GKN Holdings plc

2016 Annual Report

GKN Holdings plc LEI: 213800WS7P9FYSAIJ240

This announcement is made in connection with GKN Holdings plc’s 6.75% Bonds due 2019 and 5.375% Bonds due 2022.  The shares of GKN Holdings plc (the ‘Company’) are not listed; the Company is a wholly owned subsidiary of GKN plc, the ultimate holding company of the GKN Group.

The Company has today published its 2016 Annual Report on the GKN plc website.  The document can be viewed at or downloaded from http://www.gkn.com/en/investors/results-centre/annual-reports/annual-reports-archive/.

A copy of the 2016 Annual Report has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

In compliance with DTR 6.3.5, a description of the Company’s principal risks and uncertainties and a responsibility statement are set out below.  A condensed set of financial statements are also appended, which have been extracted from the full set of financial statements that have been prepared on a  going concern basis in accordance with International Financial Reporting Standards (IFRS) as endorsed and adopted for use by the European Union. These condensed financial statements should be read in conjunction with the full audited financial statements of GKN Holdings plc for the year ended 31 December 2016, which include the accounting policies and information regarding estimations, judgements and assumptions relevant to these condensed financial statements. The 2016 full year results announcement issued by GKN plc on 28 February 2017 included an indication of important events that occurred during the year for the Group.  The announcement can be viewed at or downloaded from http://www.gkn.com/en/investors/regulatory-news/.

Principal Risks and Uncertainties

The Company’s risk management process includes an assessment of the likelihood and potential impact of a range of events to determine the overall risk level and to identify actions necessary to mitigate their impact.  As a finance, investment and holding company within the GKN Holdings Group, aside from holding the Group’s external term loans and sponsorship of the GKN UK pension schemes, the Company’s dealings are almost exclusively intra Group transactions.  In this context, the Company’s significant risks and uncertainties are identified below.  In addition, risks which could have a material impact on the Group’s strategic objectives are given in the annual report of GKN plc for 2016 which does not form part of this report. 

Additional risks not currently known or which are regarded as immaterial could also affect future performance.

Pension deficit volatility

The Group has a number of defined benefit pension plans with aggregate net liabilities of £2,033 million at 31 December 2016. These plans are exposed to the risk of changes in asset values, discount rates, inflation and mortality assumptions. Increases to the pension deficit could lead to a requirement for additional cash contributions to these plans, thereby reducing the amount of cash available to meet the Group’s other operating, investment and financing requirements.

This risk is managed through close cooperation with scheme fiduciaries regarding management of pension scheme assets and liabilities, including asset selection and hedging actions. Alternative funding and risk mitigation actions are implemented where appropriate along with agreed recovery plans where required.

Falling yields on long-term bonds following the UK’s decision to leave the EU has resulted in an increase in the UK pension liability. In addition, weaker sterling has so far had a negative impact on the reported liability associated with our overseas pensions.

The Group continues to have a reasonable degree of visibility over the likely short- to medium-term funding cash flows and requirements of its pension schemes and builds these cash flows into its budget and strategic planning processes. We will continue to monitor the impact of market volatility and seek to reduce volatility where appropriate. Discussions with the trustees of the UK pension schemes in relation to the triennial funding valuation are progressing in a constructive manner.

Currency translation

Movements in exchange rates of key currencies may significantly impact the Group’s financial results. Our mitigation strategy includes foreign currency hedging and using cross currency swaps to align our debt to the principal currencies in which our revenues and cash flows are generated.

During the year, the Group designated US dollar and Swedish SEK loans as part of a net investment hedge of US dollar and SEK net assets.

Over time, our risk profile evolves and the principal risks facing the Group are updated accordingly. This year, acquisition integration has been removed as a principal risk following the successful integration of Fokker Technologies. Relationships with our largest joint venture Shanghai GKN HUAYU Driveline Systems Co Limited (SDS) remain strong and continue to develop positively. Accordingly, joint ventures has been removed as a principal risk.  In addition business continuity has also been removed as a separate principal risk.

All divisions continue to focus on risk mitigation, including the production, refinement and testing of business continuity and disaster recovery plans, and ongoing reviews of critical assets and prioritisation of capital investment.

DIRECTORS’ RESPONSIBILITY STATEMENT

Directors:

Mr N M Stein

Mr A C Walker

Mr M J Sclater

Each of the Directors as at the date of this report, whose names are set out above, confirm that to the best of their knowledge:

  • the Group financial statements, prepared in accordance with IFRSs as adopted by the EU,  give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
  • the strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

GKN Holdings plc condensed financial statements

Consolidated Income Statement
For the year ended 31 December 2016
Notes 2016  2015 
£m  £m 
Sales 1 8,822  7,231 
Trading profit 1 684  610 
Change in value of derivative and other financial instruments 2 (154) (122)
Amortisation of non-operating intangible assets arising on
business combinations 2 (103) (80)
Gains and losses on changes in Group structure 2 (9) (1)
Acquisition-related restructuring charges 2 (31) - 
Impairment charges (52) (71)
Reversal of inventory fair value adjustment arising on
business combinations -  (12)
Operating profit 335  324 
Share of post-tax earnings of equity accounted investments 5 73  59 
Interest payable (86) (72)
Interest receivable 7  7 
Other net financing charges (37) (72)
Net financing costs 3 (116) (137)
Profit before taxation 292  246 
Taxation 4 (54) (47)
Profit after taxation for the year 238  199 
Profit attributable to non-controlling interests 2  5 
Profit attributable to owners of the parent 236  194 
238  199 

   

Consolidated Statement of Comprehensive Income
For the year ended 31 December 2016
Notes 2016  2015 
£m  £m 
Profit after taxation for the year 238  199 
Other comprehensive income
Items that may be reclassified to profit or loss
Currency variations – subsidiaries
Arising in year 671  74 
Reclassified in year 2  4 
Currency variations – equity accounted investments
Arising in year 5 22  1 
Derivative financial instruments – transactional hedging
Arising in year -  5 
Reclassified in year -  (5)
Net investment hedge changes in fair value
Arising in year (177) (37)
Taxation 4 (14) (5)
504  37 
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit plans
Subsidiaries 8 (396) 139 
Taxation 4 63  (42)
(333) 97 
Other comprehensive income for the year 171  134 
Total comprehensive income for the year 409  333 
Total comprehensive income attributable to non-controlling interests 6  4 
Total comprehensive income attributable to owners of the parent 403  329 
409  333 

   

Consolidated Statement  of Changes in Equity
For the year ended 31 December 2016
Other reserves
Share 
capital 
£m 		 Share 
premium 
account 
£m 		 Retained 
earnings 
£m 		 Exchange 
reserve 
£m 		 Hedging 
reserve 
£m 		 Other 
reserves 
£m 		 Equity 
attributable 
to equity 
holders of 
the parent 
£m 		 Non-
controlling
interests 
£m 		 Total 
equity 
£m 
At 1 January 2016 362  301  3,358  243  (264) (134) 3,866  23  3,889 
Profit for the year -  -  236  -  -  -  236  2  238 
Other comprehensive
income/(expense) -  -  (333)  638  (138) -  167  4  171 
Total comprehensive income -  -  (97) 638  (138) -  403  6  409 
Share-based payments -  -  5  -  -  -  5  -  5 
Shares received from Employee Share
   Ownership Plan Trust		 -  -  (10) -  -  -  (10) -  (10)
Addition of non-controlling interest -  -  -  -  -  -  -  9  9 
Purchase of non-controlling interest -  -  (1) -  -  -  (1) (1) (2)
Dividends paid to non-controlling interests -  -  -  -  -  -  -  (2) (2)
At 31 December 2016 362  301  3,255  881  (402) (134) 4,263  35  4,298 
At 1 January 2015 362  301  3,066  168  (227) (134) 3,536  22  3,558 
Profit for the year -  -  194  -  -  -  194  5  199 
Other comprehensive
income/(expense) -  -  97  75  (37) -  135  (1) 134 
Total comprehensive income -  -  291  75  (37) -  329  4  333 
Share-based payments -  -  1  -  -  -  1  -  1 
Dividends paid to non-controlling
interests -  -  -  -  -  -  -  (3) (3)
At 31 December 2015 362  301  3,358  243  (264) (134) 3,866  23  3,889 

Other reserves include accumulated reserves where distribution has been restricted due to legal or fiscal requirements and accumulated adjustments in respect of piecemeal acquisitions.

Consolidated Balance Sheet
At 31 December 2016
Notes 2016  2015 
£m  £m 
Assets
Non-current assets
Goodwill 588  591 
Other intangible assets 1,320  1,265 
Property, plant and equipment 2,670  2,200 
Equity accounted investments 5 233  195 
Other receivables and investments 49  42 
Derivative financial instruments 25  21 
Deferred tax assets 4 557  388 
5,442  4,702 
Current assets
Inventories 1,431  1,170 
Trade and other receivables 1,648  1,311 
Amounts receivable from parent undertaking 2,148  2,009 
Current tax assets 4 7  9 
Derivative financial instruments 19  13 
Other financial assets 6 5  5 
Cash and cash equivalents 6 411  299 
5,669  4,816 
Total assets 11,111  9,518 
Liabilities
Current liabilities
Borrowings 6 (64) (137)
Derivative financial instruments (206) (151)
Trade and other payables (2,186) (1,757)
Amounts payable to parent undertaking (12) (6)
Current tax liabilities 4 (142) (121)
Provisions (71) (78)
(2,681) (2,250)
Non-current liabilities
Borrowings 6 (842) (867)
Derivative financial instruments (521) (294)
Deferred tax liabilities 4 (227) (157)
Trade and other payables (427) (425)
Provisions (82) (78)
Post-employment obligations 8 (2,033) (1,558)
(4,132) (3,379)
Total liabilities (6,813) (5,629)
Net assets 4,298  3,889 
Shareholders' equity
Share capital 362  362 
Share premium account 301  301 
Retained earnings 3,255  3,358 
Other reserves 345  (155)
Equity attributable to the equity holders of the parent 4,263  3,866 
Non-controlling interests 35  23 
Total equity 4,298  3,889 

   

Consolidated Cash Flow Statement
For the year ended 31 December 2016
Notes 2016  2015 
£m  £m 
Cash flows from operating activities
Cash generated from operations 7 645  940 
Interest received 7  15 
Interest paid (83) (69)
Tax paid (99) (115)
Dividends received from equity accounted investments 5 57  55 
527  826 
Cash flows from investing activities
Purchase of property, plant and equipment (416) (332)
Receipt of government capital grants 6  2 
Purchase of intangible assets (84) (81)
Repayment of government refundable advance (6) - 
Proceeds from sale and realisation of fixed assets 37  9 
Payment of deferred and contingent consideration (1) (7)
Acquisition of subsidiaries (net of cash acquired) 9 (17) (117)
Repayment of debt acquired in business combinations -  (371)
Purchase of investment (5) - 
Proceeds from disposal of subsidiary, net of cash 2 151 - 
Equity accounted investments loan settlement 4  3 
(331) (894)
Cash flows from financing activities
Shares received from Employee Share Ownership
  Plan Trust		 (10) - 
Purchase of non-controlling interests 9 (2) - 
Amounts placed on deposit -  (2)
Proceeds from borrowing facilities 102  485 
Repayment of other borrowings (243) (423)
Dividends paid to non-controlling interests (2) (3)
(155) 57 
Movement in cash and cash equivalents 41  (11)
Cash and cash equivalents at 1 January 291  317 
Currency variations on cash and cash equivalents 53  (15)
Cash and cash equivalents at 31 December 7 385  291 

   

Notes to the Consolidated Financial Statements
1 Segmental analysis
The Group’s reportable segments have been determined based on reports reviewed by the Executive Committee led by the Chief Executive.  The operating activities of the Group are largely structured according to the markets served; aerospace, automotive and the land systems markets.  Automotive is managed according to product groups; driveline and powder metallurgy.  Further to disposal of the Stromag business on 30 December 2016 (see note 2(d) for further details) the Group will change its segments to remove Land Systems for reporting in 2017.  The two businesses remaining in the Group that were part of Land Systems will be reported as follows: Wheels and Structures in Other Businesses and Driveshafts and Aftermarket Services in Driveline.  Reportable segments derive their sales from the manufacture of products and sale of service.  Revenue from royalties is not significant. 
(a) Sales
Automotive
Powder  Land 
Aerospace  Driveline  Metallurgy  Systems  Total 
 £m  £m  £m  £m  £m 
2016
Subsidiaries 3,352  3,716  1,032  683 
Equity accounted investments 71  500  -  21 
3,423  4,216  1,032  704  9,375 
Other businesses 39 
Management sales 9,414 
Less:  equity accounted investments (592)
Income statement – sales 8,822 
2015
Subsidiaries 2,387  3,124  906  670 
Equity accounted investments -  424  -  23 
2,387  3,548  906  693  7,534 
Acquisitions
Subsidiaries 102  -  -  - 
Equity accounted investments 11  -  -  - 
113  -  -  -  113 
Other businesses 42 
Management sales 7,689 
Less:  equity accounted investments (458)
Income statement – sales 7,231 
Subsidiary sales comprise £8,281 million (2015: £6,895 million) from the manufacture of product and £541 million (2015: £336 million) from the sale of service.
(b) Trading profit
Automotive
Powder  Land 
Aerospace  Driveline  Metallurgy  Systems   Total 
 £m   £m   £m   £m   £m 
2016
Trading profit before depreciation and amortisation 464  374  164  32 
Depreciation of property, plant and equipment (78) (122) (44) (16)
Amortisation of operating intangible assets (51) (11) (2) (1)
Trading profit – subsidiaries 335  241  118  15 
Trading profit – equity accounted investments 4  82  -  3 
339  323  118  18  798 
Other businesses (4)
Corporate and unallocated costs (21)
Management trading profit 773 
Less: equity accounted investments trading profit (89)
Income statement – trading profit 684 

   

Notes to the Consolidated Financial Statements (continued)
1 Segmental analysis (continued)
(b) Trading profit (continued)
Automotive
Powder  Land 
Aerospace  Driveline  Metallurgy  Systems   Total 
 £m   £m   £m   £m   £m 
2015
Trading profit before depreciation and amortisation 383  329  148  39 
Depreciation of property, plant and equipment (59) (101) (38) (15)
Amortisation of operating intangible assets (33) (7) (1) (1)
Trading profit – subsidiaries 291  221  109  23 
Trading profit – equity accounted investments -  69  -  1 
291  290  109  24  714 
Acquisitions
Subsidiaries (5) -  -  - 
Acquisition-related charges (13) -  -  - 
(18) -  -  -  (18)
Other businesses 1 
Corporate and unallocated costs (17)
Management trading profit 680 
Less: equity accounted investments trading profit (70)
Income statement – trading profit 610 
Acquisition-related charges in 2015 comprise integration costs of £3 million and transaction professional fees of £10 million.  There was also a £5 million restructuring charge within the trading profit of Fokker.

During the year ended 31 December 2016, the Group recorded a charge of £39 million in trading profit in respect of a Group-wide restructuring programme.  The charge arises in: Aerospace £10 million, Driveline £10 million, Powder Metallurgy £3 million, Land Systems £14 million and Corporate costs £2 million.
 

   

Notes to the Consolidated Financial Statements (continued)
2 Operating profit
The analysis of the additional components of operating profit is shown below:
(a) Trading profit
2016  2015 
£m  £m 
Sales by subsidiaries 8,822  7,231 
Operating costs
Change in stocks of finished goods and work in progress 68  16 
Raw materials and consumables (3,850) (3,177)
Staff costs (2,309) (1,887)
Redundancy and other employee-related amounts (ii) (43) (22)
Depreciation of property, plant and equipment (iii) (263) (218)
Amortisation of operating intangible assets (67) (43)
Operating lease rentals payable:
Plant and equipment (25) (18)
Property (43) (33)
Impairment of trade receivables (5) (4)
Amortisation of government capital grants 2  2 
Net exchange differences on foreign currency transactions (25) 2 
Acquisition-related charges -  (13)
Other costs (1,578) (1,226)
(8,138) (6,621)
Trading profit 684  610 
(i) EBITDA is subsidiary trading profit before depreciation and amortisation charges included in trading profit.  EBITDA was £1,014 million (2015: £871 million).
(ii) Reorganisation costs reflect actions in the ordinary course of business to reduce costs, improve productivity and rationalise facilities in continuing operations.  This cost is included in trading profit, and includes a charge of £39 million in respect of a Group-wide restructuring programme, see note 1b for further details.
(iii) Including depreciation charged on assets held under finance leases of less than £1 million (2015: less than £1 million).
(iv) Research and development expenditure in subsidiaries was £186 million (2015: £157 million), net of customer and government funding.
Auditor’s remuneration
The analysis of auditor’s remuneration is as follows:
2016  2015 
£m  £m 
Fees payable to the Group’s auditor for the audit of the parent company (0.1) (0.1)
Fees payable to the Group’s auditor and their associates for other
services to the Group:
- Audit of the financial statements of subsidiaries (4.4) (4.5)
Total audit fees payable to the Group’s auditor (4.5) (4.6)
- Audit-related assurance services (0.2) (0.1)
- Tax advisory services -  (0.3)
- Tax compliance services -  (0.5)
- Other services -  (0.2)
Total fees for other services (0.2) (1.1)
Fees payable to the Group’s auditor and their associates in respect of
associated pension schemes:
- Audit -  (0.1)
-  (0.1)
Total fees payable to the Group’s auditor and their associates (4.7) (5.8)
£0.1 million of audit fees in relation to the audit of subsidiaries’ financial statements was payable to other audit firms in addition to the amounts above.

All fees payable to the Group’s auditor include amounts in respect of expenses.  All fees payable to the Group’s auditor have been charged to the income statement.  Deloitte LLP replaced PricewaterhouseCoopers LLP as the Group’s auditor for 2016.

   

Notes to the Consolidated Financial Statements (continued)
2 Operating profit (continued)
(b) Change in value of derivative and other financial instruments
2016  2015 
£m  £m 
Forward currency contracts (not hedge accounted) (135) (103)
Embedded derivatives 4  1 
(131) (102)
Net gains and losses on intra-group funding
Arising in year (23) (20)
(154) (122)
IAS 39 requires derivative financial instruments to be valued at the balance sheet date and reflected in the balance sheet as an asset or liability.  Any subsequent change in value is reflected in the income statement unless hedge accounting is achieved.  Such movements do not affect cash flow or the economic substance of the underlying transaction. 
(c) Amortisation of non-operating intangible assets arising on business combinations
2016  2015 
£m  £m 
Marketing-related (4) (4)
Customer-related (67) (57)
Technology-based (32) (19)
(103) (80)
(d) Gains and losses on changes in Group structure
2016  2015 
£m  £m 
Businesses disposed 9  (5)
Business closures (18) - 
Gain on contingent consideration -  4 
(9) (1)

On 30 December 2016, the Group sold its Stromag business (part of the Land Systems division) to Altra Industrial Motion Corp. for cash consideration of £159 million excluding an overdraft disposed of £7 million and before professional and completion fees.  The profit on sale of £9 million comprises an £11 million profit on disposal of net assets and £2 million loss from reclassification of previous currency variations from other reserves.

On 17 November 2016, the Group confirmed the closure of its Aerospace business in Yeovil.  The Company previously had a contract to make airframes for the Royal Navy AW159 Wild Cat helicopters but its main customer which assembles the helicopters, announced that it was taking this contract in-house.  The site closure, which is expected to conclude by the end of 2017, has necessitated a reorganisation charge of £12 million comprising: redundancy of £4 million; impairment of property, plant and equipment of £4 million; write down of inventories of £2 million; and other associated costs of £2 million.  There has also been a further decision to curtail operations of a Driveline business with an associated reorganisation charge of £6 million comprising redundancy of £4 million and impairment of goodwill of £2 million.

On 30 January 2015, the Group sold GKN Sinter Metals Argentina SA for a cash consideration of £1 million before professional fees.  The loss on sale of £5 million comprises a £1 million loss on disposal of net assets and £4 million loss from reclassification of previous currency variations from other reserves.

During 2015, following reassessment of fair value, £4 million of contingent consideration was released to the income statement. 
(e) Acquisition-related restructuring charges
2016  2015 
£m  £m 
Redundancy and other employee-related amounts (27) - 
Integration and other expenses (4) - 
Restructuring charges (31) - 

Restructuring charges, separately identified, relate to the recently acquired Fokker Technologies Group B.V. business within Aerospace.

   

Notes to the Consolidated Financial Statements (continued)
3 Net financing costs 
2016  2015 
£m  £m 
(a) Interest payable and fee expense
Short-term bank and other borrowings (12) (10)
Repayable within five years (41) (34)
Repayable after five years (27) (25)
Government refundable advances (6) (3)
(86) (72)
Interest receivable
Short-term investments, loans and deposits 7  3 
Tax case net interest recovery (see note 6) -  4 
7  7 
Net interest payable and receivable (79) (65)
2016  2015 
£m  £m 
(b) Other net financing charges
Interest charge on net defined benefit plans (53) (49)
Fair value changes on cross-currency interest rate swaps 18  (17)
Unwind of discounts (2) (6)
(37) (72)
4 Taxation
(a) Tax expense
2016  2015 
Analysis of charge in year £m  £m 
Current tax (charge)/credit
Current year charge (73) (127)
Utilisation of previously unrecognised tax losses and other assets 1  38 
Net movement on provisions for uncertain tax positions 9  (23)
Adjustments in respect of prior years 9  2 
(54) (110)
Deferred tax (charge)/credit
Origination and reversal of temporary differences -  30 
Tax on change in value of derivative financial instruments 14  31 
Other changes in unrecognised deferred tax assets (3) 1 
Adjustments in respect of prior years (11) 1 
-  63 
Total tax charge for the year (54) (47)
Analysed as:
2016  2015 
Tax in respect of management profit £m  £m 
Current tax (46) (111)
Deferred tax (104) (26)
(150) (137)
Tax in respect of items excluded from management profit
Current tax (8) 1 
Deferred tax 104  89 
96  90 
Total for tax charge for the year (54) (47)

   

Notes to the Consolidated Financial Statements (continued)
4 Taxation (continued)
(a) Tax expense (continued)
Judgements and estimates
The Group operates in many jurisdictions and is subject to tax audits which are often complex and can take several years to conclude.  Therefore, the accrual for current tax includes provisions for uncertain tax positions which require estimates for each matter and the exercise of judgement in respect of the interpretation of tax laws and the likelihood of challenge to historical tax positions.  Management uses in-house tax experts, professional advisers and previous experience when assessing tax risks.  Where appropriate, estimates of interest and penalties are included in these provisions.  As amounts provided for in any year could differ from eventual tax liabilities, subsequent adjustments which have a material impact on the Group’s tax rate and/or cash tax payments may arise.  Tax payments comprise payments on account and payments on the final resolution of open items and, as a result, there can be substantial differences between the charge in the income statement and cash tax payments.  Where companies utilise brought forward tax losses such that little or no tax is paid, this also results in differences between the tax charge and cash tax payments.  With regard to deferred tax, judgement is required for the recognition of deferred tax assets, which is based on expectations of future financial performance in particular legal entities or tax groups.
2016 2015
Tax reconciliation £m  %  £m  % 
Profit before taxation 292  246 
Less share of post-tax earnings of equity accounted investments (73) (59)
Profit before taxation excluding equity accounted investments 219  187 
Tax charge calculated at 20% (2015: 20.25%) standard UK corporate
tax rate (44) (20) (38) (20)
Differences between UK and overseas corporate tax rates (30) (14) (34) (18)
Non-deductible and non-taxable items 30  14  13  7 
Recognition of previously unrecognised tax losses -  -  1  1 
Utilisation of previously unrecognised tax losses and other assets 1  -  38  20 
Changes in tax rates (17) (8) (2) (1)
Other changes in deferred tax assets (1) -  (5) (3)
Tax charge on ordinary activities (61) (28) (27) (14)
Net movement on provision for uncertain tax positions 9  4  (23) (12)
Adjustments in respect of prior years (2) (1) 3  1 
Total tax charge for the year (54) (25) (47) (25)
Non-deductible and non-taxable items include foreign exchange movements that are not taxable (£45 million), impairment of assets which are not deductible for tax purposes (£11 million) and other items including tax incentives (£2 million).  Foreign exchange movements in 2016 were unusually high.  The rate change primarily relates to the change of rate in the UK discussed below.
(b) Tax included in other comprehensive income
2016  2015 
Analysis of credit/(charge) in year £m  £m 
Deferred tax on post-employment obligations 60  (46)
Deferred tax on hedged foreign currency gains and losses 39  - 
Deferred tax on other foreign currency gains and losses on intra-group funding (3) 1 
Current tax on post-employment obligations 3  4 
Current tax on foreign currency gains and losses on intra-group funding (50) (6)
49  (47)
(c) Current tax
2016  2015 
£m  £m 
Assets 7  9 
Liabilities (142) (121)
(135) (112)
(d) Recognised deferred tax
2016  2015 
£m  £m 
Assets 557  388 
Liabilities (227) (157)
330  231 
There is no deferred tax charge in the income statement in the year (2015: £63 million credit) and a deferred tax credit of £96 million recorded directly in other comprehensive income (2015: £45 million charge).  These movements are impacted by the recognition and use of deferred tax assets (primarily in respect of actuarial losses).

   

Notes to the Consolidated Financial Statements (continued)
4 Taxation (continued)
(d) Recognised deferred tax (continued)
The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by IAS 12) during the year are shown below:
Assets Liabilities
Post- 
employment  Tax  Fixed 
obligations  losses  Other  assets  Other  Total 
£m  £m  £m  £m  £m  £m 
At 1 January 2016 245  176  157  (339) (8) 231 
Businesses disposed (1) 1  (1) 15  -  14 
Included in the income statement (2) (19) 18  5  (2) - 
Included in other comprehensive income 60  -  36  -  -  96 
Currency variations 23  19  19  (72) -  (11)
At 31 December 2016 325  177  229  (391) (10) 330 
At 1 January 2015 285  93  95  (283) (6) 184 
Included in the income statement 6  (10) 42  28  (3) 63 
Included in other comprehensive income (46) -  1  -  -  (45)
Businesses acquired 2  92  17  (74) -  37 
Currency variations (2) 1  2  (10) 1  (8)
At 31 December 2015 245  176  157  (339) (8) 231 
The primary territories which have tax losses and other temporary differences are the UK and the Netherlands. These territories have both recognised and unrecognised deferred tax assets.  Deferred tax assets are recognised where, based on management projections, the future availability of taxable profits to absorb the deductions before any applicable time limits expire is probable.  Deferred tax assets (including tax losses) are not recognised where the Group’s ability to utilise them is not probable, for example where management projections indicate there will be insufficient future profits before losses expire, or in cases where the quantum of losses is uncertain (i.e. subject to cases such as the FII GLO).

‘Other’ deferred tax arises mainly in relation to items that are taxable or tax deductible in a different period than the income or expense is accrued in the financial statements.  Other deferred tax assets include £139 million relating to derivatives (2015: £85 million).

   

Notes to the Consolidated Financial Statements (continued)
5 Equity accounted investments
Group share of results
2016  2015 
£m  £m 
Sales 592  458 
Operating costs (503) (388)
Trading profit 89  70 
Net financing costs (1) (1)
Profit before taxation 88  69 
Taxation (15) (10)
Share of post-tax earnings 73  59 
Group share of net book amount
2016 2015
£m  £m 
At 1 January 195  174 
Share of post-tax earnings 73  59 
Dividends paid (57) (55)
Businesses acquired -  16 
Currency variations 22  1 
At 31 December 233  195 
2016  2015 
£m  £m 
Non-current assets 171  153 
Current assets 326  256 
Current liabilities (259) (202)
Non-current liabilities (5) (12)
233  195 
Equity accounted investments have no significant contingent liabilities to which the Group is exposed, nor has the Group any significant contingent liabilities in relation to its interest in the equity accounted investments. 

The Group has one significant joint venture within Driveline, Shanghai GKN HUAYU Driveline Systems Co Limited (SDS), with 100% of sales of £870 million (2015: £746 million), trading profit of £153 million (2015: £134 million), an interest charge of £1 million (2015: nil) and a tax charge of £26 million (2015: £20 million) leaving retained profit of £126 million (2015: £114 million).  Net assets of £341 million (2015: £286 million) comprise non-current assets of £236 million (2015: £206 million), current assets of £384 million (2015: £290 million), current liabilities of £279 million (2015: £210 million) and non-current liabilities of nil (2015: nil).  During 2016, SDS paid a dividend to the Group of £54 million (2015: £52 million).

   

Notes to the Consolidated Financial Statements (continued)
6 Net borrowings
(a) Analysis of net borrowings
Current  Non-current Total 
Within  One to two  Two to five  More than  Total 
one year  years  years  five years 
£m  £m  £m  £m  £m  £m 
2016
Unsecured capital market borrowings
£450 million 5?% 2022 unsecured bond -  -  -  (446) (446) (446)
£350 million 6¾% 2019 unsecured bond  -  -  (349) -  (349) (349)
Unsecured committed bank borrowings
European Investment Bank (16) (16) (16) -  (32) (48)
2019 Committed Revolving Credit Facility -  -  -  -  -  - 
Other (net of unamortised issue costs) -  (2) (7) (4) (13) (13)
Finance lease obligations (1) -  -  (2) (2) (3)
Bank overdrafts (26) -  -  -  -  (26)
Other short-term bank borrowings (21) -  -  -  -  (21)
Borrowings (64) (18) (372) (452) (842) (906)
Bank balances and cash 236  -  -  -  -  236 
Short-term bank deposits 175  -  -  -  -  175 
Cash and cash equivalents 411  -  -  -  -  411 
Other financial assets – bank deposits 5  -  -  -  -  5 
Net borrowings (excluding cross-
currency interest rate swaps) 352  (18) (372) (452) (842) (490)
Cross-currency interest rate swaps -  -  (122) (92) (214) (214)
Net debt 352  (18) (494) (544) (1,056) (704)
2015
Unsecured capital market borrowings
£450 million 5?% 2022 unsecured bond -  -  -  (445) (445) (445)
£350 million 6¾% 2019 unsecured bond  -  -  (349) -  (349) (349)
Unsecured committed bank borrowings
European Investment Bank (16) (16) (32) -  (48) (64)
2019 Committed Revolving Credit Facility -  -  -  -  -  - 
Other (net of unamortised issue costs) (9) (11) (8) (3) (22) (31)
Finance lease obligations -  -  (1) (2) (3) (3)
Bank overdrafts (8) -  -  -  -  (8)
Other short-term bank borrowings (104) -  -  -  -  (104)
Borrowings (137) (27) (390) (450) (867) (1,004)
Bank balances and cash 227  -  -  -  -  227 
Short-term bank deposits 72  -  -  -  -  72 
Cash and cash equivalents 299  -  -  -  -  299 
Other financial assets – bank deposits 5  -  -  -  -  5 
Net borrowings (excluding cross-
   currency interest rate swaps)		 167  (27) (390) (450) (867) (700)
Cross-currency interest rate swaps -  -  -  (69) (69) (69)
Net debt 167  (27) (390) (519) (936) (769)
Unsecured capital market borrowings include: an unsecured £350 million (2015: £350 million) 6¾% bond maturing in 2019 less unamortised issue costs of £1 million (2015: £1 million) and an unsecured £450 million (2015: £450 million) 5?% bond maturing in 2022 less unamortised issue costs of £4 million (2015: £5 million). 

Unsecured committed bank borrowings include £48 million (2015: £64 million) drawn under the Group’s European Investment Bank (EIB) unsecured facility which attracts a fixed interest rate of 4.1% per annum payable annually in arrears and a borrowing of £15 million (2015: £15 million) drawn against a KfW amortising unsecured facility which attracts a fixed interest rate of 1.65%.  On 22 June 2016, the Group repaid the second of five annual instalments of £16 million on the EIB facility.  There were no drawings (2015: nil) at the year end against the Group’s 2019 Committed Revolving Credit Facilities of £800 million (2015: £800 million).  Unamortised issue costs on the 2019 Committed Revolving Credit Facilities were £3 million (2015: £4 million).

   

Notes to the Consolidated Financial Statements (continued)
7 Cash flow reconciliations
2016  2015 
Cash generated from operations £m  £m 
Operating profit 335  324 
Adjustments for:
Depreciation, impairment and amortisation of fixed assets
Charged to trading profit
Depreciation 263  218 
Amortisation 67  43 
Amortisation of non-operating intangible assets arising on business combinations 103  80 
Impairment charges 52  71 
Change in value of derivative and other financial instruments 154  122 
Gains and losses on changes in Group structure 9  1 
Amortisation of government capital grants (2) (2)
Net profits on sale and realisation of fixed assets (3) (3)
Charge for share-based payments 5  1 
Movement in post-employment obligations (75) (51)
Change in amounts due from parent undertaking (139) 55 
Change in amounts due to parent undertaking 6  (1)
Change in inventories (78) (33)
Change in receivables (151) 110 
Change in payables and provisions 99  5 
645  940 
Movement in net debt
Movement in cash and cash equivalents 41  (11)
Net movement in other borrowings and deposits 141  (60)
Movement on finance leases -  (2)
Movement on cross-currency interest rate swaps (145) (43)
Movement on other net investment hedges (17) (11)
Amortisation of debt issue costs (2) (2)
Currency variations 47  (16)
Movement in year 65  (145)
Net debt at beginning of year (769) (624)
Net debt at end of year (704) (769)
Reconciliation of cash and cash equivalents
Cash and cash equivalents per balance sheet 411  299 
Bank overdrafts included within ‘current liabilities – borrowings’ (26) (8)
Cash and cash equivalents per cash flow 385  291 

   

Notes to the Consolidated Financial Statements (continued)
8 Post-employment obligations
2016  2015 
Post-employment obligations as at the year end comprise: £m  £m 
Pensions – funded (1,285) (977)
– unfunded (662) (505)
Medical – funded (37) (30)
– unfunded (49) (46)
(2,033) (1,558)
The Group’s pension arrangements comprise various defined benefit and defined contribution schemes throughout the world.  In addition, in the US and UK various plans operate which provide members with post-retirement medical benefits.  The Group’s post-employment plans in the UK, US and Germany together account for 98% of plan assets and 98% of plan liabilities.

The Group’s post-employment plans include both funded and unfunded arrangements.  The UK pension schemes are funded, albeit in deficit in common with many other UK pension schemes, with the scheme assets held in trustee-administered funds.  The German and other European plans are generally unfunded, with pension payments made from company funds as they fall due, rather than from scheme assets.  The US schemes include a combination of funded and unfunded pension and medical plans, while Japan also operates a funded pension plan.

The Group’s defined benefit pension arrangements provide benefits to members in the form of an assured level of pension payable for life.  The level of benefits provided typically depends on length of service and salary levels in the years leading up to retirement.  In the UK and Germany, pensions in payment are generally updated in line with inflation, whereas in the US pensions generally do not receive inflationary increases once in payment.  The UK and German schemes are closed to new entrants, while the US schemes are closed to future accrual.

Independent actuarial valuations of all major defined benefit scheme assets and liabilities were carried out at 31 December 2016.  The present value of the defined benefit obligation and the related service cost elements were measured using the projected unit credit method.
(a)  Defined benefit schemes – assumptions and estimates

Estimating the post-employment obligation involves a number of significant assumptions, which are detailed below.

Key assumptions and estimates:
UK
GKN1 GKN2 GKN3 Americas Europe ROW
% % %  %  %  %
2016
Rate of increase in pensionable salaries (past/future service) n/a 4.30/4.25 n/a n/a 2.50 -
Rate of increase in payment and deferred pensions n/a 3.20 3.30 n/a 1.75 n/a
Discount rate (past/future service) n/a 2.60/2.70 2.45 4.10 1.60 0.5
Inflation assumption (past/future service) n/a 3.30/3.25 3.35 n/a 1.75 n/a
Rate of increase in medical costs:
Initial/long-term 5.4/5.4 6.75/5.0 n/a n/a
2015
Rate of increase in pensionable salaries (past/future service) n/a 4.10/4.15 n/a n/a 2.50 -
Rate of increase in payment and deferred pensions 3.05 3.10 n/a n/a 1.75 n/a
Discount rate (past/future service) 3.55 3.85/4.05 n/a 4.30 2.40 0.80
Inflation assumption (past/future service) 3.05 3.10/3.15 n/a n/a 1.75 n/a
Rate of increase in medical costs:
Initial/long-term 5.4/5.4 7.0/5.0 n/a n/a

The assumptions table above specifies separate assumptions for past and future service in relation to the UK pension scheme.  This approach is consistent with that taken in 2015, whereby a different, ‘future service’ set of assumptions will be used to determine the service cost for the following year.  This reflects market practice and is based on the premise that active members of the scheme are younger and have, on average, longer remaining life expectancy than an average scheme member.  Given that yield curves typically rise over time, this longer duration implies a higher discount rate for the ‘active’ sub-set of members which has been set at 2.70%, as at 31 December 2016.

The GKN1 scheme is in the process of being wound up which commenced in December 2016.  The residual liabilities have been transferred to the new GKN3 scheme.

The UK schemes each use a duration-specific discount rate derived from the Mercer pension discount yield curve, which is based on corporate bonds with two or more AA-ratings.  The European discount rate was calculated with reference to Aon Hewitt’s German discount rate yield curve.  For the US, the discount rate referenced the Citigroup intermediate pension liability index, the Merrill Lynch US corporate AA 10+ years index and the Towers Watson Rate:LINK benchmark.  The approach taken in each territory is consistent with the prior year.

   

Notes to the Consolidated Financial Statements (continued)
8 Post-employment obligations (continued)
(a)  Defined benefit schemes – assumptions and estimates (continued)
The underlying mortality assumptions for the major schemes, are as follows:

UK
The key current year mortality assumptions for both GKN2 and GKN3 use S2PA year of birth mortality tables (adjusted for GKN experience) with CMI 2015 improvements and a 1.5% per annum long-term improvement trend.  These assumptions give the following expectations for each scheme: for GKN3 a male aged 65 lives for a further 22.4 years and a female aged 65 lives for a further 25 years, while a male aged 45 is expected to live a further 24.5 years from age 65 and a female aged 45 is expected to live a further 27.4 years from age 65.  For GKN2 a male aged 65 lives for a further 22.5 years and a female aged 65 lives for a further 25.6 years, while a male aged 45 is expected to live a further 24.9 years from age 65 and a female aged 45 is expected to live a further 28.0 years from age 65. 
Overseas
In the US, RP-2014 tables have been used, while in Germany the RT2005-G tables have been used.  In the US, the longevity assumption for a male aged 65 is that he lives a further 20.8 years (female 22.8 years), while in Germany a male aged 65 lives for a further 19.1 years (female 23.2 years).  The longevity assumption for a US male currently aged 45 is that he also lives for a further 22.4 years once attaining 65 years (female 24.4 years), with the German equivalent assumption for a male being 21.8 years (female 25.7 years).  These assumptions are based on the prescribed tables, rather than GKN experience.
Assumption sensitivity analysis
The impact of a one percentage point movement in the primary assumptions (longevity: 1 year) on the defined benefit obligations as at 31 December 2016 is set out below:
UK  Americas  Europe  ROW 
Liabilities 
£m 		 Liabilities 
£m 		 Liabilities 
£m 		 Liabilities 
£m
Discount rate +1% 535  41  104  3 
Discount rate -1% (709) (50) (136) (2)
Rate of inflation +1% (556) (1) (89) - 
Rate of inflation -1% 463  -  74  - 
Life expectancy +1 year (126) (9) (26) - 
Life expectancy -1 year 126  10  23  - 
Health cost trend +1% (2) (2) -  - 
Health cost trend -1% 2  2  -  - 
The above sensitivity analyses are based on isolated changes in each assumption, while holding all other assumptions constant.  In practice, this is unlikely to occur, and there is likely to be some level of correlation between movements in different assumptions.  In addition, these sensitivities relate only to potential movement in the defined benefit obligations.  The assets, including derivatives held by the schemes, have been designed to mitigate the impact of these movements to some extent, such that the movements in the defined benefit obligations shown above would, in practice, be partly offset by movements in asset valuations.  However, the above sensitivities are shown to illustrate at a high level the scale of sensitivity of the defined benefit obligations to key actuarial assumptions. 

The same actuarial methods have been used to calculate these sensitivities as are used to calculate the relevant balance sheet values, and have not changed compared to the previous period.
Pension partnership interest
During the year, the Group has paid £30 million (2015: £30 million) to the UK pension schemes through its pension partnership arrangement and this is included within the amount of contributions/benefits paid. 
Pensioner buy-out
In December 2016, the Company commenced the winding-up of the GKN Group Pension Scheme (GKN1).  The benefits were settled through a combination of:

This transaction involved a specific contribution of £15 million from the Company to Scheme and resulted in the removal of £268 million of liabilities and £263 million of assets from the balance sheet.  This has resulted in an overall settlement gain of £5 million (net of expenses) in the income statement.

   

Notes to the Consolidated Financial Statements (continued)
8 Post-employment obligations (continued)
(b)   Defined benefit schemes – reporting
The amounts included in operating profit are:
2016  2015 
£m  £m 
Current service cost and administrative expenses (51) (53)
Past service credit – net -  4 
Settlements/curtailments 5  - 
(46) (49)
The amounts recognised in the balance sheet are:
2016
UK  Americas  Europe  ROW  Total  2015 
£m   £m  £m   £m   £m  £m 
Present value of unfunded obligations (17) (43) (648) (3) (711) (551)
Present value of funded obligations (3,497) (332) (40) (33) (3,902) (3,567)
Fair value of plan assets 2,293  227  37  23  2,580  2,560 
Net obligations recognised in the balance sheet (1,221) (148) (651) (13) (2,033) (1,558)
The Group’s UK defined benefit pension schemes are currently undergoing triennial funding valuations with an effective date of 5 April 2016 for GKN2 and 31 December 2016 for GKN3. Once the valuation process is complete, the funding deficit in each scheme will be confirmed and any incremental deficit contributions payable by the Group will be established.  It is likely that some additional Group funding will be required, but given the stage of negotiations with the scheme trustees and the many variables involved in both establishing the valuation and agreeing any resulting recovery plan, the final outcome cannot currently be predicted with any reasonable degree of certainty.  Following the previous triennial valuation in the UK, additional deficit funding payments of £10 million per year have continued and there is potential for further payments commencing in 2017, contingent upon asset performance.  In addition, the Group agreed, during 2014, to pay £2 million per year for four years to the UK scheme, GKN 1, to cover a funding requirement arising from a £123 million bulk annuity purchase and this payment will continue in 2017 to GKN3.

The combined contribution for deficit funding and future accrual expected to be paid by the Group during 2017 to the UK schemes is £43 million.  In addition, a distribution of £30 million is expected to be made from the UK pension partnership to the UK schemes in the first half of 2017, which brings the total expected UK cash requirement for 2017 to £79 million.  The expected 2017 contribution to overseas schemes is £30 million. 
Cumulative remeasurement of defined benefit plan differences recognised in equity are as follows:
2016  2015 
£m  £m 
At 1 January (1,073) (1,212)
Remeasurement of defined benefit plans (396) 139 
At 31 December (1,469) (1,073)
Movement in schemes’ obligations (funded and unfunded) during the year
UK  Americas   Europe  ROW  Total 
£m   £m   £m   £m   £m 
At 1 January 2016 (3,234) (319) (531) (34) (4,118)
Current service cost (35) (1) (9) (3) (48)
Businesses disposed -  -  12  -  12 
Settlements and curtailments 268 -  2  -  270 
Administrative expenses (3) -  -  -  (3)
Interest (119) (15) (13) -  (147)
Remeasurement of defined benefit plans (540) 5  (82) 5  (612)
Benefits and administrative expenses paid 149 17  22  3  191 
Currency variations -  (62) (89) (7) (158)
At 31 December 2016 (3,514) (375) (688) (36) (4,613)
At 1 January 2015 (3,382) (331) (593) (32) (4,338)
Current service cost (40) -  (8) (2) (50)
Past service credit/(cost) 6  -  (2) -  4 
Businesses acquired -  -  (7) -  (7)
Settlements and curtailments -  -  1  -  1 
Administrative expenses (2) (1) -  -  (3)
Interest (115) (13) (11) -  (139)
Remeasurement of defined benefit plans 150  27  39  -  216 
Benefits and administrative expenses paid 149  16  20  2  187 
Currency variations -  (17) 30  (2) 11 
At 31 December 2015 (3,234) (319) (531) (34) (4,118)

   

Notes to the Consolidated Financial Statements (continued)
8 Post-employment obligations (continued)
(b)   Defined benefit schemes – reporting (continued)
Movement in schemes' assets during the year
UK  Americas   Europe  ROW   Total 
 £m   £m   £m   £m   £m 
At 1 January 2016 2,322  186  33  19  2,560 
Interest 85  8  1  -  94 
Settlements and curtailments (263) -  (2) -  (265)
Businesses disposed -  -  (1) -  (1)
Remeasurement of defined benefit plans 207  7  2  -  216 
Contributions by Group 87  6  1  2  96 
Benefits paid (145) (17) (2) (2) (166)
Currency variations -  37  5  4  46 
At 31 December 2016 2,293  227  37  23  2,580 
At 1 January 2015 2,377  195  37  18  2,627 
Interest 81  8  1  -  90 
Settlements and curtailments -  -  (1) -  (1)
Remeasurement of defined benefit plans (64) (14) 1  -  (77)
Contributions by Group 75  4  -  2  81 
Benefits paid (147) (16) (3) (2) (168)
Currency variations -  9  (2) 1  8 
At 31 December 2015 2,322  186  33  19  2,560 
Remeasurement gains and losses in relation to schemes’ obligations are as follows
UK  Americas  Europe  ROW  Total 
£m  £m  £m  £m  £m 
2016
Experience gains and losses 210  6  1  -  217 
Changes in financial assumptions (715) (8) (83) 5  (801)
Change in demographic assumptions (35) 7  -  -  (28)
(540) 5  (82) 5  (612)
2015
Experience gains and losses 2  5  (3) -  4 
Changes in financial assumptions 148  15  42  -  205 
Change in demographic assumptions -  7  -  -  7 
150  27  39  -  216 
The fair values of the assets in the schemes were:
UK  Americas  Europe  ROW  Total 
£m  £m  £m  £m  £m 
At 31 December 2016
Equities (including hedge funds) 607  107  -  12  726 
Diversified growth funds 558  -  -  -  558 
Bonds – government 540  53  -  9  602 
Bonds – corporate 245  63  -  -  308 
Property 138  -  -  -  138 
Cash, derivatives and net current assets 23  4  -  -  27 
Other assets 182  -  37  2  221 
2,293  227  37  23  2,580 
At 31 December 2015
Equities (including hedge funds) 855  82  -  10  947 
Diversified growth funds 257  -  -  -  257 
Bonds – government 361  41  -  6  408 
Bonds – corporate 537  57  -  -  594 
Property 135  -  -  -  135 
Cash, derivatives and net current assets 1  6  -  1  8 
Other assets 176  -  33  2  211 
2,322  186  33  19  2,560 
As at 31 December 2016, the equities in the UK asset portfolio were split 27% domestic (2015: 26%); 73% foreign (2015: 74%), while bond holdings were 97% domestic (2015: 88%) and 3% foreign (2015: 12%).  The equivalent proportions for the US plans were: equities 41%/59% (2015: 42%/58%); bonds 89%/11% (2015: 88%/12%). 
(c) Defined contribution schemes
The Group operates a number of defined contribution schemes.  The charge to the income statement in the year was £62 million (2015: £42 million).

   

Notes to the Consolidated Financial Statements (continued)
9 Business combinations
On 30 June 2016, the Group took control, through a 60% equity shareholding, of a newly formed company; GKN (Bazhou) Metal Powder Company Limited (Bazhou).  Bazhou specialises in metal powder production in China.

The fair value of consideration for the 60% shareholding is £17 million and comprises an initial cash payment of £8 million and deferred consideration subsequently paid of £9 million.  The fair value of net assets acquired, before non-controlling interests (£9 million), of £26 million comprises: property, plant and equipment of £15 million, inventory of £3 million, receivables of £4 million and provisional goodwill of £4 million.  Bazhou has been included in Powder Metallurgy for segmental reporting.

During the year, the Group paid £2 million to purchase a non-controlling interest from the other investor in Lianyungang GKN Hua Ding Wheels Co Ltd.  The Group now owns 100% of the share capital in this company.

Copyright l 11 PR Newswire

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