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Senior Leverage covenant to 3.00x. The Total Leverage
covenant remained unchanged at 3.75x. AMG’s financing
risk is also mitigated by its year-end 2010 liquidity of
$137.1 million.
Entrepreneurial Risk
The continued growth of AMG’s business requires the
development of new products and new production
processes and highly capable management. Developing
and investing in these products and processes involves
the acceptance of certain measured entrepreneurial
risks. As competitors duplicate successful technologies
or develop new methodologies, AMG must continue to
innovate in order to maintain leading positions in its
strategic niches. It is particularly important to strike an
appropriate balance between investments in innovation
to secure future growth versus the need to preserve cash
to withstand an economic crisis. For this reason, AMG
management evaluates more than the projected internal
rate of return or the discounted cash flows of a potential
project. AMG also examines the consequences of declining
projects and the possibility of lost cash flows from the
inability to innovate. In addition to looking at the inherent
risk on a project-by-project basis, AMG also evaluates
the risk of a portfolio of projects being undertaken or
developed in the pipeline. Evaluating a project within a
portfolio of opportunities allows AMG to better manage
its liquidity and capital allocation. While certain projects
may be beneficial and profitable in the long run, timing of
cash flows is critically important as AMG always seeks to
maintain sufficient liquidity to operate its existing businesses.
Managing entrepreneurial risk requires active
management. Frequent Management Board meetings
enable the senior executives of AMG to stay informed
of all the latest information, allowing for quick action,
further reducing risk. During 2010 AMG acquired Mono2 solar casting technology from BP Solar International Inc.,
allowing AMG’s Engineering Systems Division to offer
an advanced integrated solar melting and crystallization
technology. Acquisitions of new technology such as this
will help AMG avoid entrepreneurial risk. AMG’s highly
educated and skilled workforce contributes greatly to
AMG’s entrepreneurial success. High employee turnover
or loss to a competitor of key personnel, many of whom
possess specific technical and manufacturing knowledge,
is a risk to AMG. Many incentives, financial and other, are
used to maintain a motivated workforce.
Currency Risk
AMG’s largest currency risk exists where it incurs an
imbalance in revenues and costs in a particular currency.
While the single largest sensitivity of this nature exists
for the Euro, risk also exists with the British Pound and
Brazilian Real. AMG may enter into currency hedges to
mitigate this risk. AMG also faces currency risk when it
enters into a fixed price contract to sell a product in one
currency while the costs incurred are in an alternate
currency. AMG typically enters into currency hedges to
mitigate this currency timing risk.
Legal and Regulatory Risk
Like all companies, AMG is exposed to the changing
regulatory environment in the countries and regions
where it conducts business. The most notable changes
are coming in the form of environmental policy and to a
lesser extent governmental restrictions on the freedom
to operate in certain countries and jurisdictions. New
environmental regulations or a change in regulatory bodies
that have jurisdiction over AMG products and facilities
could result in new restrictions, including those relating
to the storage or disposal of legacy material at AMG
owned properties, which may result in significantly higher
costs to AMG (see note 35 to the Consolidated Financial
Statements). The environmental regulations that are
important for the growth in AMG’s business, however, may
present operational challenges to AMG’s manufacturing
processes. More stringent regulations may be enacted
for the release of air emissions, wastewater discharge or
solid waste, which may negatively impact AMG’s operations.
Additionally, the REACH Directive became effective
in the European Union in June 2007. REACH requires
new operational procedures regarding the registration,
evaluation and authorization of chemical substances.
AMG’s business units have pre-registered all required
materials and also made complete registrations for
those products required in 2010 as a result of tonnage or
hazardous properties. Plans are in place to meet 2013 and
Report of the Management Board | Risk Management and Internal Controls 35