United States and Asia. These patents may not be issued, or may be
issued in a form narrower than the Group's applications. If some of the patents or patent applications were
not granted, were to expire or were successfully attacked, the Group may be unable to exclude competitors
from using the relevant technology. Whilst the Group's general policy is never knowingly to infringe third
party rights believed to be valid, identification of such rights and assessment of their scope and validity can
be complex and uncertain, especially in the global competitive markets in which the Group operates. The
existence of any such third party proprietary rights may result in restrictions on the Group's ability to utilise
the subject technologies. The Group could become subject to lawsuits in which it is alleged that the Group
has infringed the intellectual property rights of others, or the Group could commence lawsuits against
others whom it believes are infringing upon its rights. The Group's involvement in intellectual property
litigation could result in significant expense, adversely affecting the development of sales of the challenged
product or intellectual property and/or diverting the efforts of the Group's technical and management
personnel.
The Group's worldwide operations and businesses may be adversely affected by various political, legal,
regulatory, socio-economic and other developments.
Like many large global manufacturers, to operate successfully the Group must implement sophisticated
design, manufacturing and logistical processes in many countries around the world, including in emerging
markets. Its ability to implement these processes is subject to a variety of risks, many of which are beyond
its control and some of which may be more acute in emerging markets. Political risks include the
imposition of trade barriers or other forms of protectionism, changes to regulatory requirements and the
volatility of input costs, selling prices, taxes and currencies. The Group is subject to various legal and
regulatory regimes, including those covering taxation and environmental matters. Future global political,
legal or regulatory developments concerning the Group's businesses may affect the businesses' ability to
operate and to operate profitably in the affected jurisdictions. Should the businesses fail to comply with
applicable legal and regulatory requirements, it could result in a financial loss or restriction on the
businesses' ability to operate. The Group's operations could be adversely affected by changes in the
political, economic and financial environments in host countries, including fluctuations in exchange rates,
political instability, changes in foreign laws and regulations (or new interpretations of existing laws and
regulations) and changes in trade policies, import and export restrictions and tariffs, taxes and exchange
controls.
The Group conducts operations through joint venture arrangements with third parties, which the Group
cannot operate solely for its own benefit.
The Group has interests in a variety of joint ventures around the world, in particular in China. In 2008,
sales of joint ventures represented 5 per cent. of the Group's management sales. The Group's ability to
receive dividends, royalties and other payments from these joint ventures depends not only upon the joint
ventures' cash flows and profits, but also upon the terms of agreements with the Group's joint venture
partners. Due to the nature of the joint venture arrangements, the Group does not retain complete control
over all decisions regarding these operations. Conflict with joint venture partners may lead to deadlock and
result in the Group's inability to pursue its desired strategy or exit the joint venture other than on
disadvantageous terms. In addition, the sale or transfer of interests in the Group's joint ventures may be
restricted. Furthermore, the bankruptcy, insolvency or severe financial distress of one of the Group's joint
venture partners could adversely affect the joint venture.
The Group is subject to environmental and health and safety risks and regulations.
The Group is subject to applicable laws and regulations in all of the jurisdictions in which it operates,
including those relating to pollution, the protection of the environment, human health and safety, the
disposal of hazardous substances and waste materials and remediation of any land or water contaminated
by such substances. Violations of legal or other regulatory requirements could result in restrictions on
operations, the imposition of more stringent permitting conditions, damages, fines or other sanctions.
Furthermore, such a violation could generate significant adverse publicity and have a negative impact on
the Group's reputation which in turn may materially affect its business, financial condition and operation
results.
The Group may fail to attract and retain senior management and skilled personnel.
The Group's ability to operate its business and implement its strategies effectively depends, in part, on the
efforts of its executive officers and other key employees. In addition, its future success will depend on,
among other factors, its ability to attract and retain other qualified personnel, particularly engineers and
other employees with relevant technological expertise. The loss of the services of key employees or the
failure to attract or retain other qualified personnel could have an adverse effect on its business, results of
operations, financial condition and prospects.
Damage to corporate reputation or brand perception could affect the Group's competitive position.
The Group's markets are competitive, and its ability to compete for contracts depends in part on
establishing and maintaining strong relationships with both commercial and government direct and indirect
customers. If the Group's reputation were to decline, the Group would likely find it more difficult to
maintain relationships and win new work. Any such damage could therefore have an adverse effect on the
Group's business, results of operations, financial condition and prospects.