General
Fugro’s risk management policy is aimed at the long-term sustainable management of its business activities and the limiting or, where possible, hedging of the risks. Due to the wide diversity of markets, clients and regions and its broad portfolio of activities, quantifying all the existing risks relevant to the Group as a whole is virtually impossible. Risks are, however, quantified wherever possible and useful. This applies in particular to the influence of the US dollar.

Strengths

• An excellent strategic foundation
• A good market position in many niche markets worldwide
• Professional employees who receive continuous additional training
• High-quality technology and services provision
• Well operating fi nancial systems and risk management systems
• Cooperation between business units

Weaknesses

• Sensitivity to rapid, sharp fluctuations in the US dollar and British pound exchange rate
• Much of the revenue depends on investment by the oil and gas industry

Opportunities

• Increased investment by the oil and gas industry
• Increasing demand for oil and gas
• Optimisation of existing oil and gas fi elds
• More and larger infrastructure projects, including coastline defence
• Increased mining activities
• Upcoming markets such as India, China, Brazil, Russia and Eastern European countries

Threats

• Negative global economic developments
• Collapse of the demand for oil, gas and/or minerals
• Political instability in countries and/or regions important for Fugro

Operational
Activity portfolio
Although the core activities show a high degree of cohesion, they also target highly diverse markets,clients and regions. A high proportion of the activities provided offshore and by the Development & Production business line is related to the oil and gas market. Fugro’s dependence on the more cyclic investment in oil and gas exploration will be reduced in favour of the more stable investments in oil and gas production. The other activities are dependent on developments in markets that include infrastructure, construction and mining. The infl uence of positive and negative cyclic effects is moderated by:

• the cohesion between the activities;
• the broad geographical spread;
• the diversity of clients;
• strong market positions, and
• the size of the Group.

Order stream and price changes
Some of Fugro’s orders are awarded on the basis of long-term preferred supplier agreements. Having a large number of clients supports Fugro’s independence and improves its stability. In the course of a year Fugro often carries out a large number of projects for the same client. The projects carried out for any single client do not, however, account for more than 4% of the total annual revenue.

To carry out its projects Fugro has at its disposal highly trained employees and technically advanced, and therefore expensive, equipment. Much of Fugro’s work involves short-term orders. Fugro is, to a degree, sensitive to price changes and sudden changes in exchange rates, to which the Company can, however, adapt quickly. Fugro’s budgets are, to a great extent, based on the expected investments by the oil and gas companies. Unless there is a structural drop in the oil price to less than USD 30 – 40 per barrel, it is not anticipated that substantial (up or down) fluctuations in oil prices will lead to a rapid change in these investments.

Capacity planning
Fugro is constantly alert for signals that indicate changes in market conditions so it can react quickly and efficiently. Sudden and very unexpected changes in market conditions are, however, always possible. Some of Fugro’s survey activities can precede investment by clients and generally take place at the start of activities or investment-cycles of clients. This means Fugro’s activities can be the first to be affected by changes in market conditions. Postponement and interruption to the flow of orders can lead to temporary losses due to underutilisation of capacity.

The weather and the availability of vessels are key factors for offshore activities. Weather influences are calculated into the budgets and are averaged out over the year and the regions in which Fugro is active. As far as vessels are concerned, Fugro’s objective is a balanced fleet in which around 60% of the vessels are Company owned and around 30% are on mid-term or long-term charter basis. Some vessels (approximately 10% of the fleet) are chartered on a project basis. The fact that Fugro is deploying heavy and specialist equipment does mean that the risks of capacity under-utilisation will increase. At the same time, the exchange of manpower and equipment between the various business units can increase capacity utilisation.

Financial
Balance sheet
Fugro follows an active policy to optimise its balance sheet ratios and thus limit financial risks and maintain the Company’s long-term solvency. Being quoted on the stock exchange provides a worthwhile contribution towards achieving the Company’s (financial) targets and enables Fugro to make a well considered selection of the optimum financing mix when, for example, involved in an acquisition process.

Future interest rate risks are limited to bank loans. Fugro’s objective is to limit the effect of interest rate changes on the results.

The turnover rate of the seismic and geological databases is in general less than 2.5 years. Research costs are charged directly to the results. A portion of these costs are accounted for as project-related revenue costs. Fugro has evaluated the book value of its assets, including goodwill, within the framework of its normal balance sheet evaluation. This has shown that no significant impairment of any tangible and intangible asset is necessary.

Currency exchange rate conversion
Fugro limits its susceptibility to changes in foreign currency exchange rates, but is not immune to exchange rate losses caused by rapid changes to the rates. Besides that, changes in exchange rates will result in conversion effects. As most of Fugro’s revenue in local currencies is used for local payments, the effect of negative or positive currency movements on operational activities at a local level is minimal. Fugro’s international monetary streams are limited and mainly in US dollars or US dollar related currencies.

Where possible and desirable, forward exchange contracts are signed (at a local level and approved by Fugro N.V.). Fugro strives to match assets and liabilities in foreign currencies. In line with this we have decided not to extend the Cross Currency Swap on the Private Placement loans. Rapid and radical changes in exchange rates can also influence the balance sheet and profit and loss account, partly due to the length of time between quotes being submitted and orders being awarded or delayed, during which period forward exchange contracts would not be appropriate. This creates an additional foreign currency risk that cannot be quantified in advance.
At the Group’s current structure and size, a rate difference of USD 0.01 would affect profit by around EUR 1 million and revenue by approximately EUR 7 million.

Pension provisions
Fugro maintains pension schemes for its employees in accordance with regulations and customs in each of the countries in which the Company operates.

Since 1 January 2005, Fugro has operated an average salary scheme in the Netherlands. Under IFRS this is classified as a ‘defined benefit’ scheme. The pension commitments in the Netherlands are fully re-insured on the basis of a guarantee contract. The accrued benefits are fully financed.

In the United States Fugro has a 401K system for its employees. Fugro contributes towards the deposits of its employees in accordance with agreed rules and taking the regulations of the IRS, the American tax authority, into account. This system is free of risk for Fugro.

In the United Kingdom Fugro operates a number of pension schemes. All the schemes available to new employees are defined contribution schemes. There is one defi ned benefi t scheme open for long-serving employees and there are other defi ned benefi t schemes which have been closed but which have on-going obligations to their members. Measures have been taken to ensure these obligations can be paid when required.

In the other countries where Fugro has organized retirement provisions for its employees, obligations arising from these provisions are covered by items recognised in the balance sheet of the relevant operating company.

Insurance and legal risks
Fugro is insured against a number of risks. Risks related to occupational liability and general liability are covered at a Group level. Equipment is insured locally and local cover is arranged for risks associated with normal business operations, such as insurance for the vehicle fleet, the buildings and for employees.

Several operating companies are involved in claims, either as the claimant or the defendant, within the context of normal business operations. Where necessary proper provisions have been set-up in the annual accounts. Based on developments thus far, it is not anticipated that Fugro’s financial position will be noticeably affected by any of these proceedings. With regard to items included in the annual report adjustments to estimates are possible.

Internal systems
Due to the generally short-term nature of its assignments, constant monitoring of its markets and its operating and financial results is intrinsic to Fugro’s modus operandi.
Clarity and transparency are an absolute must for assessing and evaluating risks. These are fundamental characteristics of the Fugro culture. Due to the wide variety of markets, clients and regions and Fugro’s extensive activity portfolio, the managements of the operating companies are responsible for the application and monitoring of and compliance with the internal control systems.
The monitoring systems consist of the internal control framework described below.

Corporate Handbook
Fugro’s Corporate Handbook contains precise instructions regarding many aspects, including risk management. This Handbook is handed out to the senior management members responsible for further application within the operating companies.

Financial Handbook
This contains detailed guidelines for the financial reporting. The Financial Handbook is put at the disposal of the senior management and of the controllers of all operating companies and the Holding Company.

Manual for project management
This document contains the guidelines for the procedures to be followed in project preparation and execution. This manual is used by project managers.

Planning
The business plans of every Fugro unit are translated into budgets. Adherence to the budgets is checked on a quarterly basis. Any unforeseen circumstances that arise, or any substantial deviation from the budgets, must be reported immediately by the operating company managements to the relevant responsible Executive Committee member and to the Board of Management.
The monthly reports the operational management submits to the Holding Company include an analysis of the achievement of the approved plans.

Authorisation level
Managers are bound by clear restrictions regarding representative authorisation. Projects and contracts with a value or risk that exceeds a specified amount must be approved by either regional managers or the appropriate member of the Executive Committee or Board of Management.

Letter of representation
Every six months all regional managers, operating company controllers and the responsible member of the Executive Committee sign a detailed statement regarding the financial reporting/internal audit.

Internal Audit
The Holding Company carries out regular and frequent internal audits of the various operating companies. The findings are reported directly to the Board of Management and the Executive Committee.

Peer reviews
‘Peer reviews’ are also carried out on a regular basis. A peer review involves an inspection of an operating company by a team from other operating companies. The results are reported directly to the Board of Management and the Executive Committee.

Audit Committee
The Audit Committee, which comprises three members of the Supervisory Board, ensures an independent monitoring of the risk management process from the perspective of its supervisory role. The Audit Committee focuses on the quality of the internal and external reporting, the effectiveness of the internal audits and the functioning of the external accountants.

External audit
The annual accounts of Fugro N.V. and subsidiaries are audited annually by external auditors. These audits take place on the basis of generally accepted auditing standards.

Advisory roles
Professional advice is provided by third party experts, such as tax consultants and insurance advisors. The external auditor does not act in an advisory capacity except where due diligence projects and activities relating to the annual accounts are concerned.

Whistle-blower’s regulation
Fugro operates a ‘whistle-blower’s charter’ to ensure that any possible infringement of the Group’s policy and procedures can be reported without this act of submitting such a report having any adverse consequences for the ‘whistle-blower’.

Declaration
The Board of Management believes that the internal risk management and control systems described above provide a reasonable level of assurance that the financial statements do not contain any material misstatements and that these systems operated properly during the year under review. The Board of Management has no indication that these systems will not operate properly during the current year.
During the year the manual for project management was introduced. Apart from that no major changes to these systems were introduced during the year under review and at this moment no signifi cant changes are anticipated.