27th Mar 2013 15:05
GKN plc 2012 Annual Report
GKN plc has today published its 2012 Annual Report and circular to shareholders incorporating the notice of the 2013 Annual General Meeting. Both documents can be viewed at or downloaded from www.gkn.com/investorrelations.
Copies of both documents, together with the form of proxy for the 2013 AGM, have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.
Printed copies of these documents have today been posted to shareholders who have requested hard copies.
The 2013 AGM will be held at 2.00 pm on Thursday 2 May 2013 at the Cavendish Conference Centre, 22 Duchess Mews, London W1G 9DT.
In compliance with DTR 6.3.5, a description of the principal risks and uncertainties, details of related party transactions and a responsibility statement prepared for and contained within GKN's 2012 Annual Report are set out below. A condensed set of financial statements were appended to GKN's 2012 full year results announcement issued on 26 February 2013, which included an indication of important events that occurred during the year.
Page references below refer to page numbers in GKN's 2012 Annual Report.
Risks and uncertainties
GKN has an extensive risk management framework designed to identify and assess the likelihood and consequences of risk and to manage the actions necessary to mitigate their impact.
A detailed description of this framework is given on page 52. Set out below are the principal risks and uncertainties which could have a material impact on the Group and the corresponding mitigating actions that are in place. Additional risks not currently known or which are currently regarded as immaterial could also adversely affect future performance.
Market risks
Risk | Nature of risk and potential impact | Mitigation |
Operating in global markets
| GKN operates globally and as such our results could be impacted by global and regional changes in macroeconomic and political conditions, consumer demand and preferences. An adverse impact could result from the European debt crisis, changing consumer confidence and associated volatility in automotive demand; rescheduling or cancellation of orders for civil aircraft and changes in amount or timing of US government public spending; and volatility in agricultural, construction, mining and industrial markets.
| ● Diverse business portfolio serving different markets, with lead indicators in those markets kept under continuous review ● Flexible systems, including treasury management and cash forecasting ● Effective management of variable and fixed cost base, investment spending and working capital |
Customer concentration
| Significant customer concentration exists in the automotive and aerospace industries. The insolvency of, damage to relations, or significant worsening of commercial terms with a major customer could result in the loss of future business opportunities, asset write-offs and restructuring actions. | ● GKN is not dependent on contractual or other arrangements with any individual customer. No customer represented more than 10% of Group sales in the year ended 31 December 2012 ● Active management of customer relations and credit exposure ● Strong commercial and engineering focus at customer level together with effective programme management |
Highly competitive markets
| GKN operates in highly competitive markets with customer decisions based typically on price, quality, technology and service. Customer vertical integration (including OEMs taking production in-house), the entry of new competitors or consolidation of existing competitors could restrict our ability to deliver the Group's strategic objectives. Inability to develop or maintain sufficient or appropriate engineering and manufacturing capabilities which could impact the Group's ability to maintain a competitive advantage. | ●Continual review of competition and market trends ●Maintaining GKN's competitive position through new product technology ●Targeting investment in engineering and lean manufacturing resources, whilst also maintaining strong customer relationships |
Technology advancements
| GKN may lose customers to competitors offering new technologies if we are unable to adapt to or take advantage of market developments such as changes in legislative, regulatory or industry requirements, competitive technologies or consumer preferences. This may result from failure to launch new products, new product applications or derivations of existing products to meet customers' requirements. | ●Regular assessment of market and technology trends and drivers ●Divisional technology plans aligned to emerging and future trends ●Focused investment in research and development ●Effective programme delivery over the long term incorporating changes in technology |
Financial risks
Risk | Nature of risk and potential impact | Mitigation |
Pension deficit volatility
| Pension deficit levels are affected by changes in asset values, discount rates, inflation and mortality assumptions. Accounting valuations of pension obligations can cause volatility in financial results. Additional Company pension contributions may have an impact on investment in businesses. | ●Active management of pension scheme assets and long-term view of liability assumptions including the level of benefits ●Alternative funding and risk mitigation actions are implemented where appropriate |
Exchange rate volatility
| Currency risks include: transactional (subsidiary sales or purchases in currencies other than their functional currency) and translational (exchange rate movements in investments in overseas operations). The Group's financial statements may fluctuate as a result of movements in exchange rates. | ●Natural hedging where possible, for example through local sourcing ● Hedging of transaction exposures through forward foreign exchange contracts |
Complexity of global tax regimes
| Given GKN's global footprint and against a background of complex tax laws on a global basis, it is possible that actual tax liabilities could differ from management judgements. | ●On-going monitoring of tax developments in major jurisdictions ●Group-wide tax compliance programme |
Operational risks
Risk | Nature of risk and potential impact | Mitigation |
Supply chain disruption
| Supply chain disruption caused by lack of availability of equipment, components, services and raw materials that meet specifications could impact GKN's sales to and relationships with customers and result in additional unrecoverable costs. Dependence on limited supply chain arrangements could also result in additional cost and delay where replacement products are not available. | ●Effective supply chain management to ensure appropriate inventory levels are maintained in times of production volatility ●On-going assessment of supplier technology and dependency ●Flexible sourcing arrangements ●Monitoring financial viability of key suppliers |
Volatile input costs | Sudden increases in the cost of raw materials, labour and energy could adversely affect the Group's earnings if we are unable to pass increases on to customers. | ●Contracts that ensure the ability to pass on charges to customers where possible ●Securing long-term contracts with stable pricing for key inputs ●Maintaining good labour relations ●Forward purchasing of energy requirements where appropriate |
New product introductions | The introduction of new products brings risks related to lack of market acceptance, delays in product development or launch schedule, failure to meet customer specifications and the inability to manufacture in time for the start of production. These events may impact customer relationships and result in cost overruns. | ●Robust bid preparation and approval processes ●Rigorous programme management, including investment phasing and product testing activities ●Regular review of key programmes by the Executive Committee and Board |
Product quality issues
| Product quality issues could lead to potential liabilities for defects in products, warranty claims or product recalls and as a result adversely affect GKN's financial performance and damage our reputation. | ●High levels of quality assurance are embedded in robust manufacturing systems |
Inadequate health, safety and environmental processes | Lack of robust processes and procedures governing health, safety and environmental practices could result in accidents involving employees and others on GKN sites, regulatory violations, potential adverse financial impact and damage to GKN's reputation. | ●Consistent Group-wide application of health, safety and environmental programmes ●Health and safety audits to ensure adherence to Group policies and procedures ●A focus on process and behavioural safety through a number of Group-wide risk assessment and training programmes |
People capability | A lack of relevant capability in specific geographic regions and disciplines could result in an inability to execute the strategic plan and deliver improving financial performance. | ●Competitive reward packages together with focused training and development programmes ●A culture that motivates individuals to perform to the best of their abilities |
Acquisitions and their integration
| A lack of suitable acquisition targets aligned with the planned growth strategy, a failure to integrate acquired businesses successfully, completion of an acquisition not aligned with the strategy, or an inability to capture value from an acquisition could impact operations and prevent successful delivery of GKN's strategic objectives. | ●Thorough reviews to ensure strategic alignment of acquisitions ●Extensive pre-acquisition due diligence ●Robust management of detailed integration plans ●Post-acquisition investment reviews |
Laws, regulations and corporate reputation | The Group is subject to applicable laws and regulations in the global jurisdictions and industries in which it operates. These include regulations relating to export controls, intellectual property rights, competition laws and ethical business practices. Non-compliance could expose the Group to cost, damage to reputation, suspension or debarment. | ●Group-wide governance policies and procedures, on-going compliance training and strong oversight ●The Board's oversight of compliance also extends to consideration of issues that could impact the corporate brand and reputation |
Information system resilience | The Group could be impacted negatively by information technology security threats including unauthorised access to intellectual property or other classified information. Interruptions to the Group's information systems could also adversely affect its day to day operations. | ●Extensive system-based controls and live monitoring of risks and mitigating actions ●On-going development of appropriate plans in the event of a breach of critical systems ●Disaster recovery contingency plans and procedures |
The Group insures against the impact of a range of unpredictable losses associated with both our business assets and liabilities. GKN's risk financing strategy is based on a significant level of capped self-insured retention at the Group level (within GKN's own captive insurance
company, Ipsley Insurance Ltd, which does not insure the risks of any other entity) and a much lower retention at subsidiary level through deductibles. Catastrophe insurance is then purchased in the commercial market over and above these levels of retention. Ipsley's current participation in GKN's principal insurance programme is £10 million per incident capped at £20 million in any one year. Due to the nature of the risk, the Group's aviation products liability insurance is placed solely in the commercial market.
RELATED PARTY TRANSACTIONS
In the ordinary course of business, sales and purchases of goods take place between subsidiaries and joint venture companies priced on an arm's length basis. Sales by subsidiaries to joint ventures in 2012 totalled £65 million (2011: £88 million). The amount due at the year end in respect of such sales was £13 million (2011: £19 million). Purchases by subsidiaries from joint ventures in 2012 totalled £36 million (2011: £1 million). The amount due at the year end in respect of such purchases was nil (2011: nil).
At 31 December 2012 a Group subsidiary had £6 million payable to a joint venture company in respect of an unsecured financing facility bearing interest at one month LIBOR plus 1/8% (2011: £2 million).
STATEMENT OF DIRECTORS' RESPONSIBILITIES
Each of the Directors as at the date of the annual report, whose names and functions are set out on pages 46 and 47, confirm that to the best of their knowledge:
● the Group financial statements, prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and
the undertakings included in the consolidation taken as a whole; and
●the Directors' report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Approved by the Board of GKN plc and signed on its behalf by
Mike Turner CBE
Chairman
25 February 2013
CAUTIONARY STATEMENT
This announcement contains forward looking statements which were made in good faith based on information available at 25 February 2013, being the date of approval of the 2012 Annual Report. 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.
Related Shares:
GKN PLC