30th Mar 2016 16:53
GKN PLC - Annual Financial ReportGKN PLC - Annual Financial Report
PR Newswire
London, March 30
GKN plc 2015 annual report
GKN plc has today published its 2015 annual report and circular to shareholders incorporating the notice of the 2016 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 2016 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 2016 AGM will be held at 2.00 pm on Thursday 5 May 2016 at 195 Piccadilly, London W1J 9LN.
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 2015 annual report are set out below. A condensed set of financial statements were appended to GKN’s 2015 full year results announcement issued on 23 February 2016, which included an indication of important events that occurred during the year.
Page references below refer to page numbers in GKN’s 2015 annual report.
Risks and uncertainties
The Board is responsible for setting the Group’s risk appetite and ensuring that appropriate risk management systems are in place
The Board reviews the Group’s principal risks throughout the year as part of its normal agenda, adopting an integrated approach to risk management by regularly discussing principal risks. In addition, in the middle and at the end of each year, the Board assesses the Group’s principal risks through our enterprise risk management (ERM) programme described opposite, taking the strength of the Group’s control systems and our appetite for risk into account. We have a risk matrix which ensures that, between the Board and its committees, all of the Group’s principal risks are reviewed during the course of the year.
The Board delegates responsibility for day-to-day risk management to the Executive Committee, including the identification, evaluation and monitoring of key risks facing the Group and the implementation of Group-wide risk management processes and controls. The Executive Committee is supported in this by its Sub-Committee on Governance and Risk.
The Audit & Risk Committee keeps the effectiveness of the Group’s risk management systems under review and reports to the Board on the results of its review. The occurrence of any material control issues, serious accidents or major commercial, financial or reputational issues, or the identification of new risks, are reported to the Board and/or Audit & Risk Committee as appropriate.
In response to the changes in the UK Corporate Governance Code, in 2014 we reviewed our approach to risk management at Board level and, in 2015, increased the level of oversight for certain principal risks while continuing to strengthen the independent assurance provided in respect of some risks. While overall we are happy with our risk management processes, our philosophy, as in all areas of the business, is one of continuous improvement.
How GKN manages risk
The Group has four levels of defence through which it manages significant risks.
Level 1: Risk ownership and control
Our businesses are responsible for maintaining an effective risk and control environment as part of day-to-day operations under the direction of the Chief Executive and the Executive Committee. This includes implementation and regular monitoring and review by divisional management of processes and controls which are designed to ensure compliance with the Board’s appetite for risk, Group policies and delegated authority levels, and the GKN Code. These front line controls are regularly updated to respond to the Group’s changing risk profile.
Level 2: Monitoring and compliance
Group functions monitor adherence to the procedures set out by the Executive Committee and provide guidance to the businesses on their application. This includes ongoing reviews by our health and safety audit team and Group IT and financial control functions. Representatives of these functions report their findings to the Executive Sub-Committee on Governance and Risk or directly to the Executive Committee. The Sub-Committee reports twice a year to the Executive Committee on matters relating to the Group’s governance, risk management and assurance framework, including areas of concern or proposals for improvement.
Level 3: Independent assurance
Independent assurance over the Group’s risk management, control and governance processes is provided by the Group’s Corporate Audit team, the Head of Risk and external assurance providers.
Level 4: Oversight
The Board, Executive Committee and Audit & Risk Committee provide oversight and direction in accordance with their respective responsibilities, more information on which is set out in the governance section of this annual report.
Our ERM programme
GKN’s enterprise risk management (ERM) programme facilitates a common, Group-wide approach to the identification, analysis, and assessment of risks and the way in which they are managed, controlled and monitored.
Identify and analyse: A broad spectrum of risks is considered through the ERM process. The Executive Committee and the Board review the output from ERM at both divisional and Group levels.
Manage and mitigate: Management controls designed to monitor and mitigate the risks are documented. Risk owners are assigned for each risk.
Assess: The ERM process provides a consistent set of definitions and a common approach to risk evaluation and assesses both risk likelihood and impact.
Respond: The risk response is based on the assessment of potential risk exposure and an acceptable level of tolerance. The response reflects whether we ‘accept’ the risk on the basis of its assessed level of exposure and mitigating controls currently in place, or ‘reduce’ the risk through additional mitigation to bring it in line with required levels of tolerance.
Monitor: The output from the ERM process is regularly reviewed together with the ongoing monitoring of progress against planned improvement actions.
Principal risks and uncertainties
The nature of both our business and our strategy means that we face a number of inherent risks and uncertainties. The Board has carefully considered the type and extent of the principal risks to the Group achieving its objectives and delivering a satisfactory return for shareholders. These are summarised below, categorised according to the strategic objective to which they relate most closely. All of our principal risks may also impact our objective to sustain above market growth.
Over time our risk profile evolves and the Board’s view of the principal risks facing the Group is updated accordingly. This year, acquisition integration risk has been added as a principal risk in light of the ongoing integration of Fokker Technologies Group B. V. Each principal risk is described on the following pages together with the corresponding mitigating actions that are in place and an overview of the risk trends during 2015.
Risk trend
| Risks related to our strategic objectives | Other risks | ||||
| Leading in our chosen markets | Leveraging a strong global presence | Differentiating ourselves through technology | Driving operational excellence | ||
| Increasing | Highly competitive markets Supply chain | Technology and innovation | Acquisition integration People capability | ||
| Stable | Customer concentration | Operating in global markets Joint ventures Laws, regulations and corporate reputation | Product quality Contract risk Programme management Health and safety Information systems resilience | Business continuity Pension funding | |
| Reducing | |||||
Highly competitive markets
Risk trend /\
Description
GKN operates in highly competitive markets with customer decisions typically based on price, quality, technology and service. Contracts for major programmes are subject to highly competitive bidding processes and the strength of our competitors and general market conditions continue to drive price pressure and more challenging contractual terms.
Strong margins may come under pressure if our competitors improve or as a result of customer actions. An inability or delay in developing or maintaining sufficient or appropriate engineering and manufacturing capabilities in high growth markets could further increase the risk.
Customer vertical integration (including OEMs taking production in-house), the entry of new competitors, and the consolidation of existing competitors also contribute to increased competition.
Potential impact
Competition risk, if not mitigated, could result in reduced sales and profit margins and potentially lost growth opportunities in high growth markets. An inability to secure new business awards on major programmes could significantly impact future growth, cash flow and profitability.
Mitigation
Maintaining a balanced portfolio of businesses across our markets provides some protection against competition in particular markets. Regular review of competition and market trends. Targeted investment in engineering, and a commitment to Lean manufacturing, quality and customer relationships. Flexible management of our variable and fixed cost base including outsourcing and low-cost sourcing initiatives where appropriate.| Changes in 2015Strong competition and customer pricing pressures have continued to increase throughout 2015. Pressure on margins was particularly strong in some areas of the aerospace market and the Chinese automotive market. Despite these challenges, we continue to win new business and differentiate ourselves through our technology. |
Read more about the trends in each of our markets on pages 4 and 5
Supply chain
Risk trend /\
Description
Our suppliers are key to our success. It is essential that suppliers and subcontractors continue to meet our high standards of technical competence, innovation, product quality, reliability, delivery performance, cost, financial stability, safety, ethics and social responsibility.
Our supply chain network is exposed to potentially adverse events such as physical disruptions, environmental and industrial accidents, scarcity of supply, or insolvency of a key supplier which could impact our ability to deliver orders to our customers.
The cost of our products can be significantly affected by the cost of the underlying commodities and materials from which they are made. Fluctuations in these costs cannot always be passed on to our customers.
Potential impact
A sustained supply chain disruption, or the delivery of defective product to us, could impact our ability to meet customer requirements, result in additional contractual liabilities and have a consequential impact on financial performance.
Mitigation
Ongoing communication of our expectations of suppliers through our Supplier Code of Conduct. Contract terms and conditions that require our suppliers to meet specified performance standards. Ongoing assessment of supplier technology and dependency. Monitoring of the financial and operational viability of key suppliers. Ongoing monitoring of inventory levels to ensure availability in times of production volatility. Contingency plans designed to enable us to secure alternative key material supplies at short notice, to transfer or share production between manufacturing sites and to use substitute materials where required. Dual sourcing where appropriate to reduce dependence on single suppliers. Supplier quality reviews and audits.| Changes in 2015Supply chain risk has increased in line with the growing complexity of certain of our products and programmes. It remains critical that our suppliers are able to support our requirements across our extended global supply chain.We continue to carefully manage and monitor our supply chains and, where appropriate, build on long-term supplier relationships.A Supply Chain Steering Committee was established to lead our supply chain excellence strategy. |
Customer concentration
Risk trend < >
Description
There is significant customer concentration in the automotive and aerospace industries so a large portion of the Group’s revenues comes from a relatively small number of customers. Around 50% of the Group’s revenue is derived from its top ten customers.
Potential impact
The insolvency of, damage to relations with, or significant worsening of commercial terms with, a major customer could seriously affect the Group’s future results, and could result in loss of market share and future business opportunities, asset write-offs and restructuring actions.
Mitigation
Regular review of the Group’s relations with and exposure to key customers. Extensive and regular dialogue with key customers and strong commercial and engineering relationships. Quality, service and delivery performance are regularly reviewed based on customer KPIs. Credit exposure is actively reviewed and managed.| Changes in 2015There have been no significant changes in the OEM customer landscape with the proportion of business from the Group’s top ten customers remaining stable during 2015. No individual customer accounts for more than 10% of Group revenue. We have continued to win new business in each of our key markets but have seen significant margin pressure in some markets. We have not experienced any significant impact to sales volumes as a result of the recent problems experienced by Volkswagen, one of our largest customers, regarding vehicle emission tests. We will keep this under review throughout 2016. |
Read more about key customer trends on pages 4 and 5, and about credit risk in note 19 to the financial statements
Operating in global markets
Risk trend < >
Description
We operate globally and, as such, results could be impacted by global or regional changes in the macroeconomic or political environment, changing consumer demand and preferences, and supply chain volatility.
Our businesses could be affected by changing consumer preference and associated volatility in automotive demand; challenging credit conditions resulting in lack of access to finance by customers and end consumers; delay or cancellation of orders for civil aircraft and changes in the amount or timing of US military spending; volatility in agricultural, construction, mining and industrial markets; exchange rate fluctuations; and changing oil prices.
Potential impact
Major or prolonged economic or financial market deterioration, including movements in exchange rates of key currencies or political uncertainty in one of our key markets, may significantly impact the Group’s operational performance and financial condition. Sustained market weakness could lead to impairment of assets or site closures. It may also materially impact our customers, suppliers and other parties with whom we do business.
Mitigation
The Group has a diversified portfolio of businesses across our markets providing some protection against individual market or country risks. Lead market indicators are regularly reviewed so that we can respond quickly to changing trading conditions. Our mitigation strategy includes:– planning, budgeting and forecasting processes
– flexible management of variable and fixed cost base, investment spending and working capital
– further diversification into other sectors which present new opportunities
– focused restructuring activities, where necessary, to respond to markets which have suppressed levels of economic activity
– regular review of our financial risk management processes, including foreign currency hedging.
Alignment of our debt to the principal currencies in which our revenues and cash flows are generated through cross currency swaps. A strong balance sheet.| Changes in 2015Market conditions are discussed in the Chief Executive’s review on pages 8 to 10 and the global markets section on pages 4 and 5. We have taken action to reduce costs in GKN Driveline Brazil as a result of weak automotive demand in Brazil, and in GKN Land Systems as a result of weak agricultural and chassis systems demand.We have extended our global aerospace footprint and customer base through the acquisition of Fokker with 21 new locations in nine countries. We have also further strengthened our automotive presence in key markets, including expanding facilities in China, Mexico and Poland.We are closely monitoring the implications of the UK’s potential exit from the EU. It is too early for us to assess exactly what an exit might mean for GKN, but a vote to leave the EU would probably lead to a period of economic and political uncertainty which could pose a risk to the Group. |
Read more about the Fokker acquisition on pages 20 and 21, and about the Group’s financial risk management processes regarding foreign currency exposures in note 19 to the financial statements
Joint ventures
Risk trend < >
Description
A sizeable portion of the Group’s profits and cash flows are generated by a small number of joint ventures. In these circumstances, there is an inherent risk that the objectives of the joint-venture partners in regard to the joint venture may diverge.
Potential impact
Such a misalignment of objectives could result in the Group’s inability to pursue its desired strategy. Consequently, the Group’s business and future results may be adversely affected.
Mitigation
The Group seeks to participate only in ventures in which its interests are complementary to those of its partners. Thorough pre-transaction due diligence procedures on any potential joint venture partner. Continual focus on sustaining strong relationships with joint venture partners.| Changes in 2015In 2014 we sold our stake in Emitec; there have been no significant changes in our ongoing revenues and profits generated by other joint venture partners. Relationships relating to our largest joint venture, Shanghai GKN HUAYU Driveline Systems Co Limited (SDS), remain strong and continue to develop positively. |
Read more about the Group’s joint ventures in note 13 to the financial statements
Laws, regulations and corporate reputation
Risk trend < >
Description
The Group is subject to applicable laws and regulations in the global jurisdictions and industries in which it operates. This includes certain territories where strong ethical standards may not be well established or where parts of the markets in which we operate are highly regulated. Regulations include those related to export controls, environmental and safety requirements, product safety, tax laws, intellectual property rights, competition laws and other ethical business practices.
Tax in particular is a complex area where laws and their interpretation change regularly, leading to potential uncertainty in tax exposures.
Potential impact
Non-compliance could expose the Group to fines, penalties, damage to reputation, suspension or debarment from government contracting or suspension of export privileges.
Mitigation
A strong culture of ‘doing the right thing’ which is regularly emphasised by senior management. Group-wide governance policies and procedures, ongoing compliance training and strong oversight. Ongoing monitoring of regulatory developments in major jurisdictions. Ongoing monitoring of employee concerns through our independent employee disclosure hotline.| Changes in 2015There have been no significant new regulations impacting the Group during 2015, but our markets continue to be subject to robust enforcement activities in relation to existing regulations, particularly in relation to vehicle safety.In response, we have taken steps to reinforce our commitment across the Group to ‘doing the right thing’ in all activities. This includes emphasising its importance to all senior managers at each of our divisional leadership conferences and completing the roll-out of the new GKN Code to remind employees of the standard of behaviour we expect. We continue to strengthen our risk management systems.As part of the ongoing integration of Fokker, we will align our risk and governance procedures taking account of specific regulatory risks associated with the acquired business.During 2015 we introduced a new online export control training course and, to date, 97% of the target audience has completed it. |
Read more about doing the right thing on pages 48 to 55
Technology and innovation
Risk trend /\
Description
Developing innovative technologies for our customers is critical to maintaining our differentiation and competitive advantage. We may lose market share or be subject to additional market pressure if we fail to develop innovative technologies that our customers want.
Potential impact
The failure to launch new products, new product applications or derivatives of existing products to meet customer requirements could have a significant impact on future profitable growth.
Mitigation
Regular assessment of market and technology trends and drivers. Close relationships and technical partnerships with customers. Divisional technology plans aligned to emerging and future trends and business strategy. Technical leadership and promotion of engineering best practice by our Engineering Fellowship. Regular review of current and future technology plans by the Group Technology Strategy Board. Consideration of technology plans as part of the Board’s annual strategy review. Focused investment in research and development.| Changes in 2015We have continued to invest in technology and develop internal capabilities as we aim to meet customers’ expectations for improving efficiency of aircraft, cars and other vehicles with solutions that are lighter and more fuel-efficient.We have continued to diversify into targeted areas of new technology including electrical wiring systems (through the acquisition of Fokker), additive manufacturing and vehicle electrification. |
Read more on how the Group continues to differentiate itself through technology in the Chief Executive’s and divisional reviews on pages 8 to 33
Acquisition integration
Risk trend /\
Description
The successful realisation of the anticipated benefits of acquisitions is dependent upon the successful integration of these businesses together with their post-acquisition performance.
Potential impact
A failure to integrate major acquisitions effectively could impact the business operations, result in unplanned integration or restructuring costs, or prevent the achievement of the anticipated benefits of the acquisition.
Mitigation
The Group has robust processes to manage detailed integration plans with regular reviews by divisional management, the Executive Committee and the Board. Post-investment reviews of all acquisitions.| Changes in 2015Following the acquisition of Fokker in October 2015, acquisition integration has been added as a principal risk.The Board has carefully reviewed the associated risks and considers them to be mitigated appropriately. The Group has considerable experience managing integration processes, and integration plans for Fokker are being regularly reviewed by divisional management, the Executive Committee and the Board. |
Read more on the acquisition of Fokker on pages 20 and 21
People capability
Risk trend /\
Description
The Group’s ability to deliver its strategic objectives is dependent upon the recruitment and retention of sufficiently qualified, experienced and motivated people.
It is critical for the Group to secure and maintain the relevant capabilities in specific geographical regions and disciplines in both existing markets and to support growth markets.
Potential impact
The failure to recruit, or the loss of, key personnel, and the failure to plan adequately for succession or develop the potential of employees may impact the Group’s ability to deliver its strategic and financial objectives.
Mitigation
Competitive reward packages together with focused training and development programmes. A culture that motivates individuals to perform to the best of their abilities. Strong succession and development programmes. Local initiatives designed to engage young people, promote science, technology, engineering and mathematics (STEM) subjects and encourage the next generation of young engineers.| Changes in 2015During 2015 we reviewed the reward schemes for our senior managers and introduced a medium-term incentive plan for managers below Board level to help mitigate our retention risk. We also made some minor changes to the bonus schemes for executive Directors. We hope to implement further changes in 2017.The recruitment and development of young engineering talent has continued to be a priority during 2015 with the reintroduction of our Group-wide International Graduate Programme.We also continue to develop resources and capabilities aligned to our growth markets. |
Read more in our sustainability report on pages 48 to 55
Product quality
Risk trend < >
Description
The quality and safety of our products are essential. We are exposed to warranty, product recall and liability claims in the event that our products fail to perform as expected.
In automotive, the industry in general has experienced higher levels of recalls in recent years and the OEMs often seek contributions from throughout the supply chain. This risk increases where:
vehicle manufacturers offer longer warranty periods more vehicles are being built on standard platforms, so a single quality issue can affect a large number of vehicles regulators and our customers are taking a more stringent approach to recalling vehicles, particularly if there is a possible safety issue.In aerospace, customers and regulators impose very strict product safety and quality obligations on all aircraft suppliers.
Potential impact
A product failure could result in serious losses, damaging GKN’s financial performance and potentially our reputation. In particular, the costs associated with vehicle or aircraft recalls can be significantly higher than the cost of simply replacing defective products.
Mitigation
High levels of quality assurance are embedded in robust manufacturing systems. Regular reporting and monitoring of quality performance based upon customer KPIs. Maintenance of critical parts lists. External agency quality reviews and certifications. Robust contract terms and conditions.| Changes in 2015Excellence in quality has continued to be a priority during the year with continuous improvement programmes ongoing in each of our businesses. We continue to monitor quality and delivery performance as viewed by our customers and strive to continuously improve product quality, safety and delivery key performance indicators.During 2015, the Executive Committee and Audit & Risk Committee reviewed the quality management system in each division and agreed future actions.A cross-divisional Quality Committee has been formed to share best practice and co-ordinate Group-wide quality management projects. |
Read more about our continuous improvement culture on page 53
Contract risk
Risk trend < >
Description
Across our businesses an increasing percentage of revenues are generated through contracts which are long-term in nature and subject to complex terms and conditions. Contracts include commitments relating to pricing, quality and safety, and technical and customer requirements.
Both our aerospace and automotive businesses enter into design and build contracts. These are complex contracts that are often long-term, so it is important that the contracted risk is carefully managed.
Specifically within GKN Aerospace, the Group has risk and revenue sharing partnerships with key engine manufacturers. These contain formalised risk-sharing arrangements relating to risks which are not always within GKN management control.
Potential impact
A failure to fully understand contract risks or to anticipate technical challenges and estimate costs accurately at the outset of a contract can lead to unexpected liabilities, increased outturn costs and reduced profitability.
Mitigation
Robust bid and contract management processes including thorough reviews of contract terms and conditions, contract- specific risk assessments and clear delegation of authority for approvals. Continuous review of contract performance.| Changes in 2015During the year we reviewed our contract management processes in each division to ensure they continue to be effective in response to the increased risks associated with more complex design and build contracts. Processes have been further strengthened to focus on key areas of contract risk. |
Read more about key examples of new business wins in 2015 in the divisional business reviews on pages 16 to 33
Programme management
Risk trend < >
Description
Many of the programmes entered into by the Group are complex and long-term and are subject to various performance conditions which must be adhered to throughout the programme. The management of such programmes brings risks related to:
delays in product development or launch schedules failure to meet customer specifications or predict technical problems inability to manufacture on time for the start of production or to required production volumes dependence on key or customer-nominated suppliers failure to manage effectively internal or customer-driven change inability to forecast accurately and to manage costs.Potential impact
Ineffective programme management could result in damage to customer relationships or cancellation of a contract resulting in claims for loss and reputational damage.
Poor performance against a contract could also undermine the Group’s ability to win future contracts and could result in cost overruns and significantly lower returns than expected.
Mitigation
Embedded programme management, including investment phasing and product testing activities. Periodic impairment reviews of capitalised development costs, including formal review at half year and year end. Ongoing review and approval of key programmes by the Executive Committee and the Board. Periodic inspection of programmes by customers.| Changes in 2015During the year we thoroughly reviewed our risk management systems in this area, further strengthening our processes, organisation and training programmes where required. This will continue as an area of focus during 2016. |
Health and safety
Risk trend < >
Description
Safety is our number one priority. We manage safety carefully through extensive Group-wide processes, yet we recognise we can never be complacent. Therefore we continue to include this as a principal risk and an area which will always be a priority for GKN.
Potential impact
A serious accident in the workplace could have a major impact on employees as well as their families, colleagues and communities. Such an incident could also result in legal claims, reputational damage and financial loss.
Mitigation
Consistent Group-wide application of health and safety programmes. Regular reporting and monitoring of health and safety performance. 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. Maintenance of insurance for costs associated with injury-related actions or claims against the Group.| Changes in 2015The Group’s AFR and ASR again improved during the year and we continued to focus on near-miss reporting as a key leading indicator of our health and safety performance.Hazard awareness and risk assessment programmes continued with a particular focus on identifying and addressing potential catastrophic hazards. |
Read more about health and safety on pages 50 and 51
Information systems resilience
Risk trend < >
Description
The Group could be impacted negatively by information technology security threats including unauthorised access to intellectual property or other controlled information. Interruptions to the Group’s information systems could also adversely affect its day-to-day operations.
The inherent security threat is considered highest in GKN Aerospace where data is held in relation to civil aerospace technology and controlled military contracts.
Potential impact
A major disruption to information systems could have a significant adverse impact on the Group’s operations or its ability to trade. The loss of confidential information, intellectual property or controlled data could result in fines and damage to the Group’s reputation, and could adversely affect its ability to win future contracts.
Mitigation
Formal risk-based governance framework including dedicated IT security policies and related compliance processes, ongoing risk reviews, IT security awareness training and robust systems and processes to manage access, information assets, threats and vulnerabilities. External support and benchmarking of best practice information systems security and resilience. Ongoing development of appropriate incident detection and response plans and capabilities. Disaster recovery contingency plans which are regularly tested including data centres where the risk is deemed to be the greatest. Executive Committee oversight of IT security and assurance matters.| Changes in 2015The security of our information systems has continued to improve to address potential threats impacting both our business and our industries more generally. We increased the number of penetration tests completed on our systems and continued to improve security standards across the Group.In December, a senior former British security and intelligence officer briefed the Chief Executive’s Council on the increasingly global perspective of the cyber security threat. |
Business continuity
Risk trend < >
Description
A major disruption to internal facilities or the external supply chain could be caused by natural disaster or damage, or destruction of a key facility or asset.
The Group has a small number of facilities and assets which are key to maintaining production levels for major customers and internal service levels.
In addition, certain of the Group’s businesses are exposed to a higher inherent risk of natural disasters because of their geographical locations.
Potential impact
A sustained disruption to internal facilities or production could result in major operational disruption, a significant adverse impact on our ability to meet customer requirements and additional contractual liabilities, and could have a consequential impact on financial performance.
Mitigation
Ongoing maintenance and replacement programmes for key assets and facilities. Flexible sourcing arrangements for key supplies. Effective supply chain management to ensure appropriate inventory levels are maintained. Targeted incident response and business continuity plans.| Changes in 2015There has been no significant change in the inherent risk profile during 2015. All divisions continue to focus on risk mitigation, including regular testing of business continuity and disaster recovery plans, ongoing reviews of supplier dependence and critical assets, and prioritisation of capital investment. |
Pension funding
Risk trend < >
Description
The Group operates a number of defined benefit pension plans with aggregate net liabilities of £1,558 million at 31 December 2015. These plans are exposed to the risk of changes in asset values, discount rates, inflation and mortality assumptions.
Potential impact
Increases to the pension deficit could lead to a requirement for additional cash contributions to these plans, thereby reducing the amount of cash available to meet the Group’s other operating, investment and financing requirements.
Mitigation
Close co-operation with scheme fiduciaries regarding management of pension scheme assets and liabilities, including asset selection and hedging actions. Alternative funding and risk mitigation actions are implemented where appropriate.| Changes in 2015During the year, against an economic backdrop which has seen pension liabilities remain at a high level versus historical norms, driven by the exceptionally low yields on long-term bonds, we have continued to undertake pension risk reduction initiatives. These include extending a partial buy-in transaction in the UK and finalising a ‘pension increase exchange’ exercise to further mitigate inflation risk.The Group continues to have a reasonable degree of visibility over the range of short- to medium-term funding cash flows, but will continue to monitor the impact of market volatility ahead of the planned April 2016 funding valuation in the UK. |
Read more about the Group’s pension arrangements in note 24 to the financial statements
Related party transactions
In the ordinary course of business, sales and purchases of goods take place between subsidiaries and equity accounted investment companies priced on an arm’s length basis. Sales by subsidiaries to equity accounted investments in 2015 totalled £35 million (2014: £45 million). The amount due at the year end in respect of such sales was £12 million (2014: £12 million). Purchases by subsidiaries from equity accounted investments in 2015 totalled £7 million (2014: £5 million). The amount due at the year end in respect of such purchases was £2 million (2014: £1 million).
At 31 December 2015, a Group subsidiary had ?10 million payable to equity accounted investments companies in respect of unsecured financing facilities bearing interest at 1 month LIBOR plus 1/8% (2014: £7 million).
During the year, a child of a member of key management was employed by a subsidiary company. The remuneration expense during the period of employment on an arm’s length basis amounted to £2,336 (2014: £6,815).
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 56 and 57, confirm that to the best of his/her knowledge:
• the Group financial statements, prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole and
• the strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
In addition, the Directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
Approved by the Board of GKN plc and signed on its behalf by
Mike Turner CBE
Chairman
22 February 2016
In accordance with DTR 6.4.2, the Company announces that its "home member state" (as defined for the purposes of the Financial Conduct Authority's Disclosure Rules and Transparency Rules and the Transparency Directive) is the United Kingdom.
CAUTIONARY STATEMENT
This announcement contains forward looking statements which were made in good faith based on information available at 22 February 2016, being the date of approval of the 2015 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.
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