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GKN PLC  -  GKN   

Final Results for the year ended 31 December 2016

Released 07:00 28-Feb-2017

RNS Number : 9954X
GKN PLC
28 February 2017
 



                                                                                                                                                              

NEWS RELEASE                                                                                                  28 February 2017

 

GKN plc Results Announcement for the year ended 31 December 2016

 

Group Highlights(1)

·      Another year of growth delivering earnings momentum

o   Sales up 22% and management eps increased 12%

Continued market outperformance with organic sales up 2%

o   Strong performance from Fokker Technologies ("Fokker") in first full year of ownership

o   Profit before tax (management basis) up 12% to £678 million (2015: £603 million), including £39 million restructuring charge

o   Reported profit before tax £292 million (2015: £245 million)

o   Free cash flow of £201 million (2015: £370 million), lower due to the absence of a significant customer advance that benefited 2015

o   Momentum of new business wins continues to support growth ahead of markets

·      Sharpening the focus  

o   Group-wide fixed cost reduction programme resulted in a restructuring charge of £39 million - annualised savings of £30 million

o   Disposal of Stromag completed; GKN focused on three core divisions and two end markets

o   Capital allocation to be progressively directed towards productivity improvement in core aerospace and automotive divisions

·      Continued investment in technology

o   Strong technology pipeline; innovation recognised by customer and industry awards

o   Primary focus - electrified drivetrains and additive manufacturing (3D printing)

 

 


Management basis(1)

As reported


2016
£m

2015
£m

Change %

2016
£m

2015
 £m

Change %

Sales

9,414

7,689

+22

8,822

7,231

+22

Operating profit

773

679

+14

335

323

+4

Trading margin (%)

8.2%

8.8%

-60bps




Profit before tax

678

603

+12

292

245

+19

Earnings per share

31.0p

27.8p

+12

14.1p

11.8p

+19

 Dividend per share

8.85p

8.7p

+2

8.85p

8.7p

+2

 Free cash flow

201

370





 Net debt

704

769





 

 

Commenting on the results, Nigel Stein, Chief Executive of GKN said:

 

"This is a good set of results with GKN continuing to make underlying progress in line with our expectations. We performed well against our key markets, overcoming some demand weakness and demonstrating once again the strength of our businesses, strong market positions and leading technology. Strategically we made good progress, including smoothly integrating Fokker and completing the disposal of Stromag - evidence of our sharper focus on capital allocation towards Aerospace and Automotive markets.

 

We expect 2017 to be another year of further growth, helped by the benefits of the actions taken in 2016 and GKN's constant focus on continuous improvement."

 

 

 

 

Divisional Highlights

 

GKN Aerospace

·      Strong headline sales growth, reflecting a full year of Fokker and organic growth above the market

·      Organic sales growth in commercial aerospace (+3%) partly offset by decline in military (-2%)

·      Margin of 10.2% (2015: 10.9%), excluding the £10 million restructuring, primarily impacted by the inclusion of Fokker, ramp up costs on new engines and mature programmes declining

·      Fokker sales and margin ahead of expectations

·      New and replacement work packages won exceed $7 billion

 

GKN Driveline

·      Organic sales growth of 6%, ahead of global auto production, helped by our broad geographic footprint and increased content per vehicle

·      Trading margin of 7.9% (2015: 8.2%), excluding the £10 million restructuring charge, with a good performance in Europe and China offset by excess launch costs on a significant US all-wheel drive (AWD) programme

·      Around £1 billion of annualised new and replacement business won

 

GKN Powder Metallurgy

·      Organic sales growth of 1%, before the pass-through of lower raw material surcharges

·      Trading margin of 11.7% (2015: 12.0%), excluding the £3 million restructuring charge, reflecting a powder investment in China and a weaker North America

·      Strong focus on technology and £200 million annualised new and replacement business won

 

GKN Land Systems

·      Organic sales down 8% due to challenging agricultural and construction equipment markets and the ending of two chassis contracts

·      Trading margin of 4.5% (2015: 3.5%), excluding the £14 million restructuring charge

·      Stromag sale completed on 30 December 2016

·      Remaining GKN Land Systems businesses absorbed into GKN Driveline and Other Businesses from 1 January 2017  

 

 

Outlook

 

 

According to Teal forecasts, in 2017, the overall aerospace market is expected to be up 2%, with commercial deliveries 1% lower and military sales up 14%.  Against that backdrop, GKN Aerospace's 2017 organic sales are expected to grow slightly above the market.

 

In automotive, external forecasts predict growth in global light vehicle production of around 2% with increases in China and Europe, but North America down. Against this background, GKN Driveline and GKN Powder Metallurgy are expected to grow organically above the market. 

 

2017 is expected to be another year of further growth, helped by the benefits of the actions taken in 2016 and GKN's constant focus on continuous improvement.

 

 

 

 

 

Notes

(1) Financial information set out in this announcement, unless otherwise stated, is presented on a management basis as defined on page 14. 

 

 

Cautionary Statement

 

This announcement contains forward looking statements which are made in good faith based on the information available at the time of its approval.  It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ materially from those currently anticipated.  Nothing in this document should be regarded as a profits forecast.

 

Further Enquiries

 

Analysts/Investors:

 

Guy Stainer, Investor Relations Director, GKN plc

T: +44 (0)207 463 2382

M: +44 (0)7739 778187

E: guy.stainer@gkn.com

 

Media:

 

Chris Fox, Group Communications Director, GKN plc

T: +44 (0)1527 533238

M: +44 (0)7920 540051

E: chris.fox@gkn.com

 

Andrew Lorenz, FTI Consulting

T: +44 (0)203 727 1323

M: +44 (0)7775 641807

 

 

There will be an analyst and investor meeting today at 09.00am at UBS, 5 Broadgate, London, EC2M 2QS in their Conference Suite located on the first floor.

 

A live videocast of the presentation will be available at http://www.gkn.com/en/investors/results-centre/webcasts/ 

 

Slides will be put onto the GKN website approximately 60 minutes before the presentation is due to begin, and will be available to download from the GKN website at: http://www.gkn.com/en/investors/results-centre/ 

 

Questions will only be taken at the event.

 

A live dial in facility will be available by telephoning: +44 (0) 1452 555 566, Conf ID: 71571846

 

Following the event, a replay of the conference call will be uploaded onto the GKN website and the on-demand archive webcast will be available via the link http://www.gkn.com/en/investors/results-centre/results-and-presentations/?docyear=2016

 

 

GKN plc LEI: 213800QNZ22GS95OSW84

 

 

 

NEWS RELEASE

 

GKN plc Results Announcement for the year ended 31 December 2016

 

 

Group Overview

 

Markets

 

The Group operates in the global aerospace and automotive markets. GKN Aerospace sells to manufacturers of commercial and military aircraft, aircraft engines and equipment. In the automotive market, GKN Driveline sells to manufacturers of passenger cars and light vehicles. Around 80% of GKN Powder Metallurgy sales are also to the automotive market, with the balance to other industrial customers.

 

Results

 

Group

2016

2015

Change (%)




Headline

Organic

Sales (£m)

9,414 

7,689 

22

2

Trading profit (£m)

773 

679 

14

(7)

Trading margin (%)

8.2% 

8.8% 



Return on average invested capital (%)

16.0%

17.8% 



 

Organic sales increased £209 million (2%). The benefit from currency translation on management sales was £862 million and there was a £654 million benefit from acquisitions.

 

Overall organic trading profit reduced by £57 million, including a £39 million Group-wide restructuring programme cost. There was a benefit from currency translation of £89 million and a £62 million increase due to acquisitions.

 

The Group trading margin reduced to 8.2% (2015: 8.8%). This was primarily due to restructuring, launch related costs in GKN Driveline and the incorporation of Fokker. Return on average invested capital (ROIC) reduced to 16.0% (2015: 17.8%), principally due to the inclusion of Fokker for the first time.

 

 

Divisional Performance

 

GKN Aerospace

 

GKN Aerospace is a leading global tier one supplier of airframe and engine structures, landing gear, electrical interconnection systems, transparencies and aftermarket services. Its technology influences the performance and efficiency of the world's leading commercial and military aircraft.

 

The latest Teal data suggest that overall aerospace deliveries fell 2% in 2016, with both commercial and military each declining 2%. In commercial, single aisle aircraft deliveries grew 6%, while wide-body aircraft production declined 2% and business jets fell 11%. Military production was lower as the decline in fighters (-5%) and rotorcraft (-4%) more than offset the increase in transport aircraft (+13%).

 

According to Teal forecasts, in 2017, overall aircraft deliveries are expected to be up 2%.  Commercial deliveries are expected to be 1% lower as the decline in wide body and business jets more than offsets growth in single aisle aircraft. Military sales are expected to be up 14% due to the ramp up in production of the F-35 fighter and growth in rotorcraft and transport aircraft. 

 

 

 

The key financial results for the year are as follows:

 

GKN Aerospace

2016

2015

Change (%)


GKN Base

Fokker

Total 


Headline

Organic

Sales (£m)

2,654

769

3,423 

2,500 

37

1

Trading profit (£m)

273

66

339 

273 

24

(10)

Trading margin (%)

10.3%

8.6%

9.9% 

10.9% 



Return on average invested capital (%)



14.6%

18.1% 



 

Overall, GKN Aerospace's organic sales were £38 million higher (1%). There was a £243 million benefit from currency translation and non-organic sales from acquisitions amounted to £642 million.  

 

The division's sales were weighted commercial 74%, military 26%. Organic commercial aerospace sales growth was 3%, benefiting principally from stronger production of the A350 and A320, partly offset by a reduction in A380 and A330. Military sales were organically 2% lower, primarily due to the decline of mature programmes, mainly the F/A-18 Super Hornet and UH-60 Black Hawk helicopters, partly offset by increased F-35 sales. 

 

Trading profit was £339 million (2015: £273 million), benefiting from a full year contribution from Fokker and a favourable currency translation impact of £31 million. The organic reduction in trading profit is principally a result of ramp up costs on the PW1100 Geared Turbofan and Trent XWB engines (deployed on the A320neo and A350 aircraft, respectively), lower production of the A380 and Boeing 747-8 large aircraft (including engines) and a £10 million restructuring charge (as part of the Group-wide programme). The reduction was partially offset by increased engine spares sales and the ramp up of A350 and A320.

 

Trading margin was 9.9%, or 10.2% excluding the restructuring charge (2015: 10.9%). Return on average invested capital, was 14.6% (2015: 18.1%, excluding GKN Aerospace Fokker which had not been owned for a full 12 month period).

 

GKN Aerospace Fokker, acquired on 28 October 2015, performed strongly. In 2016, it generated sales of £769 million, profit of £66 million and a trading margin of 8.6%. Fokker restructuring, which is excluded from Management profits, was completed for £31 million, lower than the €50 million (£39 million) originally expected. During the year, the outstanding pre-acquisition fine that was agreed with the Department of Justice was settled.

 

During the year, new and replacement work packages exceeding $7 billion over their contract lives were won and a number of important milestones were achieved, including:

·     An agreement to extend the risk and revenue sharing partnership (RRSP) with Rolls-Royce on the Trent XWB engine. The agreement covers the design and supply of a lower weight, higher performance intermediate compressor case for the enhanced performance Trent XWB-84 engine; 

·     Being named among the next generation B-21 bomber contractors;

·     Signing a four-year contract extension with FMV (Swedish Defence Material Administration) to provide comprehensive support for the GKN Aerospace RM12 engine, which powers the JAS 39 Gripen C/D fighter;

·     Entry into production of the Boeing 737 MAX engine inlet lip skins that enables laminar flow properties in a new state-of-the-art facility in Orangeburg, South Carolina, USA;

·     Being chosen to maintain and service the landing gear for the F-35 fleet outside the USA; and

·     Signing a memorandum of agreement with UTC Aerospace Systems to develop electrical integrated systems for the More Electric Aircraft initiative.

 

 

 

Automotive market

 

The major automotive markets of Europe, North America, China and India increased production in 2016 compared to 2015, while Brazil and Japan declined.  Overall, global production volumes increased by 4.9% to 93.0 million vehicles (2015: 88.7 million).

 

 

Car and light vehicle production (rounded millions of units)

 

Growth


2016

2015

(%)(#)

Europe

21.5

20.9

 2.6

North America

17.8

17.5

 1.9

Brazil

 2.1

 2.3

-10.4

Japan

 8.7

 8.8

-0.4

China

27.1

23.7

14.3

India

 4.2

 3.8

 9.6

Others

11.6

11.7

-0.4

Total - global

93.0

88.7

 4.9

Source: IHS Automotive; (#) Growth is derived from unrounded production figures

 

Overall production in Europe increased compared to 2015 due to continued recovery in demand in Western Europe and despite the extended downturn in the Russian market.

 

Production in North America benefitted from consumer confidence and localisation of foreign manufacturers' capacity. Cheap credit and the low price of fuel supported increased demand and production for full-size pickups and Sport Utility Vehicles (SUVs), which outpaced that of passenger cars. The recession in the Brazilian vehicle market continued, resulting in a further decline in output.

 

Strong production growth in China resulted from the positive impact of a reduction in sales tax on smaller engine cars.  Production in India increased due to improved economic conditions and higher demand for newly launched models partly offset by diesel vehicle restrictions. Weak production in Japan resulted from demand depressed as a consequence of tax changes and economic concerns. 

 

External forecasts anticipate global production in 2017 will increase 1.9% to 94.8 million vehicles. 

 

GKN Driveline

 

GKN Driveline is the world's leading supplier of automotive driveline systems and solutions. As a global business serving the leading vehicle manufacturers, it develops, builds and supplies an extensive range of automotive driveline products and systems, for use in everything from the smallest low-cost car to the most sophisticated premium vehicles that demand complex driving dynamics.

 

The key financial results for the year are as follows:

 

GKN Driveline

2016

2015

Change (%)




Headline

Organic

Sales (£m)

4,216 

3,548 

19

6

Trading profit (£m)

323 

290 

11

(2)

Trading margin (%)

7.7% 

8.2% 



Return on average invested capital (%)

19.2% 

19.5% 



 

Organic sales increased by £242 million (6%) compared with global light vehicle production which was up 5%. The beneficial effect from currency translation was £426 million. Constant Velocity Jointed (CVJ) Systems accounted for 61% of sales and non-CVJ sales were 39%. 

 

 

GKN Driveline's market outperformance was mainly in Europe (reflecting recent market share gains and strong sales to Fiat Chrysler, Volvo and Daimler) and in North America (reflecting strong recent AWD programme gains slightly offset by lower light truck platform exposure).  GKN Driveline performed slightly below the market in China (due to its lower exposure to domestic producers and smaller vehicles) although new launches for AWD vehicles were positive and should enhance performance in 2017.

 

The organic reduction in trading profit was £5 million (after incurring £10 million of restructuring charges) and the positive impact of currency translation on trading profit was £38 million. GKN Driveline's trading margin was 7.7%, or 7.9% excluding the restructuring charge (2015: 8.2%).  Return on average invested capital was 19.2% (2015: 19.5%).

 

In terms of profitability, European plants were running at very high capacity utilisation with a strong conversion on the additional sales. In China, margin reduced slightly, with the benefits from increased production being offset by continued investment in the new technology centre and engineering, particularly to support AWD growth. The Americas operations were impacted by lower demand in Brazil and around £25 million of additional launch costs on a new global AWD programme. These launch problems have now largely been addressed with production reaching target levels. The technology developed provides an excellent platform for continued success in AWD and investment has continued in e-Drive, with new contracts won. The results also included some benefit from claims against a number of suppliers for anti-competitive behaviour. It is anticipated that further income may be recognised in 2017 as other cases are settled.

 

To provide better strategic and customer alignment, GKN Driveline reorganised from three regions into two global product lines (CVJ and AWD/eDrive) which also provides a more efficient, leaner organisation.

 

During the year, around £1 billion of annualised sales in new and replacement business was secured and a number of important milestones achieved, including:

·     The selection by BMW to supply its eAxle on the BMW 2 Series Active Tourer 225xe and the plug-in hybrid version of the BMW X1 for the Chinese market;

·     Being named as an Automotive News 2017 PACE Award finalist for its innovative electric driveline technology. PACE judges have selected the co-axial electric axle (eAxle) system that debuted on the acclaimed Volvo XC90 T8 Twin Engine plug-in hybrid as one of the finalists in 2017. The technology also launched on the Volvo S90 and will feature on other manufacturer's vehicles; and

·     Adding five new AWD production lines across two facilities in Shanghai to support growing levels of business.

 

GKN Powder Metallurgy

 

GKN Powder Metallurgy comprises GKN Sinter Metals and Hoeganaes. GKN Sinter Metals is the world's leading manufacturer of precision automotive sintered components as well as components for industrial and consumer applications. Hoeganaes is one of the world's leading manufacturers of metal powder, the essential raw material for powder metallurgy.

 

The key financial results for the year are as follows:

 

GKN Powder Metallurgy

2016

2015

Change (%)




Headline

Organic

Sales (£m)

1,032 

906 

14

-           

Trading profit (£m)

118 

109 

8

(3)

Trading margin (%)

11.4% 

12.0% 



Return on average invested capital (%)

21.0% 

22.3% 



 

Organic sales were flat, after the £11 million pass through to customers of lower steel prices and other surcharges. There was a £114 million benefit from currency translation and a £12 million increase due to the acquisition of a majority share of a powder manufacturer in China.  

 

Underlying growth (before raw material pass through) was 1%, lower than global light vehicle production which was up 5%, due to under-representation in the strong China market. Underlying sales growth above the market was achieved in China, Europe and Brazil but sales in North America fell slightly due to weaker demand from the division's largest automotive customer.

 

The organic reduction in trading profit was £4 million, including a £3m restructuring charge as part of the Group-wide programme. There was a £2 million reduction from start-up losses in the new powder business acquired in China and the gain from currency translation was £15 million.

 

The divisional trading margin was 11.4%, or 11.7% excluding the restructuring charge (2015: 12.0%), reflecting investment in China and tougher market conditions in the US. Return on average invested capital was 21.0% (2015: 22.3%).   

 

During the year, GKN Powder Metallurgy achieved a number of important milestones, which included:

·     Winning around £200 million of annualised sales in new and replacement business;

·     The commencement of production of high quality automotive grade powders in China for the Asian market;

·     Forming a new business to manufacture titanium powders in North America for Additive Manufacturing (AM) applications; and

·     Installation in Radevormwald, Germany of the first multi powder bed AM machine in the automotive industry to enable series production of designed for AM precision parts for engines and transmissions and supporting the trend towards lightweight products.

 

GKN Land Systems

 

GKN Land Systems comprised a number of businesses, designing, manufacturing and supplying products and services for the agricultural, construction and key industrial markets, offering integrated powertrain solutions and complete in-service support.

 

Sales in GKN Land Systems were lower than the prior period primarily due to a significant decline in North American agricultural equipment markets and the ending of two chassis contracts. Demand for construction equipment was also weaker while industrial sales remained relatively stable. 

 

The key financial results for the year are as follows:

 

GKN Land Systems

2016

2015

Change (%)




Headline

Organic

Sales (£m)

704 

693 

2

(8)

Trading profit (£m)

18 

24 

(25)

(38)

Trading margin (%)

2.6% 

3.5% 



Return on average invested capital (%)

7.0% 

7.1% 



 

The organic decrease in sales was £65 million (8%) and the beneficial impact from currency translation was £76 million. Of the organic reduction, £17 million relates to two chassis contracts which ended during the first and third quarters of 2016, respectively. These contracts will have a further year on year negative impact of £24 million, in 2017.

 

Trading profit was £18 million after including a £14 million restructuring charge and a £5 million benefit from currency translation. Trading margin was 2.6% (2015: 3.5%) or 4.5% excluding the restructuring charge. Return on average invested capital was 7.0% (2015: 7.1%). 

 

On 21 October 2016, the Group announced that it had agreed to sell the Stromag business for an enterprise value of €198 million (£177 million). The transaction completed on 30 December 2016. 

 

From 1 January 2017, GKN Land Systems no longer operated as a division. Of the remaining operations, Shafts and Services now reports within GKN Driveline and Wheels and Structures, including the chassis contracts, reports within Other Businesses.   

 

Other Businesses and corporate costs

 

In 2016, GKN's Other Businesses comprised Cylinder Liners (which is a 59% owned venture mainly in China, manufacturing engine liners for the truck market in the US, Europe and China), EVO eDrive Systems (a developer of axial flux motors) and GKN Hybrid Power (a flywheel energy storage and hybrid system manufacturer).

 

GKN's Other Businesses reported combined sales of £39 million (2015: £42 million). The change reflects a £6 million organic decrease in sales and £3 million benefit from currency translation. A trading loss of £4 million was reported in the year (2015: £1 million profit) reflecting a reorganisation charge at GKN Hybrid Power.

 

Corporate costs, which comprise the costs of stewardship of the Group and operating charges and credits associated with the Group's legacy businesses, were £21 million (2015: £18 million), including a pension gain of £5 million following a pensioner buy-out in December 2016 and a £2 million restructuring charge as part of the Group-wide programme. 2017 UK pension costs will be around £12 million higher, across the Group, as the pension service costs are determined by the deficit and discount rates at the end of 2016.

 

Other Financial Information

 

Items excluded from management trading profit

 

In order to achieve consistency and comparability of underlying results between reporting periods, certain items are presented separately from management basis results which are used in many of the Group's Key Performance Indicators. In addition management basis results aggregate the sales and trading profit of subsidiaries with the Group's share of the sales and trading profits of equity accounted investments.

 

The items excluded from management basis results adjusted because of their size or nature.  The Group considers the following matters when assessing the nature of items to be excluded; whether the charge or income is significantly impacted by fair value movements outside of management control, it is non-cash or it does not relate to trading performance but rather acquisition or divestment activity.

 

A full reconciliation of statutory to management basis numbers is provided in note 3 to the consolidated financial statements on page 23 and further information on the items excluded from management trading profit is provided below:

 

Change in value of derivative and other financial instruments

 

The change in value of derivative and other financial instruments during the year resulted in a charge of £154 million (2015: £122 million charge).

 

When the business wins long term customer contracts that are in a foreign currency, the Group seeks to mitigate the potential volatility of the future cash flows by hedging through forward foreign currency exchange contracts. At each period end, the Group is required to mark to market these contracts even though it has no intention of closing them out in advance of their maturity dates. At 31 December 2016, the net fair value of such instruments was a liability of £482 million (2015: £351 million liability) and the change in fair value during the year was a £135 million charge (2015: £103 million charge).

 

There was also a £4 million credit arising from the change in fair value of embedded derivatives in the year (2015: £1 million credit) and a net loss of £23 million attributable to the currency impact on Group funding balances (2015: £20 million net loss).

 

 

Amortisation of non-operating intangible assets arising on business combinations

 

The charge for amortisation of non-operating intangible assets arising on business combinations (for example, customer contracts, order backlog, technology and intellectual property rights) was £103 million (2015: £80 million). The increase was primarily a result of the acquisition of Fokker.

 

Gains and losses on changes in Group structure

 

The net loss on changes in Group structure was £9 million (2015: £1 million loss).

 

On 30 December 2016, the Group sold its Stromag business (part of the GKN Land Systems division) for a cash consideration of £159 million, excluding an overdraft disposed of £7 million and before professional and completion fees. A profit on sale of £9 million was realised.

 

On 17 November 2016, the Group confirmed the closure of its GKN Aerospace business in Yeovil. The site closure, which is expected to conclude by the end of 2017, has necessitated a reorganisation charge of £12 million. A decision was also taken to curtail operations of a GKN Driveline business with an associated reorganisation charge of £6 million.

 

Acquisition related restructuring charges

 

During the year there has been a charge of £31 million (2015: nil) in relation to redundancy and integration costs following the Group's acquisition of Fokker in 2015.

 

Impairment charges

 

Consistent with previous years, goodwill and cash generating units were tested for impairment. As a result of difficult markets and reduced sales of certain products during the year an impairment charge of £52 million (2015: £71 million) has been recorded in respect of three cash generating units; two in GKN Aerospace and one in GKN Land Systems.

 

Post-tax earnings of equity accounted investments

 

On a management basis, the sales and trading profits of equity accounted investments are included pro-rata in the individual divisions to which they relate, although shown separately post-tax in the statutory income statement. 

 

The Group's share of post-tax earnings on a management basis was £73 million (2015: £59 million), with trading profit of £89 million (2015: £70 million). The Group's share of the tax and interest charges amounted to £16 million (2015: £11 million). Trading profit increased £19 million, reflecting improved market conditions for our equity accounted investment companies, primarily in China.

 

Net financing costs

 

Net financing costs totalled £116 million (2015: £137 million) and comprise the net interest payable of £79 million (2015: £65 million), the non-cash charge on post-employment benefits of £53 million (2015: £49 million), a credit from fair value changes on cross currency interest rate swaps of £18 million (2015: £17 million charge) and charge for unwind of discounts of £2 million (2015: £6 million). The non-cash charge on post-employment benefits, fair value changes on cross currency interest rate swaps and unwind of discounts are not included in management figures. Details of the assumptions used in calculating post-employment costs are provided in note 15.

 

Interest payable was £86 million (2015: £72 million), whilst interest receivable was £7 million (2015: £7 million) resulting in net interest payable of £79 million (2015: £65 million).

 

 

Profit before tax

 

Management profit before tax was £678 million (2015: £603 million). Profit before tax on a statutory basis was £292 million (2015: £245 million). The main differences between management and statutory figures for 2016 are the change in value of derivative and other financial instruments, amortisation of non-operating intangible assets arising on business combinations, acquisition related restructuring charges, impairment charges and non-cash charge on post-employment benefits. Further details are provided in note 3 to the financial statements.

 

Taxation

 

The book tax rate on management profits of subsidiaries was 24% (2015: 24%), arising as a £144 million tax charge (2015: £133 million) on management profits of subsidiaries of £605 million (2015: £544 million).

 

The book tax rate is significantly lower than the theoretical weighted average tax rate, largely because of the tax on items excluded from management profit and movements in tax risk provisions as outstanding issues are settled.

 

The tax rate on statutory profits of subsidiaries was 22% (2015: 23%) arising as a £48 million tax charge (2015: £43 million) on statutory profits of subsidiaries of £219 million (2015: £186 million).

 

Non-controlling interests

 

The profit attributable to non-controlling interests was £2 million (2015: £5 million).

 

Earnings per share

 

Management earnings per share was 31.0 pence (2015: 27.8 pence). Average shares outstanding in 2016 were 1,712.1 million (2015: 1,674.1 million).

 

On a statutory basis earnings per share was 14.1 pence (2015: 11.8 pence). 

 

Dividend

 

The Board has decided to recommend a final dividend of 5.9 pence per share (2015: 5.8 pence per share). The total dividend for the year will, therefore, be 8.85 pence per share (2015: 8.70 pence per share). The Group's objective is to have a progressive dividend policy reflecting growth in earnings per share and free cash flow generation. The final dividend is payable on 17 May 2017 to shareholders on the register on 7 April 2017. Shareholders may choose to use the Dividend Reinvestment Plan (DRIP) to reinvest the final dividend. The closing date for receipt of new DRIP mandates is 25 April 2017.

 

Cash flow

 

Operating cash flow, which is defined as cash generated from operations of £778 million (2015: £885 million) adjusted for capital expenditure (net of proceeds from capital grants) of £494 million (2015: £411 million), repayment of principal on government refundable advances of £6 million (2015: nil) and proceeds from the sale/realisation of fixed assets of £37 million (2015: £9 million), was an inflow of £315 million (2015: £483 million).

 

Cash generated from operations includes movements in working capital and provisions totalling a net outflow of £130 million (2015: £82 million inflow). In 2016, the reduction of £212 million was primarily as a result of a substantial one-off customer advance in 2015, the VAT on which was repaid in 2016.

 

 

 

Capital expenditure (net of proceeds from capital grants) on both tangible and intangible assets totalled £494 million (2015: £411 million). Of this, £410 million (2015: £330 million) was on tangible fixed assets and was 1.6 times (2015: 1.5 times) the depreciation charge. Expenditure on intangible assets, mainly initial non-recurring costs on Aerospace programmes, totalled £84 million (2015: £81 million). 

 

The Group invested £186 million in the year (2015: £157 million) on research and development activities not qualifying for capitalisation, net of customer and government funding.

 

Net interest paid totalled £76 million (2015: £54 million) including £9 million following adverse currency movements on the Group's cross currency interest rate swaps. Tax paid in the year was £93 million (2015: £111 million).

 

Free cash flow

 

Free cash flow, which is operating cash flow including equity accounted investment dividends and after interest, tax, dividends paid to non-controlling interests but before dividends paid to GKN shareholders, was an inflow of £201 million (2015: £370 million).

 

Net debt

 

At the end of the year, the Group had net debt of £704 million (2015: £769 million). The Group has a series of cross currency interest rate swaps, used to better align its foreign currency income receipts with its debt coupon payments. The fair value of these derivative instruments at 31 December 2016 was a liability of £214 million (2015: liability of £69 million) which is included in the net debt figure of £704 million. The translational currency impact of weaker sterling was to increase net debt but this was partly offset by the £151 million net proceeds from the Stromag disposal.

 

Pensions and post-employment obligations

 

GKN operates a number of defined benefit pension schemes and historical retiree medical plans across the Group. 

 

At 31 December 2016, the total deficit on post-employment obligations of the Group totalled £2,033 million (2015: £1,558 million), comprising deficits on funded obligations of £1,322 million (2015: £1,007 million) and on unfunded obligations of £711 million (2015: £551 million). In total, the deficit has increased £475 million since 31 December 2015, primarily due to changes in the discount rates used and adverse currency movements.

 

The amount included within trading profit for the year comprises current service cost of £48 million (2015: £50 million), administrative costs of £3 million (2015: £3 million) and a settlement credit of £5 million (2015: a past service credit of £4 million). The interest charge on net defined benefit plans, which is excluded from management figures, was £53 million (2015: £49 million).

 

Cash contributions to the various defined benefit pension schemes and retiree medical arrangements totalled £121 million (2015: £100 million), including a £15 million contribution as part of a pensioner buy-out arrangement that resulted in the removal of £268 million of liabilities and £263 million of assets from the balance sheet. The settlement gain was £5 million (net of expenses) and is included in the income statement.

 

UK pensions

 

The accounting deficit for UK schemes increased to £1,221 million (2015: £912 million), following a 30% decrease in the discount rate. 

 

 

 

The Group's two UK defined benefit pension schemes are currently undergoing triennial funding valuations as at 5 April 2016 and 31 December 2016 respectively. 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 variables involved in both finalising the valuation and agreeing any resulting recovery plan, the outcome cannot currently be predicted with any reasonable degree of certainty. The current deficit funding payment is £42 million per year.  

 

Defined contribution pension schemes

 

In addition to defined benefit pension schemes, the Group also operates a number of defined contribution schemes for which the income statement charge was £62 million (2015: £42 million).

 

Net assets

 

Net assets of £2,162 million were £276 million higher than the December 2015 year end figure of £1,886 million. The increase is driven by management profit after tax (£534 million) and currency (including fair value changes in net investment hedging) movements in other comprehensive income, net of tax (£504 million) which have been partially offset by changes in value of derivative and other financial instruments (£154 million), amortisation of non-operating intangible assets arising on business combinations (£103 million), a loss on remeasurement of defined benefit plans, net of tax (£333 million) and dividends paid to equity shareholders (£150 million).

 

Exchange rates

 

Exchange rates used for currencies most relevant to the Group's operations are:

 


Average

Year End


2016

2015

2016

2015

Euro

1.22

1.38

1.17

1.36

US dollar

1.35

1.53

1.23

1.47

 

The approximate impact on 2016 trading profit of subsidiaries and equity accounted investments of a 1% movement in the average rate would be euro - £2 million, US dollar - £4 million.

 

Funding, liquidity and going concern

 

At 31 December 2016, UK committed bank facilities were £863 million (2015: £864 million). Within this amount there are committed revolving credit facilities of £800 million (2015: £800 million) and a £48 million (2015: £64 million) eight-year amortising facility from the European Investment Bank (EIB).  The revolving credit facilities of £800 million mature in 2019, whilst the second of five equal, annual £16 million EIB repayments was paid in 2016. At 31 December 2016, £48 million of the EIB facility was drawn (2015: £64 million drawn) and there were no drawings on any of the UK revolving credit facilities (2015: no drawings).

 

Capital market borrowings at 31 December 2016 and 31 December 2015 comprised a £350 million 6.75% annual unsecured bond maturing in October 2019 and a £450 million 5.375% semi-annual unsecured bond maturing in September 2022.

 

As at 31 December 2016, the Group had net debt of £704 million (2015: £769 million).

 

All of the Group's committed credit facilities have financial covenants requiring EBITDA of subsidiaries to be at least 3.5 times net interest payable and for net debt to be no greater than 3 times EBITDA of subsidiaries. The covenants are tested every six months using the previous 12 months' results. For the 12 months to 31 December 2016, EBITDA was 12.8 times greater than net interest payable, whilst net debt was 0.7 times EBITDA.

 

 

The Group has a series of cross currency interest rate swaps to better align its foreign currency income receipts in USD and EUR with its debt and had the effect of converting its Sterling bonds into US Dollars ($951 million) and Euros (€284 million). The cross currency interest rate swaps have been designated as a net investment hedge of the Group's USD and EUR net assets.

 

The Directors have taken into account both divisional and Group forecasts for the 18 months from the balance sheet date to assess the future funding requirements of the Group and compared them to the level of committed available borrowing facilities, described above. The Directors have concluded that the Group will have a sufficient level of headroom in the foreseeable future and that the likelihood of breaching covenants in this period is remote, such that it is appropriate for the financial statements to be prepared on a going concern basis.

 

Definitions

 

Financial information set out in this announcement, unless otherwise stated, is presented on a management basis which aggregates the sales and trading profit of subsidiaries with the Group's share of the sales and trading profit of equity accounted investments. References to trading margins are to trading profit expressed as a percentage of sales. Management profit or loss before tax is management trading profit less net subsidiary interest payable and receivable and the Group's share of net interest payable and receivable and taxation of equity accounted investments. These figures better reflect performance of continuing businesses.

 

Where appropriate, reference is made to organic results which exclude the impact of acquisitions/divestments as well as currency translation on the results of overseas operations.

 

Operating cash flow is cash generated from operations adjusted for capital expenditure, government capital grants, proceeds from disposal of fixed assets and government refundable advances. Free cash flow is operating cash flow including interest, tax, equity accounted investment dividends and amounts paid to non-controlling interests, but excluding dividends paid to GKN shareholders.

 

Return on average invested capital (ROIC) is management trading profit as a percentage of average total net assets of continuing subsidiaries and equity accounted investments excluding current and deferred tax, net debt, post-employment obligations and derivative financial instruments.

 

 

APPENDICES

 

 


Page



GKN Consolidated Financial Information




Consolidated Income Statement for the year ended 31 December 2016

16







Consolidated Statement of Comprehensive Income for the year ended 31 December 2016

17







Consolidated Statement of Changes in Equity for the year ended 31 December 2016

18







Consolidated Balance Sheet at 31 December 2016

19







Consolidated Cash Flow Statement for the year ended 31 December 2016

20







Notes to the News Release

21-35













 

 

 

Consolidated Income Statement

For the year ended 31 December 2016


Notes

2016 

2015 



£m 

£m 





Sales

2

8,822 

7,231 






Trading profit

2

684 

609 


Change in value of derivative and other financial instruments

4

(154)

(122)


Amortisation of non-operating intangible assets arising on






business combinations

5

(103)

(80)


Gains and losses on changes in Group structure

6

(9)

(1)


Acquisition-related restructuring charges

7

(31)


Impairment charges

8

(52)

(71)


Reversal of inventory fair value adjustment arising on






business combinations


(12)

Operating profit


335 

323 





Share of post-tax earnings of equity accounted investments


73 

59 






Interest payable


(86)

(72)


Interest receivable



Other net financing charges


(37)

(72)

Net financing costs

9

(116)

(137)





Profit before taxation


292 

245 





Taxation

10

(48)

(43)

Profit after taxation for the year


244 

202 





Profit attributable to non-controlling interests


Profit attributable to owners of the parent


242 

197 



244 

202 





Earnings per share - pence

11



Continuing operations - basic


14.1 

11.8 

Continuing operations - diluted


14.0 

11.7 

 

 

 

 

 

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2016


Notes

2016 

2015 



£m 

£m 

Profit after taxation for the year


244 

202 

Other comprehensive income




Items that may be reclassified to profit or loss




Currency variations - subsidiaries





Arising in year


671 

74 


Reclassified in year

6

Currency variations - equity accounted investments





Arising in year


22 

Derivative financial instruments - transactional hedging





Arising in year



Reclassified in year


(5)

Net investment hedge changes in fair value





Arising in year


(177)

(37)

Taxation

10

(14)

(5)



504 

37 

Items that will not be reclassified to profit or loss




Remeasurement of defined benefit plans





Subsidiaries

15

(396)

139 

Taxation

10

63 

(42)



(333)

97 

Other comprehensive income for the year


171 

134 





Total comprehensive income for the year


415 

336 





Total comprehensive income attributable to non-controlling interests


Total comprehensive income attributable to owners of the parent


409 

332 



415 

336 

 

 

 

 

Consolidated Statement of Changes in Equity

For the year ended 31 December 2016

















Other reserves





Notes

Share 
capital 
£m 

Capital 

redemption 

reserve 

£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


173 

298 

330 

1,217 

243 

(264)

(134)

1,863 

23 

1,886 

Profit for the year


242 

242 

244 

Other comprehensive













income/(expense)


(333)

638 

(138)

167 

171 

Total comprehensive income


(91)

638 

(138)

409 

415 

Share-based payments


Share options exercised


Addition of non-controlling interest


Purchase of non-controlling interest


(1)

(1)

(1)

(2)

Dividends paid to equity shareholders

12

(150)

(150)

(150)

Dividends paid to non-controlling













interests


(2)

(2)

At 31 December 2016


173 

298 

330 

981 

881 

(402)

(134)

2,127 

35 

2,162 

At 1 January 2015


166 

298 

139 

1,069 

168 

(227)

(134)

1,479 

22 

1,501 

Profit for the year


197 

197 

202 

Other comprehensive













income/(expense)


97 

75 

(37)

135 

(1)

134 

Total comprehensive income


294 

75 

(37)

332 

336 

Share-based payments


Share options exercised


Proceeds from share issue


191 

198 

198 

Purchase of own shares by Employee













Share Ownership Plan Trust


(7)

(7)

(7)

Dividends paid to equity shareholders

12

(142)

(142)

(142)

Dividends paid to non-controlling













interests


(3)

(3)

At 31 December 2015


173 

298 

330 

1,217 

243 

(264)

(134)

1,863 

23 

1,886 

 

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


233 

195 

Other receivables and investments


49 

42 

Derivative financial instruments


25 

21 

Deferred tax assets


557 

388 



5,442 

4,702 

Current assets




Inventories


1,431 

1,170 

Trade and other receivables


1,648 

1,311 

Current tax assets


Derivative financial instruments


19 

13 

Other financial assets

13

Cash and cash equivalents

13

411 

299 



3,521 

2,807 

Total assets


8,963 

7,509 





Liabilities




Current liabilities




Borrowings

13

(64)

(137)

Derivative financial instruments


(206)

(151)

Trade and other payables


(2,186)

(1,757)

Current tax liabilities


(142)

(121)

Provisions


(71)

(78)



(2,669)

(2,244)

Non-current liabilities




Borrowings

13

(842)

(867)

Derivative financial instruments


(521)

(294)

Deferred tax liabilities


(227)

(157)

Trade and other payables


(427)

(425)

Provisions


(82)

(78)

Post-employment obligations

15

(2,033)

(1,558)



(4,132)

(3,379)

Total liabilities


(6,801)

(5,623)





Net assets


2,162 

1,886 





Shareholders' equity




Share capital


173 

173 

Capital redemption reserve


298 

298 

Share premium account


330 

330 

Retained earnings


981 

1,217 

Other reserves


345 

(155)

Equity attributable to equity holders of the parent


2,127 

1,863 

Non-controlling interests


35 

23 

Total equity


2,162 

1,886 

 

 

 

 

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

14

778 

885 

Interest received


15 

Interest paid


(83)

(69)

Tax paid


(93)

(111)

Dividends received from equity accounted investments


57 

55 



666 

775 

Cash flows from investing activities




Purchase of property, plant and equipment


(416)

(332)

Receipt of government capital grants


Purchase of intangible assets


(84)

(81)

Repayment of government refundable advance


(6)

Proceeds from sale and realisation of fixed assets


37 

Payment of deferred and contingent consideration


(1)

(7)

Acquisition of subsidiaries (net of cash acquired)


(17)

(117)

Repayment of debt acquired in business combinations


(371)

Purchase of investment


(5)

Proceeds from disposal of subsidiary, net of cash


151 

Equity accounted investments loan settlement




(331)

(894)

Cash flows from financing activities




Purchase of own shares by Employee Share Ownership





Plan Trust


(7)

Purchase of non-controlling interests


(2)

Proceeds from exercise of share options


Gross proceeds from issuance of ordinary shares


200 

Costs associated with issuance of ordinary shares


(2)

Amounts placed on deposit


(2)

Proceeds from borrowing facilities


102 

485 

Repayment of other borrowings


(243)

(423)

Dividends paid to shareholders


(150)

(142)

Dividends paid to non-controlling interests


(2)

(3)



(294)

108 

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

14

385 

291 

 

 

 


Notes to the News Release

 


For the year ended 31 December 2016

 



 

1

Basis of preparation


The financial information for the year ended 31 December 2016 contained in this News Release was approved by the Board on 27 February 2017.  This announcement does not constitute statutory financial statements of the Company within the meaning of Section 435 of the Companies Act 2006, but is derived from those financial statements, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed and adopted for use by the European Union. 

 

This information has been prepared under the historical cost method except where other measurement bases are required to be applied under IFRS, using all standards and interpretations required for financial periods beginning 1 January 2016.  No standards or interpretations have been adopted before the required implementation date.  Whilst the financial information included within this announcement has been prepared in accordance with the recognition and measurement criteria of IFRS, it does not comply with all disclosure requirements.

 

Statutory financial statements for the year ended 31 December 2015 have been delivered to the Registrar of Companies.  Statutory financial statements for the year ended 31 December 2016, which have been prepared on a going concern basis, will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

 

The auditors have reported on those financial statements.  Their reports were not qualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

 

2

Segmental analysis

 

(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 

 








 

 

 

2

Segmental analysis (continued)

(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

82 




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 










383 

329 

148 

39 



(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 




291 

290 

109 

24 

714 




Acquisitions







(5)



Acquisition-related charges

(13)




(18)

(18)














Corporate and unallocated costs





(18)


Management trading profit





679 


Less: equity accounted investments trading profit





(70)


Income statement - trading profit





609 









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.

 


No income statement items between trading profit and profit before tax are allocated to management trading profit, which is the Group's segmental measure of profit or loss (see note 3).

 

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.

 

 

 

3

Adjusted performance measures



(a)

Reconciliation of reported and management performance measures





2016



As 
reported 

Equity 
accounted 
investments 

Adjusting 
and non- 
trading items

Management 
basis 



£m 

£m 

£m 

£m 


Sales

8,822 

592 

9,414 








Trading profit

684 

89 

773 


Change in value of derivative and other financial







instruments

(154)

154 


Amortisation of non-operating intangible assets







arising on business combinations

(103)

103 


Gains and losses on changes in Group structure

(9)


Acquisition-related restructuring charges

(31)

31 


Impairment charges

(52)

52 


Operating profit

335 

89 

349 

773 








Share of post-tax earnings of equity accounted investments

73 

(89)

(16)








Interest payable

(86)

(86)


Interest receivable


Other net financing charges

(37)

37 


Net financing costs

(116)

37 

(79)


Profit before taxation

292 

386 

678 








Taxation

(48)

(96)

(144)


Profit after tax for the year

244 

290 

534 


Profit attributable to non-controlling interests

(2)

(2)

(4)


Profit attributable to owners of the parent

242 

288 

530 


Earnings per share - pence

14.1 

16.9 

31.0 






2015


Sales

7,231 

458 

7,689 








Trading profit

609 

70 

679 


Change in value of derivative and other financial







instruments

(122)

122 


Amortisation of non-operating intangible assets







arising on business combinations

(80)

80 


Gains and losses on changes in Group structure

(1)


Impairment charges

(71)

71 


Reversal of inventory fair value adjustment







arising on business combinations

(12)

12 


Operating profit

323 

70 

286 

679 








Share of post-tax earnings of equity accounted investments

59 

(70)

(11)








Interest payable

(72)

(72)


Interest receivable


Other net financing charges

(72)

72 


Net financing costs

(137)

72 

(65)


Profit before taxation

245 

358 

603 








Taxation

(43)

(90)

(133)


Profit after tax for the year

202 

268 

470 


Profit attributable to non-controlling interests

(5)

(5)


Profit attributable to owners of the parent

197 

268 

465 


Earnings per share - pence

11.8 

16.0 

27.8 




Basic and management earnings per share use a weighted average number of shares of 1,712.1 million (2015: 1,674.1 million).  Also see note 11.







(b)

Summary of management performance measures by segment









2016

2015



Sales 

Trading 
profit
 

Margin 

Sales 

Trading 
profit 

Margin 



£m 

£m 


£m 

£m 



Aerospace

3,423 

339 

9.9% 

2,387 

291 

12.2% 


Driveline

4,216 

323 

7.7% 

3,548 

290 

8.2% 


Powder Metallurgy

1,032 

118 

11.4% 

906 

109 

12.0% 


Land Systems

704 

18 

2.6% 

693 

24 

3.5% 


Other businesses

39 

(4)


42 



Corporate and unallocated costs

(21)


(18)



Acquisition - Fokker (Aerospace)


113 

(18)




9,414 

773 

8.2% 

7,689 

679 

8.8% 

 

 

 

4

Change in value of derivative and other financial instruments



2016 

2015 



£m 

£m 


Forward currency contracts (not hedge accounted)

(135)

(103)


Embedded derivatives



(131)

(102)


Net gains and losses on intra-group funding





Arising in year

(23)

(20)



(154)

(122)





5

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)





6

Gains and losses on changes in Group structure



2016 

2015 



£m 

£m 


Business disposed

(5)


Business closures

(18)


Gain on contingent consideration



(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. 



7

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.



 

 

8

Impairment charges




An impairment charge of £52 million (2015: £71 million) has been recorded in the Income Statement as an adjusting and non-trading item within the line 'impairment charges' in respect of three CGUs; two in Aerospace and one in Land Systems.

 

An impairment charge in Engine Products - West, North America (Aerospace) of £29 million follows loss of key business during the year.  The charge comprises goodwill only.

 

An impairment charge in Engine Products - East, North America (Aerospace) of £18 million follows a market change in demand for the electrochemical machining technology offered by this business.  The charge comprises goodwill of £7 million and property, plant and equipment of £11 million.

 

An impairment charge in Wheels China (Land Systems) of £5 million following a significant period of market decline and loss of future orders.  The charge comprises goodwill of £2 million and property, plant and equipment of £3 million. 

 

9

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

 



Tax case net interest recovery

 



 


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)

 





 

 

 

 

10

Taxation



(a)

Tax expense









2016 

2015 


Analysis of charge in year

£m 

£m 


Current tax (charge)/credit





Current year charge

(67)

(121)



Utilisation of previously unrecognised tax losses and other assets

38 



Net movement on provisions for uncertain tax positions

(23)



Adjustments in respect of prior years



(48)

(106)


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)



Adjustments in respect of prior years

(11)



63 


Total tax charge for the year

(48)

(43)




Analysed as:





2016 

2015 


Tax in respect of management profit

£m 

£m 



Current tax

(40)

(107)



Deferred tax

(104)

(26)



(144)

(133)






Tax in respect of items excluded from management profit





Current tax

(8)



Deferred tax

104 

89 



96 

90 


Total for tax charge for the year

(48)

(43)






Book tax rate

 

The net movement on provisions of £9 million principally follows resolution of disputes in Turkey, France and Italy.

 

In 2015, the Group used £38 million of previously unrecognised tax losses against taxable profits reducing the prior year current tax charge.  The uncertainties preventing recognition of these losses will not be resolved until 2017 at the earliest and a corresponding provision was created against their use.  

 

Management tax rate

 

The tax charge arising on management profits of subsidiaries of £605 million (2015: £544 million) was £144 million (2015: £133 million) giving an effective tax rate of 24% (2015: 24%). 

 

 

 

 

 

10

Taxation (continued)



(a)

Tax expense (continued)





2016

2015


Tax reconciliation

£m 

£m 


Profit before taxation

292 


245 



Less share of post-tax earnings of equity accounted investments

(73)


(59)



Profit before taxation excluding equity accounted investments

219 


186 









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)

(13)

(34)

(18)


Non-deductible and non-taxable items

36 

16 

19 

10 


Recognition of previously unrecognised tax losses


Utilisation of previously unrecognised tax losses and other assets

38 

20 


Changes in tax rates

(17)

(8)

(2)

(1)


Other changes in deferred tax assets

(1)

(5)

(3)


Tax charge on ordinary activities

(55)

(25)

(21)

(11)


Net movement on provision for uncertain tax positions

(23)

(12)


Adjustments in respect of prior years

(2)

(1)


Total tax charge for the year

(48)

(22)

(43)

(23)



(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)


Current tax on post-employment obligations


Current tax on foreign currency gains and losses on intra-group funding

(50)

(6)



49 

(47)



 

(c)

Recognised deferred tax

 


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)


15 

14 


Included in the income statement

(2)

(19)

18 


(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

(10)

42 


28 

(3)

63 


Included in other comprehensive income

(46)


(45)


Businesses acquired

92 

17 


(74)

37 


Currency variations

(2)


(10)

(8)


At 31 December 2015

245 

176 

157 


(339)

(8)

231 



 

 

11

Earnings per share





2016

2015



Earnings 

Weighted 
average 
number of 
shares 

Earnings per 
share 

Earnings 

Weighted 
average 
number of 
shares 

Earnings per 
share 



 £m 

million 

 pence 

 £m 

million 

 pence 


Basic

242 

1,712.1 

14.1 

197 

1,674.1 

11.8 


Dilutive securities

13.9 

(0.1)

7.7 

(0.1)


Diluted

242 

1,726.0 

14.0 

197 

1,681.8 

11.7 




Management basis earnings per share of 31.0p (2015: 27.8p) is presented in note 3 and uses the weighted average number of shares consistent with basic earnings per share calculations.



 

12

Dividends





Paid or proposed in respect of


Recognised



2016 

pence 

2015 

pence 


2017 

£m 

2016 

£m 

2015 

£m 


2014 final dividend paid


92 


2015 interim dividend paid

2.9 


50 


2015 final dividend paid

5.8 


99 


2016 interim dividend paid

2.95 


51 


2016 final dividend proposed

5.9 


101 



8.85 

8.7 


101 

150 

142 




The 2016 final proposed dividend will be paid on 17 May 2017 to shareholders who are on the register of members at close of business on 7 April 2017.



 

 

 

13

Net borrowings




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 5⅜% 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




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 5⅜% 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




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) 5⅜% 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).

 

 

 

 

14

Cash flow reconciliations





2016 

2015 


Cash generated from operations

£m 

£m 


Operating profit

335 

323 


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


Amortisation of government capital grants

(2)

(2)


Net profits on sale and realisation of fixed assets

(3)

(3)


Charge for share-based payments


Movement in post-employment obligations

(75)

(51)


Change in inventories

(78)

(33)


Change in receivables

(151)

110 


Change in payables and provisions

99 



778 

885 






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 cashflow

385 

291 





 

 

 

 

 

 

15





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.

 

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.

 


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.

 

 

 

 

15

Post-employment obligations (continued)

(a) 

Defined benefit schemes - assumptions and estimates (continued)

 


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 


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%

 




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:

·      a buy-out secured with Pension Insurance Corporation for a premium of £190 million;

·      paying Winding-Up Lump Sums and trivial commutations to members with small-value benefits; and

·      transfer of liabilities to a new GKN Group Pension Scheme 2016 (GKN3).

 

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.

 

 

(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


Settlements/curtailments



(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. 



 

 

15

Post-employment obligations (continued)

 

(b)  

Defined benefit schemes - reporting (continued)

 


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

270 


Administrative expenses

(3)

(3)


Interest

(119)

(15)

(13)

(147)


Remeasurement of defined benefit plans

(540)

(82)

(612)


Benefits and administrative expenses paid

149

17 

22 

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)

(2)


Businesses acquired

(7)

(7)


Settlements and curtailments


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 

187 


Currency variations

(17)

30 

(2)

11 


At 31 December 2015

(3,234)

(319)

(531)

(34)

(4,118)




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 

94 


Settlements and curtailments

(263)

(2)

(265)


Businesses disposed

(1)

(1)


Remeasurement of defined benefit plans

207 

216 


Contributions by Group

87 

96 


Benefits paid

(145)

(17)

(2)

(2)

(166)


Currency variations

37 

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 

90 


Settlements and curtailments

(1)

(1)


Remeasurement of defined benefit plans

(64)

(14)

(77)


Contributions by Group

75 

81 


Benefits paid

(147)

(16)

(3)

(2)

(168)


Currency variations

(2)


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 

217 


Changes in financial assumptions

(715)

(8)

(83)

(801)


Change in demographic assumptions

(35)

(28)



(540)

(82)

(612)


2015







Experience gains and losses

(3)


Changes in financial assumptions

148 

15 

42 

205 


Change in demographic assumptions



150 

27 

39 

216 



 

 

15

Post-employment obligations (continued)

 

(b)

Defined benefit schemes - reporting (continued)

 

 


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 

602 

 


Bonds - corporate

245 

63 

308 

 


Property

138 

138 

 


Cash, derivatives and net current assets

23 

27 

 


Other assets

182 

37 

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 

408 

 


Bonds - corporate

537 

57 

594 

 


Property

135 

135 

 


Cash, derivatives and net current assets

 


Other assets

176 

33 

211 

 



2,322 

186 

33 

19 

2,560 

 



 

(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).

 

 

16

IFRS 15

 

Background

The Group will adopt IFRS 15 Revenue from Contracts with Customers for the year ending 31 December 2018 which will change the way that revenue is recognised and expand disclosure for revenue arrangements.  This new standard may be adopted using the full retrospective method, where changes would be applied to the comparative information and the cumulative effect recorded at 1 January 2017 or the modified retrospective method, where the cumulative effect of applying the standard would be recorded at 1 January 2018.  The implications of this choice are still being assessed.

 

As IFRS 15 will supersede all existing revenue guidance, it could impact revenue and cost recognition on a significant number of contracts across all of our business segments, as well as, business processes and information technology systems.  With the breadth of this assessment across our multinational group and complexity of judgements involved, particularly in the Aerospace business, evaluation of the effect of IFRS 15 will continue through 2017.

 

Whilst the timing of revenue could be changed, there will be no impact on either timing or quantum of cash flows.

 

Progress towards adoption

We have monitored the standard setting process, including amendments to the standard following its issuance and participated in aerospace and defence forums to understand the impact on this division.

 

We commenced our evaluation of the implications of IFRS 15 during 2016, by evaluating its impact on select number of contracts across our divisions.  With this baseline understanding, we have now developed a draft project plan in order to adopt the new standard on 1 January 2018.  We have briefed Executive management, the senior finance community and the Group's Audit Committee on our progress towards adoption and anticipate being able to estimate the impacts of adopting IFRS 15 in the second half of 2017.

 

Implications for the Group

As noted in the revenue recognition accounting policy, the Group currently has three principal revenue streams:

 

·       Sales of product;

·       Risk and revenue sharing partnerships (RRSPs); and

·       Design and build.



 

 

16

IFRS 15 (continued)


Sale of product

The overwhelming majority of Group revenue is earned from the sale of product, with a majority of the contracts in the Automotive businesses and a high proportion of the Aerospace business deriving sales on this basis.

 

Under IFRS 15 sales will be recognised as the customer obtains control of the goods and services promised in contracts (i.e. performance obligations) and this is likely to be similar to the point when risks and rewards of ownership are passed to the customer, either at the point of despatch or acceptance by the customer.  Accordingly there is expected to be little impact on this revenue stream from adoption of the new standard. 

 

However, as part of the impact assessment phase, contractual price downs have been identified in some contracts and under IFRS 15 the value of this 'material right' for the customer would need to be recognised on all relevant product sold.  Effectively the new standard takes a view that where products sold are substantially the same, a relatively consistent price should apply to all sales.  This would have the impact of deferring some early invoiced revenue to later units sold.




RRSP contracts

Whilst RRSP contracts only affect a small number of businesses in the Group, exclusively in the Aerospace division, the implications of the new accounting standard could be most significant on these revenues during both the sale of product phase and sales of services aftermarket phase.

 

Due to the nature of RRSP contracts, OE products sold to engine manufacturers are deeply discounted with more favourable pricing in the aftermarket phase.  It is likely that IFRS 15 will spread revenues more evenly over the performance obligations identified in the arrangement.  Interpretation is evolving in this area as the implication of increasing margins during the early phase of contracts through recognition of contract assets (i.e. unbilled receivables) on the balance sheet, without contractual certainty over future volumes, needs to be fully considered and understood.  In addition, IFRS 15 could also significantly impact contracts where the Group has already delivered most of its performance obligations during the OE phase and has little or no further work to perform in the aftermarket phase.  In this scenario, revenue that is currently recognised during the aftermarket phase would be recorded earlier, on completion of performance obligations, based on the best estimate of total expected variable consideration.




Design and build

This revenue stream affects a discrete number of businesses, primarily in the Aerospace division but also on a smaller scale in the Automotive division.  Where cash is received from customers in advance of work performed to compensate the Group for costs incurred in design and development activities, such amounts are considered in the context of risk and rewards of ownership over the development assets.  This can lead to deferred income on the balance sheet, which is subsequently taken to revenue as the Group performs its contractual obligations either on delivery of product or on meeting certain performance milestones.

 

Often the 'non-recurring' price is collected over a specific number of products, based on the expected volume of orders at the time of negotiating the framework agreement.  However, similar to the price down example noted above, IFRS 15 considers there to be a 'material right' for the customer where they are able to buy future units at a reduced price for expected volumes exceeding the recovery period of incremental pricing.  This is also the case in contracts where customers contract to explicitly fund capital expenditure.

 

In both of these examples a proportion of revenue invoiced could be deferred under IFRS 15 from earlier products sold to units sold later in the arrangement.  However, further assessment needs to be undertaken to take account of any changes in pricing that reflect the impact of potential transfer of intellectual property rights.

 

Other matters

·       Participation fees, which are currently amortised through cost of sales will likely be taken as a reduction of revenue.

·       In a limited number of arrangements, the Group receives free issue raw materials and is deemed to be the 'principal not agent' in a transaction, taking control of these materials before integrating them with other goods and selling the combined outputs back to the customer.  In this scenario there will be a requirement to recognise the cost of materials at fair value and gross up revenues for an equivalent amount.

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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Final Results for the year ended 31 December 2016 - RNS