Annual Report and Accounts 2014
GKN plc Annual Report and Accounts 2014
ENGINEERING
THAT MOVES THE WORLD
ENGINEERING
THAT MOVES THE WORLD
MOVES THE WORLD
MOVES THE WORLD
ENGINEERING
THAT MOVES THE WORLD
ENGINEERING
THAT MOVES THE WORLD
→ Visit our website for more information www.gkn.com
Contact information
GKN is a global engineering business. Every day we
drive the wheels of hundreds of millions of cars,
we help thousands of aircraft to fly, we deliver the
power to move earth and harvest crops, and we
make essential components for industries that
touch lives across the globe.
Engineering
that moves
the world
Visit our website for more information
www.gkn.com
GKN plc
Registrar
Tel +44 (0)1527 517715
Fax +44 (0)1527 517700
Tel 0871 384 2962*
(+44 121 415 7039 from outside UK)
London Office
50 Pall Mall
London
SW1Y 5JH
Tel +44 (0)20 7930 2424
Fax +44 (0)20 7930 3255
Fax 0871 384 2100
(+44 1903 833113 from outside UK)
PO Box 55
Ipsley House
Ipsley Church Lane
Redditch
Worcestershire
B98 0TL
enquiries@gkn.com
www.gkn.com
Registered in England No. 4191106
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
www.equiniti.com
www.shareview.co.uk
* Calls to this number cost 8p per minute plus network extras.
Lines are open 8.30 am to 5.30 pm, Monday to Friday,
excluding bank holidays.
This annual report is available on our website.
Cautionary statement
This annual report and accounts has been prepared for the members of GKN plc and should not be relied upon
by any other party or for any other purpose. It 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.
Strategic Report
Global
footprint
Page 04
Chairman’s
statement
Page 06
Our
strategic
framework
Page 08
Key
performance
indicators
Page 14
Chief
Executive’s
review
Page 16
Governance
Financial Statements
Other Information
Contents
STRATEGIC REPORT
GKN at a glance
2014 at a glance
Global footprint
Chairman’s statement
Our strategic framework
Our business model
Our business model / Global markets
Key performance indicators
Chief Executive’s review
Business review / Group performance
Business review / GKN Aerospace
Business review / GKN Driveline
Business review / GKN Powder Metallurgy
Business review / GKN Land Systems
Business review / Other financial information
Risk management
Sustainability report
02
03
04
06
08
10
12
14
16
20
22
26
30
34
38
42
52
GOVERNANCE
Board of Directors
Chairman’s introduction to governance
Corporate governance
Nominations Committee report
Audit Committee report
Directors’ remuneration report
Additional information
Statement of Directors’ responsibilities
60
62
63
70
72
78
99
102
FINANCIAL STATEMENTS
Independent auditors’ report (Group) Group financial statements Independent auditors’ report (Company) Company financial statements Group financial record 103
111
158
160
163
OTHER INFORMATION
Key subsidiaries and joint ventures Shareholder information Contact information 164
166
IBC
Pages 60 to 102 comprise the Directors’ report.
GKN plc Annual Report and Accounts 2014
01
STRATEGIC REPORT
GKN at a glance
GKN is a global engineering business – we design,
manufacture and service systems and components
for original equipment manufacturers around
the world.
We focus on innovation and delivering exceptional
customer service to create a strong business with
significant opportunities for growth.
51,400 33
employees
countries
GKN AEROSPACE
A leading tier one supplier of aerostructures and
engine products and systems to the global
aerospace industry.
GKN POWDER METALLURGY
The world’s largest manufacturer of sintered
components and a leading producer of metal
powder.
3
markets
divisions
GKN DRIVELINE
The leading tier one supplier of automotive
driveline systems and solutions to the world’s
leading vehicle manufacturers.
GKN LAND SYSTEMS
A leading supplier of power management products
and services for agricultural, construction, mining
and industrial equipment.
→ See pages 22 – 37 for more information on our divisions
02 GKN plc Annual Report and Accounts 2014
4
Strategic Report
Governance
Financial Statements
Other Information
2014 at a glance
Financial highlights
Statutory basis
Sales
Profit before tax
Earnings per share
£6,982m
£221m
10.3p
Management basis*
Sales
Profit before tax
Earnings per share
2013: £7,136m
£7,456m
2013: £7,594m
2013: £484m
2013: 24.2p
£601m
29.0p
2013: £578m
2013: 28.7p
* See page 21 for details on measurement and reporting of performance on a management basis.
• Sales on a management basis increased 4% organically; decline of 2% after
£403 million adverse currency translation impact.
• Trading margin improved to 9.2%.
• Total dividend increased 6% to 8.4 pence per share.
• Net debt of £624 million, £108 million lower than last year.
Management sales
Management trading profit
GKN Aerospace
£2,226m
GKN Aerospace
£277m
GKN Driveline
£3,444m
GKN Driveline
£280m
GKN Powder Metallurgy £916m
GKN Powder Metallurgy £101m
GKN Land Systems
£776m
GKN Land Systems
Other Businesses
£94m
£7,456m
£44m
£687m*
* Including corporate costs and Other Businesses.
GKN plc Annual Report and Accounts 2014
03
STRATEGIC REPORT
Global footprint
GKN is a global business with manufacturing facilities,
service centres and offices in over 30 countries across
five continents. This strong global footprint enables
us to serve an international customer base and
creates a platform from which we can access fastgrowing markets.
51
North America
manufacturing
locations
Operating in close proximity to our customers helps
optimise our positions in major supply chains and
is an important factor in developing new technologies
in partnership with customers.
A global
engineering
company
Sales by region
UK
Europe (excluding UK)
Americas
Asia Pacific and Africa
£7,456m
Employees by region*
13%
36%
37%
14%
UK
6,300
Europe (excluding UK) 18,200
Americas
15,400
Asia Pacific and Africa 11,500
51,400
* Including subsidiaries and joint ventures.
→ Visit www.gkn.com/our locations for more information
04 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
29
Other Information
Asia
Europe
63
Financial Statements
manufacturing
locations
1
manufacturing
locations
Africa
South America
5
manufacturing
locations
manufacturing
location
1
Australia
manufacturing
location
GKN plc Annual Report and Accounts 2014
05
STRATEGIC REPORT
Chairman’s statement
Continued progress
“We are a long term business with the
right strategy.”
MIKE TURNER CBE
CHAIRMAN
Results and dividend
2014 was another year of progress for GKN. We have delivered a good
set of results. I am particularly pleased with the results because
in some respects 2014 was not a straightforward year: we faced
considerable currency headwinds with sterling unusually strong
against all major currencies for much of the year, the agricultural
market fell sharply and the military aerospace market continued
to decline. Despite this, we have grown both our organic sales and
overall profit. This shows the resilience of our business model and
strength of our strategy.
We have continued with our progressive dividend policy and are
recommending a final dividend of 5.6 pence per share, making a
total of 8.4 pence per share for the year, an increase of 6% over the
prior year. Over the course of the past five years we have seen the
dividend rise 68% from 5.0 pence per share in 2010 to 8.4 pence in
respect of 2014.
→ See pages 20-41 for more information on our financial results
06 GKN plc Annual Report and Accounts 2014
Our strategy
Our strategy is central to the year’s good results. We successfully
positioned our automotive businesses to grow above the market and
in 2014 they grew 8% organically compared to market growth of 3%.
We have repositioned our aerospace business so that 73% is now in
the higher growth commercial sector, compared to just 42% in 2007.
Following the successful acquisition and integration as a whole of
Volvo Aero, we have a leading aerospace engine systems business
with excellent exposure to some fast-growing platforms. In the
medium term our aerospace business is very well positioned to take
advantage of growing platforms such as the Boeing 787, the A350
and the F-35 Joint Strike Fighter.
Each year we seek to improve our strategy process. In 2014 we
refined how we review and develop the Group’s strategic objectives
by increasing our focus on long term market, economic and
technology trends. There are some exciting changes ahead of us,
including the increasing electrification of vehicles and the use of
additive manufacturing in aerospace. We continue to invest to take
advantage of the opportunities presented by these changes. Our
strategic objectives are described in further detail on page 9.
Strategic Report
We did not make any major acquisitions in 2014, taking a disciplined
approach to potential opportunities and choosing to focus on
thoroughly integrating our engine systems business following the
acquisition of Volvo Aero in 2012. During 2014 we were awarded
investment grade status with all three of the major rating agencies
and continued to pay down our debt. We are now in a strong
position to make further acquisitions, but will continue to take a
focused approach.
Sustainability and risk
GKN has a long history of behaving ethically; of doing the right
thing. We recognise that we continuously need to ensure that we set
the right tone from the top and engage with our people to ensure
that they understand the behaviours that we expect of them. For
this reason we revised the GKN Code during 2014, making it clearer
and more engaging, and updating it to bring additional focus to
areas such as diversity and inclusion, and quality. We have also
strengthened our diversity and inclusion programme, which is visibly
supported by the Board, and we have worked hard to improve quality
and product safety through the ‘Voice of the Customer’ initiative
described by Nigel on page 18.
We have well developed risk management processes, but are not
complacent and note the emphasis on risk management in the
revised 2014 UK Corporate Governance Code. We continue to work
to improve our risk management processes and control systems. We
have described our work in this area in greater detail on pages 42-51.
Governance
Financial Statements
Other Information
ensure that the Board continues to have a good feel for
what is happening in each division. The Board has real
diversity of experience and technical expertise, and the
Board dynamic continues to be excellent with all Directors
making a valuable contribution.
Our people
Meeting a wide range of customer expectations is never easy,
but GKN’s culture is to persevere and through the commitment
of our people we have delivered a good set of results. They have
again demonstrated GKN’s resilience and ability to grow above
the market. I would like to take this opportunity to thank them for
all that they have done.
I have written in the past about a pressing need for a global talent
pool that is well stocked with young people with the necessary
scientific and mathematical skills. That remains the case and I am
glad to report that around the world GKN continues to engage in
hundreds of local initiatives designed to encourage young people
to choose engineering as a possible future career.
Looking forward
As we enter 2015, political and economic uncertainty will continue
to affect GKN. But we are a long term business with the right
strategy. I am therefore confident that the Group will continue to
grow and generate sustainable returns for our shareholders during
2015 and beyond.
The Board
Adam Walker joined the Board at the start of 2014 and quickly became
an effective member of the team. I am confident that he will be an
asset to the Company. On 31 December 2014 Marcus Bryson CBE
retired from his role as Chief Executive Aerospace and Land Systems
and from the Board. Marcus joined GKN in 1994 and since then
his contribution to the creation of the GKN we see today, and in
particular our aerospace division, has been significant. He fully
deserves the CBE recently awarded for his contribution to the UK
aerospace industry. We have not replaced Marcus on the Board for
now and have chosen instead to strengthen the Executive Committee
with the appointment of Kevin Cummings, CEO GKN Aerospace,
Peter Oberparleiter, CEO GKN Powder Metallurgy, and Philip Swash,
CEO GKN Land Systems. They will regularly attend Board meetings to
Mike Turner CBE
Chairman
GKN plc Annual Report and Accounts 2014
07
STRATEGIC REPORT
Our strategic framework
We aim to create long term and sustainable
shareholder value in the form of steadily growing
earnings and dividends through the delivery of
growth in sales, rising profitability and increasing
return on invested capital.
We have excellent positions in long term global
growth markets and build strong relationships with
international original equipment manufacturers (OEMs)
and prime contractors. To create value we have five
strategic objectives.
Creating
sustainable value
→ See pages 10 – 11 for more information on our business model
08 GKN plc Annual Report and Accounts 2014
Strategic Report
Our five strategic objectives
1
LEADING IN OUR
CHOSEN MARKETS
2
LEVERAGING A
STRONG GLOBAL
PRESENCE
3
DIFFERENTIATING
OURSELVES
THROUGH
TECHNOLOGY
4
DRIVING
OPERATIONAL
EXCELLENCE
5
SUSTAINING ABOVE
MARKET GROWTH
We aim to succeed in the long term
by being the leader in our chosen
markets. We are selective in our
focus and work in partnership with
our customers to deliver the most
innovative and high quality products
and systems.
Governance
Other Information
Our financial goals
Our financial goals are
based on a balanced
approach between sales
growth, margin and return
on invested capital (ROIC).
GKN is an international business with
a global footprint through which we
serve our customer base. By further
developing our geographic spread
we will continue our expansion into
growing markets and build longlasting and mutually beneficial
customer relationships that increase
our market share.
GROWTH
ABOVE MARKET
GKN delivers innovative technologies
that help our customers stay ahead
in their markets and enable us to
maintain our competitive edge,
ensuring we remain in higher value
markets. We work with our customers
to develop new technologies,
driven by global trends such as fuel
efficiency, the low-carbon agenda,
electrification, urbanisation and
population growth.
We have a strong culture of
operational excellence and, through
continuous improvement processes,
we focus on delivering exceptional
quality and customer service.
At the same time, we aim to
be an employer of choice with
a high-performance culture,
motivated people and outstanding
leaders, always ensuring that safety
is paramount in all our locations.
Financial Statements
DELIVERING
STRONG
FINANCIAL RETURNS
TRADING MARGIN
8-10%
ROIC
20%
INCREASING CASH FLOW,
EPS AND DIVIDENDS
We believe that growth, at a
manageable rate, is essential to
the creation of shareholder value.
Market leadership, global presence,
innovative technology and operational
excellence combine to help deliver
growth above our markets.
→ See pages 14 – 15 for more information on our key performance indicators
GKN plc Annual Report and Accounts 2014 09
STRATEGIC REPORT
Our business model
Our business model supports our strategy
to create long term and sustainable value
for shareholders. It highlights how we
combine our advanced engineering value
chain in global markets with our strong core
competencies and clear values.
Our business
model
Strong core competencies
GKN’s extensive industry know-how, engineering capability and strong customer relationships are
central to our value chain and ensure we are well positioned to sustain above market growth and
deliver strong financial returns.
Industry know-how
Understanding our markets and working
closely with our customers, academic
institutions and government agencies to
identify future technology requirements
gives us the expertise to deliver marketleading solutions and provides continued
opportunities for sustainable growth.
Engineering capability
We are committed to developing
and maintaining a diverse range of
engineering talent across the Group and
continually investing in technology to
enable the efficient design and delivery of
high quality, innovative solutions.
→ See pages 8 – 9 for more information on our strategic framework
10
GKN plc Annual Report and Accounts 2014
Strong customer relationships
We work in partnership with our
customers, wherever they are in the world,
to deliver customer-valued innovation and
exceptional service. Listening to feedback
and constantly striving to improve our
products and processes helps us build
and maintain these strong relationships.
Strategic Report
Governance
Financial Statements
Other Information
DESIGNING NEW PRODUCTS
AND SOLUTIONS
Investment in technology, together
with an understanding of market
trends and customer needs,
helps GKN create innovative high
quality products that are efficient,
sustainable and cost effective for
our customers, and that deliver
benefits to end consumers.
DELIVERING HIGH
QUALITY PRODUCTS
We deliver high quality products
to the right place at the right time
all over the world. These products
meet specific consumer needs,
which help us to build strong
customer relationships.
CLEAR VALUES
• By our people
• As a business
• In our world
WINNING NEW BUSINESS
Our strong engineering capability,
global footprint and innovative
solutions enable us to win
business by offering value to our
customers.
→ P.52–59
STRONG CORE
COMPETENCIES
• Industry know-how
• Engineering capability
• Strong customer
relationships
→ P.10
APPLYING LEAN MANUFACTURING
We focus on continuous
improvement and reducing waste
in our production processes around
the world, as well as providing a
safe working environment and
minimising our impact on our
environment.
DELIVERING
STRONG
FINANCIAL RETURNS
GLOBAL MARKETS
• Aerospace
• Automotive
• Land systems
→ P.12–13
SOURCING MATERIALS AND
PRODUCTS
Our well-developed supply chain
provides GKN with a reliable
source of key raw materials and
components, and is supported
by processes that assist the
decision to make in-house or
buy externally.
GKN plc Annual Report and Accounts 2014
11
STRATEGIC REPORT
Our business model / Global markets
The world population is expected to reach over
nine billion by 2050, an increase of more than
two billion from today’s level, with growth
mainly in urban areas.
GLOBAL MARKETS
• Aerospace
• Automotive
• Land systems
Global markets
Population growth drives change across our markets: increased
demand for flights and larger aircraft, changes in the types of car
people drive and the number of cars on the roads, a requirement
for increased farming efficiency to help double global agricultural
production, as well as infrastructure development in cities. All of
this influences our product development and offers significant
growth opportunities.
There is also the continual drive to improve the fuel efficiency
of aircraft, cars and other vehicles, while at the same time
increasing manufacturing efficiency and product safety. Demand
for fuel-efficient solutions remains high due to concerns over
CO2 emissions and air quality. Advanced electric and hybrid
alternatives are replacing traditional mechanical processes
and GKN has specific expertise in electric and hybrid vehicle
technology and electrically-driven machinery which help our
customers meet this challenge.
→ See pages 24, 28 and 36 for more information on our markets
12
GKN plc Annual Report and Accounts 2014
Manufacturers are increasingly opting for lightweight designs
and materials. Composite aerostructures and engine components
are already relatively common on new platforms, while in the
automotive industry, components are being designed to reduce
weight and size. Development work is underway in both sectors
to increase the opportunities for lightweight materials. GKN has
significant know-how in lightweight materials and increasingly
in advanced production technologies such as ‘Design for Powder
Metallurgy’ and additive manufacturing that offer the opportunity
to optimise product design.
9.6bn
Global population
by 2050(a)
Strategic Report
Governance
Financial Statements
Other Information
Our markets
Aerospace
Key market drivers
• Continued growth in air
passenger traffic.
• Development of lightweight
materials that improve
aircraft efficiency.
• Worldwide defence budgets.
• Environmental impact
reduction programmes.
Recent trends
• The development of new generation aircraft
and aero engines that are quieter and more
fuel-efficient.
• Commercial aircraft sales backlog at the principal
OEMs is at an historically high level.
• Production rates for many commercial single aisle
and the new generation of twin aisle aircraft are
rising in response to increased demand.
• Global competition among aircraft manufacturers
and supply chain continues to emerge.
• Focus on robustness of supply chain from OEMs
and willingness to insource if necessary.
• Cutbacks in military expenditure in the US.
Outlook
• Growth in the commercial aerospace market
is expected to continue but this will be offset
in the short term by a further decline in the
military sector.
• World aircraft production is expected
to grow at 2-3% per annum over the next
five years*.
• Airbus and Boeing forecast a global demand
of between 31,000 and 38,000 large
commercial aircraft over the next 20 years.
Airbus and Boeing deliveries in 2014: 1,352
Airbus and Boeing commercial backlog: 12,175
* Source: GKN Aerospace forecast.
Automotive
Key market drivers
• Increased affluence in
developing markets.
• Demand for more fuel-efficient
vehicles and lower tailpipe
emissions.
• Demand for personal mobility in
emerging markets.
• Customer preference for quality
and safety.
• Move by OEMs towards vehicle
platforms that support larger
build volumes.
Recent trends
• Global light vehicle production increased by 3% in
2014 to 87.4 million vehicles, whilst sales of light
vehicles rose to 86.3 million vehicles.
• China and North America saw the largest
production growth in 2014, while Japan’s output
for the year was better than expected following
sales tax changes.
• Production in Europe increased 3% due to some
recovery in the Western European market, which
was partially offset by declines in Russia and the
rest of Eastern Europe.
• Production in India and Brazil was affected by
economic problems resulting in low domestic
demand, and output fell in South Korea
and Southeast Asia.
Outlook
• External forecasts indicate that global
vehicle production in 2015 will increase
2% to 89.5 million vehicles.
• The fastest growth is expected in China (7%)
and India is forecast to increase by 6%.
• North America will grow at a slower rate than
2014 and Europe is expected to remain flat.
Light vehicle production in 2014: 87.4m
Expected growth in global vehicle production 2014-2019: 16.2%
Source: IHS Automotive.
Land systems
Key market drivers
• Demand for more efficient
agricultural equipment to
improve yields and meet an
increased demand for food as
populations grow.
• Regulatory and economic
pressures to increase energy
efficiency and reduce
CO2 emissions.
• Infrastructure development and
global demand for commodities.
• Need for significantly increased
safety, operational efficiency
and reliability.
Recent trends
• After peaking in 2013, global demand for
agricultural equipment declined in 2014.
• The construction equipment market in China is
declining due to high stock levels and difficult
access to credit.
• Industrial markets saw growth in the wind energy
and the material handling segments, while marine
applications saw a small decline.
• The largest land systems OEMs are increasingly
adopting a global approach to equipment design
and component sourcing.
Outlook
• Agricultural equipment markets are
expected to decline further in 2015.
• Construction markets will show low growth
in the US and Europe but are expected to
decline further in China.
• The mining equipment market is expecting
further pressure on commodity prices and
demand constraint in 2015.
• Most industrial markets will remain flat with
low growth in North America and China;
wind energy markets will return to growth,
especially offshore.
Global demand for agricultural equipment in 2018: $216bn(b)
Growth in world urban population by 2050: 2.5bn(c)
Source: (a) UN World Population Prospects: The 2012 Revision.
(b) Freedonia Group, World Agricultural Equipment Market, 2014.
(c) UN World Urbanisation Prospects: The 2014 Revision.
GKN plc Annual Report and Accounts 2014
13
STRATEGIC REPORT
Key performance indicators
GROWTH
ABOVE MARKET
GKN uses the following indicators of
performance to help measure progress
in delivering our strategy.
DELIVERING
STRONG
FINANCIAL RETURNS
TRADING MARGIN
8-10%
ROIC
20%
INCREASING CASH FLOW,
EPS AND DIVIDENDS
Financial KPIs
Sales growth
Trading margins(b)
Return on average invested
capital (ROIC)(b)
£7,456m 9.2%
2014
£7,456m
2014
2013
£7,594m
2013
2012
2011
2010
£6,904m
£6,112m
£5,429m
17.7%
9.2%
8.7%
Free cash flow
Earnings per share (EPS)(b)
£234m
29.0p
2014
17.7%
2014
2013
17.3%
2013
2012
8.0%
2012
18.0%
2012
2011
7.7%
2011
18.3%
2011
2010
7.6%
2010
17.0%
£234m
£346m
£225m
£147m
2010 £188m
2014
29.0p
2013
28.7p
2012
2011
2010
26.3p
22.6p
20.7p
Method of calculation
Management sales(a) measured
both in absolute terms
and on an underlying basis
(i.e. excluding the effects
of currency translation,
acquisitions and divestments)
relative to the prior year.
Management trading profit(a)
as a percentage of management
sales(a).
Ratio of management trading
profit(a) to average total net
assets including the appropriate
share of joint ventures but
excluding current and deferred
tax, cash, borrowings, postemployment obligations and
derivative financial instruments.
Cash flows from operating
activities (excluding special
pension payments and before
working capital refinancing
for Volvo Aero in 2012)
after capital expenditure
and including fixed asset
disposal proceeds, receipts of
government capital grants and
refundable advances and noncontrolling interest dividends.
Management earnings for the
Group (as set out in note 3(a) to
the financial statements) divided
by the weighted average number
of ordinary shares in issue
(excluding treasury shares).
To achieve medium term trading
margins of between 11% and
13% for GKN Aerospace, 8% and
10% for GKN Driveline, 9% and
11% for GKN Powder Metallurgy
and 8% and 11% for GKN Land
Systems, giving an overall
Group trading margin of between
8% and 10%.
To achieve ROIC at both Group
and divisional level which
exceeds the weighted average
cost of capital of the Group
(12% as a pre-tax threshold
and between 9% and 10% on a
post-tax basis). The Group target
is to achieve ROIC of 20% or
above (pre-tax).
To generate positive free cash
flow sufficient to cover dividend
payments and provide funding
resources to support organic
and acquisitive earnings growth,
and reduce indebtedness.
To achieve absolute growth in
EPS each year and in the longer
term, recognising the nature and
cyclicality of our major markets,
to achieve average annual
compound growth of at least 6%.
The Group trading margin in
2014 of 9.2% reflects good
performance in all four divisions
relative to their markets. The
divisional trading margins were:
GKN Aerospace – 12.4%; GKN
Driveline – 8.1%; GKN Powder
Metallurgy – 11.0%; and GKN
Land Systems – 5.7%.
Group ROIC of 17.7% in 2014
reflects improved profitability
partially offset by an increased
asset base. Divisional ROIC
performance was as follows:
GKN Aerospace – 17.7%; GKN
Driveline – 19.3%; GKN Powder
Metallurgy – 21.8%; and GKN
Land Systems – 11.4%.
Free cash flow amounted to
£234 million, following a
continued focus on operating
cash generation throughout
2014 which included an increase
in capital expenditure and
research and development
investment, and repayment of a
government refundable advance.
Management EPS in 2014 was
29.0 pence compared with
28.7 pence in 2013, an increase
of 1%.
Target
To achieve long term growth
rates at both Group and
divisional level (in absolute
terms and on an underlying
basis) in excess of the growth in
our major automotive, aerospace
and land systems markets.
2014 performance
Group management sales(a)
declined by 2% on an absolute
basis and grew by 4% on an
organic basis. The corresponding
figures for GKN Aerospace were a
decrease of 1% and an increase of
3%; for GKN Driveline increases of
1% and 8% respectively; for GKN
Powder Metallurgy a decrease of
2% and an increase of 5%; and for
GKN Land Systems decreases of
14% and 10% respectively.
→ See pages 20 – 41 for more information on our financial results
(a) Management sales and management trading profit are defined on page 21.
(b) 2012 restated for impact of IAS 19 (revised).
14
GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Non-financial KPIs
Non-financial KPIs help measure the sustainability of our business and progress towards operational
excellence. We strive to operate in a safe, efficient and ethical manner, and at the same time aim to be an
employer of choice and make a positive impact on the environment and the communities in which we operate.
More information can be found in the sustainability report on pages 52-59.
Health and safety performance
Per 1,000 employees
Method of calculation
Accident frequency rate (AFR) measured as the number of lost time accidents per 1,000 employees and
accident severity rate (ASR) measured as the number of days/shifts lost due to accidents and occupational
ill health per 1,000 employees.
Target
Zero preventable accidents.
2014 performance
AFR reduced to 1.3 (2013: 1.6). However ASR saw a small increase to 46 (2013: 40), primarily due to specific
occupational health issues of three employees in North America. More information can be found on page 54.
Dividend per share
Environmental performance
8.4p
Main impacts on the environment
Method of calculation
2014
8.4p
7.9p
2013
7.2p
2012
2011
2010
6.0p
5.0p
Amount declared as payable by
way of dividend divided by the
number of ordinary shares in
issue (excluding treasury shares).
Energy consumption and associated CO2 emissions, waste generation, waste recycled and water
2014
[00]
consumption measured on a divisional basis per unit of production and against sales in GKN Aerospace.
2013Target
3.2%
Improved year-on-year performance across all KPIs, with a 15% improvement in energy efficiency from
20122009 to 2014.3.1%
2014 performance
Environmental performance in 2014 was in line with expectations, with most divisions achieving improved
results in energy consumption, CO2 emissions, waste and water consumption. Group energy efficiency
decreased by 4% over 2013, primarily due to currency fluctuations depressing statutory sales, but improved
by 16% since 2009, meeting our target of a 15% improvement over the five years. See page 58 for more
information on our environmental performance.
Governance
Online compliance training
Completion of mandated compliance training on anti-bribery and corruption, competition law and IT security.
Method of calculation
Measured as a percentage completion against a pre-defined target audience of employees.
Target
100% training completion for all employees within the target audience.
2014 performance
To maintain a progressive
dividend policy aligning
dividends with the long term
trend in management earnings
and reflecting growth in
earnings per share and free
cash flow generation.
Dividend per share increased
in 2014 reflecting positive
earnings and cash performance.
The dividend for the year, at
8.4 pence, is covered 3.4 times
by management earnings and
1.7 times by free cash flow.
• 98% (7,284 employees) of the target audience have to date completed our online anti-bribery training
(2013: 84%; 6,302 employees).
• 98% (1,575 employees) of the target audience have to date completed our online competition law
training (2013: 98%; 1,594 employees).
• 85% (14,191 employees) of the target audience have to date completed our online IT security training
(2013: 37%; 6,273 employees).
Our people
Management turnover
Method of calculation
Management turnover is a measure of success in retaining our leaders and achieving our goal of being
an employer of choice. Voluntary turnover of management employees, which excludes compulsory
redundancies, terminations and retirements, is calculated as a percentage of total subsidiary management
level employees.
Target
Voluntary turnover of less than 5% of management employees.
2014 performance
In 2014, voluntary management turnover was 4.7% (2013: 6.1%), bringing us into our target range of less
than 5%.
GKN plc Annual Report and Accounts 2014
15
STRATEGIC REPORT
Chief Executive’s review
Moving forward
NIGEL STEIN
Chief Executive
The Group continued its progress in 2014 helped by good growth in
our automotive and aerospace businesses which more than offset
the headwinds of adverse currency translation and difficult land
systems markets. Although management sales declined to
£7,456 million, this represented underlying, organic growth
of 4%. Earnings per share increased by 1% and the Board has
recommended an increase to the dividend of 0.5 pence.
Our aim is to create long term and sustainable shareholder value
through a balanced approach with three elements: growth, trading
margin and return on invested capital.
We look to grow sales ahead of our markets, have targeted our
Group margin to run in the 8-10% range and have a goal for return on
invested capital (ROIC) of around 20%. I am pleased that in 2014 we
made progress against all three of these objectives.
Our business
Over the course of the year we have seen the benefit of our business
model. We are a global engineering business serving the world’s
leading original equipment manufacturers in three large markets.
But whichever the market, our approach and strategy are the same:
using our knowledge of our customers and their needs, combined
with our leading technology, excellent global footprint and broad
operational excellence, to design, develop and deliver outstanding
products. This requires a thorough understanding of market trends
and a strong capability for product innovation. There are good
examples of both throughout this report including the case studies
featured on pages 25-37.
The table opposite summarises some strategic landmarks for the
Group and in the business review (pages 22-37) we set out the most
noteworthy divisional achievements.
→ See pages 20 – 41 for more information on our financial results
16
GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
STRATEGIC PROGRESS
Leading in our chosen markets
→
→
• Organic and add-on opportunities in all divisions.
• Sold interest in Emitec.
Leveraging a strong global presence
→
• Further increased our presence in Mexico and Asia.
Differentiating ourselves through technology
→
• Increased proportion of investment in advanced
engineering.
Driving operational excellence
→
→
• Focus on operational excellence continued.
• Used customer data to measure our performance –
‘Voice of the Customer’.
• Focused on safety across our operations.
→
↓
SUSTAINING ABOVE MARKET GROWTH
Leading in our chosen markets – excellent positions in their markets
helped all four divisions prove successful in winning new business
during 2014. GKN Aerospace won business for both aerostructures
and engine systems, with the risk and revenue sharing partnership to
supply components for the Pratt & Whitney PurePower PW100 Geared
TurbofanTM engine. GKN Driveline won significant sideshaft business
with Ford, General Motors, Volkswagen, BMW, Renault Nissan, Mazda
and Hyundai whilst successfully designing and launching several
all-wheel drive products with Fiat, BMW and Jaguar Land Rover.
For GKN Powder Metallurgy, new business wins in the year totalled
£165 million, higher than last year’s equivalent and including a
good proportion of higher margin ‘Design for Powder Metallurgy’
components. For GKN Land Systems, the tough markets limited
options, but its business in the industrial market continued to do
well, successfully exploiting its leadership in clutches and brakes.
During the year we sold our stake in the emissions control business
Emitec, a good business with sound prospects, but which did not
give GKN a route to a leadership position in that market.
Leveraging a strong global presence – having manufacturing
plants and design centres located around the world, close to our
customers, is an important strategic advantage for GKN. We also use
the regional presence of one division to help other divisions enter or
expand in that market.
China continues to be an important market for GKN. Although the
country’s economic growth has eased in recent years, growth of
around 7% remains very attractive. We have continued to build
our GKN Driveline joint venture company whilst at the same time
expanding the activities of GKN Land Systems and GKN Powder
Metallurgy in the country. We are also seeking to establish GKN
Aerospace in China but this remains a work in progress.
Differentiating ourselves through technology – our excellent
technology helped win significant business this year. This was clearly
demonstrated through GKN Driveline’s critical role in the Fiat Chrysler
small all-wheel drive platform, GKN Powder Metallurgy driving its
margin through new ‘Design for Powder Metallurgy’ component
wins and GKN Land Systems winning new business with Claas on
the back of superior technical offering. GKN Aerospace continued
building its position as a technology leader and was pleased to be
awarded leadership of a challenging £30 million future wing research
programme, backed by the UK’s Aerospace Technology Institute.
They also delivered an innovative wing leading edge demonstrator to
the Clean Sky programme, helping bring an ultra-high performance,
natural laminar flow wing closer to reality.
Increasing investment was made into advanced engineering projects
looking to the longer term, including development work on additive
manufacturing (also known as 3D printing), the electrification of
vehicle powertrains, future wing technologies and energy storage.
All look likely to drive significant market changes in the future.
Mexico and Asia in general saw the greatest activity in this respect.
Over the course of 2014, Group capital investment in Mexico and
Asia was £37 million and £56 million respectively.
GKN plc Annual Report and Accounts 2014
17
STRATEGIC REPORT
Chief Executive’s review
“The continued implementation of our strategy in 2014
delivered organic growth, improved margins and increased
ROIC, together bringing increased financial returns to our
shareholders.”
Operational excellence – is fundamental to what we do and provides
the opportunity to differentiate ourselves in our customers’ eyes.
Employee safety is our number one priority and our performance
is set out on page 54. In general 2014 saw a good reduction in the
number of accidents. However, in February 2014 an employee at GKN
Aerospace Engine Systems’ El Cajon plant in the US suffered a fatal
injury whilst operating a forklift truck. I deeply regret this loss of life
and we have provided support to the employee’s family. Lessons
have been learned from this and applied elsewhere in the Group.
Across the Group, the GKN Lean manufacturing programme enables
us to continue to drive continuous improvement in manufacturing
performance and back-office processes.
Listening to the ‘Voice of the Customer’ in a direct way is vital to our
success. During 2014 we have implemented improved processes
to ensure all employees keep their eyes focused on our customers’
own ratings of us, understand any concerns and work speedily and
determinedly to resolve them. Although customers’ views have
always been important in GKN, I am confident the positive effect of
this direct feedback will prove an advantage in building our business.
Together the successful delivery of these four strategic objectives
helped deliver the fifth strategic objective of sustaining above
market growth. In 2014 overall Group sales showed an organic
increase of 4%, better than average for our markets.
Doing the right thing
Underpinning these results is a strong set of GKN Values. We
call this ‘doing the right thing’ and the effects of this are set out
in the sustainability report on pages 52-59. At our 2014 internal
International Leadership Conference, considerable time was spent
discussing how GKN’s most senior people should demonstrate our
Group Values.
Supporting this we have introduced new processes for clarifying
to managers what is expected of them and getting their
acknowledgment they understand this. In the months ahead we will
be running a process of re-communicating the GKN Code to every
employee wherever they are and no matter which of the 27 Groupwide languages they speak.
Summary
The continued implementation of our strategy in 2014 delivered
organic growth, improved margins and increased ROIC, together
bringing increased financial returns to our shareholders. This
could not have been achieved without the expertise, focus and
sheer hard work of the 51,400 committed GKN people around the
world. In closing, I would like to thank everyone in the GKN team
for their contribution this year. I would also like to thank my former
colleagues Marcus Bryson CBE and Bill Seeger for their support and
contribution as members of my Executive team and the Board.
→ See pages 52 – 59 for more information on ‘doing the right thing’
18
GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Lean manufacturing
Delivering operational excellence
Looking ahead
Commercial aircraft production should continue to be strong
whereas military markets are forecast to decline. GKN Aerospace’s
2015 organic sales are expected to be broadly flat, reflecting these
differing trends and the phasing of our programmes. However, a
strong commercial order book supports attractive growth for GKN
Aerospace over the medium term.
In automotive, external forecasts predict growth in global light
vehicle production of around 2% with increases in China and North
America, and Europe flat. Against this background, GKN Driveline
and GKN Powder Metallurgy are expected to continue to grow
organically above the market.
→ Visit us at www.gkn.com to see more case studies
Softer global agricultural equipment markets are likely to more than
offset the slight improvement in industrial markets. As a result,
GKN Land Systems 2015 sales are expected to be lower than 2014
and an £8 million restructuring charge is planned to further reduce
the fixed cost base.
Operational excellence founded on Lean manufacturing is a focus for
GKN sites across the world. This culture of continuous improvement
enables GKN to deliver quality products and exceptional customer
service, and GKN Driveline in Vigo, Northern Spain, is one example
of a site that has seen significant operational improvements in
recent years.
Although some markets remain challenging, 2015 is expected to
be a year of further growth. Beyond 2015, we are well positioned to
outperform in our large global markets.
Nigel Stein
Chief Executive
GKN DRIVELINE VIGO
The plant, which supplies sideshafts to European automotive
manufacturers, has implemented a system to reduce waste and
optimise productivity, created tools for the sharing of knowledge
and ideas and provided Lean training for all employees. Maximising
employee involvement, both in the office and on the shop floor, has
been fundamental in engaging the teams and developing the change
in culture.
The site has been recognised by the KAIZEN Institute, a global
organisation that specialises in the continuous improvement of
people, processes and systems, winning one of its 2014 awards.
GKN plc Annual Report and Accounts 2014
19
STRATEGIC REPORT
Business review / Group performance
Financial progress
The Group has made good progress on its
financial targets during 2014 with growth
in organic sales, an improved Group
margin, and an increase in Group ROIC –
all of which support an increase of 6% in
the total dividend.
ADAM WALKER
Group Finance Director
Group performance
Results
Sales (£m)
Trading profit (£m)
Change (%)
2014
2013
7,456
7,594
687
661
Trading margin
9.2%
8.7%
Return on average invested capital
17.7%
17.3%
→ See pages 22 – 37 for more information on the financial performance of our divisions
20 GKN plc Annual Report and Accounts 2014
Headline
Organic
(2)
4
4
11
Strategic Report
Governance
Financial Statements
Other Information
m
Management sales
Organic sales increased by £303 million (4%). The adverse
effect of currency translation on management sales was
£403 million (5%) and there was a £7 million benefit from
acquisitions which was more than offset by a £45 million
reduction due to disposals.
Organic trading profit increased £66 million, due to the absence
of restructuring costs (2013: £25 million), the strong performance
of three of our divisions, lower profits from GKN Land Systems and
£6 million net benefit from commercial settlements and provision
releases. Adverse currency translation was £38 million and there
was a £2 million reduction due to acquisitions and divestments.
Group trading margin increased to 9.2% (2013: 8.7% or 9.0%
excluding restructuring charges). Return on average invested
capital (ROIC) increased to 17.7% (2013: 17.3%).
Management sales
 GKN Aerospace
£2,226m
 GKN Driveline
£3,444m
 GKN Powder Metallurgy £916m
 GKN Land Systems
£776m
 Other Businesses
£94m
£7,456m
Management sales
 GKN Aerospace
 GKN Driveline
 GKN Powder Metallurgy  GKN Land Systems
GKN driveline region
The use of management measures allows the Group to chart
progress, make decisions and allocate resources based on the
actions for which management is responsible or can influence,
without volatility arising from significant one-time trading and
portfolio change transactions or the mark to market valuation of
currency hedges.
Definitions
Financial information, unless otherwise stated, is presented on a
management basis which aggregates the sales and trading profit
of subsidiaries (excluding certain subsidiary businesses sold and
closed) with the Group’s share of the sales and trading profit of
joint ventures. 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 joint ventures. These figures better
reflect performance of continuing businesses. Where appropriate,
metallurgy customer
GKN driveline product
GK
£277m
£280m
£101m
£44m
* Including corporate costs and Other Businesses.
In this report, financial information, unless otherwise stated,
is presented on a management basis, the definition of which is
below. The Group uses management measures, which are nonGAAP measures, to assess operating performance on a consistent
basis, as we believe this gives a fairer assessment of the underlying
performance of the business.
GK
G
Management trading profit
£687m*
Basis of reporting
GKN driveline region
management profit
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, joint venture dividends, own shares purchased 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
ventures
excludingmarket
metallurgy
customerand jointlandsystems
metallurgy
2
current and deferred tax, net debt, post-employment obligations
and derivative financial instruments.
la
Exchange rates
Exchange rates used for currencies most relevant to the Group’s
operations are:
Average
Euro
US dollar
Year end
2014
2013
2014
2013
1.24
1.65
1.18
1.57
1.29
1.56
1.20
1.66
The approximate impact on 2014 trading profit of subsidiaries
and landsystems
joint ventures of amarket
1% movement in the
average rate would
landsystems
region
be euro – £1 million, US dollar – £4 million.
GKN plc Annual Report and Accounts 2014
21
STRATEGIC REPORT
Business review / GKN Aerospace
GKN Aerospace is a leading global tier one
supplier of airframe and engine structures,
components, assemblies and
transparencies to a wide range of aircraft
and engine prime contractors and other tier
one suppliers. It operates in three main
product areas: aerostructures, engine
components and sub-systems, and
special products.
GKN Aerospace
Products
• Integrated aerostructures, including wing/empennage and
flight control surface assemblies and fuselage structures.
• Fixed and rotating propulsion products for aircraft engines,
fan cases, engine components, exhaust systems and nacelles.
• Transparencies including specially coated cockpit and
cabin windows.
• Niche products such as ice protection, fuel systems and
flotation devices.
→ See pages 24 – 25 for more information on GKN Aerospace
22 GKN plc Annual Report and Accounts 2014
Key strategic activities
To support the achievement of the Group’s five strategic
objectives, GKN Aerospace is focusing on the following areas:
• Exploiting its strong positions on existing programmes for
new aircraft platforms, and pursuing long term contracts on
selective high-growth and long-running platforms.
• Deploying new technologies for future commercial and military
aircraft, to improve fuel efficiency, reduce emissions and
minimise the environmental impact of aviation.
• Expanding into adjacent markets with similar product
technologies and manufacturing capabilities; and expanding
our global footprint.
Strategic Report
12,350 7
employees
countries
Governance
Financial Statements
Other Information
33
manufacturing
locations
GKN plc Annual Report and Accounts 2014
23
STRATEGIC REPORT
Business review / GKN Aerospace
management profit
Management sales
GKN Aero customer
GK
GKN Aerospace sales by customer
Management sales
management profit
Management sales
GKN
driveline region
management
profit
 Airbus
 GE
 UTC
 Boeing
 Snecma
 Rolls-Royce
 Spirit
 Honeywell
GKN Aero
 MTU
 Other
21%
13%
13%
12%
6%
4%
3%
customer3%
3%
22%
GKN
driveline
product
GKN
Aero customer
GKN Aero market
GKNGKN
driveline
customer
Aero market
GK
GKN Aerospace sales by market
 Commercial
 Military KEVIN CUMMINGS
Chief Executive GKN Aerospace
The overall aerospace market remained positive in 2014 driven by
a growing commercial aircraft market partly offset by a declining
military market. The division’s commercial sales were 73%, with
GKN
driveline
region
GKN driveline product
military
representing
27%.
Commercial aircraft production is still growing. Both Airbus and Boeing
metallurgy
continue
to benefit
from higher
deliveries and
a record
ordercustomer
backlog,
GKN
driveline
region
GKN
driveline
product
and both have announced plans to increase production levels for single
aisle aircraft in the future. There is also more demand for strong global
suppliers to support their expansion plans.
73%
27%
GKN driveline customer
GKN Aerospace sales by product
metallurgycustomer
2
GKNcomponents
driveline
 Engine
and sub-systems
 Aerostructures  Special products GKN Aero product
metallurgy
product
GKN Aero product
£1,045m
£1,042m
£139m
Military spending remains under pressure, largely driven by cutbacks
throughout the US and Europe, with the ramp-up of new programmes
being delayed and overseas military operations reduced.
metallurgy
customer
metallurgy
Divisional
performance
against Group
strategy 2
STRATEGIC OBJECTIVE
metallurgy customer
Leading in our chosen markets
PROGRESS
Leveraging a strong global presence
→
→
Differentiating ourselves through technology
→
engine structures market.
• $3 billion new work packages won.
• Invested in composite and metallic manufacturing in Mexico.
• Construction began of a new manufacturing site in Seattle, US, to support the
Boeing 737 MAX assembly line.
• Fabricated robotically-welded case technology selected for the Pratt & Whitney
PurePower PW1900 Geared Turbofan™ engine.
• Continued to develop strong positions in additive manufacture and future
→
wing design.
landsystems region
landsystems market
landsystems market
landsystems customer
metallurgy
2
metallurgy product
landsystems customer
landsystems
market
region
→
• A world leader inlandsystems
aerostructures and
number two in the independent aero
→
Driving operational excellence
metallurgy product
→
• Improved customer scorecard results across the globe through ‘Voice of the
Customer’ initiative.
landsystems
•region
Received a number of quality awards from customers, including
→
‘Best performing supplier’ from Airbus.
↓
SUSTAINING ABOVE MARKET GROWTH
→ See page 13 for more information on the aerospace market
24 GKN plc Annual Report and Accounts 2014
lands
Strategic Report
The key financial results for the year are as follows:
GKN Aerospace
Change (%)
2014
2013
2,226
2,243
277
266
Trading margin
12.4%
11.9%
Return on average
invested capital
17.7%
17.8%
Sales (£m)
Trading profit (£m)
Headline
Organic
(1)
3
4
7
Governance
Financial Statements
Other Information
Wings of the future
Strategy in action
Overall, GKN Aerospace’s organic sales were £59 million higher (3%).
There was an adverse £76 million (3%) impact from currency translation.
Organic commercial aerospace sales were 4% higher, driven by
increased demand for the Boeing 787, A350 and engine spares, partly
offset by lower A330 and A380 sales and a £17 million reduction due to
the previously announced supply chain contract taken back in-house
by Airbus in May 2013. Military sales were broadly flat as spares on
programmes which ceased production were offset by lower sales for
F/A-18 Super Hornet and UH-60 Blackhawk helicopter.
The organic increase in trading profit was £18 million, the impact from
currency on translation of results was £10 million adverse (4%) and
there was a £3 million benefit relating to losses from the Composite
Technology and Applications Limited (CTAL) disposal in 2013.
Each year there are commercial issues and provision movements
which impact the results. This year they amounted to a £4 million
net benefit, which included a credit of £11 million as progress was
made on an onerous contract partly offset by a £7 million charge for
customer claims. Trading profit also included income of £8 million
(2013: £5 million) for milestones achieved in relation to CTAL, which
is not expected to be repeated in 2015.
Other factors included improved commercial spares sales and
higher volumes on new programmes offset by lower military sales
on mature programmes. Further start-up operating losses at the
new A350 facility were £8 million (2013: loss of £11 million).
Trading margin was 12.4% (2013: 11.9%).
Return on average invested capital was 17.7% (2013: 17.8%),
following the repayment of a Government advance in the first half
of the year.
→ Visit us at www.gkn.com to see more case studies
During the year a number of important milestones were achieved
including:
• a new 7% (US$2.5 billion) risk and revenue sharing partnership
(RRSP) with Pratt & Whitney covering the supply of components
for the PurePower PW1900 Geared Turbofan™ engine for the
Embraer 190 and the 195-E2 narrow body aircraft;
• a long term agreement (LTA) worth more than US$200 million with
Rolls-Royce to supply components for the latest version of the
Trent 1000 engine, a capability enhancement of the existing Trent
1000 engine for the Boeing 787;
• a contract from Boeing for the final assembly and paint of
Advanced Technology (AT) Winglets for the new 737 MAX;
• investment and work being transferred into our low cost
manufacturing facilities in Mexico; and
• leading collaborative projects backed by the UK’s Aerospace
Technology Institute for additive manufacturing and future
wing research.
GKN Aerospace is helping lead the way in wing design for future
aircraft. It is participating in a number of UK research programmes
focused on using new manufacturing technologies and more cost
effective processes to create lighter, more fuel-efficient aircraft.
GKN AEROSPACE
Together with industrial partners, research institutions and the UK
Government, GKN Aerospace is working to develop and demonstrate
new manufacturing techniques that will enable the UK aerospace
industry to build wings for tomorrow’s aircraft.
It is focusing on creating a new generation of automated processes
and technologies that will extend the boundaries of what we are
able to manufacture, while at the same time increasing the quality,
consistency and speed of production.
GKN plc Annual Report and Accounts 2014
25
STRATEGIC REPORT
Business review / GKN Driveline
As a global business serving the world’s
leading vehicle manufacturers, GKN
Driveline develops, builds and supplies
an extensive range of automotive driveline
products and systems, for use in
everything from the most sophisticated
premium vehicles, that demand complex
driving dynamics, to the smallest ultra
low-cost cars.
GKN Driveline
Products
• Constant velocity jointed systems including CV joints and
sideshafts.
• All-wheel drive (AWD) systems including propshafts, couplings
and final drive units.
• Trans-axle solutions including open, limited slip and locking
differentials and electronic torque vectoring products.
• eDrive systems including electric axles, transmissions
and motors.
→ See pages 28 – 29 for more information on GKN Driveline
26 GKN plc Annual Report and Accounts 2014
Key strategic activities
To support the achievement of the Group’s five strategic
objectives, GKN Driveline is focusing on the following areas:
• Providing innovative driveline systems and solutions,
supporting developing market trends for more
fuel-efficient vehicles.
• Increasing business in high growth regions.
• Serving the needs of strategic customers through a marketleading global footprint.
Strategic Report
Governance
Financial Statements
Other Information
25,650 22 46
employees
countries
manufacturing
locations
GKN plc Annual Report and Accounts 2014
27
STRATEGIC REPORT
Business review / GKN Driveline
Management
sales
GKN
driveline product
GKN driveline region
management
profit
GKN
driveline customer
GK
GK
Management sales
ma
GKN Driveline sales by customer
metallurgy customer
 Volkswagen
 Fiat Chrysler
 Ford
 Renault Nissan
 General Motors
 Tata Group
 BMW Group
 Toyota Group
 Mitsubishi
 Other
15%
11%
10%
10%
9%
6%
6%
5%
4%
24%
GKNmetallurgy
driveline region
2
GKN
drivelineproduct
product
metallurgy
GKN
land
GKN Driveline sales by product group
 CVJ Systems £2,075m
 AWD and eDrive Systems £1,337m
 Other £32m
ANDREW REYNOLDS SMITH
EXECUTIVE DIRECTOR
Chief Executive GKN Automotive
Production in the major automotive markets of China, North
America, Europe and Japan increased relative to 2013, while Brazil
and India declined. Overall, global production volumes increased
3.1% to 87.4 million vehicles (2013: 84.8 million).
Automotive market
Car and light vehicle production
(rounded millions of units)
landsystems market
Growth (%)*
2014
2013
Europe
North America
Brazil
Japan
China
India
Others
20.1
17.0
3.0
9.2
22.6
3.6
11.9
19.5
16.2
3.5
9.1
20.9
3.7
11.9
3.3
5.2
(14.1)
2.1
8.1
(1.7)
0.0
Total – global
87.4
84.8
3.1
GKN driveline region
metallurgy
metallurgy 2
GKN Driveline
salescustomer
by region of origin
landsystems region
 Europe  North America  China  Japan  South America
 India  Other £1,312m
£1,079m
£380m
£298m
£147m
£81m
£147m
metallurgy customer
* Growth is derived from unrounded production figures.
Source: IHS Automotive.
Divisional performance against Group strategy
STRATEGIC OBJECTIVE
landsystems market
landsystems region
PROGRESS
Leading in our chosen markets
→
→
• Number one in driveline and all-wheel drive markets.
• £700 million annualised new business won in sideshafts and all-wheel drive.
Leveraging a strong global presence
→
→
• Further expansion of existing plants in China.
• Increased capacity and localised propshaft production in Mexico, and
expanded facility in Newton, North America.
Differentiating ourselves through technology
→
• Produced the industry’s first two-speed eAxle for electric and hybrid vehicles,
which has entered production on the BMW i8.
landsystems market
• Developed the world’s smallest all-wheel drive disconnect system.
→
Driving operational excellence
→
• Began implementation of the Driveline Excellence System to ensure
consistency in key processes and standards.
↓
SUSTAINING ABOVE MARKET GROWTH
→ See page 13 for more information on the automotive market
28 GKN plc Annual Report and Accounts 2014
GKN
m
lan
Strategic Report
The key financial results for the year are as follows:
GKN Driveline
Sales (£m)
Trading profit (£m)
Trading margin
Return on average
invested capital
Change (%)
2014
2013
Headline
Organic
3,444
3,416
1
8
14
23
280
246
8.1%
7.2%
19.3%
17.0%
Governance
Financial Statements
Other Information
Industry’s first
two-speed eAxle
Strategy in action
Organic sales increased by £265 million (8%) compared with global
vehicle production which was up 3%. The adverse effect of
currency translation was £226 million (7%) and the impact from
disposals was £11 million, being the proportionate loss of sales
from a wholly-owned business in China which was transferred into
our Shanghai GKN HUAYU Driveline Systems Co Limited (SDS) joint
venture in November 2013. Constant velocity jointed (CVJ) systems
accounted for 60% of sales and non-CVJ sales were 40%.
GKN Driveline’s market outperformance was broadly based across
the main markets reflecting recent market share gains, a stronger
position in premium vehicles, demand for which continued to be
good, and GKN Driveline’s broadening product mix, particularly
with all-wheel drive (AWD) systems. GKN Driveline slightly
underperformed the market in Japan due to our specific
programme mix.
The organic improvement in trading profit was £53 million,
including the absence of £16 million of restructuring charges
reported in 2013. The adverse impact of currency translation on
trading profit was £18 million (8%). Each year there are commercial
settlements and provision movements which impact the results.
In 2014, whilst individually larger than usual, they amounted to
a £2 million net benefit. This £2 million included a commercial
settlement credit of £14 million and a credit of £5 million as
progress was made on an onerous contract, partly offset by a
higher than usual £17 million charge for warranty and quality
claims. GKN Driveline’s trading margin was 8.1% (2013: 7.2%, or
7.7% excluding restructuring charges), reflecting higher organic
revenue growth.
Return on average invested capital increased to 19.3% (2013: 17.0%).
During the year, over £700 million of annualised sales in new and
replacement business was secured in CVJ and AWD systems and a
number of important milestones were achieved, including:
• expanding facilities in Mexico and AWD capacity in Newton, US;
• expanding facilities in China with new Power Transfer Unit (PTU)
wins and localisation of AWD products from Europe and
North America;
• design and launch of the world’s first integrated disconnect AWD
system for Fiat Chrysler’s small SUV platform;
• eAxle new launches on advanced plug-in hybrid supercars, with
the world’s first two-speed eTransmission on the BMW i8 and
Porsche awarding GKN Driveline ‘Technology Partner’ status for its
development of a high-performance eAxle for the 918 Spyder; and
• 11 customer awards, including from Ford, General Motors,
Mitsubishi, Nissan and Volvo.
→ Visit us at www.gkn.com to see more case studies
GKN DRIVELINE
The market for electric and hybrid vehicles is growing and consumers
are increasingly looking for dynamic performance, not just exceptional
fuel efficiency and low CO2 emissions.
GKN Driveline has developed the industry’s first two-speed eAxle,
which delivers electric power throughout a vehicle’s entire speed
range. Optimised for weight, packaging and efficiency, the two-speed
eAxle supports effective hybridisation, contributing to an outstanding
driving experience.
The technology features on the BMW i8 plug-in hybrid sports car, a
vehicle that is changing the perception of hybrid vehicles. Working
closely with BMW, GKN drew on the expertise and knowledge of its
global engineering network to deliver the project from concept to
production in just 24 months.
GKN plc Annual Report and Accounts 2014 29
STRATEGIC REPORT
Business review / GKN Powder Metallurgy
GKN Powder Metallurgy comprises GKN Sinter
Metals and Hoeganaes. GKN Sinter Metals is
the world’s leading manufacturer of precision
automotive components as well as components
for industrial and consumer applications.
Hoeganaes is one of the world’s largest
manufacturers of metal powder, the essential
raw material for powder metallurgy.
GKN Powder
Metallurgy
Products
• Sintered components for engines and transmissions, as well
as pumps, bodies and chassis, and compressors.
• Sintered bearings and filters.
• Metal injection moulded components.
• Metal powders.
• Soft magnetic components for use in electric motors.
• Sintered components for numerous industrial applications.
Key strategic activities
To support the achievement of the Group’s five strategic
objectives, GKN Powder Metallurgy is focusing on the
following areas:
• Developing ‘Design for Powder Metallurgy’ applications to
meet the rapidly developing requirements for high efficiency
engines, advanced transmission applications, weight
reduction and evolving emissions standards.
• Expanding the business in high-growth markets, supporting
customers globally.
• Enhancing performance of metal powders.
→ See pages 32 – 33 for more information on GKN Powder Metallurgy
30
GKN plc Annual Report and Accounts 2014
Strategic Report
6,900 10
employees
countries
Governance
Financial Statements
Other Information
34
manufacturing
locations
GKN plc Annual Report and Accounts 2014
31
management profit
GK
GKN Aero customer
metallurgy
customer
GK
GKN driveline product
GKN
GKN driveline customer
landsystems market
metallurgy 2
GK
lan
m
Management sales
STRATEGIC REPORT
Business review / GKN Powder Metallurgy
management profit
Management sales
GKN Powder Metallurgy sales
GKN driveline region
by customer
GKN driveline region
 Ford
 General Motors
 Hilite
 Fiat Chrysler
 ZF
 Schaeffler
 Borg Warner
 Linamar
 Volkswagen
GKN driveline
 Means Industries
 Other
9%
6%
4%
4%
4%
3%
2%
2%
product2%
2%
62%
metallurgy customer
PETER OBERPARLEITER
Chief Executive GKN Powder Metallurgy
GKN Powder Metallurgy sales*
metallurgy customer
GKN Sinter Metals
 Americas  Europe  Rest of World £373m
£322m
£73m
 Hoeganaes £148m
* GKN Sinter Metals sales by region.
metallurgy 2
metallurgy product
GKN Powder Metallurgy sales
by product type
landsystems market
Sintered components
 Automotive  Industrial £661m
£107m
Hoeganaes
 Metal powder £148m
landsystems region
Divisional performance against Group strategy
STRATEGIC OBJECTIVE
Leading in our chosen markets
PROGRESS
landsystems market
landsystems region
→
→
→
• Global leader in sintered components.
• World’s number two manufacturer of metal powder.
• £165 million new business won.
Leveraging a strong global presence
→
• Expanded production facilities in China.
Differentiating ourselves through technology
→
• Increased success for ‘Design for Powder Metallurgy’ components such as in
variable oil pump applications for automotive engines and transmissions.
• Continued to develop technically enhanced powders.
• Technology partnership established to accelerate use of hydrogen storage.
→
→
Driving operational excellence
→
→
• Roll-out of advanced compaction presses in the US to improve
manufacturing efficiency.
• Launched ‘My quality’ programme.
↓
SUSTAINING ABOVE MARKET GROWTH
→ See pages 13 and 28 for more information on the automotive market
32
GKN plc Annual Report and Accounts 2014
land
Strategic Report
The key financial results for the year are as follows:
Change (%)
GKN Powder Metallurgy
2014
2013
Sales (£m)
916
932
(2)
5
7
15
101
94
Trading margin
11.0%
10.1%
Return on average
invested capital
21.8%
21.1%
Trading profit (£m)
Headline
Organic
Governance
Financial Statements
Other Information
Enhancing
capability at GKN
Powder Metallurgy
Strategy in action
Organic sales at GKN Powder Metallurgy were £40 million higher
(5%). There was an adverse £56 million (6%) impact from currency
translation. Good growth was achieved in North America,
China and Europe but sales in South America fell due to weaker
automotive and industrial markets.
The organic increase in profit was £13 million, including the
absence of £5 million of restructuring charges reported in 2013.
The impact of currency translation was £6 million adverse (7%).
The divisional trading margin was 11.0% (2013: 10.1%, or 10.6%
excluding restructuring charges), reflecting the move towards
higher value ‘Design for Powder Metallurgy’ parts.
Return on average invested capital was 21.8% (2013: 21.1%),
reflecting the improvement in profitability.
GKN Powder Metallurgy continued its strong product and
development activities in engines and transmissions, being
awarded £165 million of annualised sales in new and replacement
business. It also won a number of quality awards including:
Excellent Supplier Award and Zero PPM 2014 Award from GETRAG
(Jiangxi) Transmission Co., Ltd.; and four Supplier Quality
Excellence awards from General Motors.
Reflecting our move into more advanced applications of powder
metal technologies, GKN Powder Metallurgy is expanding its
facilities in North America with more complex and efficient tooling
and presses. It has signalled its commitment to the Chinese
market with the expansion of its two production facilities there
and also announced a technology collaboration agreement with
McPhy Energy to develop solid state hydrogen storage solutions.
During the year, Hoeganaes made progress in the development
and commercialisation of high technology powders for additive
manufacturing. For example, highly alloyed tool steels, nickel
based alloys and specialised stainless steel powders have been
developed and the first commercial shipments made. Early
development work also progressed on titanium powders for
additive manufacturing. A new research titanium atomizer is
currently being installed at the Powder Innovation Centre in the
US and will be commissioned during the first half of 2015.
→ Visit us at www.gkn.com to see more case studies
GKN POWDER METALLURGY
GKN Powder Metallurgy has worked with a global machine
manufacturer to develop and build a new type of press to improve
manufacturing efficiency and deliver increased value to its customers.
The advanced compaction presses enable GKN Powder Metallurgy to
manufacture more complex parts, at a higher speed, with improved
quality and cost effectiveness. This is especially important when
applying a ‘Design for Powder Metallurgy’ approach, which requires
specialist production techniques to cater for the freedom of design
the process allows.
The first of these presses in North America was installed at GKN Powder
Metallurgy, St Mary’s, Pennsylvania, during 2014 to support the product
launch of a complex gear for an electronic parking brake system. The
presses are already in use in Europe and Asia, and are now being rolled
out at a number of GKN Powder Metallurgy plants in North America.
GKN plc Annual Report and Accounts 2014
33
STRATEGIC REPORT
Business review / GKN Land Systems
GKN Land Systems is a leading supplier of
power management products and services.
It designs, manufactures and supplies
products and services for the agricultural,
construction, mining and utility vehicle
markets and key industrial segments, offering
integrated powertrain solutions and complete
in-service support.
GKN Land Systems
Products
• Electro-mechanical power management devices such
as electromagnetic brakes, flexible couplings, clutches,
driveshafts and gear technology.
• Hybrid power systems for highly cost effective energy recovery,
ideally suited to start-stop vehicles such as buses and trams.
• Sensors, actuators and controls.
• Custom-designed wheels for arduous applications in
all terrains.
• Advanced structures and chassis systems for a variety of
vehicle types.
• Aftermarket parts and remanufacturing for passenger cars,
commercial trucks, agricultural and construction vehicles, and
industry applications.
→ See pages 36 – 37 for more information on GKN Land Systems
34
GKN plc Annual Report and Accounts 2014
Key strategic activities
To support the achievement of the Group’s five strategic
objectives, GKN Land Systems is focusing on the
following areas:
• Leading in high technology power management solutions to
the world’s original equipment manufacturers.
• Deploying new technologies to advance the penetration of our
electro-mechanical products and systems.
• Positioning our strong brands outside our traditional home
markets into new and emerging growth markets.
• Providing better customer solutions based on a detailed
understanding of their needs and future strategies.
Strategic Report
5,200 15
employees
countries
Governance
Financial Statements
Other Information
37
manufacturing and
service locations
GKN plc Annual Report and Accounts 2014
35
STRATEGIC REPORT
Business review / GKN Land Systems
metallurgy customer
metallurgy 2
GKN driveline region
GKN driveline product
metallurgy product
landsystems customer
metallurgy customer
GKN
GKN Land Systems sales by customer
landsystems market
landsystems region
 John Deere
 Case New Holland
 Tata Group
 Claas
 Caterpillar
 Agco
 JCB
 Toyota Group
metallurgy
 Volkswagen
 Agritalia/Carraro
 Other
9%
8%
5%
4%
4%
3%
2%
customer1%
1%
1%
62%
metallurgy 2
m
landsystems market
la
GKN Land Systems sales by market
PHILIP SWASH
Chief Executive GKN Land Systems
Sales in GKN Land Systems were lower than the prior year primarily
due to progressively worsening agricultural equipment markets
while demand for construction and industrial equipment remained
relatively stable.
 Agriculture  Industrial  Automotive  Construction and mining £349m
£179m
£139m
£109m
landsystems market
landsystems region
GKN Land Systems sales by region
 Europe
 Americas
 Rest of World
£591m
£158m
£27m
Divisional performance against Group strategy
STRATEGIC OBJECTIVE
PROGRESS
Leading in our chosen markets
→
• Maintained strong positions in shafts, wheels, clutches and industrial
products.
Leveraging a strong global presence
→
→
• Invested and expanded product portfolio in Liuzhou, China.
• Work continued to balance global footprint, which is currently dominated by
Europe and North America.
Differentiating ourselves through technology
→
• Customer technology exhibitions in Japan led to contract wins to provide
wheels and driveshafts for Komatsu.
Driving operational excellence
→
→
• Actions taken to mitigate effects of depressed market conditions.
• Invested in wheel production capability in the US.
↓
SUSTAINING ABOVE MARKET GROWTH
→ See page 13 for more information on the land systems market
36 GKN plc Annual Report and Accounts 2014
Strategic Report
The key financial results for the year are as follows:
Change (%)
GKN Land Systems
2014
2013
Sales (£m)
776
899
(14)
(10)
(41)
(38)
Trading profit (£m)
Trading margin
Return on average
invested capital
44
75
5.7%
8.3%
11.4%
18.3%
Headline
Organic
Governance
Financial Statements
Other Information
Investing to deliver
customer benefits
in Armstrong
Strategy in action
The organic decrease in sales was £84 million (10%) and the
adverse impact of currency translation was £40 million (5%).
The organic decrease in sales included £14 million due to the
previously announced cessation of two chassis contracts in the
second half of 2013. The acquisition impact of £1 million related
to our wheels venture in China.
The organic decrease in trading profit was £27 million, including
the absence of £3 million of restructuring charges in 2013.
The negative impact of currency translation was £4 million (6%).
Trading margin was 5.7% (2013: 8.3%, or 8.7% excluding
restructuring charges). In 2015, there is expected to be an
£8 million restructuring charge reflecting actions being taken
to further reduce the fixed cost base in response to difficult
market conditions.
Return on average invested capital was 11.4% (2013: 18.3%).
Good progress was made towards winning new business and
implementing the GKN Land Systems strategy through broadening
its product offering and geographic footprint, particularly investing
to support industrial product sales in North America and enhancing
capacity in China.
Business review / Other Businesses
GKN’s Other Businesses comprise Cylinder Liners (which is a 59%
owned venture mainly in China, manufacturing engine liners for the
truck market in the US, Europe and China), our joint venture stake
in EVO Electric (a developer of axial flux motors) and the activities
relating to GKN Hybrid Power, acquired on 1 April 2014 from
Williams Grand Prix Engineering Limited. Since the acquisition,
GKN Hybrid Power has secured orders to fit 750 buses with its
innovative fuel-saving solution.
GKN sold its 50% stake in Emitec for a cash consideration of
£37 million on 31 July 2014.
→ Visit us at www.gkn.com to see more case studies
GKN LAND SYSTEMS
GKN Land Systems’ Armstrong facility in Iowa, US, manufactures
wheels for agricultural vehicles in close proximity to key OEMs in
North America. Substantial investment to replace key components of
its main rim rolling line has significantly improved its ability to both
serve its existing customers and attract new customers.
The new technology means the Armstrong facility can now produce
larger wheels and deliver a 40% increase in production speed,
improved quality through greater consistency and tighter tolerances,
and reduced changeover times. These benefits have added value for
customers and mean that GKN Land Systems has widened its product
portfolio so it can better serve the North American agricultural market.
GKN’s Other Businesses reported combined sales in the year of
£94 million (2013: £104 million), reflecting a £23 million organic
increase in sales and a £6 million benefit from acquisitions, more
than offset by the £34 million impact from disposals and the
£5 million adverse currency translation. Trading profit was
£5 million (2013: £5 million).
GKN plc Annual Report and Accounts 2014
37
STRATEGIC REPORT
Business review / Other financial information
Corporate costs
Corporate costs, which comprise the costs of stewardship
of the Group and operating charges and credits associated
with the Group’s legacy businesses, were £20 million
(2013: £25 million), primarily due to a lower charge in relation
to future incentive schemes.
Items excluded from management trading profit
In order to achieve consistency and comparability between
reporting periods, the following items are excluded from
management measures as they do not reflect trading activity:
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 loss of £209 million (2013: profit of
£26 million).
When the business wins long term customer contracts that are in
a foreign currency, the Group offsets the potential volatility of the
future cash flows by hedging through forward foreign 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 2014, the net fair value of such instruments
was a liability of £180 million (2013: asset of £52 million) and the
change in fair value during the year was a £232 million charge
(2013: £19 million credit).
There was also a £4 million credit arising from the change in the
fair value of embedded derivatives in the year (2013: £4 million
charge) and a net gain of £19 million attributable to the currency
impact on Group funding balances (2013: £11 million net gain).
Amortisation of non-operating intangible assets arising
on business combinations
The charge for the amortisation of non-operating intangible
assets arising on business combinations (for example, customer
contracts, order backlog, technology and intellectual property
rights) was £69 million (2013: £75 million).
Gains and losses on changes in Group structure
The net gain on changes in Group structure was £24 million
(2013: £12 million).
On 31 July 2014, the Group sold its 50% share in Emitec,
a joint venture company, for a cash consideration of £37 million.
The carrying value on the date of disposal was £14 million and
£1 million of previous currency variations were reclassified
from other reserves resulting in a profit on sale of £24 million.
38 GKN plc Annual Report and Accounts 2014
Impairment charges
Consistent with previous years, goodwill was tested for
impairment. As a result of difficult markets and reduced sales
of certain products during the year, an impairment charge of
£69 million (2013: nil) has been recorded in respect of three cash
generating units; two in Aerospace and one in Land Systems.
Additionally, an impairment charge has been recorded against
the carrying value of an investment balance of £4 million in
Other Businesses.
Post-tax earnings of joint ventures
On a management basis, the sales and trading profits of joint
ventures 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
were £62 million (2013: £54 million), with trading profit of
£75 million (2013: £64 million). The Group’s share of the tax
and interest charges amounted to £13 million (2013: £10 million).
Underlying trading profit increased by £13 million, reflecting a
strong trading performance by our joint venture companies,
primarily in China.
Net financing costs
Net financing costs totalled £129 million (2013: £128 million) and
comprise the net interest payable of £73 million (2013: £73 million),
the non-cash charge on post-employment benefits of £50 million
(2013: £45 million), fair value changes in net investment hedges
of £3 million credit (2013: nil) and a charge for unwind of discounts
of £9 million (2013: £10 million). The non-cash charge on postemployment benefits, fair value changes in net investment hedges
and unwind of discounts are not included in management figures.
Details of the assumptions used in calculating post-employment
costs are provided in note 24.
Interest payable was £75 million (2013: £76 million), whilst interest
receivable was £2 million (2013: £3 million) resulting in net interest
payable of £73 million (2013: £73 million).
Interest charged on Government refundable advances was
£7 million (2013: £6 million).
Strategic Report
Operating cash flow
£343m
£343m
Operating cash flow
2014
Financial Statements
£624m
£624m
Other Information
Net debt
2014
£343m
2013
2012
Governance
Net debt
£437m
£210m
2014 before tax
Profit
£624m
2013
£732m
2012
£871m
£624m
2011
The
profit attributable to non-controlling
interests was £5 million
£538m
2013 £12 million, including £8 million from
£732m
(2013:
the pension
£151m
2010
partnership
arrangement).
2012
£871m
£343m
Management
profit before
tax was £601 million (2013: £578 million).
2011
£227m
2013before tax on a statutory basis was £221 million £437m
Profit
£245m
2010 £484 million). The main
(2013:
differences between management
2012
£210m
and statutory figures are the change in value of derivative and other
financial
of non-operating intangible
2011 instruments, amortisation
£227m
assets arising on business combinations, impairment charges,
and
the interest charge on £245m
net defined benefit pension plans. Further
2010
details are provided in note 3 to the financial statements.
2014
Non-controlling
interests
Management profit before tax of continuing operations
On a statutory basis,
earnings
share was 10.3 pence (2013:
Management
earnings
perper
share
Management profit before tax of continuing operations
Management earnings per share
£601m
£601m
2014
£601m
2013
2012
2014
2011
2013
2010
2012
2011
Taxation
£578m
£493m
£417m
£363m
£601m
£578m
£493m
£417m
The
book tax rate on management
£363mprofits of subsidiaries
2010
was 22% (2013: 20%), arising as a £121 million tax charge
(2013: £105 million) on management profits of subsidiaries
of £539 million (2013: £524 million). The book tax rate is likely
to increase at a similar rate in 2015.
The Group’s theoretical weighted average tax rate, which assumes
that book profits/losses are taxed at the statutory tax rates in the
countries in which they arise, is 37% (2013: 34%). The book tax rate
was significantly lower, largely because of the recognition of
deferred tax assets (mainly in the US) due to increased confidence
in the Group’s ability both to access the losses and realise future
taxable profits that absorb brought forward tax deductions.
The cash tax rate was 13% (2013: 10%), primarily due to the
utilisation of prior years’ tax losses. The cash tax rate is expected
to be similar to the book tax rate in 2015.
2011
Earnings
per share
£538m
Management earnings per share was 29.0 pence (2013:
£151m
2010
28.7
pence).
Average shares outstanding in 2014 were
1,640.6 million (2013: 1,634.7 million).
24.2 pence), lower primarily due to the loss on mark to market
of foreign exchange hedging contracts and impairment charges.
29.0p
29.0p
2014
29.0p
2013
28.7p
2012
2014
2011
2013
2010
2012
2011
2010
26.3p
29.0p
22.6p
20.7p
28.7p
26.3p
22.6p
20.7p
Dividend
In view of the continued improvement in trading performance and
taking into account the Group’s future prospects, the Board has
decided to recommend a final dividend of 5.6 pence per share
(2013: 5.3 pence per share). The total dividend for the year will,
therefore, be 8.4 pence per share (2013: 7.9 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 18 May 2015 to
shareholders on the register at 10 April 2015. 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 24 April 2015.
The tax rate on statutory profits of subsidiaries was 29%
(2013: 18%) arising as a £47 million tax charge (2013: £77 million
charge) on statutory profits of subsidiaries of £160 million
(2013: £432 million).
GKN plc Annual Report and Accounts 2014
39
STRATEGIC REPORT
Business review / Other financial information
Cash flow
Free cash flow
Within operating cash flow there was an outflow of working
capital and provisions of £33 million (2013: £47 million outflow).
Net debt
Operating cash flow, which is defined as cash generated from
operations of £765 million (2013: £782 million) adjusted for capital
expenditure (net of proceeds from capital grants) of £403 million
(2013: £349 million), proceeds from the disposal/realisation
of fixed assets of £19 million (2013: £4 million) and repayment
of the principal of a government refundable advance in the
UK of £38 million (2013: nil) was an inflow of £343 million
(2013: £437 million).
Capital expenditure (net of proceeds from capital grants)
on both tangible and intangible assets totalled £403 million
(2013: £349 million). Of this, £328 million (2013: £273 million)
was on tangible fixed assets and was 1.5 times (2013: 1.2 times)
the depreciation charge, higher than the previous year due
to additional investment in the automotive businesses in
North America. Expenditure on intangible assets, mainly
initial non-recurring costs on aerospace programmes, totalled
Operating cash flow
£75 million (2013: £76 million).
£343m
The Group invested £161 million in the year (2013: £149 million)
on research and development activities not qualifying for
capitalisation, net of customer and government funding.
Net
interest paid totalled £83 million (2013: £65 million) including
2014
£343m
£16 million of previously accrued interest on a government
refundable
advance. Tax paid in the year was £68 million
2013
£437m
(2013: £52 million).
2012
£210m
Operating
cash flow
2011
£343m
£437m
£601m
£210m
£227m
£245m
2014
£601m
2013
£578m
2012
£493m
Management
profit before tax of continuing operations
2011
2010
£417m
£363m
2014
£601m
2013
£578m
40 GKN plc Annual Report and Accounts 2014
2012
£624m
2013
£732m
2012
£871m
£538m
£151m
GKN operates a number of defined benefit pension schemes and
2014 retiree medical plans across
historic
the Group.
£624m
£343m
£601m
2014
Pensions and post-employment obligations
2013
2010
£624m
£624m
Management profit before tax of continuing operations
2011
Net debt
2010
£245m
2014
2012
At the end of the year, the Group had net debt of £624 million
(2013: £732 million) after payment of a government refundable
advance (including accrued interest) of £54 million. In September
2014, the Group entered into a series of cross currency interest
rate swaps to better align its foreign currency income receipts
with its debt coupon payments. The fair value of these derivative
instruments at 31 December 2014 was a liability of £26 million
which is included in the net debt figure of £624 million.
Net
debt
2011
£227m
2010
Free cash flow, which is operating cash flow including joint venture
dividends and after interest, tax, amounts paid to non-controlling
interests and own shares purchased, but before dividends paid to
GKN shareholders, was an inflow of £234 million (2013: £346 million).
The year-on-year change reflects increased capital expenditure of
£54 million, repayment of a government refundable advance in
the UK relating to the A350 programme of £54 million (including
interest) and incremental pension funding of £12 million.
£493m
£732m
At2013
31 December 2014, the total deficit on post-employment
Management
earnings
per share
obligations
of the
Group totalled
£1,711 million (2013:
2012
£871m
£1,271 million), comprising the deficits on funded obligations of
£1,095
2011 million (2013: £763 million)
£538mand on unfunded obligations
of £616 million (2013: £508 million). The total deficit represents
a2010
£440 million
increase since 31 December 2013 which is due
£151m
primarily to significantly lower discount rates in all of the
major territories where GKN operates post-retirement schemes.
2014
29.0p
New US mortality assumptions have also contributed to the
increase
2013 in the deficit, and these factors have been partly
28.7poffset
by strong asset performance.
2012
26.3p
The amount included within trading profit for the period comprises
Management
earnings
per
share
2011 service cost of £49 million (2013:22.6p
current
£51 million) and
administrative costs of £3 million (2013: £3 million), offset by a
20.7p
2010
settlement
credit of £9 million. The settlement
credit related to a
29.0p
29.0p
2014
29.0p
2013
28.7p
2012
26.3p
Strategic Report
Governance
Financial Statements
Other Information
Cash contributions to the various defined benefit pension
schemes and retiree medical arrangements totalled £108 million
(2013: £112 million).
other than to hedge identified exposures of the Group. Speculative
use of such instruments or derivatives is not permitted. Group
Treasury prepares reports at least annually to the Board, and on a
monthly basis to the Finance Director and other senior executives
of the Group. In addition, liquidity, interest rate, currency and
other financial risk exposures are monitored weekly. The overall
indebtedness of the Group is reported on a weekly basis to the
Chief Executive and the Finance Director.
UK pensions
Funding, liquidity and going concern
voluntary programme run in the US which offered deferred members
the opportunity to take a cash lump sum in lieu of a future pension.
Interest on net defined benefit plans, which is excluded from
management figures, was £50 million (2013: £45 million).
The accounting deficit for UK schemes increased to £1,005 million
(2013: £714 million), due to the application of lower discount rates.
Both UK pension schemes (GKN 1, a mature scheme, and GKN 2,
with a larger active and deferred population) underwent funding
valuations as at 5 April 2013 and final agreement was reached on
the valuation and resulting deficit recovery plan for each scheme
during the year. The agreed deficit recovery plan requires payments
of £10 million per year and the potential for further additional
payments commencing in 2016, contingent upon asset
performance. The first payment of £10 million was made during the
year. This is in addition to a £30 million (2013: £30 million) annual
payment made under the Group’s pension partnership arrangement.
Early in the year, a bulk annuity pensioner 'buy-in' was completed
in relation to the UK pension scheme, GKN 1, as a result of which a
proportion (c.12%) of GKN 1 liabilities are now fully insured.
The transaction involved a payment of £123 million, made from GKN
1’s assets. This gave rise to an additional scheme funding requirement
of £8 million which the Group will pay to GKN 1 over a four-year
period. The first payment of £2 million was made during the 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 £35 million (2013: £34 million).
Net assets
Net assets of £1,501 million were £294 million lower than the
December 2013 year end figure of £1,795 million. The decrease
includes management profit after tax of £480 million more than
offset by dividends paid to equity shareholders of £133 million,
currency on translation of subsidiaries and joint ventures net of
tax and the change in value of derivative and other financial
instruments of £182 million and a loss on remeasurement of
defined benefit plans of £485 million.
Treasury management
All treasury activities are co-ordinated through a central function
(Group Treasury), the purpose of which is to manage the financial
risks of the Group and to secure short and long term funding at
the minimum cost to the Group. It operates within a framework of
clearly defined Board-approved policies and procedures, including
permissible funding and hedging instruments, exposure limits
and a system of authorities for the approval and execution
of transactions. It operates on a cost centre basis and is not
permitted to make use of financial instruments or other derivatives
At 31 December 2014, UK committed bank facilities were
£880 million. Within this amount there are committed revolving
credit facilities of £800 million (31 December 2013: £837 million)
and an £80 million eight-year amortising facility from the European
Investment Bank (EIB). The revolving credit facilities of £800 million,
renegotiated during the year, mature in 2019, whilst the first of
five equal, annual £16 million EIB repayments falls due in 2015.
At 31 December 2014, the £80 million EIB facility was fully drawn
(2013: £80 million fully drawn) and there were no drawings on any
of the UK revolving credit facilities (2013: no drawings).
Capital market borrowings at 31 December 2014 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 2014, the Group had net debt of £624 million
(31 December 2013: £732 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 2014, EBITDA was 11.8 times greater than net interest
payable, whilst net debt was 0.7 times EBITDA.
The Group entered into a series of cross currency interest rate
swaps during the year 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 fair value of the cross currency interest rate
swaps at 31 December 2014 was a liability of £26 million (2013: nil).
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.
GKN plc Annual Report and Accounts 2014
41
STRATEGIC REPORT
Risk management
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 regularly discussing our principal risks. In addition, in the middle and at the end of each year, the Board assesses the Group’s
principal risks, taking the strength of the Group’s control systems and our appetite for risk into account.
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 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 Committee as appropriate.
Following changes to the UK Corporate Governance Code in 2014 we reviewed whether there are any gaps in our integrated approach to
risk management at a Board level by comparing our principal risks to the topics discussed by the Board during a typical year. As a result
of this review, we will increase the level of oversight of certain principal risks and will strengthen the independent assurance provided in
respect of some risks. Whilst overall we are happy with our risk management processes, our philosophy across the Group is to seek to
continuously improve. Risk management is no exception.
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 Group CEO 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 the GKN Code (see page 54). 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 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.
Level 4:
Oversight
Level 3:
dent assuranc
n
e
p
e
e
Ind
M
Level 2:
ring and complia
o
t
i
nce
on
Level 1:
Risk ownership
and control
42 GKN plc Annual Report and Accounts 2014
Strategic Report
Enterprise Risk Management
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 a divisional and Group level.
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 with specific reference
to likelihood and impact.
Respond: The risk response is based upon the assessment of
potential risk exposure and the level of tolerance acceptable.
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.
Governance
Financial Statements
Other Information
Principal risks and uncertainties
The nature of both our business and our strategy means that we
face a number of inherent risks. 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 principal risks and uncertainties are summarised below
according to the strategic objective to which they relate. They 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,
the risk relating to integrated systems complexity has been split
into two risks relating to contract risk and product quality. The
Board believes that this reflects more clearly the risks associated
with, respectively, revenues which are increasingly tied to long
term contracts with complex terms and the increasing cost and
frequency of product recalls across the automotive industry in
general. Acquisition integration has been removed as a principal
risk following the successful integration of the aero engine division
of AB Volvo and we have added a risk relating to the supply chain.
The nature of each principal risk is further described on pages
44 to 51 together with the corresponding mitigating actions that
are in place and an overview of the risk trends during 2014.
Monitor: The output from the ERM process is regularly
reviewed together with the live tracking of delivery of planned
improvement actions.
Strategic objectives
Risk trend
Leading in our
chosen markets
Leveraging a
strong global
presence
Increasing
• Highly competitive
markets
• Joint ventures
Stable
• Supply chain
• Customer
concentration
• Laws, regulations
and corporate
reputation
• Operating in global
markets
Differentiating
ourselves
through
technology
Driving
operational
excellence
Other risks
• Contract risk
• Programme
management
• Product quality
• Technology and
innovation
• People capability
• Health and safety
• Information system
resilience
• Business continuity
• Pension funding
Reducing
GKN plc Annual Report and Accounts 2014
43
STRATEGIC REPORT
Risk management / Principal risks and uncertainties
Highly competitive markets
Leading in our chosen markets
Risk trend
Description and potential impact
Mitigation
Increasing
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.
• Maintaining a balanced portfolio of businesses across our
markets provides some protection against competition in
individual markets or countries.
• Continual review of competition and market trends.
• Targeted investment in engineering, Lean manufacturing
resources, quality and customer relationships.
In those countries where we have strong margins, these
margins may come under pressure as our competitors
improve, particularly if the relevant markets slow. An
inability or delay in developing or maintaining sufficient
or appropriate engineering and manufacturing
capabilities in high growth markets could further
increase the risk.
Strong competition and customer pricing pressures have
continued throughout 2014. Pressure on margins is increasing in
high growth markets such as China and competition is particularly
strong in areas of new and emerging technologies. Despite these
challenges, we continue to win new business and differentiate
ourselves through our technology.
▴
Customer vertical integration (including OEMs taking
production in-house), the entry of new competitors or
consolidation of existing competitors also contribute to
increased competition.
Changes during 2014
The strategic report on page 13 includes more information on the
trends in each of our markets.
Potential impact
Competition, 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.
Supply chain
Leading in our chosen markets
Risk trend
Description and potential impact
Mitigation
Stable
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.
• 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.
◂▸
Our supply chain network is exposed to potentially
adverse events such as physical disruptions,
environmental and industrial accidents, and scarcity of
supply or bankruptcy 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 the
customer through pricing.
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.
44 GKN plc Annual Report and Accounts 2014
Changes during 2014
We continue to carefully manage and monitor our supply chains
and, where appropriate, build upon long term supplier
relationships. In December we introduced a new Supplier Code of
Conduct aimed at making it easier and clearer for suppliers to
understand what we expect of them (see page 57 for more
information).
Strategic Report
Governance
Financial Statements
Customer concentration
Other Information
Leading in our chosen markets
Risk trend
Description and potential impact
Mitigation
Stable
Significant customer concentration exists 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 10 customers.
• 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.
• We monitor and review quality, service and delivery
performance based upon customer KPIs (the ‘Voice of the
Customer’ programme is described further on page 48 under
‘Product quality’).
• Credit exposure is actively reviewed and managed.
◂▸
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.
Changes during 2014
There have been no significant changes in the OEM customer
landscape with the proportion of business from the Group’s top 10
customers remaining stable during 2014. No individual customer
accounts for more than 10% of Group revenue. However, we have
won significant new business with one of our automotive
customers, have continued to diversify our aerospace customer
base, and will continue to regularly review the degree of our
customer concentration.
See page 12 of the strategic report for more information on key
customer trends and page 143 (note 19c) on credit risk.
Joint ventures
Leveraging a strong global presence
Risk trend
Description and potential impact
Mitigation
Increasing
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.
• 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.
▴
Potential impact
Such a misalignment of objectives may result in the
Group’s inability to pursue its desired strategy as a
consequence of which the Group’s business and future
results may be adversely affected.
Changes during 2014
Revenues and profits generated by our joint venture partners have
again increased this year. Relationships remain strong, further
enhanced by the expansion in November 2013 of GKN Driveline’s
long-standing joint venture in China to cover the complete range
of GKN Driveline products. On 31 July 2014, the Group sold its
stake in the Emitec joint venture.
See page 138 (note 13) for more information on the Group’s joint
ventures.
GKN plc Annual Report and Accounts 2014
45
STRATEGIC REPORT
Risk management / Principal risks and uncertainties
Laws, regulations and corporate reputation
Leveraging a strong global presence
Risk trend
Description and potential impact
Mitigation
Stable
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 ethical business practices.
• 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.
Tax in particular is a complex area where laws and their
interpretation are changing regularly, leading to
potential uncertainty in tax exposures.
There have been no significant new regulations impacting the
Group during 2014, but our markets are subject to increased
enforcement activities in relation to existing regulations,
particularly in relation to vehicle safety.
◂▸
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.
Changes during 2014
In response, we have taken steps to reinforce our commitment
across the Group to ‘doing the right thing’ in all activities. This
includes emphasising the importance of ‘doing the right thing’ to
all senior managers at the Group’s International Leadership
Conference and re-launching the GKN Code to remind employees
of the standard of behaviour we expect. We continue to strengthen
our risk management systems.
See pages 52 to 54 for more information on 'doing the right
thing' and 68 to 69 for more information on governance policies
and procedures.
Operating in global markets
Leveraging a strong global presence
Risk trend
Description and potential impact
Mitigation
Stable
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.
• 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 also 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.
◂▸
Our businesses could be impacted 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.
46 GKN plc Annual Report and Accounts 2014
Changes during 2014
During the year we have aligned our debt to the principal
currencies in which our revenues and cash flows are generated
through cross currency swaps.
We have further strengthened our presence in Asia and Mexico
and are working hard to continue to diversify our aerospace
customer base.
Further commentary on the recent trends and outlook for each of
our markets is set out in the Chief Executive’s review on pages 16
to 19 and the global markets section on pages 12 to 13. For further
details on the Group’s financial risk management processes
regarding foreign currency exposures see page 142 (note 19).
Strategic Report
Governance
Technology and innovation
Financial Statements
Other Information
Differentiating ourselves through technology
Risk trend
Description and potential impact
Mitigation
Stable
Developing innovative technologies for our customers
is critical to maintaining our differentiation and
competitive advantage. 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.
• 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.
• 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.
◂▸
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.
Changes during 2014
We have continued to invest in technology 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 further strengthened our Engineering
Fellowship who support the Board in developing the Group’s
technology plan and provide engineering leadership throughout
the Group. The Group continues to establish cross-divisional
projects aimed at delivering innovative solutions to meet our
customer needs across all our markets.
Further commentary on how the Group continues to differentiate
itself through technology is included in the business review
section on pages 22-37.
Contract risk
Driving operational excellence
Risk trend
Description and potential impact
Mitigation
Increasing
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.
• Robust bid and contract management processes including
thorough reviews of contract terms and conditions, contractspecific risk assessments and clear delegation of authority
for approvals.
• Continuous review of contract performance.
Specifically within the Aerospace business, the Group
has risk and revenue sharing partnerships (RRSP) with
key engine manufacturers. These contain formalised
risk sharing arrangements relating to risks that are not
always within GKN management control.
As the Group focuses on providing solutions to its customers,
often including a design element, the risks associated with
complex contracts increases. The Group regularly reviews ways to
further strengthen its contract management processes and this
will continue as an area of focus during 2015.
▴
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.
Changes during 2014
See pages 20 to 37 of the strategic report for more information.
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.
GKN plc Annual Report and Accounts 2014
47
STRATEGIC REPORT
Risk management / Principal risks and uncertainties
Programme management
Driving operational excellence
Risk trend
Description and potential impact
Mitigation
Increasing
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 customerdriven change;
• inability to forecast accurately and to manage costs.
• 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.
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.
See pages 22 to 37 of the business review for more information on
major new programme wins.
▴
Changes during 2014
Programme management risk has continued to increase in line
with the move towards common global platforms in automotive
and the launch of new aircraft in aerospace, together with the
application of new technologies. In response, the Group has
continued to strengthen its risk management systems in this area,
and this will continue as an area of focus during 2015.
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.
Product quality
Driving operational excellence
Risk trend
Description and potential impact
Mitigation
Increasing
The quality and safety of our products is essential.
We are exposed to warranty, product recall and
liability claims in the event that our products fail to
perform as expected.
• 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.
• Robust contract terms and conditions.
▴
In automotive, the industry in general has experienced
higher levels of recalls in recent years and the OEMs
often seek contribution 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.
48 GKN plc Annual Report and Accounts 2014
Changes during 2014
Excellence in quality has continued to be a priority during the year
with continuous improvement programmes ongoing in each of our
businesses. A central part of this year’s focus on quality has been
our 'Voice of the Customer' initiative. In addition to our internal
quality KPIs we now view quality through the eyes of our
customers by collecting the quality reports issued by our
customers, analysing these and by working to continously improve
quality and delivery as measured by our customers.
See page 18 of the Chief Executive’s review and page 57 of the
sustainability report for more information.
Strategic Report
Governance
Financial Statements
People capability
Other Information
Driving operational excellence
Risk trend
Description and potential impact
Mitigation
Stable
The Group’s ability to deliver its strategic objectives
is dependent upon the recruitment and retention
of sufficiently qualified, experienced and
motivated people.
• 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.
◂▸
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.
Changes during 2014
The recruitment and development of young engineering talent has
continued to be a priority during 2014 together with resources and
capabilities aligned to our growth markets.
More information is available in the sustainability report on
pages 55 and 56.
Health and safety
Driving operational excellence
Risk trend
Description and potential impact
Mitigation
Stable
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.
• Consistent Group-wide application of health and
safety 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.
• Maintenance of insurance for costs associated with related
actions or claims against the Group.
◂▸
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.
Changes during 2014
Against a target of zero preventable accidents, our accident
frequency rate (AFR) continued to improve during 2014, whereas
our accident severity rate (ASR) saw a minor increase. Our core
thinkSAFE! and ‘don’t WALK BY’ programmes continued together
with the introduction of thinkHEALTH! (occupational health
awareness), all aimed at encouraging employees to identify and
resolve safety concerns.
Focused hazard awareness and risk assessment programmes
continued to be embedded throughout our manufacturing sites to
support proactive risk identification and corrective actions.
See page 54 of the sustainability report for more information on
the Group’s health and safety performance.
GKN plc Annual Report and Accounts 2014
49
STRATEGIC REPORT
Risk management / Principal risks and uncertainties
Information system resilience
Driving operational excellence
Risk trend
Description and potential impact
Mitigation
Stable
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.
• 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.
◂▸
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, damage to the Group’s reputation, and could
adversely affect its ability to win future contracts.
Changes during 2014
The Group has continued to strengthen its mitigating processes
and controls in this area and to monitor the nature and volume of
information security threats impacting both our business and our
industries more generally.
See page 69 of the corporate governance report for more
information on the Group’s IT governance.
Business continuity
Risk trend
Description and potential impact
Mitigation
Stable
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.
• 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.
◂▸
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, additional contractual liabilities and have
a consequential impact on financial performance.
50
Other risks
GKN plc Annual Report and Accounts 2014
Changes during 2014
There has been no significant change in the inherent risk profile
during 2014. All divisions continue to focus on risk mitigation,
including the production, refinement and testing of business
continuity and disaster recovery plans, and ongoing reviews of
critical assets and prioritisation of capital investment.
Strategic Report
Governance
Financial Statements
Pension funding
Other Information
Other risks
Risk trend
Description and potential impact
Mitigation
Stable
The Group operates a number of defined benefit pension
post-retirement medical plans with aggregate net
liabilities of £1,711 million at 31 December 2014. These
plans are exposed to the risk of changes in asset values,
discount rates, inflation and mortality assumptions.
• 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.
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.
Changes during 2014
◂▸
During 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,
including a partial buy-in transaction in the UK and an increase in
hedging ratios. In addition, in the UK we commenced a ‘pension
increase exchange’ exercise to further mitigate inflation risk,
which will conclude in early 2015, and undertook a 'voluntary lump
sums programme' in the US, whereby deferred members of the US
pension plan were offered a cash lump sum in lieu of future
pension rights. The Group continues to have a reasonable degree
of visibility over the range of short to medium term funding
cash flows.
See pages 40 to 41 and 150 to 155 for more information on the
Group’s pension arrangements.
GKN plc Annual Report and Accounts 2014
51
STRATEGIC REPORT
Sustainability report
Our Values at the heart of a sustainable business
CLEAR VALUES
• By our people
• As a business
• In our world
Doing the right thing
Message from the Chief Executive
At GKN, being a sustainable business means operating in an ethical, efficient and safe
manner. The GKN Code, its related policies and our Values are all in place to make sure
we do so. They describe how the Group and employees should conduct business in
order to build a long term, sustainable future for GKN.
This section explains essential business processes from continuous improvement and
how we work with suppliers, to ensuring we have the right people by recruiting talent,
developing them and making sure they remain safe in our sites.
We also focus on our impact in our world and GKN’s positive role in the communities in
which we operate.
Our Values are at the heart of our business.
They explain what GKN stands for and guide
our day-to-day activities. By living these
Values all GKN employees are contributing
to the long term success of the Group. Our
Values can be summed up in one simple
phrase: doing the right thing.
Twelve promises, six from GKN to our
employees and six from employees to
GKN, help our employees live these Values
every day.
52
GKN plc Annual Report and Accounts 2014
6
PROMISES
Strategic Report
Governance
Financial Statements
Other Information
PROMISES FROM GKN TO EMPLOYEES
PROMISES FROM EMPLOYEES TO GKN
→→ We will support you through investment
and training so we can build a high
performance business by delivering superb
customer service.
→→ I share GKN’s commitment to build a high
performing business with a strong customer
focus. I show that commitment through
my work.
→→ We will help you develop your full potential
and we will not tolerate any discrimination.
→→ I always respect the rights of other
team members.
→→ We will care for you by providing a safe
working environment.
→→ I do not put other team members at risk
of injury and will counsel anyone I see
working unsafely.
→→ We will do what we can to minimise our
impact on the environment.
→→ We are all part of a wider society and we will
contribute positively to the communities of
which we are part.
→→ If you have a problem we will listen
in confidence.
→→ I believe in honest and proper conduct at
all times.
→→ I know I am free to report behaviour which is
wrong and I will do so.
→→ I will help protect the environment and
support local communities.
GKN believes in doing the right thing by our people, as a business and in our world.
OUR PEOPLE (pages 54-56)
We employ 51,400 people in more than
30 countries across five continents. We
have strong relationships with customers,
suppliers and contractors around the world.
Our people are the key to those relationships
and are central to our success.
At GKN, ‘doing the right thing’ by our
people means promoting a safe working
environment, developing our employees,
encouraging a diverse workforce and
building an environment where people
feel comfortable speaking up if they see
behaviour which is wrong.
This approach helps GKN develop an
outstanding team. It means we are more
able to recruit the very best talent and create
a workforce of engaged colleagues around
the world.
OUR BUSINESS (page 57)
GKN is a global technology leader in three
core markets: aerospace, automotive and
land systems. Every day we deliver high
quality products and services that touch
people’s lives and help move the world,
helping us to achieve our strategic
objective of differentiating ourselves
through technology.
We believe in building a high performance
business and are committed to delivering
safe, high quality products and services.
We also believe in creating a culture of
continuous improvement across GKN,
applying the Lean Enterprise model to
everything that we do. This helps us towards
the Group’s strategic objective of driving
operational excellence.
OUR WORLD (pages 58-59)
We strive to have a positive impact on our
world – from the sites we work in, to the
communities in which we operate and the
planet on which we live.
As a global engineering business we aim to
reduce the impact that both our operations
and our customers have on the environment.
Every product that we engineer is designed
to perform better than its predecessor,
be it lighter, more efficient or resulting in
less waste.
We also aim to support the communities
in which we operate. GKN is proud of the
positive role that our sites and employees
play in society every day, whether this is
through job creation and promoting good
business practice, or supporting local charity
and community organisations. This supports
our strategic objective of leveraging a strong
global presence.
GKN plc Annual Report and Accounts 2014
53
STRATEGIC REPORT
Sustainability report / Our people
Doing the right thing by our people
GKN Code
During 2014 we revised the GKN Code to make it clearer and simpler,
and to provide additional guidance on key areas of risk. The new GKN
Code will be rolled out to all employees during 2015, reinforcing our
Values and reminding employees about the standards of behaviour
we expect.
The rollout programme started in February 2015 with briefings at
each of our divisional leadership conferences; it will be followed
by an ongoing cascade to all employees through manager-led
face-to-face awareness sessions.
Health and safety
At GKN we have a goal of zero preventable accidents. To support
this we have a number of GKN-developed and globally applied
behavioural safety programmes. These highlight potential safety
issues, share best practice and help to minimise hazards at our
sites. Led by our Group-wide communications and awareness
programme, thinkSAFE!, this consistent approach helps us work
towards our strategic objective of driving operational excellence.
We have continued to integrate Total Plant Risk Management (TPRM)
techniques into key operations following their introduction in 2013.
TPRM is focused on raising our hazard awareness competence within
manufacturing sites and uses screening tools to identify risks and
take corrective actions.
We require all our manufacturing plants to achieve certification to
the health and safety standard OHSAS 18001 or equivalent, and all
sites have obtained or are working towards certification.
We measure our health and safety performance through two metrics:
accident frequency rate (AFR) is used to track the number of lost time
accidents and accident severity rate (ASR) records the number of days
lost due to accidents and occupational ill health. In 2014 there was
continued improvement in the AFR, reducing from 1.6 in 2013 to 1.3;
however, the ASR saw a minor increase from 40 to 46, primarily due to
specific occupational health issues in North America associated with
the long term absences of three employees. Actions to address this
have been implemented in 2014 and will continue into 2015.
In February 2014 an employee at GKN Aerospace Engine Systems' El
Cajon plant in the US suffered a fatal injury whilst operating a forklift
truck. We deeply regret this loss of life and have provided support
to the employee’s family. A full investigation was carried out and
lessons learned have been communicated across the Group. This has
included a forklift truck safety improvement programme.
Accident frequency rate
Accident severity rate
68
The Group extended its management and control of potentially
catastrophic risk by introducing the use of the 'Bowtie model'.
The Group identified a number of improvement opportunities to
reduce the overall health, safety and environment (HSE) risk profile,
completing the majority of actions in 2014. The Bowtie process will
be further developed and improved during 2015.
2.7
thinkSAFE! and ‘don’t WALK BY!’ continued throughout 2014
and we introduced thinkHEALTH! (occupational health awareness).
These programmes encourage employees to resolve safety and
health concerns.
During 2014 we increased our focus on near-miss incident reporting
and associated improvement actions. There was an overall reporting
increase of 74% over 2013. This focus will continue into 2015
with the aim of using this leading indicator as a means of taking
preventive actions.
59
Number of days/shifts lost due to
accident and occupational ill
health per 1,000 employees*
During 2014, there were 14 incidents in respect of which a safety
enforcement action was issued; 13 in the US with a penalty totalling
$16,710 and one in the UK without a penalty.
2014
2013
2012
2011
2010
2014
2013
2012
2011
2010
1.3
1.6
40
46
51
2.1
2.3
Number of lost time accidents per
1,000 employees*
During 2014, 69 health, safety and environmental audits were carried
out through our internal HSE audit function, HSE peer audits and
using external audit expertise. These audits assess performance
against broad-based and wide-ranging criteria. Audit findings are
analysed and corrective actions are taken. We also share best
practice examples across the Group.
* 2010 figures include subsidiary employees only.
2011-2014 figures also include agency workers.
→
A safety briefing
for employees at
GKN Driveline in
Birmingham, UK
54
GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Leadership assurance
Developing our people
Speaking up
Our online training support tool, GKN Academy, enables employees
to access development options from their workplace or from
home. There is now a library of 4,400 courses available in up to
20 languages, in support of our growing global workforce. In 2014,
employees completed more than 21,600 courses – a 45% increase
on the previous year – and the GKN Academy site experienced an
average of 8,500 hits per month.
Our leadership team plays an essential role by setting an example
and personally demonstrating how we value the importance of
‘doing the right thing’. All GKN leaders are required, on an annual
basis, to confirm that that they understand the behaviours expected
of them as leaders in promoting the right behaviours within GKN. In
2015 they will also be asked to confirm that they have received, read
and understood the new GKN Code and have held a cascade briefing
with their team.
GKN is committed to a culture in which people feel comfortable
speaking up when they see behaviour which is inconsistent with
the GKN Code. We continue to promote the importance of our
confidential Employee Disclosure Hotline, which is available to all
employees and enables them to raise concerns on an anonymous
basis. It is hosted by an external, independent company and is
available 24 hours a day, seven days a week. Matters reported are
investigated and feedback is always provided to the caller. Over the
past three years we have experienced a rise in the number of calls
to the hotline to 133 calls in 2014 (0.3% of employees). We attribute
this to increased promotion raising awareness of the service and a
growing workforce.
GKN is committed to supporting all its employees through
investment and development. Training and career development
remain a focus for the business. Employee progress is charted
through managerial and technical career paths, supported by
focused assessment and training.
Formula Student
Inspiring the next generation of engineers
2014
2013
2012
2011
2010
52
76
88
116
133
Number of calls to Employee Disclosure Hotline
Graduates and apprentices
In 2014, GKN divisions recruited over 150 graduates worldwide.
These are sought-after posts attracting high quality candidates.
As we seek to increase the number of talented individuals we recruit
with the skills and talent to become our leaders of the future,
a Group-wide graduate programme will be re-introduced during
2015. This will focus on recruiting high calibre individuals onto a
fast-track management programme, consisting of cross divisional
and diverse assignments.
GKN is also expanding its recruitment of apprentices and has
nearly 900 globally, an increase of around 20% during 2014.
An apprenticeship with GKN combines learning practical skills
with classroom studies, preparing young people for a future career
at the heart of engineering.
→ Visit us at www.gkn.com/careers to find out more
GKN is helping to inspire the next generation of engineers
through global support for international student motorsport
competitions, such as Formula Student, in which students
compete to design, build and race their own vehicles. Over 100
universities and more than 4,000 students were involved in these
contests. During 2014, GKN invested approximately £23,000
supporting teams and contests in the UK, China and Spain,
as well as providing materials, components and expertise to
contestants across the world.
GKN plc Annual Report and Accounts 2014
55
STRATEGIC REPORT
Sustainability report / Our people
The Group has an organisation-wide succession planning and
development programme to ensure our people develop the
capabilities required to deliver the business plan. In 2014 the Group
internal recruitment rate for management roles was 70%. Voluntary
turnover of management employees, which excludes compulsory
redundancies, terminations and retirements, was 4.7% (2013: 6.1%),
bringing us into our target range of less than 5%.
Employees by business*
 GKN Aerospace
12,350
 GKN Driveline
25,650
 GKN Powder Metallurgy 6,900
 GKN Land Systems
5,200
 Other Businesses
1,300
* Including subsidiaries and joint ventures.
Employee engagement
GKN is committed to creating and maintaining a working
environment that stimulates both personal and
organisational growth.
In the first half of 2014, the results of the 2013 biennial Global
Employee Survey, reported last year, were delivered to every
business unit and every global function. Since then site-level action
plans have been created to address issues raised by the survey.
Progress against these action plans are captured through Positive
Climate Index (PCI) sessions, held monthly in every GKN site.
Hosted by business leaders, and facilitated by HR colleagues,
these sessions provide an opportunity for open and honest
dialogue between employees and site leadership. Colleagues
answer questions about their experiences of working for GKN and
can suggest ideas for improvement. HR teams and Site Steering
Committees then work together to respond to the issues raised and
drive cultural improvements.
PCI performance is now an essential measure of business
performance and forms part of all monthly divisional
operation reviews.
The Group’s average PCI data has been consistent for the past three
years. A programme of support for leaders is being deployed in the
form of an Engagement Workshop for management teams. This will
be rolled out and expanded in 2015.
56
GKN plc Annual Report and Accounts 2014
Diversity and inclusion
As a global organisation with operations in more than 30 countries,
we value the individuality that each employee brings to our
business. Our objective is to have a positive and inclusive working
environment free from any kind of discrimination and in which
employees are motivated to maximise their contribution.
GKN’s policies require all Group companies to treat employees
fairly and with respect, recognising their abilities, differences
and achievements.
Our aim is to ensure that the workforce is representative of the
countries and markets in which we operate and the communities in
which we are located, including an appropriate gender mix. Women
make up 13.2% of total subsidiary employees (see table below) and
6.8% of the senior executive population.
As at 31 December 2014
Male
Female
GKN plc Board
Senior managers(b)
Total employees(c)
7
373
39,235
1
33
5,990
(a)
(a) Excluding Marcus Bryson who retired from the Board on 31 December 2014.
(b) Comprises senior executives and, as required by S414C of the Companies Act
2006, subsidiary company directors.
(c) Excluding joint ventures.
As an engineering group we face particular challenges in increasing
our gender diversity, especially amongst the senior executive
population. In order to increase our talent pipeline of women and
other under-represented groups, we have implemented a diversity
and inclusion programme which will focus on the following actions
in 2015:
• Interactive diversity training for executives and senior
management.
• Identification of high potential people from under-represented
groups and setting up mentoring relationships.
• Recruitment and promotion training for relevant employees.
• Online diversity training throughout the organisation.
Strategic Report
Governance
Financial Statements
Other Information
Sustainability report / Our business
Doing the right thing as a business
Human rights
A respect for human rights is the first tenet in our Ethics Policy. It
is also implicit in our Values and the other policies which underpin
them. We support the Universal Declaration of Human Rights and do
not tolerate the use of child or forced labour.
Suppliers
GKN employees delivered over 80 weeks of training to more than
300 leaders during the past year. A new course, Lean Leadership,
was developed and delivered to Executive leaders, providing
alignment at all levels of the Group. In our sites, leaders delivered
Lean Fundamentals training and led events to organise work cells,
develop value streams, and improve business processes.
Supply chains are carefully planned and monitored. We align our
resources and capacities to our customers’ demands, ensuring
timely delivery of high quality products with minimum disruption
and waste.
This robust system of training, improvement workshops and
coaching ensures that GKN grows its culture of continuous
improvement and contributes to a successful and sustainable
Lean Enterprise.
Our suppliers are integral to the sustainability of our business.
We are committed to treating all our suppliers and partners with
fairness and integrity and aim to develop and maintain strong
supplier relationships. In return, we expect our suppliers to ‘do
the right thing’. Our supply chain management policy sets out the
principles and procedures each GKN company should follow in
dealing with suppliers and potential suppliers.
Compliance training
In December 2014 we introduced a new Supplier Code of Conduct
aimed at making it easier and clearer for suppliers to understand
what we expect of them. This code sets out the requirements of
suppliers in relation to health, safety and environmental standards,
internationally accepted standards of workers’ rights, use of child
and forced labour, ethical standards, bribery and corruption, and
compliance with relevant laws and regulations. Our contractual
terms and conditions support the implementation of this code.
Our online compliance training modules continue to be an important
element of our overall compliance programmes. Of our pre-defined
target audience of employees, 98% have completed training on antibribery and corruption and competition law, and since their launch,
12,500 and 3,400 employees respectively have completed these
courses. 85% (14,191 employees) of the pre-defined target audience
have completed online IT security training. All new starters meeting
our defined criteria are expected to complete these online courses
which are supplemented by face-to-face training for individuals in
roles more relevant to those areas.
Continuous improvement
GKN’s Lean Enterprise model provides a framework for continuous
improvement across the Group. Employees from the office and
factory floor up to the executive level are trained to identify value for
customers and shareholders, and encouraged to eliminate waste or
remove barriers.
As we strive towards operational excellence, employee teams
work to improve workplace safety, meet customer targets for
quality and delivery, and improve the flow of parts and information.
Employees and leaders develop skills in coaching and problem
solving, building a culture of continuous improvement in our
factories and offices alike.
↓
A continuous
improvement meeting
at GKN Driveline in
Trier, Germany
The ‘Voice of the Customer’ initiative in 2014 has reinforced
mechanisms for reflecting customer views on GKN’s performance
into our management reviews.
GKN plc Annual Report and Accounts 2014
57
STRATEGIC REPORT
Sustainability report / Our world
Doing the right thing in our world
Environment
The Group is committed to continuous improvement in all areas of
environmental performance and seeks to minimise our impact on the
environment across our operations.
We apply GKN Lean Enterprise techniques to energy efficiency and
waste reduction programmes, both in offices and at manufacturing
locations. Sites are required to develop energy efficiency targets and
plans, which are reviewed regularly, and best practice is rewarded
in the Environmental category of the annual GKN Excellence Awards.
ISO 14001 is our mandated environmental management system
and all manufacturing sites have either achieved this or are in the
process of obtaining certification.
Energy consumption per unit of production kWh/tonne
3000
2500
2000
1500
1000
500
0
A major project was launched in 2014 to introduce energy metering
and monitoring at 10 pilot sites across GKN. This programme will
be further expanded in 2015 to cover our major energy using sites.
The project will allow our sites, divisions and Group to have near real
time energy data and take corrective actions as appropriate.
200
600
400
0
Aerospace*
Driveline
Powder
Metallurgy
Land
Systems
Waste generation per unit of production kg/tonne
250
200
484
465
529
100
50
2014
2013
2012
2011
0
2010
Land
Systems
150
484
587
576
Powder
Metallurgy
CO2 emissions per unit of production kg/tonne
800
2009
Driveline
1000
In 2014, in line with the thinkSAFE! methodology, we introduced
thinkGREEN!, an environmental awareness programme targeted
at all employees to encourage them to help reduce our impact on
the environment.
GroupGroup
energy
efficiency
kWh kWh
per £000
salessales
energy
efficiency
per £000
Aerospace*
Aerospace*
Driveline
Powder
Metallurgy
Land
Systems
Recycled waste % of total waste
100
Environmental performance in 2014 was in line with expectations,
with most divisions achieving improved results, as illustrated in
the charts. Group energy efficiency decreased by 4% over 2013,
primarily due to currency fluctuations depressing statutory sales,
but improved by 16% since 2009, meeting our target of a 15%
improvement over the five years. Going forward, we have set a target
of improving Group energy efficiency by 3% year-on-year.
80
60
40
20
0
Aerospace
Driveline
Powder
Metallurgy
Land
Systems
Water consumption per unit of production m3/tonne
5
4
3
2
1
0
Aerospace*
Driveline
Powder
Metallurgy
Land
Systems
* Aerospace measured against £1,000/sales.
2012
58 GKN plc Annual Report and Accounts 2014
2013
2014
Strategic Report
GKN calculates greenhouse gas emissions using the Greenhouse
Gas Protocol. The greenhouse gas intensity of the Group (i.e.
operations included in the consolidated financial statements)
increased by 8% in 2014. Expressed as tonnes of CO2 equivalent
per £million sales, emissions intensity increased from 171 in 2013
to 186 in 2014. This increase was caused primarily by currency
fluctuations depressing Group sales and partly by improved
greenhouse gas collection processes (see note below). The
absolute emissions of the Group increased by 6% from 1,228,000
tonnes of CO2 equivalent in 2013 to 1,300,000 tonnes of CO2
equivalent in 2014. This includes: Scope 1 (direct) emissions of
280,000 tonnes and Scope 2 (indirect) emissions of 1,020,000
tonnes (2013: 245,000 tonnes and 983,000 tonnes respectively).
This increase was largely due to improved data collection and
increased production in our more energy-intensive businesses.
We have set a target of improving Group greenhouse gas intensity
by 3% year-on-year going forward.
Governance
Financial Statements
Other Information
Casa dos Sonhos
House of Dreams, Gravataí, Brazil
Note: Scope 1 emissions in 2014 include CO2 equivalent emissions resulting from
transport, process and fugitive emissions, which were not included in 2013. Process
emissions from arc furnaces at two GKN Powder Metallurgy plants were included in
both years.
During 2014 there were 15 environmental enforcement actions,
all in the US. Four resulted in financial penalties totalling $6,600.
Environmental enforcement actions from 2013 in Brazil were
finalised and resulted in a penalty of R$3,035.
Communities
The majority of GKN sites are active in their communities. Sometimes
the activity is management-led, but on many occasions it is the
employees who instigate projects and initiatives. We focus these
activities on two main areas: enhancing local communities through
social projects and charitable donations; and working with young
people to inspire the next generation of engineers.
We aim to support young people in our communities and also to
inspire them to study science and mathematics and consider a
career in engineering. Around the world, GKN led over 125 significant
projects aimed at doing this; these projects touched the lives of
more than 25,000 young people.
Hearts of Gold
Held annually, our internal Hearts of Gold awards allow us to
recognise extraordinary GKN people who contribute to their
communities. Hearts of Gold winners receive a trophy and a
certificate to recognise their achievement.
We are also working on improved ways of recording and celebrating
these remarkable stories. One example is a new Hearts of Gold
microsite, which allows GKN employees to upload and share
community activities that they and their colleagues have taken part
in. This site is due to be launched in the first quarter of 2015.
→ Visit us at www.gkn.com to see more case studies
The Casa dos Sonhos – or House of Dreams – began as the vision of
one GKN Porto Alegre employee, Maria Mercedes de Paula, in 1985.
She wanted to help under-privileged children in her community and
after almost 20 years of fundraising and meetings with businesses
and local authorities, her school was built in the nearby town of
Gravataí in 2003. Today, 70 children from the ages of 6 to 16 attend
Casa dos Sonhos, learning reading, writing, sports and IT skills,
and GKN continues to donate Christmas gifts and equipment to
the school.
GKN plc Annual Report and Accounts 2014
59
GOVERNANCE
Board of Directors
1
MIKE TURNER CBE (66)
Chairman N
4
TUFAN ERGINBILGIC (55)
Independent non-executive Director A R N
7
ANDREW REYNOLDS SMITH (48)
Chief Executive Automotive E
60 GKN plc Annual Report and Accounts 2014
2
3
NIGEL STEIN (59)
Chief Executive N E
5
ANGUS COCKBURN (51)
Independent non-executive Director A R N
6
SHONAID JEMMETT-PAGE (54)
Independent non-executive Director A R N
8
RICHARD PARRY-JONES CBE (63)
Senior Independent Director A R N
9
ADAM WALKER (47)
Group Finance Director E
JOS SCLATER (42)
General Counsel & Company Secretary E
A Member of Audit Committee
N Member of Nominations Committee
R Member of Remuneration Committee
E Member of Executive Committee
Strategic Report
1. MIKE TURNER CBE
Chairman
Appointed to the Board in September 2009
and became Chairman in May 2012.
Experience Has extensive experience of
the aerospace industry having worked for
BAE Systems plc for over 40 years, and as
its Chief Executive from 2002 to 2008.
Former President of the Aerospace &
Defence Industries Association of Europe.
Fellow of the Royal Aeronautical Society.
External Appointments Chairman of
Babcock International Group PLC and
non-executive Director of Lazard Ltd.
Member of the Government’s
Apprenticeship Ambassadors Network.
Governance
2.NIGEL STEIN
Chief Executive
Appointed to the Board in January 2013.
Experience Currently the Chief Financial
Officer of Serco Group plc. He joined Serco
in October 2014 from Aggreko plc where
he held the role of Chief Financial Officer
for 14 years and was latterly Interim Chief
Executive. Prior to this he was Managing
Director of Pringle Scotland, a division of
Dawson International plc. Previously held
a number of roles at PepsiCo Inc and was
latterly Regional Finance Director for
Central Europe. Former non-executive
Director of Howden Joinery Group plc and
former Chairman of the Group of Scottish
Finance Directors. He is also an Honorary
Professor at the University of Edinburgh.
External Appointments Member of the
Automotive Council.
Appointed to the Board in May 2011.
Appointed to the Board in June 2010.
Experience Currently Chief Executive,
Downstream for BP plc with specific
responsibility for the Fuels, Lubricants and
Petrochemicals businesses. He joined BP
in 1997 and has held a number of senior
marketing and operational roles, including
Chief of Staff to the Group Chief Executive,
Chief Operating Officer of the Fuels
business and Chief Executive of the
Castrol Lubricants business. His early
career was spent at Mobil Oil.
Experience Former Chief Operating Officer
of CDC Group plc, the UK Government’s
development finance institution. Joined
CDC from Unilever, where for eight years
she was Senior Vice-President Finance and
Information, Home and Personal Care,
originally in Asia and later for the group as
a whole. Her early career was spent at
KPMG, latterly as a partner. Former
non-executive Director of Havelock Europa
plc and Close Brothers Group plc.
External Appointments Independent
non-executive Director of Amlin plc, APR
Energy plc and Greencoat UK Wind plc.
Non-executive Director and Vice Chairman
of Origo Partners plc.
Experience Joined GKN in 2002 and has
held a number of senior positions across
the Group’s automotive businesses. Joined
the Executive Committee in January 2006
and became Chief Executive Automotive
and Powder Metallurgy in October 2011.
Prior to GKN, he held various general
management and functional positions at
Ingersoll Rand, Siebe plc (now Invensys
plc) and Delphi Automotive Systems.
Former Chairman of the CBI Manufacturing
Council and former member of the
Ministerial Advisory Group for
Manufacturing.
3.ANGUS COCKBURN
Independent non-executive Director
Experience Joined GKN in 1994 and held a
range of commercial, general management
and finance roles, including Group Finance
Director and Chief Executive Automotive
before becoming Chief Executive in
January 2012. Prior to GKN, he gained
experience in the commercial vehicle and
manufacturing sector and held senior
financial positions with Laird Group plc
and Hestair Duple Ltd. Member of the
Institute of Chartered Accountants of
Scotland and former non-executive
Director of Wolseley plc.
5.SHONAID JEMMETT-PAGE
Independent non-executive Director
Appointed to the Board in June 2007.
Other Information
Appointed to the Board in August 2001.
4.TUFAN ERGINBILGIC
Independent non-executive Director
7. ANDREW REYNOLDS SMITH
Chief Executive Automotive
Financial Statements
8.ADAM WALKER
Group Finance Director
Appointed to the Board in January
2014 and as Group Finance Director
in February 2014.
Experience Former Finance Director of
Informa plc from 2008 to 2013 and
operationally responsible for the Events
Division from 2012 until leaving the group.
Prior to this he was Group Finance Director
at National Express Group plc from 2003
to 2008, having joined in 2001 as Head
of Corporate Development. His early
career was spent at Touche Ross,
NatWest Markets and, latterly, Arthur
Andersen where he held a number of
senior finance positions.
6.RICHARD PARRY-JONES CBE
Senior Independent Director
Appointed to the Board in March 2008
and as Senior Independent Director in
May 2012.
Experience Has extensive experience of
the automotive industry having previously
worked for the Ford Motor Company for
38 years, latterly as Group Vice-President
Global Product Development and Group
Chief Technical Officer. Fellow of the Royal
Academy of Engineering, the Institution of
Mechanical Engineers and the Royal
Society of Statistical Science. Former
non-executive Director of Cosworth Group
Holdings Ltd. Former Chairman of the
Welsh Assembly Government Ministerial
Advisory Group and former Chairman of
the Automotive Council.
External Appointments Non-executive
Chairman of Network Rail Ltd. Nonexecutive Director of Kelda Eurobond Co
Ltd and Yorkshire Water Services Ltd.
9.JOS SCLATER
General Counsel & Company Secretary
Appointed General Counsel in
January 2012. Assumed the joint
role of General Counsel & Company
Secretary in June 2014.
Experience Joined GKN from AkzoNobel
where he was Director of Legal Affairs
South Asia and Pacific and Lead M&A
Counsel for Asia Pacific. Prior to this, he
spent eight years at Imperial Chemical
Industries plc (ICI) and held a number of
senior legal positions within its
headquarters and Asia Pacific operations
and ICI’s Quest International business.
External Appointments Non-executive
Director of Morgan Advanced Materials plc
and Vice President of CLEPA (the European
Association of Automotive Suppliers).
GKN plc Annual Report and Accounts 2014
61
GOVERNANCE
Chairman’s introduction to governance
Doing the right thing.
MIKE TURNER CBE
Chairman
The value of good governance has been increasingly recognised by
stakeholders over the past few years. Whilst strong operational
performance is important, the Company’s progress towards its
strategic objectives must be underpinned by ethical behaviour and
a strong set of core values. For example, if we wish to lead in our
chosen markets, then we must compete fairly. If we want to expand
our global footprint, then we need to be mindful that we may
encounter differing ethical standards and must ensure that we hold
ourselves to the highest standards of behaviour.
These standards and values are set and demonstrated by the
Directors. With this in mind, we approved a revised code of conduct
(the GKN Code) in 2014 which was designed to provide a clear
framework for the increasingly complex environment in which our
51,000 employees operate. The financial and reputational impact
if we get it wrong cannot be underestimated and the revised GKN
Code helps our employees understand the obligations we have to
the Company’s stakeholders.
Leadership
The balance of skills, knowledge and experience on the Board
and on the Committees which support its work is crucial to the
Group’s success.
During the year, Adam Walker succeeded Bill Seeger as Group
Finance Director following Bill’s retirement. Adam brings a wealth
of knowledge and experience which has been invaluable in what
has been a challenging year for many UK companies. Marcus
Bryson, CBE, retired from his role as Chief Executive Aerospace and
Land Systems at the end of 2014 after 20 years with the Company.
Marcus will continue to work for the Company on a part-time basis
in 2015 to provide advice and support in relation to industry
developments and UK government relations. The Nominations
Committee considered both succession planning and the
composition of the Board in light of Marcus’ retirement;
further information can be found in its report on page 71.
62 GKN plc Annual Report and Accounts 2014
Conducting our business ethically and
safeguarding our shareholders’ investment
through high standards of both corporate
governance and business performance
are fundamental to GKN Values.
Effectiveness
Following our external evaluation in 2013, during the year we
conducted an internal evaluation of the Board. The evaluation
process involved face to face interviews with each Director to
gather feedback on the areas we believe to be critical to the
Board’s effectiveness. More information on the process can be
found on page 67 of this statement.
Accountability
The Board is ultimately responsible for setting the risk appetite of
the Group and for the maintenance of appropriate risk management
systems. During the year we continued to refine our risk procedures
and further strengthen our risk assurance processes in response
to changes in the market environments in which we operate.
A description of how GKN manages risk and the principal risks which
could impact the Group are set out on pages 42 to 51 of the strategic
report, and a summary of the internal control and compliance
procedures is set out on pages 68 and 69 of this statement.
The actions we have taken throughout the year are described more
fully throughout this report.
Mike Turner CBE
Chairman
23 February 2015
Strategic Report
Governance
Financial Statements
Other Information
Corporate governance
Leadership
The role of the Board
We are responsible for the long term success of GKN, with the
overarching aim of safeguarding shareholders’ interests. Principally,
we achieve this through:
• setting the strategic objectives of the Group and ensuring the
necessary resources are in place to meet those aims;
• providing entrepreneurial leadership within an effective risk
management framework;
• setting the values and standards of the Group; and
• reviewing management performance.
As Chairman, I am responsible for leading the Board and for its
effectiveness. Nigel Stein leads the business as Chief Executive and
is responsible for the execution of the Group’s strategy and the
day-to-day running of the Group. He does so with the support of the
Executive Committee.
A full description of our role, which includes a number of specific
responsibilities reserved to us, is available on our website at
www.gkn.com.
Board meetings
I set Board agendas following consultation with the Chief Executive
and with the assistance of the Company Secretary. An annual
programme of items for discussion is kept under review by the
Company Secretary to ensure that all matters reserved to us and
other key issues are considered at the appropriate time. Agendas are
closely aligned to the key aspects of our role; below are examples of
areas on which we focused in 2014.
Board focus areas in 2014
STRATEGY
PERFORMANCE
→→ Reviewed and approved the Group’s strategic plans
and annual budget
→→ Reviewed divisional strategic and
operational performance
→→ Approved the acquisition of Williams Hybrid
Power Limited
→→ Considered Group financial performance against
budget and forecast
→→ Approved the disposal of the Group’s 50%
shareholding in Emitec
→→ Considered health and safety performance throughout
the Group
→→ Reviewed a number of potential acquisitions
→→ Kept under review the technology plans for the
Group following consideration of megatrends and
emerging technologies
RISK
→→ Assessed the risks to the achievement of the Group
strategy including risks in relation to future
technology trends
CONTROL
→→ Considered and approved a revised employee
code of conduct to reinforce the Company’s values
and standards
→→ Assessed, with the support of the Audit Committee,
the effectiveness of internal control and
audit processes
→→ Considered and debated the principal risks and
uncertainties which could impact the Group
→→ Approved the level of risk financing and insurance
CAPABILITIES
→→ Considered succession planning for the Board and for
senior executive positions within the Group as well as
the succession planning framework
→→ Evaluated the effectiveness of the Board
GKN plc Annual Report and Accounts 2014
63
GOVERNANCE
Corporate governance continued
We meet formally approximately eight times a year. At least one
meeting is combined with a Board visit to the Group’s business
locations, and in 2014 we visited GKN Driveline in Oleśnica, Poland.
In addition to regular Board meeting discussions on strategy, one
two-day Board meeting per year is devoted to reviewing progress
made against Group strategy and for discussing longer term
strategic options. During this meeting senior executives give a
number of updates and each divisional chief executive proposes the
strategic options for their respective division. A number of informal
meetings are also held during the year which helps to strengthen
relations between Directors. Additionally, I meet from time to time
with the non-executive Directors without the executive Directors
being present.
Board committees
Certain Board responsibilities are delegated to our Board
Committees which play an important governance role through
the work they carry out. Reports on their activities can be found
on the following pages and their terms of reference are available
on our website. All Board Committees are supported by the
Company Secretariat.
Briefing papers are prepared and circulated to Committee members
in advance of each meeting and, in respect of the Audit Committee,
made available to other Directors. In order that the Board remains
fully updated on their work, the Committee Chairmen report formally
on Committee activities at the subsequent Board meeting.
The Committees may obtain external professional advice at the
Company’s expense if deemed necessary.
GKN PLC BOARD
AUDIT
COMMITTEE
REMUNERATION
COMMITTEE
NOMINATIONS
COMMITTEE
EXECUTIVE
COMMITTEE
DISCLOSURE
COMMITTEE
Shonaid
Jemmett-Page
Richard
Parry-Jones
Mike Turner
Nigel Stein
Nigel Stein
Composition
All independent
non-executive Directors
All independent
non-executive Directors
All non-executive
Directors and the
Chief Executive
Executive Directors,
divisional chief
executives, Group
HR Director, Group
Communications
Director, Company
Secretary
Chief Executive,
Finance Director,
Company Secretary
Meets
At least four times
annually
Periodically when
required
Periodically when
required
Eleven times annually
Periodically when
required
Role
• Monitors and reviews
certain aspects of
management and
auditor conduct
which could impair
the financial
performance of
the Company.
This includes:
–– monitoring the
integrity of
the financial
reporting process;
–– overseeing the
Group’s internal
control and risk
management
systems; and
–– reviewing the
effectiveness
of the external
and internal
audit process.
• Agrees remuneration
of the Directors and
the Company
Secretary within
the terms of the
agreed policy.
• Reviews proposed
short and long term
incentive payments
to executive Directors
in light of annual
financial results to
ensure such
payments are
justified by the
Group’s performance.
• Monitors the level
and structure of
remuneration of
the most senior
executives
immediately below
Board level.
• Leads the process
for identifying and
appointing Directors
with skills and
experience to deliver
the continued
success of the
Company.
• Keeps under review
the succession
planning and
leadership needs of
the Group.
• Keeps under review
the structure, size
and composition of
the Board and its
Committees,
recommending any
changes to the Board.
• Leads, oversees and
directs the activities
of the Group.
• Executes the Group’s
strategic plan.
• Approves and leads
the consistent
implementation
of business and
operational
processes.
• Identifies, evaluates
and monitors the
risks facing the
Group and decides
how they are to
be managed.
• Ensures adequate
procedures, systems
and controls are
maintained to enable
the Company to
comply with its
obligations regarding
identification and
disclosure of
inside information.
Chairman
64 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Operational governance
The work of the Executive Committee in executing the Group’s strategy is supported by three sub-committees.
LEAN ENTERPRISE
SUB-COMMITTEE
• Responsible for driving operational best
practice globally through the application of
Lean business processes.
GOVERNANCE
AND RISK
SUB-COMMITTEE
GROUP TECHNOLOGY
STRATEGY BOARD
• Responsible for development of the Group’s
technology plan.
• Drives the development of appropriate
technologies across the Group and the
strengthening of external relationships,
including access to sources of funding.
• Reviews the plans for and progress of major
technology projects across the Group.
• Responsible for monitoring and reviewing
matters relating to governance, compliance and
risk management.
In addition, the Chief Executive’s Council assists in shaping the Group’s strategy and operations. Chaired by the Chief Executive, the
Council’s membership comprises members of the Executive Committee and 17 senior executives from divisional leadership teams involved in
the day-to-day running of the businesses.
Board and Committee attendance
Attendance at relevant meetings of the Board and of the Audit, Remuneration and Nominations Committees held during 2014 was as follows:
Board
(9 meetings)
Audit
Committee
(5 meetings)
Remuneration
Committee
(8 meetings)
Nominations
Committee
(3 meetings)
9
—
—
3
Executive Directors
Nigel Stein
Marcus Bryson(a)
Andrew Reynolds Smith
Adam Walker
9
8
9
9
—
—
—
—
—
—
—
—
3
—
—
—
Non-executive Directors
Angus Cockburn
Tufan Erginbilgic(b)
Shonaid Jemmett-Page
Richard Parry-Jones
9
8
9
9
5
4
5
5
8
6
8
8
3
2
3
3
2/2*
—
—
—
Director
Chairman
Mike Turner
Former Executive Director
William Seeger (c)
* Actual attendance/maximum number of meetings Director could attend based on date of retirement.
(a) Marcus Bryson was unable to attend the December Board meeting due to illness.
(b) Tufan Erginbilgic was unable to attend the February Audit and Remuneration Committee meetings due to illness and the September Board, Remuneration and Nominations
Committee meetings due to a prior business commitment.
(c) William Seeger retired from the Board on 25 February 2014.
GKN plc Annual Report and Accounts 2014
65
GOVERNANCE
Corporate governance continued
Effectiveness
Board composition
The Board currently comprises three executive Directors and
five non-executive Directors including the Chairman. It
considers that all of the non-executive Directors, excluding the
Chairman, are independent and it is not aware of any
relationship or circumstance likely to affect the judgement of
any Director.
The composition of our Board is kept under review by the
Nominations Committee to ensure that it retains the necessary skill,
knowledge and experience to meet the needs of the business. In
2014 it considered composition and succession planning in light of
Marcus Bryson’s decision to retire from the Board; further details
can be found on page 71.
Following the appointment of Adam Walker as Group Finance
Director Designate on 1 January 2014 and until William Seeger’s
retirement from the Board on 25 February 2014, our Board comprised
five executive and four independent non-executive Directors
(excluding me as Chairman). Although contrary to the UK Corporate
Governance Code provision which states that at least half the board,
excluding the chairman, should comprise non-executive directors,
we considered that this arrangement was necessary to facilitate
an orderly handover between William Seeger and his successor.
As a Board, we are content that the independent judgement of the
non-executive Directors was not adversely affected during this
short period.
In accordance with the provisions of the Code, all Directors will seek
re-election at the 2015 AGM. Our biographical details are given on
page 61.
Recommendations for appointments to the Board are made by the
Nominations Committee. The Committee follows Board-approved
procedures (available on our website) which provide a framework for
the different types of Board appointments. Appointments are made
on merit against objective criteria with due regard to diversity of
skills, experience and gender. Non-executive appointees must also
demonstrate that they have sufficient time to devote to the role. The
activities of the Nominations Committee during the year are set out
on page 71.
Development
Directors are continually updated on the Group’s businesses, the
markets in which they operate and changes to the competitive and
regulatory environment through briefings to the Board and meetings
with senior executives. Board visits to Group business locations
enable us to meet local management and employees and to update
our knowledge of the Group’s operations. Non-executive Directors
are also encouraged to visit Group operations to increase their
exposure to the business.
I discuss training and development needs with each Director as part
of our annual individual performance evaluation process. The
Company Secretary keeps under review the suitability of external
courses so that any needs identified either through the evaluation
process or on an ad hoc basis can be addressed. Directors attended
external training courses on a number of matters during the year
including ethics, technological updates and risk and compliance.
Information and support
I am responsible for ensuring that Directors receive accurate, timely
and clear information. The provision of information to the Board was
reviewed during the year as part of the performance evaluation
exercise referred to on the following page.
To ensure that adequate time is available for Board discussion and to
enable informed decision making, briefing papers are prepared and
circulated to Directors one week prior to scheduled Board meetings.
All Directors have direct access to the advice and services of the
Company Secretary who ensures that the Board is fully briefed on
legislative, regulatory and corporate governance developments. In
addition, Directors may, in the furtherance of their duties, take
independent professional advice at the Company’s expense.
The Company Secretary also supports the Committee Chairmen by
ensuring that agendas are appropriate and address all matters for
which the Committee has specific responsibility.
Induction
On joining the Board, a Director receives a tailored induction to suit
the individual’s background and experience. This includes:
• a comprehensive induction pack with background information
about GKN, details of Board meeting procedures, and Directors’
duties and responsibilities in addition to a number of other
governance-related issues;
• a briefing with the Company Secretary who is tasked with
facilitating the induction of new Directors both into the Group and
as to their roles and responsibilities as Directors;
• meetings with the Chief Executive and with relevant senior
executives to be briefed on the Group strategy and each
individual business portfolio;
• plant visits; and
• external training where appropriate, particularly on matters
relating to the role of a Director and the role and responsibilities
of Board Committees.
This induction process was applied following the appointment of
Adam Walker.
66 GKN plc Annual Report and Accounts 2014
Strategic Report
Performance evaluation
Board evaluation
Each year a performance evaluation of the Board is undertaken. An
external evaluation is carried out every three years. Following the
external evaluation conducted in 2013, we undertook an internal
evaluation in 2014. The evaluation process is described below:
PERFORMANCE EVALUATION PROCESS
Together with the Company Secretary, I agree areas of focus that
we believe to be critical to the Board’s effectiveness. For 2014
these included:
• strategy and process;
• Board composition and succession planning;
• risk and risk management systems;
• monitoring financial and non-financial performance;
• culture; and
• overall Board and Committee working/efficiency.
Extensive one-to-one interviews conducted by
the Company Secretary with each Director
Summary of results presented to the Board
for discussion
Key actions agreed by the Board
2014 actions
Following feedback gained during last year’s evaluation exercise,
progress against our key actions included making changes to the
strategy process to ensure that macro and mega trends were
considered in more detail. We also invited external industry experts
to attend our strategy meeting to update us on future technology
trends and market outlook.
Governance
Financial Statements
Other Information
2015 actions
Feedback from the evaluation was generally positive. In particular,
members felt that there was a constructive and challenging dynamic
and the style of the meetings was conducive to all members feeling
that their contributions were encouraged and valued.
Following discussion of the evaluation results, the Board agreed the
following key actions for 2015:
Strategy
Divisional strategies to be discussed in
the context of long term macro-economic
and technology trends, with input from
external experts.
Risk
KPIs relating to key principal risks to be
revised and reported to the Board.
The internal control systems of each division
relating to quality, programme management
and contracting to be reviewed during 2015.
Succession
planning
Increase senior management’s level of
exposure to the Board to accelerate
development.
Director evaluation
The individual performance of the Directors was evaluated
against a number of assessment areas. I conducted interviews
with each Director, taking into account feedback received as part
of the Board evaluation process. I can confirm that each Director
continues to make a valuable contribution to the Board and devotes
sufficient time to the role. My evaluation was undertaken by the
Senior Independent Director taking into account the views
of the other Directors.
Committee evaluation
Committee evaluations were carried out as part of a separate
process; details of these evaluations can be found in the relevant
Committee report.
GKN plc Annual Report and Accounts 2014
67
GOVERNANCE
Corporate governance continued
Accountability
Financial and business reporting
When reporting externally, the Board aims to present a fair,
balanced and understandable assessment of the Group’s
position and prospects. During the year, the Board satisfied
itself that appropriate assurance processes are in place to
enable it to state that this annual report, taken as a whole, is
fair, balanced and understandable and provides the information
necessary for users to assess the Company’s performance,
business model and strategy. A statement of this responsibility,
together with additional responsibilities of the Directors in
respect of the preparation of the annual report, is set out on
page 102. Page 109 of the auditors’ report includes a statement
by PricewaterhouseCoopers LLP about their reporting
responsibilities. As set out on page 41, the Directors are of the
opinion that GKN’s business is a going concern.
Risk management and internal control
The Board is responsible for setting the risk appetite of the Group
and we also retain responsibility for maintaining sound risk
management and internal control systems and undertaking an
annual review of the effectiveness of these systems. Certain
elements of this responsibility are overseen on our behalf by the
Executive Committee and the Audit Committee.
Our risk management and internal control processes are regularly
reviewed and revised to ensure that they remain relevant to changes
in the Group’s internal and external risk profiles. Improvements
during 2014 included:
• the development and approval of a revised GKN Code for
Group employees;
• the continued strengthening of the Group’s export control
compliance programme;
• the introduction of an online tool for assessing external
anti-bribery and corruption risks;
• the revision of our Supplier Code of Conduct; and
• the enhancement of reviews of catastrophic health
and safety risk.
During the year, we considered changes to the revised UK Corporate
Governance Code and related FRC guidance, particularly in respect
of risk management and internal control. We are reviewing our
processes in the context of these changes and will report against the
revised provisions in the 2015 annual report.
Enterprise risk management
GKN’s enterprise risk management (ERM) programme facilitates a
Group-wide approach to the identification and assessment of risk.
A description of the process for managing enterprise risk, together
with a summary of risks which could have a material impact on
the Group and actions in place to mitigate those risks, is given
on pages 42 to 51.
Internal control
The Group has in place a number of controls to manage risk in respect
of financial reporting and the preparation of consolidated accounts.
These include:
• the implementation of Group accounting policies and procedures,
supported by regular bulletins from the central and divisional
finance teams on the application of accounting standards and
reporting protocols;
• Group and divisional policies governing the maintenance of
accounting records, transaction reporting and key financial
control procedures;
• a proprietary internal control monitoring system, GKN Reporting
and Integrity Procedures (GRiP), to assess compliance with key
financial controls on monthly, quarterly and annual cycles;
• monthly operational review meetings which include,
as necessary, reviews of internal financial reporting issues
and financial control monitoring;
• divisional certifications in relation to internal financial controls,
accounting judgements and representations of divisional financial
results; and
• ongoing training and development of financial reporting personnel.
Other controls in place to minimise risk and ensure the efficient conduct
of the Group’s business include:
• the regular review of the GKN Code and policies to ensure that areas
of potential risk are adequately covered. The Code and policies
define the behaviours expected of all GKN employees and are
available on the Group intranet;
• the development and dissemination of training programmes to
educate employees on relevant topics such as competition law or
anti-bribery and to reinforce the behaviours expected of them;
• clearly defined approval limits and delegated authorities,
particularly in relation to treasury transactions and capital
expenditure submissions; and
• an employee disclosure hotline which employees can use to report
any instances of suspected wrongdoing.
The areas of our risk assurance processes in which compliance
monitoring is considered to be of the utmost importance currently
include: financial reporting, IT controls, legal matters (including
anti-bribery and corruption, competition law and export control),
human resources issues (including employment practices and
employee disclosure) and health, safety and the environment. The risk
assurance framework therefore incorporates:
• monthly monitoring of compliance with the GRiP financial reporting
processes through a self-certification process and peer reviews;
• the quarterly completion of an IT controls checklist confirming
adherence to Group IT standards and policies;
• monitoring the completion of mandated training on legal topics and
the compliance of divisional sales agents and consultants
committees (implemented as part of the Group’s anti-bribery and
corruption measures) with the relevant Group policy;
• the bi-annual completion of a human resources controls
checklist confirming compliance with certain Group HR
standards and procedures;
• monitoring the completion of internal health and safety audits
against target and any themes arising from these audits;
• the annual completion of a questionnaire by senior managers in
relation to awareness of the Group’s Code and policies; and
• the annual confirmation by senior managers that non-financial
controls are in place and operating effectively in their businesses.
The Executive Sub-Committee on Governance and Risk (ESCGR)
monitors the output from these processes and reports any areas of
concern and proposals for improvement to the Executive Committee
for consideration.
68 GKN plc Annual Report and Accounts 2014
Strategic Report
In 2014, the ESCGR made recommendations to revise the Group’s
Supplier Code of Conduct and recommunicate the Group’s Fraud
Management policy, both of which were accepted by the Executive
Committee.
Risk review
Each year all Group businesses are required formally to review their
business risks and to report on whether there has been any material
breakdown in their internal controls. This formal review is
supplemented by an interim review conducted at the half year.
Businesses also have to confirm annually whether they have
complied with statutory and regulatory obligations as well as with
the policies which support the GKN Code.
The Group’s systems and procedures are designed to identify,
manage and, where practicable, reduce and mitigate the effects of
the risk of failure to achieve business objectives. They are not
designed to eliminate such risk, recognising that any system can
only provide reasonable and not absolute assurance against
material misstatement or loss.
Process for review of effectiveness
The Audit Committee is responsible for reviewing the ongoing control
processes, and the actions undertaken by the Committee to
discharge this responsibility are described in the Audit Committee’s
report on pages 72 to 77.
The Board receives an annual report from the Audit Committee
concerning the operation of the key systems of internal control and
risk management. This report is considered by the Board in forming
its own view on the effectiveness of the systems.
The Board has reviewed the effectiveness of the Group’s
systems of internal control and risk management during the
period covered by this annual report. It confirms that the
processes described above, which accord with the FRC guidance
on internal control (the revised Turnbull Guidance), have been in
place throughout that period and up to the date of approval of
the annual report. The Board also confirms that no significant
failings or weaknesses were identified in relation to the review.
Relations with investors
The Board maintains a dialogue with investors with the objective of
ensuring a mutual understanding of objectives.
Major shareholders
Communication with major institutional shareholders is undertaken
as part of GKN’s investor relations programme, in which nonexecutive Directors are encouraged to participate.
With support from the Company Secretary, I meet with institutional
shareholders and investor representatives to discuss matters
relating to governance and strategy and feed back any issues to the
Board. The Senior Independent Director is also available to discuss
issues with shareholders where concerns cannot be addressed
through normal channels of communication.
Governance
Financial Statements
Other Information
The Chief Executive, Group Finance Director and Director of Investor
Relations meet regularly with major shareholders to discuss
strategy, financial and operating performance. Feedback is sought
by the Company’s brokers after meetings and presentations to
ensure that the Group’s strategy and performance is being
communicated effectively and to develop further an understanding
of shareholders’ views. This feedback is included in a twice-yearly
report to the Board, which also provides an update on investor
relations activity, highlights changes in holdings of substantial
shareholders and reports on share price movements. In addition,
external brokers’ reports on GKN are circulated to all Directors.
GKN hosted a number of events for institutional investors in 2014,
which included site visits to its facilities in the UK, China and the US
and divisional presentations on strategy, growth opportunities and
technology innovations. A recording of the presentations and slide
material shown is available on our website.
Communications with shareholders
Written responses are given to letters or email received from
shareholders and all shareholders receive, or can access
electronically, copies of the annual and half year reports. The
investor relations section of our website provides further detail
about the Group, including share price information, webcasts and
presentations of annual and half year results, other presentations
made to the investment community, and copies of financial reports.
Annual general meeting
Information regarding the 2015 AGM is given on page 99.
Shareholders who attend the AGM are invited to ask questions
during the meeting and to meet with Directors after the formal AGM
business has been completed. Resolutions for consideration at the
AGM are voted on by way of a poll rather than by show of hands to
allow the votes of all shareholders to be counted, including those
cast by proxy. The results of the poll vote are announced to the
London Stock Exchange and published on our website after
the meeting.
Compliance statement
This corporate governance statement, together with the
Nominations Committee report on pages 70 and 71, the Audit
Committee report on pages 72 to 77 and the Directors’
remuneration report on pages 78 to 98, provide a description of
how the main principles of the 2012 edition of the UK Corporate
Governance Code (the Code) have been applied within GKN
during 2014. The Code is published by the Financial Reporting
Council and is available on its website at www.frc.org.uk.
As noted on page 66, from 1 January 2014 until 25 February
2014, GKN was not compliant with Code provision B.1.2 relating
to the balance of executive and non-executive Directors. For the
remainder of the year, it is the Board’s view that GKN was in
compliance with all relevant Code provisions.
This statement complies with sub-sections 2.1, 2.2(1), 2.3(1),
2.5, 2.7 and 2.10 of Rule 7 of the Disclosure Rules and
Transparency Rules of the Financial Conduct Authority. The
information required to be disclosed by sub-section 2.6 of
Rule 7 is shown on pages 99 to 101.
Richard Parry-Jones, in his capacity as Remuneration Committee
Chairman, also engages in discussion with shareholders on
significant matters relating to executive remuneration.
GKN plc Annual Report and Accounts 2014 69
GOVERNANCE
Nominations Committee report
The appointment and retention of strong
candidates is key to the success of the Company.
MIKE TURNER CBE
Chairman of the Nominations Committee
Committee membership
Mike Turner
The Nominations Committee plays a vital role in
ensuring the selection and recommendation of
strong candidates for appointment to the Board.
We keep under review the balance of skills,
knowledge and experience on the Board and the
composition of Board Committees, with any
changes recommended to the Board for its
consideration. We also review succession
planning, both to the Board and to the senior
management grade immediately below Board.
(Chairman)
Angus Cockburn
Tufan Erginbilgic
Shonaid Jemmett-Page
Richard Parry-Jones
Nigel Stein
In accordance with the provisions of the UK Corporate Governance Code, the majority of members
are independent non-executive Directors.
The Secretary to the Committee is Jos Sclater, General Counsel & Company Secretary.
Role
The role of the Nominations Committee is to lead the process for identifying, and making
recommendations to the Board on, candidates for appointment as Directors and as Company
Secretary, giving full consideration to succession planning and the leadership needs of the Group.
It also:
• makes recommendations to the Board on the composition of the Nominations Committee and
the composition and chairmanship of the Audit and Remuneration Committees;
• keeps under review the structure, size and composition of the Board, including the balance of
skills, knowledge, experience, ethnicity and gender and the independence of the non-executive
Directors; and
• makes recommendations to the Board with regard to any changes.
The Nominations Committee follows Board-approved procedures in making its recommendations.
Written terms of reference that outline the Committee’s authority and responsibilities are available
on our website at www.gkn.com.
The Committee met three times in 2014. Our attendance at these meetings is set out in the table on
page 65.
70
GKN plc Annual Report and Accounts 2014
Strategic Report
2014 activities
During 2014 we:
• considered the composition of the Board following Marcus
Bryson’s decision to retire;
• considered and recommended new appointments to the
Executive Committee;
• considered and recommended the appointment of Jos Sclater as
General Counsel & Company Secretary; and
• recommended to the Board a three-year extension of terms of
office for Richard Parry-Jones and Tufan Erginbilgic.
Board and Committee composition
In light of Marcus Bryson’s retirement at the end of 2014, we
considered the subsequent composition of the Board and the
Executive Committee and the balance of skills, knowledge and
experience on each.
Following our review, we deemed the size of the Board and the
balance of executive and non-executive Directors following Marcus
Bryson’s retirement to be appropriate. We considered that the
Board’s collective skills and experience and its knowledge of both
GKN and the industries in which it operates would enable the Board
to continue to discharge its responsibilities effectively. We did,
however, support changes to the Executive Committee to ensure
appropriate divisional representation. Accordingly, the Board
approved our recommendation to appoint Kevin Cummings, CEO
GKN Aerospace, Peter Oberparleiter, CEO GKN Powder Metallurgy,
and Phil Swash, CEO GKN Land Systems, to the Committee. Each
will attend Board meetings when there is a significant agenda item
relating to their divisions, giving the Board direct access to their
knowledge and expertise where appropriate.
Governance
Financial Statements
Other Information
Diversity
We acknowledge the importance of diversity, including gender,
both on the Board and throughout the Group. Our aim is for the
Board to consist of people with diverse experience who can add
real value to Board debates, thereby supporting the achievement of
our strategic objectives. This includes diversity of industry skills,
knowledge and experience in addition to gender and ethnicity.
It is our aim to have at least 25 per cent female representation on
the Board and we will continue to work towards this as and when
positions arise. However, our overriding purpose in any new
appointment must always be to select on merit, in fulfilment of our
role of ensuring the continued success of the Company.
We are currently focusing on the development and support of our
executive pipeline with regard to gender and ethnic diversity;
further information can be found in the sustainability review on
page 56.
Advice provided to the Committee
From time to time the Committee appoints external search
consultants to assist with the selection and recruitment of
potential new Board members. During the year no such assistance
was required.
Performance evaluation
The Committee’s annual evaluation was carried out as part of a
series of one-to-one interviews between the Company Secretary
and each Director. No changes were considered necessary to the
Committee’s terms of reference as a result, and the Committee was
considered to be effective in fulfilling its role throughout 2014.
Executive matters
On behalf of the Committee
Non-executive matters
Mike Turner CBE
Chairman of the Nominations Committee
23 February 2015
Following the retirement of Judith Felton, Company Secretary, in
June 2014, the Committee recommended the appointment of Jos
Sclater as Company Secretary in addition to his role as General
Counsel. The Board approved our recommendation.
During the year we considered the extension of the terms of
appointment of Richard Parry-Jones and Tufan Erginbilgic. Taking
into account the contribution that each makes to the Board and its
Committees, the Committee recommended to the Board the
extension of the terms of both non-executive Directors for a further
three years. The Board approved these recommendations.
GKN plc Annual Report and Accounts 2014
71
GOVERNANCE
Audit Committee report
The Audit Committee plays a key role in
monitoring and reviewing those aspects of
management and auditor conduct which could
financially impact shareholders.
SHONAID JEMMETT-PAGE
Chairman of the Audit Committee
Committee membership
Shonaid Jemmett-Page
This includes reviewing the integrity of the
Group’s financial statements to determine
whether the judgements and policies taken
by management are appropriate, as well as
monitoring the independence and effectiveness
of the external auditors. It also includes oversight
of the Group’s systems of internal control and
risk management. This report details the activities
we undertook during the year in fulfilling
our responsibilities.
(Chairman)
Angus Cockburn
Tufan Erginbilgic
Richard Parry-Jones
All members are independent non-executive Directors and, in the Board’s view, have recent and
relevant financial experience as required by the UK Corporate Governance Code. In particular,
Shonaid Jemmett-Page has held a number of senior finance roles in Unilever and is a former partner
at KPMG and former Chief Operating Officer at CDC Group plc, the UK Government’s development
finance institution. Angus Cockburn is currently the Chief Financial Officer of Serco Group plc and
previously held senior finance positions within international organisations.
The secretary to the Committee is Jos Sclater, General Counsel & Company Secretary.
Role
The primary role of the Audit Committee is to ensure the integrity of the financial reporting and
audit processes and the maintenance of sound internal control and risk management systems.
This includes responsibility for monitoring and reviewing:
• the integrity of the Group’s financial statements and the significant reporting judgements
contained in them;
• the appropriateness of the Group’s relationship with the external auditors, including auditor
independence, fees and provision of non-audit services;
• the effectiveness of the external audit process, making recommendations to the Board on the
appointment of the external auditors;
• the activities and effectiveness of the internal audit function (Corporate Audit);
• the effectiveness of the Group’s internal control and risk management systems; and
• the effectiveness of the Group’s whistleblowing policies.
Written terms of reference that outline the Committee’s authority and responsibilities are available
on our website at www.gkn.com.
The Committee met five times in 2014, with meetings generally timed to coincide with the
financial and reporting cycles of the Company. Our attendance at these meetings is set out
in the table on page 65.
72
GKN plc Annual Report and Accounts 2014
Strategic Report
In order to maintain effective communication between all relevant
parties, we invited the Group Chairman, Chief Executive, Group
Finance Director, Head of Corporate Audit, the external audit
engagement partner and other members of senior management to
attend Committee meetings as necessary.
Members of the Committee met separately at the start of each
meeting to discuss matters in the absence of any invitees. At the
conclusion of meetings, the Head of Corporate Audit and the audit
engagement partner of PricewaterhouseCoopers LLP (PwC) were
each given the opportunity to discuss matters without executive
management being present. Both the Head of Corporate Audit and
the external auditors have direct access to me should they wish to
raise any concerns outside formal Committee meetings.
Governance
Financial Statements
Other Information
2014 activities
Our activities in 2014 principally related to financial reporting, the
external audit, internal control and risk management. In addition,
we considered other specific matters such as treasury activities,
updates from the divisional finance directors on relevant divisional
matters and the Group’s approach to IT controls including
cyber security.
Significant issues
We identified the issues below as significant in the context of the 2014 financial statements. We consider these areas to be significant
taking into account the level of materiality and the degree of judgement exercised by management. We debated the issues in detail to
ensure that the approaches taken were appropriate.
Area of focus
Committee action
Impairment testing
We considered the significant judgements, assumptions and estimates made by management in preparing
the impairment review to ensure that they were appropriate.
(see Note 11 to the financial
statements)
An impairment review is carried
out annually by management to
identify cash generating units in
which the recoverable amount
of the unit’s assets (including
expected future cash flows
generated by those assets) is
less than the value of the assets
carried in the Group’s accounts.
Impairment results in a charge to
the Group income statement.
Key judgements and assumptions
need to be made when valuing the
assets of the cash generating units
and the quantum of potential future
cash flows arising from those assets.
Provisions for potential
liabilities
(see Note 21 to the financial
statements)
The Group makes provisions where
it is probable that settlement of
liabilities will result in a cash outflow
in respect of contractual obligations,
warranties, litigation, customer and
supplier claims and other matters.
Key judgements are made in
assessing an appropriate level
of provisioning.
We reviewed assumptions relating to:
• the discount rates, which reflect the risk inherent in each unit taking into account factors such as
geography and sector, used to discount the expected future cash flows to their present value;
• the estimation of long term growth rates for the territories in which the units were based; and
• the forecast of operating cash flows, based on the most recent budget and strategic reviews and taking
into account data such as sales profile and prices, market performance, volume, raw material costs and
capital expenditure levels.
We also considered sensitivities that would affect the assumptions noted above.
We obtained the external auditors’ view in relation to the appropriateness of the approach and outcome of
the review. Taking this into account, together with the documentation presented and the explanations
given by management, we were satisfied with the thoroughness of the approach and judgements taken.
The review resulted in the impairment of four units and a charge to the income statement of £69 million.
We increased our focus on this area in 2014 due to the evolving risk profile of the Group, particularly with
regard to long term complex contracts in aerospace and increasing customer activity in relation to vehicle
recalls in automotive. Both of these factors could have a significant impact on the Group’s liabilities.
Further details on the nature of these risks can be found in our principal risks and uncertainties on
pages 47 and 48.
In particular, we focused on the potential liabilities arising from contractual matters with customers. To
determine whether the level of provisioning in the balance sheet was appropriate, we considered
management’s view of a number of factors including the nature of the claim received, details of any costs
incurred and potential recall or rectification costs. We also reviewed an assessment of the likelihood of
future cash outflows arising and the historical accuracy of the level of Group provisions.
We invited PwC’s comments on this area and concluded that the approach taken in respect of provisioning
continued to be appropriate.
GKN plc Annual Report and Accounts 2014
73
GOVERNANCE
Audit Committee report continued
We also reviewed the following areas due to their materiality and the application of judgement. However, we considered them to be stable
in nature and therefore we did not classify them as significant issues in the context of the 2014 financial statements.
Development costs on
aerospace programmes
(see Note 11 to the financial
statements)
Development costs for large aerospace
programmes can be significant and
assessing the likelihood of future
recoverability of costs involves various
judgements and assumptions. These
relate to factors such as anticipated
volumes, method of amortisation,
forecast cash flows and discount rates.
Post-employment
obligations
(see Note 24 to the financial
statements)
Determining the current value of the
Group’s future pension obligations
requires a number of assumptions.
These assumptions relate principally to
life expectancy, discount rates applied
to future cash flows and rates of
inflation and future salary increases.
Treasury hedging activities
(see Notes 18 and 19 to the financial
statements)
In 2014, the Group entered into crosscurrency interest rate swap instruments
to convert its £350 million 6.75% bonds
maturing in 2019 and £450 million
5.375% bonds maturing in 2022 into US
Dollars and Euros. Although entering
into such instruments is a relatively
common activity for companies which
operate globally, we considered
this area due to the quantum of
the amounts involved and the
accounting implications.
Financial reporting
Impairment reviews of programme development costs against associated future cash flows are
circulated to the Committee on a six-monthly basis. On each occasion we reviewed the valuation and
the assumptions made, including programme risk factors, and the most recent external forecasts of
aircraft programme demand. Actions and factors likely to influence levels of impairment were noted and
the view of the external auditors was sought in relation to the appropriateness of the approach and
outcome. Particular focus was placed on the A350 programme due to the value of its development costs,
which totalled £210 million including capital expenditure and capitalised interest at 31 December 2014.
Taking into account the documentation presented and the assessment of the external auditors, we were
satisfied with the approach and judgements taken.
Key matters reviewed this year included the appropriateness of valuation assumptions such as discount
rates, mortality and inflation. The Committee also reviewed the impact of certain pension de-risking
activities on the financial statements. In the US, cash lump sums were offered to deferred members on
a voluntary basis in lieu of future pension obligations. In the UK, a bulk annuity ‘buy-in’ was completed
whereby the Group insured a proportion of its pension liabilities.
Valuation assumptions, prepared by external actuaries and adopted by management, were
considered in the light of prevailing economic indicators and the view of the external auditors.
The adoption of a new US mortality table was reviewed and the approach adopted by management
was accepted as appropriate.
The use of such instruments requires a number of decisions to be made which impact the financial
statements. In some areas, management has discretion as to how to act, particularly with regard to:
• the way in which the instruments are accounted for;
• the way in which the instruments are valued; and
• the method by which the effectiveness of the instruments is measured.
We considered management’s adoption of net investment hedge accounting and reviewed the method
and frequency by which it planned to perform the valuations of the swap instruments and effectiveness
testing of the hedge relationship. We were content that the decisions taken by management were
appropriate in all instances.
Given the significance of foreign currency movements on the financial statements, we debated the
nature of the Group’s hedging activities and reviewed the financial and presentational impact on the
2014 financial statements. We were satisfied by the approach taken and disclosures given.
During the year, we:
• considered information presented by management on
significant accounting judgements and policies adopted in
respect of the Group’s half year and annual financial statements
and agreed their appropriateness;
• examined key points of disclosure and presentation to
ensure the adequacy, clarity and completeness of the
financial statements;
• discussed with PwC its audit reports which highlighted key
accounting matters and significant judgements in respect of
each set of financial statements;
• reviewed documentation prepared to support the going concern
judgement given on page 41; and
• received an update on the implications of a new accounting
standard which will take effect in 2017.
74
GKN plc Annual Report and Accounts 2014
External audit
In 2014, we:
• approved PwC’s audit plan and terms of engagement;
• conducted our annual review of the independence and
objectivity of PwC;
• noted the non-audit fees payable to PwC, having regard
to the policy on the provision of non-audit services;
• approved for recommendation to the Board a revised
policy on non-audit services to take effect from 2015;
• determined that PwC remained effective in their role
as external auditors;
• recommended to the Board that PwC be appointed
as external auditors for a further year; and
• agreed the timing of a tender exercise in relation to
the appointment of external auditors.
Strategic Report
The Committee is responsible for making recommendations to
the Board in relation to the appointment of the external
auditors. We also approve the terms of engagement and fees
of the external auditors, ensuring that they have appropriate
audit plans in place and that an appropriate relationship is
maintained between the Group and the external auditors.
Audit plan
PwC’s presentation of their audit plan set out the scope and
objectives of the audit together with an overview of the planned
approach, an assessment of the Group’s risks and controls and
proposed areas of audit focus. In my role as Chairman, I attended
PwC’s audit planning meeting. Additionally, PwC worked with
Corporate Audit and management to identify areas which indicated
an increased risk of control breakdown. These areas were then
targeted proactively to ensure they received the appropriate
amount of attention during the audit.
Independence
As a Committee we are responsible for the development,
implementation and monitoring of the Company’s policies on
external audit which are designed to maintain the objectivity and
independence of the external auditors. These policies regulate the
appointment by the Group of former employees of PwC and set out
the approach to be taken when using the external auditors for
non-audit work.
Governance
Financial Statements
Other Information
Details of the fees paid to PwC in 2014 can be found in note
4(a) to the financial statements. Non-audit fees incurred
during 2014 amounted to £0.9 million which related principally
to tax compliance services (£0.5 million). Tax advisory services
totalled £0.2 million and audit related assurance services and
other services amounted to £0.1 million each. Non-audit fees
as a percentage of audit fees totalled 20%. All such activities
remained within the policy approved by the Board.
During the year, we approved a revised policy on the provision of
non-audit services for recommendation to the Board. This takes
effect from 2015 and was amended in anticipation of the
implementation of EU legislation. In addition to limiting the
permissible services, the authorisation levels were also reviewed
and amended. Any proposal to use the external auditors for
non-audit work with a value between £50,000 and £250,000 must
be submitted to the Group Finance Director for approval prior to
their appointment. All proposals above this amount must be
submitted to me for approval. In addition, the Group Finance
Director will seek my prior authorisation for certain aspects of
non-audit services relating to acquisitions, disposals and
investigative accounting services, regardless of the fee value. The
use of contingent fees is strictly prohibited under the policy.
Our annual review of the independence of the external
auditors included:
• receiving confirmation from PwC that they remained
independent and objective within the context of applicable
professional standards;
• considering the tenure of the audit engagement partner, who is
required to rotate every five years in line with ethical standards;
• ensuring that management confirmed compliance with the
Group’s policies on the employment of former employees of PwC
and the use of PwC for non-audit work; and
• considering Corporate Audit’s annual review of PwC’s
objectivity, independence and effectiveness and of the
audit process.
As a result of this review, we concluded that PwC remained
appropriately independent in the role of external auditors.
Non-audit services
In order to safeguard independence further, we monitor compliance
with the policy for the provision of non-audit services. The external
auditors are generally excluded from consultancy work and are
not engaged by GKN for other non-audit work unless there are
compelling reasons to do so, for example where PwC can
draw upon significant historic knowledge gained through the
audit process.
GKN plc Annual Report and Accounts 2014
75
GOVERNANCE
Audit Committee Report continued
Effectiveness and reappointment
Our review of the performance of PwC and the effectiveness of the
external audit process included consideration of responses from
questionnaires conducted with members of the Committee,
executive Directors and senior management. All participants were
asked to rate PwC’s effectiveness in a number of areas including
independence and objectivity, audit planning and execution,
conduct and communication, audit findings and feedback and
expertise and resourcing. The results confirmed that both PwC and
their audit process were considered to be effective and that a good
working relationship was supplemented by a sufficient amount of
robustness in challenging management judgements. Minor
improvements relating to team member continuity and
communications with site management were suggested to and
accepted by PwC.
PwC have been the Company’s external auditors since their
formation in 1998, although several predecessor organisations of
PwC held office for some time prior to that date. Whilst the
Company has not formally tendered the audit in recent years, the
Committee did conduct a comprehensive review of the
effectiveness and performance of the external auditors following
the rotation of the audit partner in 2011. As part of this exercise,
the new audit partner submitted a tender proposal for future audits
covering matters such as independence, objectivity, resourcing
and value for money. We also conducted a benchmarking exercise
based on external data and a review of external documents on the
four major audit firms issued by regulatory bodies.
In determining whether to recommend the auditors for
reappointment in 2015, we took into consideration the tenure of the
audit partner, the results of the effectiveness review detailed
above, the FRC Audit Quality Inspection Report in respect of PwC
and the firm’s internal quality control procedures. Taking these
elements into account, we concluded that it was appropriate to
recommend to the Board PwC’s reappointment as the Company’s
auditors for a further year.
Mindful of the increasing regulatory focus on audit tendering in the
UK and EU, we have been keeping under review the appropriate
timing of conducting a formal tender exercise. During 2014, the
Committee recommended, and the Board accepted, a proposal to
put the audit contract out to competitive tender following the
rotation of the current audit partner. It is therefore anticipated that
any change in auditors would take effect for the audit of the 2016
financial statements.
There are no contractual obligations restricting our choice of
external auditors.
Internal control and risk management
In fulfilling our remit we:
• reviewed the results of audits undertaken by Corporate Audit;
• received reports on control issues of significance to the Group;
• reviewed the status of the Group’s internal financial control
monitoring system;
• reported to the Board on our evaluation of the operation of the
Group’s systems of internal control and risk management,
informed by reports from Corporate Audit and PwC; and
• noted the implementation of additional risk processes.
The Committee is responsible for monitoring and reviewing the
effectiveness of the Group’s internal control and risk
management systems and the activities and effectiveness of
Corporate Audit.
We reviewed Corporate Audit’s quarterly reports throughout the
year which detail any internal control issues and identify any
themes arising in relation to audit recommendations. We
considered the adequacy of management’s response to matters
raised and the implementation of recommendations made.
We received regular updates on progress in respect of the
continued development of the Group’s risk management framework
and the implementation of additional assurance processes in order
to strengthen the framework. Further information on the Group’s
systems of internal control and risk management is given on pages
68 and 69. Together with an internal control review undertaken by
Corporate Audit and an informal review of our internal control
environment carried out by PwC, we evaluated the systems of
internal control and risk management and reported to the Board on
our evaluation in order that it could form a view on the
effectiveness of those systems. The Board’s statement on internal
control can be found on pages 68 and 69.
Internal audit
During the year we:
• approved the appointment of a new Head of Corporate Audit;
• approved the 2015 Corporate Audit programme, including the
proposed audit approach, coverage and allocation of
resources; and
• reviewed the effectiveness of Corporate Audit.
In relation to consideration of the Corporate Audit programme for
the forthcoming year, we reviewed the proposed audit approach,
coverage and allocation of resource. We also received progress
updates against the 2014 audit programme throughout the year.
We reviewed the terms of reference and effectiveness of Corporate
Audit, taking into account the views of Directors and senior
management on matters such as independence, proficiency,
resourcing, and audit strategy, planning and methodology. The
review confirmed that the Corporate Audit function was
independent and objective and remained an effective element of
the Group’s corporate governance framework.
76
GKN plc Annual Report and Accounts 2014
Strategic Report
Employee disclosure
To support the Group’s Employee Disclosure Procedures Policy
(available on our website), GKN operates a Group-wide
international employee disclosure hotline. Run by an external
and independent third party, the hotline enables employees to
make (anonymously if preferred) confidential disclosures
about suspected impropriety and wrongdoing. Any matters
reported are investigated and escalated to the Audit
Committee as appropriate, and statistics on the volume and
general nature of all disclosures made are reported to the
Committee on an annual basis.
Other matters
During the year we:
• received an update on treasury strategy, particularly in respect
of hedging activities;
• reviewed progress against the Group’s IT security plan; and
• received updates from divisional finance directors on matters
relevant to their divisions.
Recognising the financial impact that an IT security breach could
have on the Company, we received an update on the Group’s
approach to IT security controls in terms of prevention, detection
and response. Further information can be found in our principal
risks and uncertainties on page 50.
We also received updates from our divisional finance directors on
matters relevant to their divisions. Principally these related to
contractual matters, reviews of programme development costs and
updates on a cross-divisional project to develop a bespoke
software tool to track and improve the separation of duties in
transactions, thereby reducing the risk of fraud or error.
Governance
Financial Statements
Other Information
Performance evaluation
Our annual evaluation process was carried out by questionnaire in
2014. The questionnaire focused on areas such as Committee
composition, quality and content of meetings, role and remit, and
areas of focus for 2015. Feedback from the questionnaire, which
was circulated to Committee attendees as well as members, showed
that the Committee was considered to be effective in fulfilling its
role throughout 2014.
Overview of Committee activities for 2015
Risk management will continue to be our priority for 2015. As part of
the refinement and reinforcement of our internal control systems,
the Board plans to review the control systems relating to the
Group’s principal risks of product quality, programme management
and contracting. We will consider the effectiveness of any additional
internal control systems that may be implemented as a result of this
review. Our other area of focus will be the oversight of the tender
process for the external audit contract.
On behalf of the Committee
Shonaid Jemmett-Page
Chairman of the Audit Committee
23 February 2015
Advice provided to the Committee
The Committee has independent access to the services of
Corporate Audit and to the external auditors, and may obtain
outside professional advice as necessary in the performance
of its duties.
GKN plc Annual Report and Accounts 2014
77
GOVERNANCE
Directors’ remuneration report
Dear Shareholder
I would like to take this opportunity to thank you
for supporting our remuneration policy, which
was approved by 98% of shareholder votes at last
year’s AGM. Since then, we have not made
any significant changes to our remuneration
arrangements and continue to take a disciplined
approach to execution to ensure that our
remuneration framework rewards the right
behaviours and supports the strategic goals
of GKN.
PROFESSOR RICHARD PARRY-JONES CBE
Chairman of the Remuneration Committee
We note the emphasis in the 2014 UK Corporate Governance Code on designing pay schemes that promote the long term success of the
Group. This is in line with our approach to reward. GKN is a long term business, with automotive platforms often lasting for seven years or
more and aerospace platforms frequently lasting for more than twenty years. This is why in 2012 we were one of the first industrial
companies to introduce a significant five year element into our long term incentive scheme. The other elements of our incentives
arrangements are also carefully designed to align with our strategy and risks, as described below.
Incentive scheme
Link to strategy and risk
Annual bonus
scheme (STVRS)
Our Short Term Variable Remuneration Scheme (STVRS) is designed to incentivise the achievement of short
term financial and strategic initiatives which are required to deliver the long term strategy.
As described on page 9, we aim to achieve a balanced approach between growth, margin and return on
invested capital (ROIC), resulting in increased cash flow. The STVRS financial targets are designed to reward
the achievement of these measures. We set challenging targets, whilst seeking to avoid excessive risk taking.
The STVRS strategic measures are designed to reward the achievement of key strategic goals that will help
deliver the broader Group and divisional strategies and address key risks. The 2014 strategic measures were
tailored to Group and divisional strategies but there were some common themes as set out below:
Strategic goal
Link to strategic objective
Link to principal risk
New business wins
Leading in chosen markets
Highly competitive markets
Development of technology
Technology driving margin
Technology and innovation
Implementation of our ‘Voice of the Operational excellence
Customer’ initiative
Product quality
We ensure that the strategic goals are specific, measurable and fairly assessed.
Deferred bonus
plan (DBP)
Any STVRS payment that exceeds 65% of salary is deferred into shares for a two year deferral period. Awards
will generally lapse on resignation. This aids retention as well as aligning executives’ interests with those of
our shareholders.
Long term
incentive
plan (SEP)
As described on page 9, our strategy aims to increase earnings per share (EPS) on a sustainable basis. The
Sustainable Earnings Plan (SEP) incentivises executives to sustain EPS growth over the medium to long term.
Performance is measured over three and five years. Whilst we want to encourage earnings growth, we do not
want to drive the wrong behaviour. We therefore consider the quality of earnings before we approve the
vesting of each SEP award.
As with the DBP, the structure of the SEP is designed to aid the retention of executives, recognising that the
appointment and retention of key executives continues to be crucial to the Group’s achievement of its
strategic objectives.
78
GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Performance and STVRS outcome for 2014
As described in the strategic report, GKN made good progress in 2014 despite some difficult trading conditions. These included the effects of
translational currency exchange rates, market volatility in Land Systems and certain automotive territories and some declining military
programmes. These adverse factors were more than offset by some good performances.
STVRS payments to executive Directors were between 38% and 55% of salary, depending upon performance against their targets. The maximum
annual bonus achievable was 110% of base salary. Given the Group’s good results, this outcome reflects the stretching targets we put in place at
the start of 2014.
As a general principle, the Committee seeks to avoid exercising discretion unless there are good reasons to do so. During 2014 we exercised
discretion to ensure that STVRS performance was measured on a consistent, like-for-like basis by excluding the impact of two small
transactions: the acquisition of Williams Hybrid Power and the disposal of the Group’s 50% share in Emitec. These transactions were not
included in the financial targets set at the start of the year and therefore we felt it was reasonable to exclude them. We also reviewed the
circumstances surrounding the fatal accident at El Cajon and exercised our discretion to adjust some payouts in the chain of accountability
downwards in line with our principle that safety is our top priority.
SEP
The first SEP award was granted in 2012 and the three year performance period for that award ended on 31 December 2014. The core element of
the 2012 SEP award vested at 67.5% of maximum following annual compound growth in earnings per share of 9.4% over the performance period.
The Committee carefully considered the quality of earnings, noting that performance across the Group’s KPIs was generally strong during the
performance period. In particular, ROIC was good for each year of the performance period, ending at 17.7% for the Group in 2014. This is a
particularly credible outcome given that we acquired Volvo Aerospace during the relevant performance period. The share price performed well
during the performance period, increasing from 183p on 1 January 2012 to 344p on 31 December 2014 and the dividend per share increased from
7.2p in 2012 to 8.4p in 2014. The sustainability element of the 2012 SEP award will be measured at the end of 2017 after the five year
performance period.
Other key decisions during 2014
Marcus Bryson, CBE, retired from the Board at the end of 2014. Given Marcus’ contribution to GKN and his retirement after many years of
exceptional performance, he was treated as a good leaver and, in line with our approved remuneration policy, his outstanding awards under
the SEP will vest taking into account performance achieved and time served during the relevant performance periods.
We approved salary increases for the executive Directors of around 2.7% for 2014, after carefully considering their performance, market
reference points, and salary increases awarded to both the senior management population and all UK employees. The salary increases approved
for the executive Directors were broadly in line with those awarded to UK employees generally.
We approved an increase in the Chairman’s fee; this is explained in more detail on page 92. We concluded that this increase was appropriate in
light of the scope of the role, time commitment and positioning against the market. We also considered the Chairman’s shareholding
requirement of 30% of his fee and decided that it continued to be appropriate.
In the course of the year, the Committee considered the external environment for executive talent and changes to the UK Corporate Governance
Code, consulted with shareholders, reviewed its effectiveness and agreed on actions for continuous improvement.
Our approach for 2015
No major changes will be made to the structure of the STVRS for 2015 but we will continue to refine it to ensure that it incentivises the right
behaviours. Having reviewed the STVRS payments over the last three years against Group performance and shareholder expectations, we
consider that the targets have been challenging. Whilst we have not changed our approach to setting targets for 2015, we have revised the ranges
above and below target to encourage executives to drive beyond the targets, whilst carefully managing risk. We have tailored the ranges for each
division and our view of their markets in 2015. In addition, we have refined the cash targets to continue encouraging improvement in sustainable
cash flow. The strategic measures for 2015 are aligned with our strategy and risks and include incentivising the continued development of our
risk management systems, implementation of our diversity and inclusion programme, new business wins and operational excellence.
As a Committee, we keep the remuneration framework under review to ensure that it continues to be appropriate and effectively aligns
executives with the long term sustainability of the business. Whilst we do not plan to make any significant changes for 2015, we will apply
malus and clawback provisions to our STVRS and SEP schemes for our executive Directors and members of the Executive Committee. In addition,
we will review the STVRS and SEP schemes and targets to ensure that they continue to be both appropriately stretching and an effective tool for
the appointment and retention of top executives.
Overall, given GKN’s performance over the one and three year periods to the end of 2014, I am comfortable that the absolute amounts awarded
to our executive Directors in respect of 2014 are appropriate. We will continue to take a rigorous, principled and fair approach to setting
remuneration. The following pages describe in further detail how we have implemented our remuneration policy in respect of 2014, together
with our plans for 2015.
Richard Parry-Jones CBE
23 February 2015
GKN plc Annual Report and Accounts 2014
79
GOVERNANCE
Directors’ remuneration report continued
Committee
membership
Richard Parry-Jones
(Chairman)
Angus Cockburn
Tufan Erginbilgic
Shonaid Jemmett-Page
All members are independent non-executive Directors. The secretary to the Committee is Jos Sclater,
General Counsel & Company Secretary.
Other attendees
During the year, we consulted and invited Mike Turner (Group Chairman), Nigel Stein (Chief Executive),
Douglas McIldowie (Group HR Director) and Deloitte LLP (advisors to the Committee) to attend
meetings as appropriate. In consulting with senior management, we took care to ensure there were no
conflicts of interest.
Committee members and other attendees were not present in any matter that directly concerned their
own remuneration or terms of service.
We met as a Committee eight times during the year; attendance at Committee meetings is set out in
the table on page 65.
Role
The Board has delegated responsibility to the Committee for:
• determining the Group’s policy on executive Directors’ remuneration and, within the terms of that
policy, setting the detailed remuneration and other terms of service of the executive Directors and
determining the remuneration of the Company Secretary;
• determining the fees of the Chairman; and
• recommending to the Chief Executive, and monitoring the level and structure of, remuneration of
the most senior executives below Board level.
The Committee’s terms of reference are available on the Company’s website.
2014 activities
Our principal activities in respect of 2014 were as follows:
Salary and annual
bonus plan
• We considered and approved salary proposals for the executive Directors and the General Counsel
& Company Secretary.
• We monitored the level and structure of remuneration, benefits and pensions for the most senior
executives below Board level.
• We reviewed the Chairman’s fee and shareholding requirement against market data and
other factors.
• We considered and approved STVRS targets and payouts.
Long term incentive
arrangements
• We assessed the satisfaction of performance conditions for the 2011 Executive Share Option
Scheme (ESOS) and Long Term Incentive Plan (LTIP) awards.
• We considered and approved the 2014 SEP award levels for all participants across the Group.
• We confirmed the value of long term incentive awards in relation to the appointment of Adam
Walker and determined the level of vesting of his first restricted share award.
Board and Executive
Committee changes
• We considered and approved remuneration arrangements for Marcus Bryson’s retirement.
• We reviewed and recommended appropriate remuneration arrangements for the new Executive
Committee members.
Governance matters
•
•
•
•
•
We undertook a performance evaluation of the Committee and its external advisers.
We reviewed and approved the remuneration report.
We considered remuneration trends and the corporate governance and regulatory landscape.
We conducted a review of risks in the context of remuneration policy and practice.
We considered the impact of the key changes to the UK Corporate Governance Code
regarding remuneration, including proposed changes on malus and clawback.
• We approved the use of malus and clawback in relation to our long and short term
incentive schemes.
80 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Annual report on remuneration – executive Directors
The Committee presents the annual report on remuneration, which together with the Chairman’s letter, will be put to shareholders as an
advisory vote at the 2015 AGM to be held on 7 May 2015.
Single total figure of remuneration (audited)
Fixed pay
Salary
£000
STVRS –
cash
£000
Pension
£000
STVRS –
deferred shares
£000
2014
2013
2014
2013
2014
2013
2014
2013
2014
775
483
483
492
755
470
470
–
18
19
16
15
18
20
17
–
334
236
220
123
312
188
199
–
407
182
248
270
490
306
306
–
–
–
–
–
69
442
4
29
18
177
–
364
–
2,302 2,137
72
84
931
876
1,107 1,466
–
Executive Directors
Nigel Stein
Marcus Bryson
Andrew Reynolds Smith
Adam Walker (a)
Former executive Director
William Seeger(b)
Total
Taxable benefits
£000
Variable pay
Long term
incentives
£000
2013
2014
131 1,388 2,147
46 862 1,803
102 862 1,803
–
–
–
–
–
–
45
2013
–
2014
Other
remuneration
(joining awards)
£000
– 1,760
279 3,112
7,513
–
45
2013
Total
remuneration
£000
2014
2013
– 2,922 3,853
– 1,782 2,833
– 1,829 2,897
–
945
–
–
91 2,772
– 7,569 12,355
(a) Appointed as a Director on 1 January 2014.
(b) Figures reflect payments up to 25 February 2014 (date retired as a Director). Details of hypothetical tax withholdings are shown on page 92.
Definitions
Salary: Base salaries receivable during the year taking account of the salary increases on 1 July 2014. Further details are shown on page 82.
Taxable benefits: Gross value of taxable benefits including US benefits that were received during the year and taxable in the UK.
Pension: Value of all cash allowances/contributions in respect of pension and, where appropriate, the value of defined benefit participation.
Further details on pension entitlements and pension provisions are shown on pages 82 and 90 respectively.
STVRS – cash: Value of the cash element payable under the STVRS. Further details are shown on pages 83 and 84.
STVRS – deferred shares: Value of the deferred element of the STVRS awarded as shares under the DBP. Further details are shown on
page 84.
Long term incentives: Value of vested shares under the 2012 SEP Core Award (including the element of shares deferred until 2017 and
dividend equivalent shares accrued from the date of grant to 31 December 2014) using the GKN share price on 17 February 2015 (375.5p) (the
date on which the Committee determined the performance outcome for the SEP Core Awards). Further details are shown on page 86. The
prior year value relates to the 2011 ESOS and LTIP awards. Further details for these awards are shown on pages 89 and 90.
Other remuneration (joining awards): Value of vested joining awards granted to Adam Walker following his appointment in 2014 using the
GKN share price of 366p on 29 July 2014 (release date). Further details are shown on page 87.
GKN plc Annual Report and Accounts 2014
81
GOVERNANCE
Directors’ remuneration report continued
Salaries
During the year
In June 2014, we undertook an annual review of salaries for executive Directors. We took into account a number of factors, including their
performance, increases awarded to senior management and employees in the UK generally, the advice of our remuneration advisers and
market data. We approved salary increases of 2.7% (rounded to the nearest thousand) for executive Directors as set out below. This increase
was broadly in line with the average increase awarded to UK employees generally. Salary increases were effective from 1 July 2014.
Nigel Stein
Marcus Bryson
Andrew Reynolds Smith
Adam Walker(b)
1 July 2014
(£)
1 July 2013(a)
(£)
785,000
490,000
490,000
498,000
764,000
477,000
477,000
485,000
(a) Or date of appointment if later.
(b) Appointed as a Director on 1 January 2014.
Implementation of policy for 2015
Any salary increases in 2015 will be made in line with the approved remuneration policy as set out at the end of this report.
Taxable benefits
All Directors received healthcare benefits and car and fuel allowances. In addition, William Seeger received US benefits (medical insurance,
life insurance, long and short term disability benefit and fees for computation of annual tax return) that were taxable in the UK and converted
into UK sterling using the average exchange rate for the first business day of each month.
Pension entitlements
During the year
Pension benefits are provided to executive Directors through the GKN Group Pension Scheme (2012) (the Scheme). The Scheme has changed
in recent years in line with pension regulations. Directors receive benefits either under the defined benefit section of the Scheme or the
defined contribution section of the Scheme depending on when they joined.
Defined benefit section of the Scheme
These are legacy arrangements which apply to Nigel Stein, Marcus Bryson and Andrew Reynolds Smith, under which they receive:
• a pension of up to two-thirds of pensionable salary on their normal retirement date with a maximum annual accrual rate of 1/30th.
From 1 September 2007, benefits under the Scheme have been calculated on a career average basis; and
• a supplementary cash allowance of up to 40% of the difference between their pensionable salary and base salary.
They may choose to opt out and receive a cash allowance on their full base salary. Nigel Stein opted out of the Scheme.
Defined contribution section of the Scheme
Adam Walker receives retirement benefits by way of a cash allowance equivalent to 25% of base salary which may be delivered in cash or as
a payment into the defined contribution section of the Scheme. He was automatically enrolled into the Scheme but chose to opt out and
therefore receives the full allowance as cash.
No compensation is offered for any additional tax suffered by a Director in the event that the value of his or her pension exceeds the
statutory lifetime allowance.
William Seeger did not participate in the Scheme during the period he was a Director but received an overall allowance of 40% of base
salary, which included the Company’s contributions to qualified and non-qualified defined contribution pension arrangements consistent
with US practice.
Details of the pension benefit provisions under the defined benefit and defined contribution sections of the Scheme can be found on
page 90.
Implementation of policy for 2015
There are no plans to change Directors’ pension entitlements in 2015.
82 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
STVRS
Purpose of Short Term Variable Remuneration Scheme (STVRS)
Aligning short term financial and strategic measures with long term strategic objectives
Payments under the STVRS are triggered by performance against targets set for financial and strategic measures. The financial measures
represent a maximum opportunity of 90% of base salary, assessed against targets relating to profit, margin and cash flow in relation to
Group or individual portfolios as appropriate. The strategic measures for 2014 are summarised below and represent the remaining bonus
opportunity of 20% of base salary.
The STVRS financial measures are designed to reward the achievement of profit, margin and cash flow without encouraging excessive
risk-taking. Strategic objectives are tailored to meet the broader Group strategies and the individual business needs of each division.
Payments of up to 65% of base salary are made in cash and any balance is deferred into shares under the DBP (see page 84).
2014 STVRS performance (audited)
Performance of the financial measures achieved relating to Group profit and margin for 2014 are set out below:
Measure
Profit (£m)
Margin (%)
Threshold
Target
Maximum
Actual
Maximum
opportunity
(% of salary)
611
8.9
643
9.2
675
9.5
642
9.3
50
10
Payout
(% of salary)
24.2
6.7
The profit and margin figures above are calculated using 2014 budget exchange rates to eliminate the impact of translational currency
fluctuations. As described in the Chairman’s letter, actual performance has been adjusted to remove the impact of two small one-off items to
ensure that performance is measured against targets on a like-for-like-basis and some payouts were reduced in light of a fatal accident at
our Aerospace site in El Cajon, US. Targets are set on a monthly, cumulative basis to reflect the budgeted cash profile for the year and also
include an element in relation to cash conversion and an underpin to encourage capital expenditure broadly in line with budget phasing.
Performance of strategic goals at Group and divisional levels included the following:
Strategic goals
Outcome
• Winning appropriate new business and delivering other strategic
initiatives relating to technology development and market
expansion.
• A good performance across the Group, with particularly strong
new business wins by Driveline at appropriate margins and good
growth of the Land Systems business in China.
• Improving quality through the ‘Voice of the Customer’ initiative.
• Very good progress across all divisions, particularly Aerospace.
• Successful transition of the new members of the Executive
Committee, higher graduate recruitment and improvements in
intellectual property and treasury management.
• Strong progress with a seamless transition to the new Executive
Committee members, an additional 75 graduates into our training
schemes and delivery of key intellectual property and treasury
initiatives.
STVRS is based on performance against stretching targets set by the Committee at the start of the year. The Board believes that detailed
cash flow and divisional financial targets are commercially sensitive, but the disclosure set out overleaf in relation to 2014 STVRS provides
information on the level of performance achieved against the various measures during 2014 and demonstrates the extent to which this
performance met threshold, target and maximum levels.
GKN plc Annual Report and Accounts 2014 83
GOVERNANCE
Directors’ remuneration report continued
Measure
Chief Executive
(Nigel Stein)*
Finance Director
(Adam Walker)
Group Profit
10
Group Cash flow
30
Strategic measures
20
Group Profit
50
Group Margin
10
Group Cash flow
30
Strategic measures
20
Target
Portfolio Cash flow
Strategic measures
20
Group Profit
25
Portfolio Profit
25
Portfolio Margin
Portfolio Cash flow
10
30
Strategic measures
20
Maximum
24.2%
6.7%
9.5%
14.6%
24.2%
6.7%
9.5%
14.6%
25
25 0.0%
10 0.0%
30
Portfolio Margin
Performance against target range
50
Group Margin
Chief Executive Aerospace Group Profit
& Land Systems
Portfolio Profit
(Marcus Bryson)*
Chief Executive
Automotive
(Andrew Reynolds Smith)
Maximum
opportunity
(% of salary) Threshold
12.1%
13.0%
15.0%
12.1%
13.9%
3.3%
7.0%
15.0%
* These figures do not include the 2.5% reduction in payout following the exercise of discretion by the Committee in relation to the fatal accident at El Cajon.
Implementation of policy for 2015
The performance measures are reviewed annually. For the 2015 STVRS, the weighting between each STVRS measure will not change, as set
out below.
% of salary
Profit
Cash
Margin
Strategic objectives
Target
Maximum
25
15
5
10
50
30
10
20
55
110
Taking into account the revisions to the 2014 UK Corporate Governance Code, we will apply clawback provisions to the STVRS from 2015
onwards (the DBP already includes malus provisions). Clawback and malus will be applied in the event of a material misstatement of the
Group’s published accounts or if an individual is guilty of serious misconduct or has committed a serious breach of the GKN Code. We will
also be able to apply malus provisions where there has been a failure of risk management or major reputational damage to GKN. In applying
clawback, the value of any other long or short term incentive awards may be reduced.
STVRS – deferred shares
Purpose of Deferred Bonus Plan (DBP)
Aligning interests of key executives with those of shareholders
Currently any STVRS payment above 65% of base salary is deferred into shares under the DBP. The table below sets out the DBP awards
granted during the year in respect of the deferred element of the 2013 STVRS:
Director
% of salary
deferred into shares
Face value of
award (£) (a)
No of shares
awarded (b)
Date of
release
17
10
22
130,981
46,953
102,084
32,569
11,675
25,383
2016
2016
2016
Nigel Stein
Marcus Bryson
Andrew Reynolds Smith
(a) Value excludes amount of dividend equivalents paid in cash from date of grant to date of release.
(b) Granted with no exercise price. Further details are shown on page 89.
The release of DBP awards is subject to continued employment and malus provisions.
The 2014 STVRS award did not meet the 65% threshold so no amounts will be deferred into shares.
84 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Implementation of policy for 2015
There is no change to the policy for setting targets for 2015. However we have revised the ranges above and below target to encourage
executives to drive performance beyond the targets. Any STVRS payment above 65% of salary earned in respect of 2015 will be deferred.
Long term incentives
Purpose of Sustainable Earnings Plan (SEP)
Sustained earnings performance to support the Group’s growth strategy and objective of creating long term
shareholder value
The SEP is designed to improve alignment with the Group’s growth strategy and with shareholder interests, as well as encouraging and
rewarding earnings performance which is sustained over the long term. Awards take the form of a Core Award and a Sustainability Award
and are normally granted annually to executive Directors and to the senior management population. The chart below illustrates how the
SEP operates:
Year 1
Year 2
Year 3
Year 4
Year 5
Sustainability performance period
Core performance period
Core Award
“Deferred” Core Award
50% Core Award released
50% Core Award released
Sustainability Award will be
reduced to the extent that the
core target is not satisfied over
the Core Performance Period
Sustainability Award vests
at the end of year 5 subject
to the achievement of the
sustainability target
Sustainability Award
Total of Core and Sustainability
Awards: 174% of salary
The Core and Sustainability Awards are subject to performance targets and to an additional assessment of the quality of earnings as set
out below.
The performance targets for the 2014 awards were as follows:
Core target
Compound annual EPS(a) growth
12% or more
6%
Less than 6%
Sustainability target
Vesting level
100%
25%
0%
(a)Management EPS calculated using cash tax rate as reported in note 9 to the financial
statements.
(b) Growth between 6% and 12% is on a straight line basis.
(c) The base year (2013) EPS against which growth will be measured is 31.9p.
Highest level of EPS(a)
Vesting
level(b)
Year 4
√
√
Year 5
√
X
100%
50%
X
X
√
X
50%
0%
(a)Highest level of EPS in any year in the core performance period.
(b)Vesting level is subject to reduction to reflect the extent to which the core target is
not satisfied.
(c) Sustainability target is assessed separately in years 4 and 5.
As a Committee, we take into account the following factors to ensure we are satisfied that the level of vesting is justified by
the quality of earnings:
• Group ROIC against internal projections;
• shareholder expectations;
• new investment performance; and
• cost of capital to ensure the level of vesting appropriately reflects the creation of shareholder value.
GKN plc Annual Report and Accounts 2014 85
GOVERNANCE
Directors’ remuneration report continued
Vesting of awards in 2014 (audited)
The long term incentive values shown in the single total figure table on page 81 relate to the 2012 SEP Core Award for which the performance
period ended on 31 December 2014. The performance targets and vesting levels are set out in the table below. The quality of earnings is
an important assessment which includes the creation of both financial and shareholder value. Before we approved the 2012 SEP vesting
levels we reviewed the quality of earnings. This included a review of organic sales growth, trading margin, free cash flow, ROIC, dividend
per share, net debt and cost of capital during the performance period. As described in the Chairman’s letter, we were satisfied with the
quality of earnings.
Target for vesting (a)
2012 SEP Core Awards
Performance measure (compound annual EPS
Vesting level
Threshold
Maximum
Actual vesting
6%
25%
12%
100%
9.4%
67.5%
growth(b) )
(a) Vesting between these points is on a straight line basis.
(b) Compound annual growth in management EPS normalised for tax, and excluding exceptional items, post-employment finance charges and volatile IFRS charges or credits.
50% of the vested Core Award shares (together with accrued dividend equivalent shares) are due to be released on 24 February 2015
(see page 95). Dividend equivalent shares accrue based on the value of dividends paid from the date of grant to the date of release.
The remaining 50% of the vested Core Award shares (together with dividend equivalent shares) will be released in 2017 (see page 89).
The chart below shows the value of the vested Core Awards (as shown in the single total figure table) that is attributable to performance and
share price appreciation:
Chief Executive
(Nigel Stein)
831
557
Chief Executive,
Aerospace & Land Systems
(Marcus Bryson)
516
346
862
Chief Executive, Automotive
(Andrew Reynolds Smith)
516
346
862
0
300
600
900
1200
1,388
1500
£000
Performance element
Share appreciation element
The Sustainability Awards associated with the vested Core Awards will vest subject to the satisfaction of the sustainability target measured
in each of the financial years ending 31 December 2015 and 31 December 2016, and will be capable of release in 2017. The number of
Sustainability Award shares has been reduced to reflect the extent to which the core target has not been met over the core performance
period; the number of Sustainability Award shares which vests will be determined by reference to the extent to which the sustainability
target is met.
86 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Granting of awards in 2014 (audited)
Director and award type(a)
% of salary
Face value of
award (£)(b)
No of shares
awarded
% vesting at
threshold
End of
performance period
Nigel Stein
Core Award
Sustainability Award
145
29
1,107,800
221,560
279,585
55,917
25
50
31 December 2016
31 December 2018
25
50
31 December 2016
31 December 2018
25
50
31 December 2016
31 December 2018
25
50
31 December 2016
31 December 2018
335,502
Marcus Bryson
Core Award
Sustainability Award
145
29
691,650
138,330
174,557
34,911
209,468
Andrew Reynolds Smith
Core Award
Sustainability Award
145
29
691,650
138,330
174,557
34,911
209,468
Adam Walker
Core Award
Sustainability Award
145
29
703,250
140,650
177,485
35,497
212,982
(a) Core and Sustainability Awards (in the form of conditional awards) were granted as performance share awards with no exercise price.
(b) Value is based on the maximum number of shares that would vest assuming the relevant performance conditions (see page 85 for further details) are satisfied in full. The number
of Core Award shares is calculated using the GKN share price of 396.23p, being the average share price for the three dealing days immediately before the date of grant (10 March
2014). The number of Sustainability Award shares is based on 20% of the Core Award Shares. The value excludes the amount attributable to dividend equivalents (paid in
additional shares or cash) over the relevant performance periods which are released at the same time as the Core and Sustainability Award shares.
Implementation of policy for 2015
Awards under the SEP, with a face value of 174% of base salary, will continue to be measured against growth in EPS using the targets set out
on page 85 and against a baseline EPS for 2014 of 32.1p. Provided all or part of the Core Award vests, the Sustainability Award will be
measured by reference to the highest level of EPS achieved in any year of the core performance period.
Taking into account the revisions to the 2014 UK Corporate Governance Code, we will apply malus and clawback provisions to the 2015 SEP
awards and subsequent awards. Clawback and malus will be applied to the SEP Core awards in the event of a material misstatement of the
Group’s published accounts or if an individual is guilty of serious misconduct or has committed a serious breach of the GKN Code. We will
also be able to apply malus provisions to all SEP awards where there has been a failure of risk management or major reputational damage to
GKN. In applying clawback, the value of any other long or short term incentive awards may be reduced.
Historic plans
Prior to the introduction of the SEP in 2012, long term incentive awards were granted under the GKN Long Term Incentive Plan (LTIP) which
targeted EPS growth and the GKN Executive Share Option Scheme (ESOS) which was based on TSR performance. Details of vested and
outstanding LTIP and ESOS awards are shown on pages 89 and 90. Since 2012, all long term incentive awards have been granted under
the SEP.
Joining awards
Purpose of joining awards
To compensate for long term incentives forfeited on leaving former employer
Adam Walker joined the Board on 1 January 2014 and became Group Finance Director on 26 February 2014. In addition to participating in the
normal ongoing incentive arrangements (STVRS and SEP), he was granted joining awards (as set out below). These awards were granted in
line with the remuneration policy to compensate him for the long term incentive arrangements he forfeited on leaving his former employer.
Award type(a)
Restricted Shares 1
Face value of
award(b)
No of shares
awarded
Actual/expected
release dates
£48,000
12,114
29.07.14
Restricted Shares 2
£283,000
71,423
24.02.15
Performance Shares
£302,000
76,218
2016
(a) Granted with no exercise price. Further details, including conditions for vesting of awards, are shown on page 88.
(b) Value excludes amount of dividend equivalents (paid in additional shares or cash) from date of grant to date of release.
GKN plc Annual Report and Accounts 2014
87
GOVERNANCE
Directors’ remuneration report continued
Executive Directors’ share interests (audited)
We believe that the interests of Directors should be closely aligned with those of shareholders so we operate a shareholding requirement to
achieve this. For executive Directors, a considerable part of this alignment can be achieved through the retention of shares released under
the DBP and under long term incentive plans.
In July 2012, the alignment between shareholders and executive Directors was improved as the minimum shareholding requirement was
increased from 100% to 200% of base salary. Nigel Stein, Marcus Bryson and Andrew Reynolds Smith, who were all in post at that time, were
expected to meet the requirement within five years and did so comfortably (see table below).
Adam Walker, as a newly appointed Director, is expected to acquire shares with a value of 100% of his base salary within five years of
appointment and 200% of base salary as soon as possible after that. He is expected to retain all vested long term incentive awards (net of
tax) until the requirement is met in full. He has made considerable progress towards meeting the requirement since his appointment to the
Board on 1 January 2014.
The shareholding requirement is tested annually on 31 December using the average share price for the final three months of the year based
only on shares that are held outright by the Director or their connected persons.
We also apply a similar shareholding requirement for Executive Committee members and the top 100 executives in the Group as we believe
that their interests should be closely aligned with shareholders in the same way as those of executive Directors and non-executive Directors
(see page 93). Executive Committee members are expected to hold shares with a value of a minimum of 100% of base salary (retaining all
vested long term incentives net of tax until the requirement is met in full). The top 100 executives below that level are required to hold a
minimum of either 20% or 30% of base salary, depending on their grade, (retaining 50% of vested long term incentives net of tax until the
requirement is met in full).
The following table shows the number of shares held by the Directors (and their connected persons) at 31 December 2014. It also shows the
interests of executive Directors in share awards at the same date (with further details provided in the subsequent tables).
Shares
Shares held
Interests in shares
Shareholding
requirement
%
of salary
Required
Executive Directors
Nigel Stein
Marcus Bryson
Andrew Reynolds Smith
Adam Walker
Former executive Director
William Seeger
Without performance
conditions
DBP
Restricted
awards(b)
award(c)
Achieved(a)
Unvested
Unvested
LTIP
awards(d)
With performance conditions
SEP
Performance
awards(e)
awards(f )
Vested
Unvested
Unvested
ESOS
options(g)
Vested
1,370,077
873,161
905,455
77,281
200
200
200
200(h)
564
576
597
50
32,569
11,675
25,383
–
–
–
–
71,423
408,997
343,558
343,558
–
1,439,773
895,746
895,746
212,982
–
–
–
76,218
1,387,902
168,353
168,353
–
612,712(i)
–
–
–
–
–
644,775(j)
–
–
(a) Based on average share price of 323.33p per share for the period 1 October 2014 to 31 December 2014 and salary as at 31 December 2014.
(b) DBP awards are in the form of conditional shares which will vest subject to continued employment and malus provisions.
(c) Restricted award is in the form of conditional shares and will vest subject to continued employment. Clawback will apply in the event employment ceases within
12 months of vesting.
(d) LTIP awards are in the form of nil cost options (with the exception of those to William Seeger which are in the form of conditional shares). Vested LTIP awards have a
deferral period and are capable of exercise on 1 April 2015 (fourth anniversary of date of grant).
(e) SEP awards are in the form of conditional shares and will vest subject to the achievement of an EPS performance condition (which is the same as that attached to the
2013 SEP Core Award) and continued employment.
(f ) Performance award is in the form of conditional shares and will vest subject to the achievement of an EPS performance condition and continued employment.
Clawback will apply in the event employment ceases within 12 months of vesting.
(g) ESOS awards are market value options. Vested ESOS awards are those not exercised at 31 December 2014.
(h) Required to achieve a shareholding requirement of 100% of salary within five years of appointment and 200% of salary as soon as possible after that.
(i) Shares held on retirement from the Board on 25 February 2014.
(j) Awards held on retiring from the Company on 31 August 2014 (see SEP table on page 89 for further details).
Further details on the awards shown in the above table can be found in the share awards tables below and the additional notes.
There were no changes in the interests of Directors in the period 31 December 2014 to 23 February 2015.
88 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Beneficial interests under the DBP
Financial Statements
Other Information
Shares
granted in
year
Shares
released in
year
Shares held
at 31.12.2014
Status of
award at
31.12.2014
Share price
(pence)(a)
Actual/
expected
release date
32,569
–
32,569
Unvested
402.16
2016
Grant date
Shares held
at 01.01.2014
Nigel Stein
06.03.14
–
Marcus Bryson
08.08.12
53,278
–
53,278
–
Released
212.18
26.02.14
06.03.14
–
11,675
–
11,675
Unvested
402.16
2016(b)
06.03.14
–
25,383
–
25,383
Unvested
402.16
2016
Andrew Reynolds Smith
(a) Average GKN share price for the five dealing days immediately before the grant dates used to calculate the number of shares under the awards.
(b) Normal release date under DBP rules, however shares will be released following his retirement as a Director and the announcement of the 2014 annual results.
Beneficial interests under the SEP
Grant date
Shares
held at
01.01.2014(a)
Shares
granted in
year
Shares held
at 31.12.2014
Status of
award at
31.12.2014
Share price
(pence)(b)
Performance
period
Actual/expected
release date(c)
Nigel Stein
06.08.12
04.03.13
10.03.14
622,143
482,128
–
–
–
335,502
622,143
482,128
335,502
Unvested
Unvested
Unvested
208.36
268.87
396.23
2012 – 2016
2013 – 2017
2014 – 2018
24.02.2015 / 2017
2016 / 2018
2017 / 2019
Marcus Bryson
06.08.12
04.03.13
10.03.14
386,647
299,631
–
–
–
209,468
Unvested
Unvested
Unvested
208.36
268.87
396.23
2012 – 2016
2013 – 2017
2014 – 2018
24.02.2015(d)
2016 / 2018(e)
2017 / 2019(e)
Andrew Reynolds Smith
06.08.12
04.03.13
10.03.14
386,647
299,631
–
–
–
209,468
Unvested
Unvested
Unvested
208.36
268.87
396.23
2012 – 2016
2013 – 2017
2014 – 2018
24.02.2015 / 2017
2016 / 2018
2017 / 2019
Unvested
396.23
2014 – 2018
2017 / 2019
– 363,265 (f) Unvested
– 281,510(f) Unvested
208.36
268.87
2012 – 2016
2013 – 2017
24.02.2015 / 2017
2016 / 2018
1,439,773
386,647
299,631
209,468
895,746
386,647
299,631
209,468
895,746
Adam Walker
10.03.14
–
William Seeger
06.08.12
04.03.13
363,265
281,510
212,982
212,982
644,775
(a) Includes shares under both the Core and Sustainability Awards.
(b) Average GKN share price for the three dealing days immediately before the grant dates used to calculate the number of shares under the Core Awards. The number
of Sustainability Award shares is based on 20% of the Core Award shares.
(c) 50% of any vested Core Award is released after three years and the remaining 50% (and any vested Sustainability Award) is released after five years, in both cases
after announcement of the prior year annual results. For the 2012 SEP Core Award, the performance condition was satisfied at 67.5%.
(d) Shares vested under the 2012 Core Award will be released in full on 24 February 2015 (no shares will be deferred). The Sustainability Award will lapse. See page 91
for further details.
(e) Shares that vest under the 2013 and 2014 Core Awards will be released on the original release dates subject to the performance conditions being satisfied and pro-rated
to reflect period of service during the performance periods. The Sustainability Awards will lapse.
(f ) Awards held on retiring from the Company on 31 August 2014. Shares that vest will be released on the original release dates subject to the performance conditions being
satisfied and pro-rated to reflect period of service during the relevant performance periods. Details of awards released are shown on page 91.
Beneficial interests under the LTIP
Grant date
Shares held
at 01.01.2014
Shares
released
in year
Shares held
at 31.12.2014
Status of
award at
31.12.2014
Share price
(pence)(a)
Performance
period
Actual/expected
release date/period
Nigel Stein
11.08.10
01.04.11
453,720
408,997
453,720
–
–
408,997
Released
Vested
88.16
146.7
2010 – 2012
2011 – 2013
11.08.14
01.04.15 – 31.03.21
Marcus Bryson
11.08.10
01.04.11
381,125
343,558
381,125
–
–
343,558
Released
Vested
88.16
146.7
2010 – 2012
2011 – 2013
22.10.14
01.04.15(b)
Andrew Reynolds Smith
11.08.10
01.04.11
381,125
343,558
381,125
–
–
343,558
Released
Vested
88.16
146.7
2010 – 2012
2011 – 2013
23.10.14
01.04.15 – 31.03.21
William Seeger
11.08.10
01.04.11
372,050
335,378
372,050
335,378
–
–
Released
Released
88.16
146.7
2010 – 2012
2011 – 2013
11.08.14(c)
25.09.14(d)
(a) Average GKN share price for the prior year used to calculate the number of shares under the awards.
(b) Normal release date under LTIP rules. However, shares are released as soon as practicable following retirement (in this case following the announcement of the 2014
annual results).
(c) Award released before retiring from the Company on 31 August 2014 (see page 91 for further details).
(d) Award released before normal release date in accordance with the LTIP rules.
GKN plc Annual Report and Accounts 2014 89
GOVERNANCE
Directors’ remuneration report continued
Beneficial interests under the ESOS
Nigel Stein
Grant date
Shares held
at 01.01.2014
Exercised
in year
Shares held
at 31.12.2014
12.08.09
07.05.10
01.04.11
752,861
434,621
200,420
–
–
–
752,861
434,621
200,420
Status of award at Exercise price
31.12.2014
(pence)(a)
Performance
period
Actual/expected exercise
date /period
Unexercised
Unexercised
Unexercised
110.08
134.60
199.58
2009 – 2011
2010 – 2012
2011 – 2013
12.08.12 – 11.08.19
07.05.13 – 06.05.20
01.04.14 – 31.03.21
199.58
2011 – 2013
01.04.14 – 31.03.21(b)
1,387,902
Marcus Bryson
–
168,353
Unexercised
168,353
–
168,353
Unexercised
199.58
2011 – 2013
01.04.14 – 31.03.21
164,345
164,345
–
Exercised
199.58
2011 – 2013
01.04.14(c)
01.04.11
168,353
Andrew Reynolds Smith
01.04.11
William Seeger
01.04.11
(a) Average GKN share price for the five dealing days immediately before the grant dates used to calculate the number of shares under the awards.
(b) Normal exercise period under the rules. The award must be exercised within six months following retirement.
(c) Awards exercised before retiring from the Company on 31 August 2014 (see page 91 for further details).
Beneficial interests under the joining awards for Adam Walker
Award type
Grant date
Shares held
at 01.01.2014
Restricted Shares 1
10.03.14
–
Shares
granted in
year
Dividend
Shares
Shares
released in
year
Shares held
at 31.12.2014
Status of
award at
31.12.2014
Share price
(pence)(a)
Actual/
expected
release date
12,114
167
12,281
–
Released
396.23
29.07.14
Restricted Shares 2
10.03.14
–
71,423
–
–
71,423
Unvested
396.23
24.02.15
Performance Shares
10.03.14
–
76,218
–
–
76,218
Unvested
396.23
2016
147,641
(a) Average GKN share price for the three dealing days immediately before the grant date used to calculate the number of shares under the awards.
The aggregate gain made by Directors on the release of awards and exercise of options in the year was £4.2 million.
Pension (audited)
The table below sets out details of the pension benefit provisions under the defined benefit and defined contribution sections of the Scheme
for executive Directors during the year.
Normal
retirement
date(a)
Nigel Stein
Marcus Bryson
Andrew Reynolds Smith
Adam Walker
31.12.15
20.06.14 (e)
12.05.26
–
Accrued
pension at
31.12.14(b)
Transfer value
of accrued
pension at
31.12.2014(c)
£000
£000
85
189
46
–
2,425
5,522
953
–
Increase
in accrued Pension value
in the year
pension
during from defined
benefit
year (net of
inflation) scheme (A)(d)
£000
£000
2
2
3
–
33
43
66
–
Pension
value in year Total pension
value in year
from cash
allowance/ as reported in
single figure
defined
table (A+B)
contribution
£000
(B) £000
301
193
154
123
334
236
220
123
(a) Earliest date that a non-reduced pension is payable to Directors.
(b) Accrued annual pension includes entitlements earned as an employee prior to becoming a Director as well as for qualifying services after becoming a Director.
(c) Transfer value represents the present value of accrued benefits. It does not represent an amount of money which the individual is entitled to receive. The change in transfer value
over the year reflects the additional pension earned and the effect of changes in financial market conditions during the year. The method and assumptions used to calculate
transfer values from the Scheme were last reviewed in November 2012 and remain applicable.
(d) Notional value of defined benefit included in single total figure table on page 81.
(e) Retired from the Company on 1 January 2015.
90 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Payments in respect of retiring Directors (audited)
Marcus Bryson
Marcus Bryson stepped down from the Board at the close of business on 31 December 2014 and retired from the Company on 1 January 2015.
He will be employed on a part-time basis until 31 December 2015. No STVRS or SEP awards will be made to him in respect of 2015.
Incentive awards
In accordance with the rules of the relevant incentive plans and the remuneration policy, Marcus Bryson’s incentive awards will be treated
as follows:
• The 2011 ESOS award over 168,353 shares with an option price of 199.58p has vested in respect of performance to 31 December 2013 and
can be exercised until 1 July 2015 (six months after retirement).
• The 2011 LTIP award of 343,558 shares has vested in respect of performance to 31 December 2013 and will be released (i.e. the award will
become capable of exercise) as soon as practicable following his retirement, in accordance with the rules of the plan. A cash amount
equivalent to the dividends on the vested shares (from the beginning of the third year of the relevant performance period to the release
date) will also be paid.
• The 2014 DBP award over 11,675 shares will be released as soon as practicable following his retirement in accordance with the rules of the
plan. A cash amount equivalent to the dividends on the shares during the period from grant to release will also be paid.
• The 2014 STVRS award will be paid wholly in cash as it did not exceed the 65% threshold for any deferral into shares.
We considered Marcus Bryson to be a good leaver for the purposes of the SEP awards granted in 2012, 2013 and 2014; this was considered
appropriate given his retirement from full time employment and his contribution to the Group. The number of shares under his unvested 2013
and 2014 SEP awards will be reduced on a pro rata basis to reflect his length of service during the relevant performance periods. These
awards will remain subject to the original performance conditions and any core awards that vest will be released at the end of the relevant
three year core performance period. The sustainability awards relating to all of his 2013 and 2014 SEP awards will lapse. The 2012 Core Award
(which vested at 67.5% as shown on page 89) will be released in full (217,489 shares) on 24 February 2015 together with 12,152 dividend
equivalent shares. The Sustainability Award will lapse.
William Seeger
William Seeger retired from the Board on 25 February 2014. The payments he received whilst he was a Director are shown in the single total
figure table on page 81. This section provides details of remuneration and benefits received whilst he was an employee and following his
retirement from the Company.
In the 2013 annual report on remuneration we disclosed estimated values of certain expatriate benefits that he was entitled to receive.
Where these payments have been made whilst he was an employee and following his retirement from the Company, we have set out the
actual amounts below.
Payments whilst an employee
William Seeger continued to be employed within the Group until his retirement on 31 August 2014. During this time he received salary and
normal benefits and pension entitlements. For the period 26 February 2014 to 31 August 2014, he received the following expatriate benefits:
• Repatriation costs of £7,242 (estimated at £15,000). No further payment due.
• Tax return support of £4,219 for the period 26 February 2014 to 31 December 2014 (estimated at £25,000 until vesting of all outstanding
awards). Payments ongoing until 2018.
• Reasonable expenses for sale of his US property of $57,232 (payment capped at the lower of 7% of selling price or $100,000. No further
payment due.
• Tax and social security equalisation was applied to his remuneration for the period so he was not disadvantaged by his global tax
position (details for the period 1 January 2014 to 31 December 2014 are shown in the hypothetical tax withholding section below). Tax
equalisation will continue to be applied to any relevant payment made.
Payments following retirement
For the period 1 September 2014 to 31 December 2014, William Seeger received the following ongoing expatriate benefits:
• US healthcare benefits of £5,214 (estimated at £15,000 for 18 months following his retirement from the Company). Payments ongoing until
March 2016.
• Tax return support continued to be applied for the period following retirement (full details shown above). Payments ongoing until 2018.
• Tax and social security equalisation continued to be applied for the period (full details for the period 1 January 2014 to 31 December 2014
are shown in the hypothetical tax withholding section below). Tax equalisation will continue to be applied to any relevant payment made.
As reported on page 89, the 2012 SEP Core Award vested at 67.5%. On 24 February 2015, 90,796 shares (50% of the vested Core Award
shares) and 5,073 dividend equivalent shares will be released to him. The remaining 90,797 vested Core Award shares will be released in
2017. The Sustainability Award associated with the vested Core Award will vest subject to the satisfaction of the sustainability target
measured over each of the financial years ending 31 December 2015 and 31 December 2016, and will be released in 2017. The number of
Sustainability Award shares has been reduced to 40,867 shares to reflect the extent to which the core target has not been met over the core
performance period; the number of Sustainability Award shares which vest will be determined by reference to the extent to which the
sustainability target is met and pro-rated for time served over the award’s five year period.
GKN plc Annual Report and Accounts 2014
91
GOVERNANCE
Directors’ remuneration report continued
The table below shows the awards released to William Seeger during 2014:
Award
Number of shares released
Release/exercise date
164,345
372,050
335,378
01.04 2014
11.08.2014
25.09.2014
2011 ESOS
2010 LTIP
2011 LTIP
The aggregate gain made on the release/exercise of the above awards was £2.7 million.
Hypothetical tax withholding
William Seeger is a US national who relocated to the UK in 2008. During the period 1 January 2014 to 31 December 2014, his emoluments
were paid in US$ subject to full US State and Federal hypothetical tax withholding. The Company operates hypothetical tax and social
security withholding so that he is placed in a tax neutral position mitigating him against double taxation in the UK and US. This treatment
has resulted in GKN making a payment of £1,671,937 (2013: £1,055,689) to the UK and US tax authorities with any overpayment of taxes
being subsequently refunded to the Company. For 1 January 2014 to 31 December 2014, the best estimate of the amount which is not
expected to be refunded to the Company, based on information available to date, is £134,780 (2013: £26,298). These amounts are not
included in the single figure table for 2013 or 2014 on page 81. For the period he was a Director (1 January 2014 to 25 February 2014), the
estimated actual tax payments made by the Company were £120,751 on a cash paid basis. Of this, the best estimate of the amount which is
not expected to be refunded to the Company based on the information available to date is £53,604.
No payments for loss of office were made to any past Director during the year.
Annual statement of remuneration – non-executive Directors
Single total figure of remuneration – Chairman and non-executive Directors (audited)
Senior Independent Director/
Committee Chairman fee
£000
Basic Fees
£000
Chairman
Mike Turner
2014
2013
2014
2013
2014
2013
315
306
–
–
315
306
55
55
55
55
55
55
55
55
–
–
15
25(b)
–
–
10(a)
25(b)
55
55
70
80
55
55
65
80
–
19
–
5(d)
–
24
535
545
40
40
575
585
Non-executive Directors
Angus Cockburn
Tufan Erginbilgic
Shonaid Jemmett-Page
Richard Parry-Jones
Former non-executive Director
John Sheldrick(c)
Total
Total
£000
(a) Fee for Audit Committee Chairman from 2 May 2013 (date of appointment).
(b) Fees for Remuneration Committee Chairman (£15,000) and Senior Independent Director (£10,000).
(c) Retired 2 May 2013.
(d) Fee for Audit Committee Chairman to 2 May 2013.
Implementation of policy for 2015
In November 2014, we reviewed the fees for the Chairman and approved an increase of 6% with effect from 1 January 2015. We concluded
that this increase was appropriate taking into account the scope of the role, time commitment and positioning against market.
In November 2014 the fees for non-executive Directors were reviewed by the Board and an increase of 9% was approved taking into account
the current market environment, the scope of the role, the time commitment expected of them and the time since the last increase was made
(being two years ago). The additional fees for the Audit and Remuneration Committee Chairmen and Senior Independent Director were also
reviewed but not increased. The fees from 1 January 2015 are set out below:
Chairman’s fee
Non-executive Director base fee
Audit Committee Chairman additional fee
Remuneration Committee Chairman additional fee
Senior Independent Director additional fee
92 GKN plc Annual Report and Accounts 2014
1 Jan 2015
1 Jan 2014
£335,000
£60,000
£15,000
£15,000
£10,000
£315,000
£55,000
£15,000
£15,000
£10,000
Strategic Report
Governance
Financial Statements
Other Information
Non-executive Directors’ shareholdings
The Board reviewed the shareholding requirement for non-executive Directors in November 2014 and confirmed that the current requirement
to achieve a minimum shareholding of 30% of base fees within three years of appointment remained appropriate. The shareholding
requirement is tested annually on 31 December using the average share price for the final three months of the year based only on shares that
are held outright by the Director or their connected persons. All non-executive Directors met the requirement comfortably.
The following table shows the number of shares held by the non-executive Directors (and their connected persons) at 31 December 2014.
Shareholding requirement
Chairman
Mike Turner
Non-executive Directors
Angus Cockburn
Tufan Erginbilgic
Shonaid Jemmett-Page
Richard Parry-Jones
Shares held
% of fees
required
% of fees
achieved(a)
260,000
30
267
10,000
30,000
12,900
20,000
30
30
30
30
59
176
76
118
(a) Based on average share price of 323.33p per share for the period 1 October 2014 to 31 December 2014 and fees as at 31 December 2014.
Other information
Percentage change in the remuneration of the Chief Executive
The comparison of the percentage change in the remuneration of the Chief Executive is based on a senior management population of
approximately 196 people around the world. This is considered appropriate as it includes those employees with international responsibilities
who have similar remuneration arrangements to the Chief Executive, in particular the annual bonus arrangements.
Chief Executive
(%)
Base salary
Benefits
Annual bonus
3
0
(35)
Senior Management
(%)
9(a)
0
27
(a) Salary increases reflect promotions and additional responsibilities as well as increases awarded in certain high inflation countries.
We take account of increases for UK employees generally when considering salary increases for Directors. The average salary increase for UK
employees was 2.7% (in line with the Chief Executive).
External advisers to the Committee
Advice provided to Committee
Deloitte LLP(a)
• All aspects of remuneration arrangements for
executive Directors and senior executives
below Board level.
• Market updates and practices.
Fees
£76,000
Other services provided to the Group
• Tax support to GKN employees on international assignment.
• Advice on due diligence, and other taxation matters
including employment tax, transfer pricing and corporate
tax compliance services.
• Advice in obtaining government support opportunities
in Europe.
• Consultancy support on customer-focused organisation
and processes.
Other advisors
Slaughter & May
• Advice on malus and clawback provisions in
incentive schemes.
£2,500
N/A
(a) Deloitte LLP was appointed by the Committee in 2012 following a competitive tender process. It was retained by the Committee to act as independent adviser to the Committee
throughout 2014 and the fees are charged on a costs incurred basis. Deloitte LLP is a member of the Remuneration Consultants Group and voluntarily operates under the code of
conduct in relation to executive remuneration consulting in the UK.
The Committee is satisfied that the advice it receives is objective and independent.
GKN plc Annual Report and Accounts 2014
93
GOVERNANCE
Directors’ remuneration report continued
Historical performance graph
The graph below provides a comparison of GKN’s total shareholder return with that of the FTSE 350 Index, based on an initial investment of
£100 over the six year period to 31 December 2014. The FTSE 350 Index was chosen for this chart as it is a broadly based index which
contains more manufacturing and engineering companies than the FTSE 100 Index.
700
GKN
FTSE 350
600
Value (£)
500
400
300
200
100
0
2008
2009
2010
2011
2012
2013
2014
Pay for performance
The table below shows the total remuneration of the Chief Executive over the last six years as well as the level of STVRS and long term
incentive vestings achieved as a percentage of maximum.
Chief Executive(a)
Sir Kevin Smith
Single figure of remuneration (£000)
STVRS payout (% of maximum)
LTIP vesting (% of maximum)
Nigel Stein
2009
2010
2011
2012
2013
2014
1,267
50
Nil
1,779
95
Nil
3,659
39
100
3,206
42
100
3,853
75
100
2,922
48
67.5
(a) Sir Kevin Smith retired as Chief Executive on 31 December 2011 and Nigel Stein was appointed Chief Executive on 1 January 2012.
Relative importance of spend on pay
The table below sets out the amounts paid in 2013 and 2014 in respect of the remuneration of all employees and dividends to shareholders.
Total employee remuneration(a)
Distributions to shareholders(b)
2013 £m
2014 £m
Change %
1,452
121
1,446
133
-0.4%
10%
(a) Represents amounts included in note 9 to the financial statements.
(b) Includes the total dividends paid in respect of each financial year.
Statement of voting at AGM
The table below sets out the outcome of votes at the 2014 AGM in respect of both the remuneration policy and the annual report on
remuneration. We were pleased with the level of support received for both resolutions.
Resolutions at 2014 AGM
Votes for
%
Votes against
Approval of the remuneration policy
1,134,343,544
97.8
25,705,162
Approval of the annual report on remuneration
1,151,824,009
99.3
8,237,738
%
Total votes
Votes withheld(a)
2.2 1,160,048,706
1,513,445
0.7
1,500,405
1,160,061,747
(a) Votes withheld are not counted in the total votes.
External appointments
Executive Directors may accept one non-executive directorship with another company (excluding that of chairmanship of a FTSE 100
company) subject to review by the Board in each case. The Board recognises the benefits that such appointments can bring both to the
Company and to the Director in broadening their knowledge and experience in other markets and countries. The fees received for such a role
may be retained by the Director. Andrew Reynolds Smith is a non-executive director of Morgan Advanced Materials plc from which he
received (and retained) a fee of £48,715 in respect of 2014.
94 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Dilution limits
The rules of the discretionary share plans (SEP, ESOS and LTIP) contain limits on the dilution of capital. These limits are monitored to ensure
that the issue of new shares or transfer of shares from treasury does not exceed 5% of the issued share capital in any rolling 10 year period
for discretionary plans or 10% of the issued share capital in any rolling 10 year period for all employee plans.
At 31 December 2014 the cumulative number of shares issued under discretionary plans for the previous 10 year period as a percentage of
the issued share capital was 2.67%. The Company no longer operates an all employee share plan.
GKN’s policy is to satisfy awards under the SEP, ESOS and LTIP by the issue of shares, transfer of shares from treasury or from an employee
share ownership plan trust (Trust) established for that purpose. DBP awards are satisfied by transfer of shares held in the Trust. A dividend
waiver operates in respect of shares held in the Trust.
During the year, shares held in treasury were used to satisfy awards under the ESOS and LTIP and shares held in the Trust were used to
satisfy awards under the DBP. Details of the Trust shares are set out below:
Balance at
31 December 2013
Shares acquired
Shares transferred to
participants
Balance of shares at
31 December 2014
1,887,665
130,000
1,831,013
186,652
The Directors’ remuneration report, including the Chairman’s letter and annual report on remuneration, has been approved by the Board.
Signed on behalf of the Board
Professor Richard Parry-Jones CBE
Chairman of the Remuneration Committee
23 February 2015
Note: Changes to Directors’ interests on 24 February 2015:
2012 SEP Core Award:
50% of the vested core shares and additional dividend equivalent shares were released as follows:
Nigel Stein 174,977 shares and 9,778 dividend equivalent shares.
Andrew Reynolds Smith 108,744 shares and 6,076 dividend equivalent shares.
Restricted Shares 2:
71,423 shares and 1,572 dividend equivalent shares were released to Adam Walker.
As at 25 February 2015, there were no other changes in the interests of Directors.
This report has been prepared under The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment)
Regulations 2013 (‘the Regulations’), and in accordance with the requirements of the Listing Rules. The Board has applied the principles
of good governance relating to directors’ remuneration contained within the 2012 UK Corporate Governance Code.
GKN plc Annual Report and Accounts 2014
95
GOVERNANCE
Directors’ remuneration report continued
Directors’ remuneration policy
The Company’s full policy on remuneration for executive Directors was approved by shareholders on 1 May 2014 and can be found on the
Company’s website at www.gkn.com/remuneration. We have included sections of the remuneration policy below that we consider would be
most helpful for shareholders to have repeated here.
Policy table for executive Directors
Fixed Pay
Base salary
Benefits in kind
Pension
Purpose and
link to
strategy
• To provide a market
competitive salary to recruit
and retain individuals with
the necessary knowledge,
skills and experience
to deliver the Group’s
strategic objectives.
• To provide benefits
consistent with the scope
and location of the role.
• To provide appropriate retirement
benefits and assist with recruitment and
retention.
Operation
• Normally reviewed annually
(with any increase generally
taking effect from 1 July)
taking into account a
number of factors including
individual experience, scope
of the role, responsibility
and performance, Group
profitability, prevailing
market conditions and
pay awards in the
Group generally.
• Benefits are consistent
with those provided to
senior managers, and
principally include car
and fuel allowance, life
assurance, disability and
healthcare benefits.
• Other benefits may be
provided at the discretion
of the Committee based on
individual circumstances
and business requirements,
such as appropriate
relocation and expatriate
allowances and support.
• Provided by means of an allowance
delivered in cash and/or as payment to a
pension plan.
• Where historical arrangements are in
place, benefits are provided in part
through membership of the GKN Group
Pension Scheme 2012.
Maximum
potential
value
• Salary increases will
normally be in line with the
average increase awarded to
other employees in the
Group. However, larger
increases may be awarded
in circumstances where it is
considered appropriate by
the Committee, such as:
–– an increase in scope and
responsibility;
–– a new executive Director
being moved to market
positioning over time; and
–– an existing executive
Director falling below
market positioning.
• To comply with the
Regulations, the maximum
potential value for existing
Directors will be no more
than the amount paid to the
Chief Executive at any time
plus 15%.
• Benefits are set at a level
which the Committee
considers appropriate and
are kept under review. Car
and fuel allowances will not
increase by more than 15%
in any one year. Some
benefits (such as
healthcare insurance) are
provided through third
parties and therefore the
cost to the Company may
vary from year to year.
Relocation and expatriate
allowances, where granted,
are set at a level which the
Committee considers
appropriate based on
market practice and
individual circumstances.
• The maximum allowance for Directors
appointed from 1 January 2013 onwards
is 25% of base salary.
• Directors appointed before that date
currently have legacy benefits under
the GKN Group Pension Scheme 2012,
a defined benefit scheme. The pension
due under these arrangements is up to
two-thirds of pensionable salary
(calculated on a career average basis
for service from 1 September 2007
onwards), with a maximum annual
accrual rate of 1/30th. The Committee
has discretion to provide alternative
arrangements on terms no more
favourable if it considers it to be in the
best interests of the Company. These
Directors receive a supplementary cash
allowance of up to 40% of the difference
between their individual pensionable
salary and base salary.
Performance
measures
Not applicable.
Not applicable.
Not applicable.
96 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Variable Pay
Annual bonus plan
(STVRS)
Deferred Bonus Plan
(DBP)
Sustainable Earnings Plan
(SEP)
Purpose and
link to
strategy
• To drive and reward
achievement of short
term financial and
strategic measures
which support long term
strategic objectives.
• Any STVRS payment above a
percentage of salary
(currently 65%) is deferred
into shares to assist with
retention of key executives
and to align their interests
with those of shareholders.
• To encourage and reward sustained earnings
performance in line with the Group’s growth
strategy and its objective of creating long term
shareholder value.
• To assist with retention of key executives.
Operation
• Award levels and
performance measures
(including the proportion
relating to strategic
measures and weightings)
are reviewed annually to
ensure alignment with the
Group’s financial and long
term strategic objectives.
• Level of payment is
determined by the
Committee after the year
end based on performance
against targets.
• Payments up to a certain
percentage of base salary
(currently 65%) are
normally made in cash and
the balance is deferred
into shares under the DBP.
The Committee has
discretion to make the
payment wholly in cash
in certain circumstances
(for example to a
departing Director).
• DBP awards are released at
the end of a two year deferral
period. Awards generally
lapse in the event of
resignation during the
deferral period.
• On release, a cash amount is
paid equivalent to the
aggregate dividends per
share paid during the
deferral period.
• A maulus provision exists
to allow the Committee
to adjust unvested DBP
awards in the event of
material misstatement,
material failure of risk
management or serious
reputational damage.
• Awards comprise a Core Award and a
Sustainability Award (equal to 20% of the
shares in a Core Award) with vesting based on
performance over an initial three year (core)
period and subsequent two year
(sustainability) period.
• Subject to performance, 50% of the Core
Award is released after the end of year three;
the balance of the Core Award and the
Sustainability Award are released after the
end of year five.
• On vesting, the value of dividends accrued on
vested shares from date of grant to date of
release is delivered in additional shares
or cash at the discretion of the Committee.
• The Committee reviews the award levels
annually and keeps performance targets
under review to ensure continued alignment
with strategy.
Maximum
potential
value
• Maximum is 110%
of base salary.
• No additional opportunity
above the STVRS maximum.
• Maximum award level under the SEP rules is
200% of base salary (including both the Core
and Sustainability Awards).
Performance
measures
• Targets are normally
applied to a combination
of Group, and where
appropriate individual
portfolio, financial and
strategic measures. A
significant proportion of
the total award is based
on financial measures.
• Performance is measured
over a one year period.
• Payments range between
0 to 110% of base salary
with 55% of base salary
payable for achievement
of on target performance.
• No additional performance
measures (see STVRS) but
release is subject to
continued employment.
Core Awards:
• Measured over the initial three year period
based on a stretching EPS growth target.
• Vesting at threshold is 25% rising to a
maximum of 100%.
Sustainability Awards:
• If the highest level of EPS attained in any year
of the core performance period is achieved or
exceeded in both years four and five, the
Sustainability Award will vest in full (subject
to any reduction made in respect of the core
target not being satisfied over the core
performance period).
• The sustainability target will be assessed for
year four and year five separately.
• Vesting at threshold is 50% rising to a
maximum of 100%.
Vesting of Core and Sustainability Awards is
subject to an additional test based on the
Committee’s assessment of the quality of
earnings (as described below).
GKN plc Annual Report and Accounts 2014
97
GOVERNANCE
Directors’ remuneration report continued
Performance measures
STVRS: a combination of financial and strategic measures which support the delivery of the Group’s long term strategic objectives.
Appropriate targets are set each year which align with the specific business objectives for that year. The Committee has discretion to alter
targets to reflect changed circumstances such as material changes in accounting standards or changes in the Group’s structure. The
Committee also has discretion to reduce payments based on its assessment of underlying performance of the Group, including health and
safety performance.
SEP: based on sustained EPS growth over the long term in line with GKN’s stated growth strategy and objective of creating long term
shareholder value. Before any vesting can occur, the Committee must be satisfied that this is justified by the quality of earnings. This will
involve consideration of Group return on average invested capital (ROIC) against internal projections, shareholder expectations, new
investment performance and cost of capital to ensure that the level of vesting appropriately reflects shareholder value creation. In
accordance with the rules of the SEP, the Committee can adjust and/or set different performance measures and targets if events occur (such
as a change in strategy, a material acquisition and/or divestment of a Group business or a change in prevailing market conditions) which
cause the Committee to determine that the measures or targets are no longer appropriate and that amendment is required so that they
achieve their original purpose.
Whilst stretching, targets under the STVRS and SEP are designed to discourage inappropriate risk taking.
Policy table for Chairman and non-executive Directors
Purpose and link
to strategy
• To provide fees within a market competitive range to recruit and retain individuals with the necessary
experience and ability to make a substantial contribution to the Group’s affairs.
Operation
• Fees are reviewed periodically.
• The fee structure is:
–– Chairman is paid a single consolidated fee.
–– Non-executive Directors are paid a basic fee plus an additional fee for any chairmanship of Board
Committees and for the role of Senior Independent Director.
• Fees are paid in cash.
Maximum
potential value
• Set at a level which reflects the contribution and commitment required of them, taking into account fee
levels in other companies of similar size and complexity.
• Overall the fees paid to non-executive Directors will remain within the limit stated in the articles of
association, currently £1 million per annum.
The Chairman and non-executive Directors do not receive benefits in kind nor do they participate in the Group’s short and long term incentive
arrangements or in its pension scheme.
98 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Additional information
Annual general meeting
Restrictions on the transfer of securities
Dividend
Under the Company’s articles, the Directors have power to suspend
voting rights and the right to receive dividends in respect of shares
in circumstances where the holder of those shares fails to comply
with a notice issued under section 793 of the Companies Act 2006.
The Company is not aware of any agreements between shareholders
that may result in restrictions on the transfer of securities or voting
rights.
The annual general meeting (AGM) of the Company will be held at
2.00 pm on Thursday, 7 May 2015 at 195 Piccadilly, London W1J 9LN.
The notice of meeting, which includes the business to be transacted
at the meeting, is included within the AGM circular. The circular
also contains an explanation of all the resolutions to be considered
at the AGM.
The Directors recommend a final dividend of 5.6p per ordinary share
in respect of the year ended 31 December 2014, payable to
shareholders on the register at the close of business on 10 April
2015. This, together with the interim dividend of 2.8p paid in
September 2014, brings the total dividend for the year to 8.4p.
Issued share capital
At 31 December 2014, the issued share capital of the Company
consisted of 1,660,529,859 ordinary shares of 10p (2013:
1,660,529,859 shares), of which 17,797,916 shares (1.07%) were held
in treasury (2013: 20,558,781 shares; 1.24%). During the year a total
of 2,760,865 ordinary shares were transferred out of treasury in
connection with the exercise of options by participants under the
Company’s share option schemes (2013: 7,684,420 shares).
The ordinary shares are listed on the London Stock Exchange. In
addition, GKN has a sponsored Level 1 American Depositary Receipt
(ADR) programme for which the Bank of New York Mellon acts as
Depositary. The ADRs trade in the US over-the-counter market where
each ADR represents one GKN ordinary share.
Whilst the Board has the power under the articles of association to
refuse to register a transfer of shares, there are no restrictions on
the transfer of shares.
Substantial shareholders
As at 31 December 2014*, the Company had been notified of the
following holdings of voting rights in its shares under Rule 5 of the
Disclosure Rules and Transparency Rules of the Financial Conduct
Authority:
Shareholder
Standard Life Investments
(Holdings) Ltd
Ameriprise Financial Inc
Rights and obligations attaching to shares
Holders of ordinary shares are entitled to receive dividends when
declared, to receive the Company’s annual report, to attend and
speak at general meetings of the Company, to appoint proxies and to
exercise voting rights.
Nature of Interest
% of
voting
rights
Direct
Indirect
Total
5.13
3.86
8.99
Direct
Indirect
Contracts for difference
Total
0.06
4.88
0.07
5.01
* See footnote on page 101.
On a show of hands at a meeting of GKN, every member present
holding ordinary shares has one vote. On a poll taken at a meeting,
every member present and entitled to vote has one vote in respect of
each ordinary share held by him. In the case of joint shareholders
only the vote of the senior joint holder who votes (and any proxy duly
authorised by him) may be counted. Shares held in treasury carry no
voting rights.
GKN operates an Employee Share Option Plan Trust (the Trust) to
satisfy the vesting and exercise of awards of ordinary shares made
under the Group’s share-based incentive arrangements. The trustee
of the Trust does not exercise any voting rights in respect of shares
held by the Trust. Once the shares are transferred from the Trust to
share scheme participants, the participants are entitled to exercise
the voting rights attaching to those shares. A dividend waiver
operates in respect of shares held by the Trust pursuant to the
provisions of the Trust deed.
Full details of the rights and obligations attaching to the Company’s
shares are contained in the articles of association.
GKN plc Annual Report and Accounts 2014 99
GOVERNANCE
Additional information continued
Directors
The Directors who served during the financial year were as follows:
Name
Position as at
31 December 2014
Service in the year ended
31 December 2014
Mike Turner
Nigel Stein
Marcus Bryson
Angus Cockburn
Tufan Erginbilgic
Shonaid Jemmett-Page
Richard Parry-Jones
Andrew Reynolds Smith
William Seeger
Adam Walker
Chairman
Chief Executive
Chief Executive Aerospace and Land Systems
Independent non-executive Director
Independent non-executive Director
Independent non-executive Director
Senior Independent Director
Chief Executive Automotive and Powder Metallurgy
N/A
Finance Director
Served throughout the year
Served throughout the year
Retired from the Board on 31 December 2014
Served throughout the year
Served throughout the year
Served throughout the year
Served throughout the year
Served throughout the year
Retired from the Board on 25 February 2014
Served throughout the year
Membership of the Board and biographical details of the Directors in
office at the date of this report are shown on page 61. All Directors
will retire and offer themselves for re-election at the 2015 AGM in
accordance with the UK Corporate Governance Code. Further details
relating to Board and Committee composition are disclosed in the
corporate governance statement on pages 62 to 69.
The articles of association provide that a Director may be appointed
by an ordinary resolution of shareholders or by the existing
Directors, either to fill a vacancy or as an additional Director. Further
information on GKN’s internal procedures for the appointment of
Directors is given in the corporate governance statement.
The executive Directors serve under rolling contracts that are
terminable with 12 months’ notice from the Company and 6 months’
notice from the executive Director. The non-executive Directors serve
under letters of appointment and do not have service contracts with
the Company.
Copies of the service contracts of the executive Directors and the
letters of appointment of the non-executive Directors are available
for inspection at the Company’s registered office during normal
business hours and will be available for inspection at the
Company’s AGM.
The Directors’ remuneration report, which includes the Directors’
interests in GKN shares, is set out on pages 78 to 98.
Directors’ powers
The Board of Directors may exercise all the powers of the Company
subject to the provisions of relevant legislation, the Company’s
articles of association and any directions given by the Company in
general meeting. The powers of the Directors include those in
relation to the issue and buyback of shares.
At the 2014 AGM the Directors were authorised to exercise the
powers of the Company to purchase up to 164,003,599 of its ordinary
shares. No shares were purchased under this authority in 2014. The
Directors were also authorised to allot shares in the Company up to
an aggregate nominal amount of £54,667,866. These authorities will
remain valid until the 2015 AGM or 1 July 2015, if earlier. Resolutions
to renew these authorities will be proposed at the 2015 AGM.
100 GKN plc Annual Report and Accounts 2014
Directors’ indemnities
Pursuant to the articles of association, the Company has executed a
deed poll of indemnity for the benefit of the Directors of the
Company and persons who were Directors of the Company in respect
of costs of defending claims against them and third party liabilities.
These provisions, deemed to be qualifying third party indemnity
provisions pursuant to section 234 of the Companies Act 2006, were
in force during the year ended 31 December 2014 and remain in force.
The indemnity provision in the Company’s articles of association
also extends to provide a limited indemnity in respect of liabilities
incurred as a director, secretary or officer of an associated company
of the Company.
A copy of the deed poll of indemnity is available for inspection at the
Company’s registered office during normal business hours and will
be available for inspection at the Company’s AGM.
The Company has also arranged appropriate insurance cover for
legal action taken against its Directors and officers.
Conflicts of interest
Under the Companies Act 2006, Directors must avoid situations
where they have, or could have, a direct or indirect interest that
conflicts or possibly may conflict with the Company’s interests. As
permitted by the Act, the Company’s articles of association enable
Directors to authorise actual and potential conflicts of interest.
Formal procedures for the notification and authorisation of such
conflicts are in place. These procedures enable non-conflicted
Directors to impose limits or conditions when giving or reviewing
authorisation and require the Board to review the register of
Directors’ conflicts annually and on an ad hoc basis when necessary.
Any potential conflicts of interest in relation to newly appointed
Directors are considered by the Board prior to appointment.
Articles of association
The Company’s articles of association can only be amended by
special resolution of the shareholders. GKN’s current articles are
available on our website at www.gkn.com.
Strategic Report
Change of control
As at 31 December 2014, the Company’s subsidiary, GKN Holdings
plc, had agreements with 14 banks for 15 bilateral banking facilities
totalling £800 million and an £80 million loan facility with the
European Investment Bank. Each of these agreements provides that,
on a change of control of GKN plc, the respective bank can give
notice to GKN Holdings plc to repay all outstanding amounts under
the relevant facility.
The Company has in issue £450 million fixed rate notes paying
5.375% semi-annual interest and maturing on 19 September 2022
under a euro medium term note programme established by GKN
Holdings plc (the Notes). Pursuant to the terms attaching to the
Notes, a holder of the Notes has the option to require GKN Holdings
plc to redeem or (at GKN Holdings plc’s option) purchase the holder’s
Notes at their principal amount if there is a change of control of the
Company and either (i) the Notes are unrated or do not carry an
investment grade credit rating from at least two ratings agencies; or
(ii) if the Notes carry an investment grade credit rating from at least
two ratings agencies, the Notes are downgraded to a non-investment
grade rating or that rating is withdrawn within 90 days of the change
of control and such downgrade or withdrawal is cited by the ratings
agencies as being the result of the change of control.
Companies in the Group’s Aerospace division are party to long term
supply contracts with customers which are original equipment
manufacturers of aircraft and aero engines. Certain of these
contracts contain provisions which would entitle the customer to
terminate the contract in the event of a change of control of the
Company, where such change of control conflicts with the interests
to the customer.
Companies in the Group’s Driveline division are party to supply
contracts with customers which are original equipment
manufacturers of motor vehicles. Certain of these contracts contain
provisions which would entitle the customer to terminate the
contract in the event of a change of control of the Company.
All of the Company’s share schemes contain provisions relating to a
change of control. Outstanding options and awards normally vest
and become exercisable on a change of control subject to the
satisfaction of any performance conditions at that time.
In line with best practice and the Company’s policy for future service
contracts of executive Directors, the service contract entered into
with Adam Walker does not include any provision for the payment of
a predetermined amount on a change of control of the Company. The
service contracts of the other executive Directors in office at the
date of this report were amended on 19 February 2014 to remove the
change of control provision.
Governance
Financial Statements
Other Information
Donations
In 2014, charitable donations made by Group companies
around the world totalled £739,000 of which £175,000 was
to UK registered charities.
In accordance with the Group’s policy, no political donations were
made and no political expenditure was incurred during 2014.
The Group’s US Aerospace business has a Political Action Committee
(PAC) which is funded entirely by employees and their spouses. No
funds are provided to the PAC by GKN and any administrative
services provided to the PAC by the US Aerospace business are fully
charged to and paid for by the PAC, and the Company does not
therefore consider these to be political donations. Employee
contributions are entirely voluntary and no pressure is placed on
employees to participate. Under US law, an employee-funded PAC
must bear the name of the employing company.
Research and development
Group subsidiaries undertake research and development work in
support of their principal manufacturing activities. Further details of
the Group’s research and development activities can be found
throughout the strategic report.
Financial instruments
Details of the Group’s use of financial instruments can be found in
Note 19 to the financial statements.
Strategic report
Pursuant to section 414C of the Companies Act 2006 the strategic
report contains details in relation to the likely future developments
of the business of the Group and the disclosure of greenhouse gas
emissions for which the Company is responsible.
Auditors and disclosure of information
Resolutions to reappoint PricewaterhouseCoopers LLP as auditors of
the Company and to authorise the Directors to determine their
remuneration will be proposed at the 2015 AGM.
Each of the Directors who held office at the date of approval of this
Directors’ report confirms that, so far as he/she is aware, there is no
relevant audit information of which the Company’s auditors are
unaware. Each Director has taken all the steps that he/she ought to
have taken as a Director in order to make himself/herself aware of
any relevant audit information and to establish that the Company’s
auditors are aware of that information.
The strategic report comprising the inside front cover and pages 1
to 59 and this Directors’ report comprising pages 60 to 102 have
been approved by the Board and are signed on its behalf by
Payments to suppliers
It is Group policy to abide by the payment terms agreed with
suppliers, provided that the supplier has performed its obligations
under the contract. In support of this policy, the Company is a
signatory to the UK Government’s Prompt Payment Code.
Branches
GKN, through various subsidiaries, has established branches in a
number of different countries in which the business operates.
Jos Sclater
General Counsel & Company Secretary
23 February 2015
* As at 25 February 2015, the Company had not been advised of any further changes or
additions to the interests notified under Rule 5 of the Disclosure Rules and
Transparency Rules of the Financial Conduct Authority as set out on page 99.
GKN plc Annual Report and Accounts 2014 101
GOVERNANCE
Statement of Directors’ responsibilities
The Directors are responsible for preparing the annual report, the Directors’ remuneration report and the Group and Company financial
statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and Company financial statements for each financial year. Under that law, the Directors
are required to prepare the Group financial statements in accordance with applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union (EU) and have elected to prepare the Company financial statements in accordance with applicable
law and United Kingdom (UK) Accounting Standards (UK Generally Accepted Accounting Practice).
Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of
the state of affairs of the Group and the Company and of their profit or loss for that period. In preparing each of the Group and Company
financial statements the Directors are required to:
• select appropriate accounting policies and apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;
• for the Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material
departures disclosed and explained in the Company financial statements; and
• prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group and the Company will
continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and the
Company’s transactions, disclose with reasonable accuracy at any time the financial position of the Group and the Company, and enable
them to ensure that the financial statements and the Directors’ remuneration report comply with the Companies Act 2006 and as regards the
Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the
Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s
website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other
jurisdictions.
Each of the Directors as at the date of the annual report, whose names and functions are set out on pages 60 and 61, confirm that to the best
of their knowledge:
• the Group financial statements, prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
• the strategic report includes a fair review of the development and performance of the business and the position of the Company and the
undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they
face.
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 performance, business model and strategy.
Approved by the Board of GKN plc and signed on its behalf by
Mike Turner CBE
Chairman
23 February 2015
102 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Independent auditors’ report to the members of GKN plc
Report on the Group financial statements
Our opinion
In our opinion, GKN plc’s Group financial statements (the “financial statements”):
• give a true and fair view of the state of the Group’s affairs as at 31 December 2014 and of its profit and cash flows for the year then ended;
• have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union;
and
• have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
What we have audited
GKN plc’s financial statements comprise:
• the Consolidated balance sheet as at 31 December 2014;
• the Consolidated income statement and Consolidated statement of comprehensive income for the year then ended;
• the Consolidated cash flow statement for the year then ended;
• the Consolidated statement of changes in equity for the year then ended; and
• the notes to the consolidated financial statements, which include a summary of significant accounting policies and other explanatory
information.
Certain required disclosures have been presented elsewhere in the Annual Report and Accounts (the “Annual Report”), rather than in the
notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and IFRSs as
adopted by the European Union.
Our audit approach
Overview
• Overall Group materiality: £22 million which represents 5% of profit before tax,
adjusted for the change in fair value of derivative and other financial instruments.
Materiality
Audit scope
Area of
focus
• Following our assessment of the risk of material misstatement to the Group
financial statements we performed full scope audits in 56 reporting units and
specified procedures in a further 24 reporting units.
• In addition, certain centralised functions and reporting units, including those
covering post-employment obligations, derivative financial instruments, taxation,
goodwill and intangible asset impairment assessments, and the Company were
subject to full scope audit procedures.
• The components on which full scope audits, specified procedures and centralised
work was performed accounted for approximately 89% of Group revenue.
• As part of our supervision process, the Group engagement team visited
component auditors in the USA, Germany, India, Sweden and China, as well as
being responsible for all UK reporting locations performing full scope audits.
Our assessment of the risk of material misstatement also informed our views on the
areas of particular focus for our work which are listed below:
• Assessment of the carrying value of the intangible and tangible assets relating to
the A350 programme at Western Approach.
• Risk of fraud in revenue recognition.
• Assessment of the carrying value of goodwill and other relevant assets.
• Assessment of the accounting position adopted on complex
contractual obligations.
The scope of our audit and our areas of focus
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”).
We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular,
we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved
making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of
management override of internal controls, including evaluating whether there was evidence of bias by the Directors that represented a risk of
material misstatement due to fraud.
The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are
identified as “areas of focus” in the table below. We have also set out how we tailored our audit to address these specific areas in
order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be
read in this context. This is not a complete list of all risks identified by our audit.
GKN plc Annual Report and Accounts 2014 103
FINANCIAL STATEMENTS
Independent auditors’ report to the members of GKN plc continued
Area of focus
Assessment of the carrying value of the intangible and
tangible assets relating to the A350 programme at
Western Approach
Refer to pages 44 to 51 (Principal risks and uncertainties), pages
73 to 74 (Audit committee report), note 1 (Accounting policies and
presentation), note 11 (Goodwill and other intangible assets) and
note 12 (Property, plant and equipment).
We focused on this area because the Directors’ assessment of the
recoverability of this programme’s intangible assets of £120 million
and tangible assets of £89 million, inclusive of £15 million of
capitalised borrowing costs, involve complex and subjective
judgements and assumptions about the progress and future
results of this programme. The key judgements and assumptions
made by the Directors included the discount rate and the key
business drivers of the cash flow forecasts, being the number of
aircraft sets to be produced, production and assembly hours,
material costs, programme timings which include potential delays
and the effects of foreign exchange rates.
How our audit addressed the area of focus
We obtained and understood the Directors’ impairment model
and tested it for mathematical accuracy, and found that it
followed an acceptable methodology and was consistent with
prior periods.
We challenged the Directors on the discount rate used by
comparing this to the cost of capital for the Group and a selection
of comparable organisations.
We also challenged the Directors’ impairment model around the
key business drivers of the cash flow forecasts supporting their
recoverability assessment. A range of sensitivities were
performed across the different elements of the impairment model
in order to understand which judgements and assumptions were
most sensitive in achieving the Directors’ recoverability
assessment. The most sensitive and judgemental elements are
detailed below: • for production and assembly hours, we considered the
Directors’ expectations for achieving targeted learning curve
improvements and hence reducing the total hours per aircraft
set. We challenged the Directors on the historical achievement
of learning curve improvement targets on the A350
programme. We also considered how this was balanced
against the expected increase in production rates over future
years and the implicit challenges that this will bring to
achieving the required hours improvements.
• for the number of aircraft sets, we considered the Directors’
expectations for the number and timing of sets to be produced
and compared this to current industry expectations, past
schedules and the latest reported order book from Airbus.
Based on our audit work, the planned levels of production and
assembly hour improvements appear achievable, although not
without challenge, and the total number of aircraft sets expected
to be produced is consistent with current market expectations
and production schedules. As a result of this, we found that the Directors’ assessment of the
carrying value of intangible and tangible assets relating to the
A350 programme at Western Approach to be supportable.
However, we consider that a failure to meet target production and
assembly hour rates as the supply to Airbus increases, or a
significant change in the total number of aircraft sets to be
produced could reasonably be expected to give rise to an
impairment charge in the future.
104 GKN plc Annual Report and Accounts 2014
Strategic Report
Area of focus
Risk of fraud in revenue recognition
Refer to pages 44 to 51 (Principal risks and uncertainties),
pages 73 to 74 (Audit committee report), note 1 (Accounting
policies and presentation) and note 2 (Segmental analysis).
We focused on this area because the Group has a number of
complex revenue recognition policies, which require the Directors
to exercise judgement and therefore revenue could be subject to
misstatement, whether due to fraud or error. This specifically
includes judgement over whether revenue has been earned, can
be recognised and the subsequent value at which to recognise
this revenue.
These complexities and judgements include, but are not
limited to:
• revenue risk sharing partnerships (RRSPs) in Aerospace where
GKN are entitled to a set percentage of revenue per completed
aircraft as contractually agreed with the programme partner,
which requires the Directors to exercise judgement as to how
much revenue to recognise reflecting the differences in pricing
of Original Engine Manufacturer parts and spare parts at the
year-end;
• pricing of non-contractually agreed elements of revenue,
including rebates and ongoing pricing discussions, which
requires a level of judgement to be applied by the Directors
over how much revenue to recognise; and
• bill and hold arrangements in Aerospace whereby the
recognition of revenue is based on meeting specific criteria
which can be subject to judgement by the Directors.
In addition, we also focused on this area because the GKN Short
Term Variable Remuneration Scheme (STVRS) of the Directors and
senior management is significantly driven by financial measures
including revenue recognition, which we concluded gave a greater
risk of manipulation of judgements around revenue recognition to
ensure that STVRS targets are achieved.
Governance
Financial Statements
Other Information
How our audit addressed the area of focus
For each area of complexity identified, we challenged the amount
of revenue recognised by the Directors to ensure that it was in line
with IAS 18 ‘Revenue’ and the contractual agreement, or latest
formal correspondence with the customer. In particular:
• For RRSPs we agreed the percentage of revenue entitlement
to the customer contract, agreed the revenue recognised to
supporting correspondence from the customer and challenged
the Directors on the level of revenue recognised where
estimates were used at the year-end date. Specifically,
ensuring the reasonableness of the estimate through
agreement to post year-end confirmations received by the
Directors from customers.
• When revenue was recognised based on non-contractually
agreed terms, we challenged the Directors on the level of
revenue recognised by taking into account the historical level
of agreement reached with customers on similar programmes
and agreed the revenue recognised to either post year-end
cash settlements or communications with the customer.
• For bill and hold arrangements we challenged the Directors
on the state of completion of the products that had been sold
by inspecting the product and assessing the level of required
labour hours needed to complete the product in line with the
agreed specification. We agreed the acceptance of the risks
and rewards of ownership and confirmed the overall bill and
hold arrangement was at the request of the customer by
verifying this to confirmations with the customer.
In addition to the specific items noted above, we also responded
to the risk that manual adjustments could override standard
controls and processes to misstate revenue by testing a sample
of manual journals relating to revenue so as to identify unusual
or irregular items. We agreed the manual journals tested to
corroborative evidence and found no instances of manipulation
of revenue occurring in this way.
Based on the results of our audit work, we found that the revenue
recognised by the Directors agreed to the relevant contractual
terms, was at an appropriate value and was consistent with the
requirements of IAS 18. However we did note that contracts with
customers are becoming ever more complex and unique and we
have therefore recommended that the Directors continue to give
sufficient consideration to the revenue being recognised.
GKN plc Annual Report and Accounts 2014 105
FINANCIAL STATEMENTS
Independent auditors’ report to the members of GKN plc continued
Area of focus
Assessment of the carrying value of goodwill and other
relevant assets
Refer to page 38 (Business review), pages 44 to 51 (Principal risks
and uncertainties), pages 73 to 74 (Audit committee report),
note 1 (Accounting policies and presentation) and note 11
(Goodwill and other intangible assets).
We focused on this area because the Directors’ assessment
of whether or not certain elements of goodwill and other
intangible assets were impaired, and the level of impairment to
be booked if applicable, involved complex and subjective
judgements and assumptions about the progress and future
results of the Group’s Cash-Generating Units (CGUs).
In particular, we focused on the carrying values of material CGUs
for Aerospace Engine Products in North America (£38 million
of goodwill and £54 million of other assets) and Land Systems
Wheels and Structures Europe (£18 million of goodwill and
£24 million of other assets).
The Directors have recorded total impairment charges of
£69 million relating to the Aerospace Engine Products CGU
(£33 million), the Land Systems Wheels and Structures Europe CGU
(£26 million) and other impairment charges totalling £10 million.
At 31 December 2014 the carrying value of goodwill and intangible
assets in respect of the Group’s remaining CGUs totalled
£498 million and £944 million respectively. No impairment
triggers had been identified by the Directors in respect of the
remaining CGUs and/or their impairment models determined
that adequate headroom existed not to result in the need for
an impairment charge in reasonably possible scenarios.
How our audit addressed the area of focus
We understood and challenged the Directors’ impairment models
around the key business drivers of the cash flow forecasts
supporting their recoverability assessments, being pricing,
market performance and expected growth, the level of
new business wins, the margin growth capabilities and
capital expenditure requirements. We also evaluated the
appropriateness of the key assumptions including the discount
rate and long term growth rate used.
For the Aerospace Engine Products CGU, where the Directors
recognised an impairment charge of £33 million, we were able
to evaluate the reasonableness of the Directors’ forecast by
challenging their assumptions regarding the amount of future
revenue by agreeing this to contractual terms and challenging the
margin expected to be achieved by reference to historical margin
and margin improvement programmes. We also challenged the
level of maintenance capital expenditure required to deliver
current programmes as well as to be able to deliver new business
wins within the current capacity and challenged the margin to be
achieved in respect of new programmes by reference to historic
margins achieved.
In the Land Systems Wheels and Structures Europe CGU, where
the Directors recognised an impairment charge of £26 million,
the key assumption we focused on was the amount of growth
expected to be achieved in both revenue and operating margin.
Factors we considered were the forecast economic growth in the
region compared to independent industry forecasts and customer
data within Europe, combined with the capacity and operating
capabilities within the CGU which we compared to historical levels.
We also challenged the Directors on the discount rate used by
comparing this to the cost of capital for the Group and a selection
of comparable organisations, agreeing any differences identified
to supporting evidence. The Directors’ key assumptions for long
term growth rates were also compared to economic and industry
forecasts for reasonableness and were considered appropriate.
We performed sensitivity analysis around the key assumptions
above to ascertain the extent of change in those assumptions
that either individually or collectively would be required for
the impairment charge to be significantly different to those
amounts recognised. We also considered the likelihood of such
changes occurring.
For both Aerospace Engine Products and Land Systems Wheels
and Structures Europe we found that the planned level of future
growth in revenue and operating margin reflected performance
levels below those historically achieved.
As a result of our audit work, we determined that the impairment
charges for the Aerospace Engine Products and Land Systems
Wheels and Structures Europe CGUs were conservative although
within a range of potential likely outcomes based on the current
plans which reflect the Directors’ best estimate of the value in
use of the CGUs.
106 GKN plc Annual Report and Accounts 2014
Strategic Report
Area of focus
Governance
Financial Statements
Other Information
How our audit addressed the area of focus
In addition, based on our audit work, in respect of the remaining
CGUs, the Directors’ assessment that no impairment charge
currently needed to be recognised was supportable. However, the
models are sensitive to growth and margin improvement targets
which, if not achieved, could reasonably be expected to give rise
to further impairment charges in the future.
Assessment of the accounting position adopted on
complex contractual obligations
Refer to pages 25 and 29 (Business review), pages 44 to 51
(Principal risks and uncertainties), pages 73 to 74 (Audit
committee report), note 1 (Accounting policies and presentation),
note 2 (Segmental analysis) and note 21 (Provisions).
The Group continues to work closely with its customers and
suppliers to resolve contractual and other claims and disputes.
These matters are principally in respect of warranty, delivery
performance, pricing and contract variations.
We focused on this area because the Directors are required to
perform an assessment in line with relevant accounting standards
and consider each item individually. The determination of
whether to recognise a liability or not, or make disclosure in the
financial statements, for claims received, onerous contracts or
recognise an asset for potential recoveries, requires the Directors
to exercise considerable judgement.
In addition, given the wide ranging geographical and market
spread of the Group, there is also complexity in ensuring the
Directors have considered all known disputes, claims and
potential recoveries.
We tested, on a sample basis, the valuation and calculation of
individual liabilities or assets that made up the total, including in
respect of onerous contracts, claims for contract breaches, late
deliveries, product quality, warranty, non-contractually agreed
pricing and cost recoveries. In particular:
• for liabilities recognised, we challenged the Directors on
ensuring the assessment and calculation of any provision
was consistent with the requirements of IAS 37 ‘Provisions,
contingent liabilities and contingent assets’ and that all
potential outcomes had been considered and appropriately
disclosed in the financial statements;
• for assets recognised, we challenged the Directors on their
assessment of the recognition criteria and that the assets were
virtually certain to be recovered; and
• where liabilities and assets related to the same customer or
supplier, we challenged the Directors to ensure that all items
had been individually considered and were not presented on a
net basis.
We assessed the completeness of the Directors’ list of claims,
disputes, onerous contracts and potential recoveries using our
knowledge of the business, enquiries of the Directors, examining
post year-end correspondence with customers and suppliers and
assessing the Directors’ material litigation process.
We found no material exceptions from the procedures noted
above. We consider the Directors’ recognition of liabilities and
assets to be reasonable and within an acceptable range of
potentially likely outcomes and consistent with the requirements
of IAS 37.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a
whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the
Group operates.
The Group is structured along four segments being Aerospace, Driveline, Powder Metallurgy and Land Systems with each division set up to
manage operations on both a regional and functional basis and consisting of a number of reporting units.
The Group financial statements are a consolidation of 237 active reporting units, comprising the Group’s operating businesses and
centralised functions. These reporting units maintain their own accounting records and controls and report to the head office finance team in
the UK through an integrated consolidation system.
Aerospace reporting units are based predominantly in the UK, USA and Sweden. Driveline reporting units are based in 22 countries with
Europe and North America being the largest regions. Powder Metallurgy reporting units are based predominantly in North America with other
sites in Europe and Asia-Pacific. Land Systems reporting units are based predominantly in Europe and North America.
In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at each reporting unit
and we used component auditors within PwC UK and from other PwC network firms operating under our instruction, who are familiar with the
local laws and regulations in each of these territories to perform this audit work.
GKN plc Annual Report and Accounts 2014 107
FINANCIAL STATEMENTS
Independent auditors’ report to the members of GKN plc continued
Accordingly, of the Group’s 237 active reporting units, we identified 56 which, in our view, required an audit of their complete financial
information, whether due to their significance and/or risk characteristics. These reporting units accounted for 73% of
Group revenue.
Specific audit procedures on certain balances and transactions were performed at a further 24 reporting units with due consideration paid to
obtaining global coverage on a rotational basis. The reporting units on which these specific procedures were performed accounted for a
further 16% of Group revenue.
Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those
reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the
Group financial statements as a whole.
The Group engagement team visits component auditors based on significance and/or risk characteristics, as well as on a rotational basis to
ensure coverage across the Group. In the current year, the Group engagement team visited component auditors in the USA, Germany, India,
Sweden and China, as well as being responsible for all UK reporting locations performing full scope audits. Additionally the Group audit team
was in contact, at each stage of the audit, with a number of other component auditors, which included meeting local GKN management,
attendance at audit planning meetings, attendance at audit close meetings and review of audit working papers.
The Group consolidation, financial statements disclosures and a number of centralised reporting units were audited by the Group
engagement team at the head office. These included, but were not limited to, central procedures on post-employment obligations, derivative
financial instruments, taxation, and goodwill and intangible asset impairment assessments. We also performed group level analytical
procedures on all of the remaining out of scope active reporting units to identify whether any further audit evidence was needed, which
resulted in no extra testing being required. The Company was also subject to a full scope audit.
Taken together, the reporting units and group functions where we performed audit procedures accounted for approximately 89% of Group
revenue. Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together
with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and
to evaluate the effect of misstatements, both individually and on the financial statements as a whole.
Based on our professional judgement, and consistent with the prior year, we determined materiality for the financial statements as a whole
as follows:
Overall Group materiality
£22 million (2013: £23 million).
How we determined it
5% of profit before tax, adjusted for the change in fair value of derivative and other financial
instruments and as disclosed on the face of the consolidated income statement.
Rationale for benchmark
applied
We believe that profit before tax adjusted for the change in fair value of derivative and other
financial instruments provides us with a consistent year on year basis for determining
materiality as it eliminates the fluctuating nature of these items which can have a
disproportionate impact on the Group’s consolidated income statement.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £1 million (2013: £1 million)
as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
108 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Going concern
Under the Listing Rules we are required to review the Directors’ statement, set out on page 41, in relation to going concern. We have nothing
to report having performed our review.
As noted in the Directors’ statement, the Directors have concluded that it is appropriate to prepare the financial statements using the going
concern basis of accounting. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the
Directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded
that the Directors’ use of the going concern basis is appropriate.
However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s ability to
continue as a going concern.
Other required reporting
Consistency of other information
Companies Act 2006 opinion
In our opinion, the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements
are prepared is consistent with the financial statements.
ISAs (UK & Ireland) reporting
Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:
• information in the Annual Report is:
–– materially inconsistent with the information in the audited financial statements; or
–– apparently materially incorrect based on, or materially inconsistent with, our knowledge of
the Group acquired in the course of performing our audit; or
–– otherwise misleading.
We have no exceptions to report
arising from this responsibility.
• the statement given by the Directors on page 68, in accordance with provision C.1.1 of the
UK Corporate Governance Code (“the Code”), that they consider the Annual Report taken as
a whole to be fair, balanced and understandable and provides the information necessary for
members to assess the Group’s performance, business model and strategy is materially
inconsistent with our knowledge of the Group acquired in the course of performing our audit.
We have no exceptions to report
arising from this responsibility.
• the section of the Annual Report on pages 73 to 77, as required by provision C.3.8 of the Code,
describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
We have no exceptions to report
arising from this responsibility.
Adequacy of information and explanations received
Under the Companies Act 2006 we are required to report to you if, in our opinion, we have not received all the information and explanations
we require for our audit. We have no exceptions to report arising from this responsibility.
Directors’ remuneration
Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors’ remuneration specified by
law are not made. We have no exceptions to report arising from this responsibility.
Corporate governance statement
Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the Company’s compliance with
ten provisions of the UK Corporate Governance Code. We have nothing to report having performed our review.
GKN plc Annual Report and Accounts 2014 109
FINANCIAL STATEMENTS
Independent auditors’ report to the members of GKN plc continued
Responsibilities for the financial statements and the audit
Our responsibilities and those of the Directors
As explained more fully in the Statement of Directors’ responsibilities set out on page 102, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland).
Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of
Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any
other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior
consent in writing.
What an audit of financial statements involves
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance
that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:
• whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and
adequately disclosed;
• the reasonableness of significant accounting estimates made by the Directors; and
• the overall presentation of the financial statements.
We primarily focus our work in these areas by assessing the Directors’ judgements against available evidence, forming
our own judgements, and evaluating the disclosures in the financial statements.
We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a
reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures
or a combination of both.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited
financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the
knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
Other matter
We have reported separately on the Company financial statements of GKN plc for the year ended 31 December 2014 and on the information in
the Directors’ remuneration report that is described as having been audited.
Ian Chambers (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Birmingham
23 February 2015
a) The maintenance and integrity of the GKN plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters
and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
110 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Consolidated income statement
For the year ended 31 December 2014
Notes
2014 £m 2013 £m Sales
2
6,982 7,136 Trading profit
Change in value of derivative and other financial instruments
Amortisation of non-operating intangible assets arising on business combinations
Gains and losses on changes in Group structure
Impairment charges
2
4
4
4
11
612 (209)
(69)
24 (69)
597 26 (75)
12 –
289 560 Operating profit
Share of post-tax earnings of joint ventures
13
Interest payable
Interest receivable
Other net financing charges
Net financing costs
5
Profit before taxation
61 52 (75)
2 (56)
(76)
3 (55)
(129)
(128)
221 484 Taxation
6
(47)
(77)
Profit after taxation for the year
174 407 5 –
4 8 5 169 12 395 174 407 10.3 10.2 24.2 23.8 Profit attributable to other non-controlling interests
Profit attributable to the Pension partnership
Profit attributable to non-controlling interests
Profit attributable to owners of the parent
Earnings per share – pence
Continuing operations – basic
Continuing operations – diluted
7
GKN plc Annual Report and Accounts 2014 111
FINANCIAL STATEMENTS
Consolidated statement of comprehensive income
For the year ended 31 December 2014
2014 £m 2013 £m 174 407 47 –
(114)
–
2 (1)
(1)
–
(30)
–
9 –
–
1 27 (114)
(485)
–
122 60 –
(28)
(363)
32 Total comprehensive income for the year
(162)
325 Total comprehensive income for the year attributable to:
Owners of the parent
Notes
Profit after taxation for the year
Other comprehensive income
Items that may be reclassified to profit or loss
Currency variations – subsidiaries
Arising in year
Reclassified in year
Currency variations – joint ventures
Arising in year
Reclassified in year
Net investment hedge changes in fair value
Arising in year
Reclassified in year
Taxation
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit plans
Subsidiaries
Joint ventures
Taxation
13
6
24
6
(167)
315 Other non-controlling interests
Pension partnership
5 –
2 8 Non-controlling interests
5 10 (162) 112 GKN plc Annual Report and Accounts 2014
325 Strategic Report
Governance
Financial Statements
Other Information
Consolidated statement of changes in equity
For the year ended 31 December 2014
Non-controlling
interests
Other reserves
Notes
At 1 January 2014
Profit for the year
Other comprehensive
income/(expense)
Total comprehensive
income
Share-based payments
Share options exercised
Purchase of noncontrolling interests
Dividends paid to
equity shareholders
Dividends paid to noncontrolling interests
Capital Share redemption reserve capital
£m £m Share premium account £m Retained earnings £m Exchange reserve £m Hedging reserve £m Equity attributable to equity holders of Other the parent reserves £m £m Other £m Total equity £m 1,775 169 –
–
20 5 1,795 174 166 –
298 –
139 –
1,392 169 111 –
(197)
–
–
–
–
(363)
57 (30)
–
(336)
–
–
(336)
10
22
–
–
–
–
–
–
–
–
–
(194)
3 1 57 –
–
(30)
–
–
–
–
–
(167)
3 1 –
–
–
5 –
–
(162)
3 1 23
–
–
–
–
–
–
–
(1)
(1)
8
–
–
–
–
–
–
–
–
–
(133)
(133)
(133)
–
–
–
–
–
–
–
(2)
(2)
166 298 139 1,069
168 (227)
(134)
1,479
–
22 1,501 At 1 January 2013
Profit for the year
Other comprehensive
income/(expense)
166 –
298 –
139 –
1,079 395 223 –
(197)
–
(134)
–
1,574 395 334 8 19 4 1,927 407 –
–
–
32 (112)
–
–
(80)
–
(2)
(82)
10
22
–
–
–
–
–
–
–
–
–
427 14 8 (112)
–
–
–
–
–
–
–
–
315 14 8 8 –
–
2 –
–
325 14 8 24
–
–
–
–
–
–
–
–
(10)
–
(10)
24
–
–
–
(10)
–
–
–
(10)
(332)
–
(342)
–
–
–
–
–
–
–
–
–
2 2 22
–
–
–
(5)
–
–
–
(5)
–
–
(5)
8
–
–
–
(121)
–
–
–
(121)
–
–
(121)
At 31 December 2013
–
–
–
–
–
166 298 139 1,392 111 –
(197)
–
–
At 31 December 2014
Total comprehensive
income
Share-based payments
Share options exercised
Distribution from
Pension partnership
to UK Pension scheme
Amendment to the
Pension partnership
arrangement
Addition of noncontrolling interests
Purchase of own shares
by Employee Share
Ownership Plan Trust
Dividends paid to
equity shareholders
Dividends paid to noncontrolling interests
–
(134)
–
Pension partner- ship £m –
(134)
–
–
(3)
(3)
1,775 –
20 1,795 Other reserves include accumulated reserves where distribution has been restricted due to legal or fiscal requirements and accumulated
adjustments in respect of piecemeal acquisitions.
GKN plc Annual Report and Accounts 2014 113
FINANCIAL STATEMENTS
Consolidated balance sheet
At 31 December 2014
Assets
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Investments in joint ventures
Other receivables and investments
Derivative financial instruments
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Current tax assets
Derivative financial instruments
Other financial assets
Cash and cash equivalents
Notes
2014 £m 2013 £m 11
11
12
13
14
20
6
498 944 2,060 174 44 16 407 544 932 1,945 179 52 52 225 4,143 3,929 15
16
6
20
18
18
971 1,226 8 10 3 319 931 1,142 11 42 –
184 2,537 2,310 6,680 6,239 18
20
17
6
21
(43)
(76)
(1,611)
(125)
(51)
(27)
(11)
(1,485)
(135)
(55)
(1,906)
(1,713)
18
20
6
17
21
24
(877)
(148)
(223)
(202)
(112)
(1,711)
(889)
(37)
(178)
(237)
(119)
(1,271)
Total assets
Liabilities
Current liabilities
Borrowings
Derivative financial instruments
Trade and other payables
Current tax liabilities
Provisions
Non-current liabilities
Borrowings
Derivative financial instruments
Deferred tax liabilities
Trade and other payables
Provisions
Post-employment obligations
Total liabilities
Net assets
Shareholders' equity
Share capital
Capital redemption reserve
Share premium account
Retained earnings
Other reserves
22
Equity attributable to equity holders of the parent
Non-controlling interests
Total equity
(3,273)
(2,731)
(5,179)
(4,444)
1,501 1,795 166 298 139 1,069 (193)
166 298 139 1,392 (220)
1,479 22 1,775 20 1,501 1,795 The financial statements on pages 111 to 157 were approved by the Board of Directors and authorised for issue on 23 February 2015. They
were signed on its behalf by:
Nigel Stein, Adam Walker
Directors
114 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Consolidated cash flow statement
For the year ended 31 December 2014
2014 £m 2013 £m 13
765 2 (82)
(3)
(68)
44 782 6 (71)
–
(52)
44 658 709 17
30
4
17
4
13
13
(329)
1 (75)
19 (6)
(8)
–
(38)
37 –
8 (274)
1 (76)
4 (74)
–
2 –
3 (13)
–
(391)
(427)
–
–
(1)
1 (3)
66 (63)
–
(133)
(2)
(10)
(5)
–
8 –
10 (93)
(1)
(121)
(3)
(135)
(215)
132 181 4 67 124 (10)
317 181 Notes
Cash flows from operating activities
Cash generated from operations
Interest received
Interest paid
Costs associated with refinancing
Tax paid
Dividends received from joint ventures
Cash flows from investing activities
Purchase of property, plant and equipment
Receipt of government capital grants
Purchase of intangible assets
Proceeds from sale and realisation of fixed assets
Payment of deferred and contingent consideration
Acquisition of subsidiaries (net of cash acquired)
Proceeds from sale of businesses (net of cash disposed and fees)
Repayment of government refundable advance
Proceeds from sale of joint venture
Investments in joint ventures
Joint venture loan settlement
Cash flows from financing activities
Distribution from Pension partnership to UK Pension scheme
Purchase of own shares by Employee Share Ownership Plan Trust
Purchase of non-controlling interests
Proceeds from exercise of share options
Amounts placed on deposit
Proceeds from borrowing facilities
Repayment of other borrowings
Finance lease payments
Dividends paid to shareholders
Dividends paid to non-controlling interests
23
24
22
23
22
8
Movement in cash and cash equivalents
Cash and cash equivalents at 1 January
Currency variations on cash and cash equivalents
Cash and cash equivalents at 31 December
23
GKN plc Annual Report and Accounts 2014 115
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
For the year ended 31 December 2014
1 Accounting policies and presentation
The Group's significant accounting policies are summarised below.
Basis of preparation
The consolidated financial statements (the “statements”) have been
prepared in accordance with International Financial Reporting
Standards (IFRS) as endorsed and adopted for use by the European
Union. These statements have been prepared under the historical
cost method except where other measurement bases are required to
be applied under IFRS as set out below.
These statements have been prepared using all standards and
interpretations required for financial periods beginning 1 January
2014. No standards or interpretations have been adopted before the
required implementation date.
Standards, revisions and amendments to standards
and interpretations
The Group adopted all applicable amendments to standards with an
effective date in 2014, including IFRS 10, IFRS 11 and IFRS 12, with no
material impact on its results, assets and liabilities. All other
accounting policies have been applied consistently.
Basis of consolidation
The statements incorporate the financial statements of the Company
and its subsidiaries (together “the Group”) and the Group's share of
the results and equity of its joint ventures and associates.
Subsidiaries are entities over which, either directly or indirectly, the
Company has control through the power to govern financial and
operating policies so as to obtain benefit from their activities. This
power is accompanied by a shareholding of more than 50% of the
voting rights. The results of subsidiaries acquired or sold during the
year are included in the Group’s results from the date of acquisition
or up to the date of disposal. All business combinations are
accounted for by the purchase method. Assets, liabilities and
contingent liabilities acquired in a business combination are
measured at fair value.
Intra-group balances, transactions, income and expenses
are eliminated.
Other non-controlling interests represent the portion of
shareholders’ earnings and equity attributable to third
party shareholders.
Joint ventures
Joint ventures are entities in which the Group has a long term
interest and exercises joint control with its partners over their
financial and operating policies. In all cases voting rights are 50%
or lower. Investments in joint ventures are accounted for by the
equity method. The Group’s share of equity includes goodwill
arising on acquisition.
Foreign currencies
Subsidiaries and joint ventures account in the currency of their
primary economic environment of operation, determined having
regard to the currency which mainly influences sales and input
costs. Transactions are translated at exchange rates approximating
to the rate ruling on the date of the transaction except in the case of
material transactions when actual spot rate may be used where it
116 GKN plc Annual Report and Accounts 2014
more accurately reflects the underlying substance of the
transaction. Where practicable, transactions involving foreign
currencies are protected by forward contracts. Assets and liabilities
denominated in foreign currencies are translated at the exchange
rates ruling at the balance sheet date. Such transactional exchange
differences are taken into account in determining profit before tax.
Material foreign currency movements arising on the translation of
intra-group balances treated as part of the net investment in a
subsidiary are recognised through equity. Movements on other
intra-group balances are recognised through the income statement.
The Group’s presentational currency is sterling. On consolidation,
results and cash flows of foreign subsidiaries and joint ventures are
translated to sterling at average exchange rates except in the case of
material transactions when the actual spot rate is used where it
more accurately reflects the underlying substance of the
transaction. Assets and liabilities are translated at the exchange
rates ruling at the balance sheet date. Such translational exchange
differences are taken to equity.
Profits and losses on the realisation of foreign currency net
investments include the accumulated net exchange differences that
have arisen on the retranslation of the foreign currency net
investments since 1 January 2004 up to the date of realisation.
Presentation of the income statement
IFRS is not fully prescriptive as to the format of the income
statement. Line items and subtotals have been presented on the
face of the income statement in addition to those required
under IFRS.
Sales shown in the income statement are those of subsidiaries.
Operating profit is profit before discontinued operations, taxation,
finance costs and the share of post-tax earnings of joint ventures
accounted for using the equity method. In order to achieve
consistency and comparability between reporting periods, operating
profit is analysed to show separately the results of normal trading
performance and individually significant charges and credits. Such
items arise because of their size or nature and comprise:
• the impact of the annual goodwill impairment review;
• asset impairment and restructuring charges which arise from
events that are significant to any reportable segment;
• amortisation of the fair value of non-operating intangible assets
arising on business combinations;
• changes in the fair value of derivative financial instruments
and material currency translation movements arising on
intra-group funding;
• gains or losses on changes in Group structure which do not meet
the definition of discontinued operations or which the Group
views as capital rather than revenue in nature;
• profits or losses arising from business combinations including
fair value adjustments to pre-combination shareholdings,
changes in estimates of contingent consideration made after the
provisional fair value period and material expenses and charges
incurred on a business combination; and
• significant pension scheme curtailments and settlements.
The Group’s post-tax share of joint venture earnings is shown as a
separate component of profit before tax. The Group’s share of
material restructuring and impairment charges, amortisation of the
Strategic Report
fair value of non-operating intangible assets arising on business
combinations and other net financing charges and their related
taxation are separately identified, in the related note.
Net financing costs are analysed to show separately interest
payable, interest receivable and other net financing charges. Other
net financing charges include the interest charge on net defined
benefit plans, specific changes in fair value on cash flow hedges
and unwind of discounts on fair value amounts established on
business combinations.
Revenue recognition
Sales
Governance
Financial Statements
Other Information
Depreciation
Depreciation is not provided on freehold land or capital work in
progress. In the case of all other categories of property, plant and
equipment, depreciation is provided on a straight line basis over the
course of the financial year from the date the asset is available for use.
Depreciation is applied to specific classes of asset so as to reduce
them to their residual values over their estimated useful lives, which
are reviewed annually.
The range of depreciation lives are:
Years
Revenue from the sale of goods is measured at the fair value of the
consideration receivable which generally equates to the invoiced
amount, excluding sales taxes and net of allowances for returns,
early settlement discounts and rebates.
Freehold buildings
Steel powder production plant
General plant, machinery, fixtures and fittings
Computers
Commercial vehicles and cars
Invoices for goods are raised when the risks and rewards of
ownership have passed which, dependent upon contractual terms,
may be at the point of despatch, acceptance by the customer or, in
Aerospace, certification by the customer. Sales of services under
risk and revenue sharing partnerships are recognised by reference to
the stage of completion based on services performed to date. The
assessment of the stage of completion is dependent on the nature of
the contract, but will generally be based on: costs incurred to the
extent these relate to services performed up to the reporting date;
achievement of contractual milestones where appropriate; or flying
hours or equivalent for long term aftermarket arrangements.
Property, plant and equipment is reviewed at least annually for
indications of impairment. Impairments are charged to the income
statement. Similarly, where property, plant and equipment has been
impaired and subsequent reviews demonstrate the recoverable value
is in excess of the impaired value an impairment reversal is recorded.
The amount of the reversal cannot exceed the theoretical net book
amount at the date of the reversal had the item not been impaired.
Impairment reversals are credited to the income statement against the
same line item to which the impairment was previously charged.
Many businesses in Automotive and Land Systems recognise an
element of revenue via a surcharge or similar raw material cost
recovery mechanism. The surcharge invoiced or credited is generally
based on prior period movement in raw material price indices
applied to current period deliveries. Other cost recoveries are
recorded according to the customer agreement. In those instances
where recovery of such increases is guaranteed, irrespective of the
level of future deliveries, revenue is recognised, or due allowance
made, in the same period as the cost movement takes place.
Other income
Interest income is recognised using the effective interest rate
method.
Sales and other income is recognised in the income statement
when it can be reliably measured and its collectability is
reasonably assured.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and impairment charges.
Cost
Cost comprises the purchase price plus costs directly incurred in
bringing the asset into use and borrowing costs on qualifying assets.
Where freehold and long leasehold properties were carried at
valuation on 23 March 2000, these values have been retained as book
values and therefore deemed cost at the date of the IFRS transition.
Where assets are in the course of construction at the balance sheet
date they are classified as capital work in progress. Transfers are
made to other asset categories when they are available for use.
Up to 50
18
6 to 15
3 to 5
4 to 5
Borrowing costs
Borrowing costs are capitalised as cost on qualifying tangible and
intangible fixed asset expenditure. A qualifying asset is an asset or
programme where the period of capitalisation is more than
12 months and the capital value is more than £25 million. For general
borrowings the capitalisation rate is the weighted average of the
borrowing costs outstanding during the year. For specific funding
and borrowings the amount capitalised is the actual borrowing cost
incurred less any investment income on the temporary investment of
those borrowings.
Financial assets and liabilities
Financial liabilities are recorded in arrangements where
payments, or similar transfers of financial resources, are
unavoidable or guaranteed.
Borrowings are measured initially at fair value which usually equates
to proceeds received and includes transaction costs. Borrowings are
subsequently measured at amortised cost.
Cash and cash equivalents comprise cash on hand and demand
deposits, and overdrafts together with highly liquid investments of
less than 90 days maturity. Other financial assets comprise
investments with more than 90 days until maturity. Unless an
enforceable right of set-off exists and there is an intention to net
settle, the components of cash and cash equivalents are reflected
on a gross basis in the balance sheet.
Other financial assets and liabilities, including short term
receivables and payables, are initially recognised at fair value and
subsequently measured at amortised cost less any impairment
provision unless the impact of the time value of money is considered
to be material.
GKN plc Annual Report and Accounts 2014 117
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
1 Accounting policies and presentation continued
Derivative financial instruments
The Group does not trade in derivative financial instruments.
Derivative financial instruments including forward foreign currency
contracts and cross currency interest rate swaps are used by the
Group to manage its exposure to risk associated with the variability
in cash flows in relation to both recognised assets or liabilities or
forecast transactions. All derivative financial instruments are
measured at the balance sheet date at their fair value.
Where derivative financial instruments are not designated as or not
determined to be effective hedges, any gain or loss on
remeasurement is taken to the income statement. Where derivative
financial instruments are designated as and are effective as cash
flow hedges, any gain or loss on remeasurement is held in equity
and recycled through the income statement when the designated
item is transacted, unless related to the purchase of a business,
when recycled against consideration.
Gains or losses on derivative financial instruments no longer
designated as effective hedges are taken directly to the
income statement.
Derivatives embedded in non-derivative host contracts are recognised
at their fair value when the nature, characteristics and risks of the
derivative are not closely related to the host contract. Gains and losses
arising on the remeasurement of these embedded derivatives at each
balance sheet date are taken to the income statement.
Financial guarantee contract liabilities are measured initially at
fair value and subsequently at the amount of the obligation under
the contract.
Goodwill
Goodwill consists of the excess of the fair value of the consideration
over the fair value of the identifiable intangible and tangible assets
net of the fair value of the liabilities including contingencies of
businesses acquired at the date of acquisition. Acquisition related
expenses are charged to the income statement as incurred.
Goodwill in respect of business combinations of subsidiaries is
recognised as an intangible asset. Goodwill arising on the
acquisition of a joint venture is included in the carrying value of
the investment.
Goodwill is not amortised but tested at least annually for
impairment. Goodwill is carried at cost less any recognised
impairment losses that arise from the annual assessment of its
carrying value. To the extent that the carrying value exceeds the
recoverable amount, determined as the higher of estimated
discounted future net cash flows or recoverable amount on a fair
value less cost of disposal basis, goodwill is written down to the
recoverable amount and an impairment charge is recognised in the
income statement.
118 GKN plc Annual Report and Accounts 2014
Other intangible assets
Other intangible assets are stated at cost less accumulated
amortisation and impairment charges.
Computer software
Where computer software is not integral to an item of property, plant
or equipment its costs are capitalised and categorised as intangible
assets. Cost comprises the purchase price plus costs directly
incurred in bringing the asset into use. Amortisation is provided on a
straight line basis over its useful economic life which is in the range
of 3-5 years.
Development costs and participation fees
Where development expenditure results in a new or substantially
improved product or process and it is probable that this expenditure
will be recovered, it is capitalised. Cost comprises development
expenditure and borrowing costs on qualifying assets or fair value
on initial recognition when as a result of a business combination. In
addition, payments made to engine manufacturers and original
equipment manufacturers for participation fees relating to risk and
revenue sharing partnerships and long term agreements, are carried
forward in intangible assets to the extent that they can be recovered
from future sales.
Amortisation is charged from the date the asset is available for use.
In Aerospace, amortisation is charged over the asset’s life up to a
maximum of 15 years for all programmes other than risk and revenue
sharing partnerships where a maximum life of 25 years is assumed,
either on a straight line basis or, where sufficient contractual terms
exist, a unit of production method is applied. In Automotive,
amortisation is charged on a straight line basis over the asset’s life
up to a maximum of 7 years.
Capitalised development costs, including participation fees, are
subject to annual impairment reviews with any resulting
impairments charged to the income statement.
Research expenditure and development expenditure not qualifying
for capitalisation is written off as incurred.
Assets acquired on business combinations –
non-operating intangible assets
Non-operating intangible assets are intangible assets that are
acquired as a result of a business combination, which arise from
contractual or other legal rights and are not transferable or
separable. On initial recognition they are measured at fair value.
Amortisation is charged on a straight line basis to the income
statement over their expected useful lives which are:
Years
Marketing related assets
– brands and trademarks
– agreements not to compete
Customer related assets
– order backlog
– other customer contracts and relationships
Technology based assets
20-50
Life of agreement
Length of backlog
2-25
5-25
Strategic Report
Inventories
Inventories are valued at the lower of cost and estimated net
realisable value with due allowance being made for obsolete or
slow-moving items. Cost is determined on a first in, first out or
weighted average cost basis. Cost includes raw materials, direct
labour, other direct costs and the relevant proportion of works
overheads assuming normal levels of activity. Net realisable value
is the estimated selling price less estimated selling costs and costs
to complete.
Taxation
Current tax and deferred tax are recognised in the income statement
unless they relate to items recognised directly in other
comprehensive income when the related tax is also recognised in
other comprehensive income.
Full provision is made for deferred tax on all temporary differences
resulting from the difference between the carrying value of an asset
or liability in the consolidated financial statements and its tax base.
The amount of deferred tax reflects the expected manner of
realisation or settlement of the carrying amount of the assets and
liabilities using tax rates enacted or substantively enacted at the
balance sheet date.
Deferred tax assets are reviewed at each balance sheet date and are
only recognised to the extent that it is probable that they will be
recovered against future taxable profits.
Deferred tax is recognised on the unremitted profits of joint
ventures. No deferred tax is recognised on the unremitted profits of
overseas branches and subsidiaries except to the extent that it is
probable that such earnings will be remitted to the parent in the
foreseeable future.
Pensions and post-employment benefits
The Group’s pension arrangements comprise various defined benefit
and defined contribution schemes throughout the world. In the UK
and in certain overseas companies pension arrangements are made
through externally funded defined benefit schemes, the
contributions to which are based on the advice of independent
actuaries or in accordance with the rules of the schemes. In other
overseas companies funds are retained within the business to
provide for retirement obligations.
The Group also operates a number of defined contribution and
defined benefit arrangements which provide certain employees with
defined post-employment healthcare benefits.
The Group accounts for all post-employment defined benefit
schemes through recognition of the schemes’ surpluses or deficits
on the balance sheet at the end of each year. Remeasurement of
defined benefit plans is included in other comprehensive income.
Current and past service costs, curtailments and settlements are
recognised within operating profit. Interest charges on net defined
benefit plans are recognised in other net financing charges.
Governance
Financial Statements
Other Information
Government refundable advances
Government refundable advances are reported in Trade and other
payables in the balance sheet. Refundable advances include
amounts advanced by Government, accrued interest and directly
attributable costs. Refundable advances are provided to the Group
to part-finance expenditures on specific development programmes.
The advances are provided on a risk sharing basis, i.e. repayment
levels are determined subject to the success of the related
programme. Interest is calculated using the effective interest
rate method.
Share-based payments
Share options granted to employees and share-based arrangements
put in place since 7 November 2002 are valued at the date of grant or
award using an appropriate option pricing model and are charged to
operating profit over the performance or vesting period of the
scheme. The annual charge is modified to take account of shares
forfeited by employees who leave during the performance or vesting
period and, in the case of non-market related performance
conditions, where it becomes unlikely the option will vest.
Provisions
Provisions for onerous or loss making contracts, warranty
exposures, environmental matters, restructuring, employee
obligations and legal claims are recognised when: the Group has a
present legal or constructive obligation as a result of past events; it
is probable that an outflow of resources will be required to settle the
obligation; and the amount can be reliably estimated. Restructuring
provisions comprise lease termination penalties and employee
termination payments. Provisions are not recognised for future
operating losses.
Provisions are measured at the present value of the expenditures
expected to be required to settle the obligation using a pre-tax
discount rate that reflects current market assessments of the time
value of money and the risks specific to the obligation. Any increase
in provisions due to discounting, only recorded where material, is
recognised as interest expense within other net financing charges.
Standards, revisions and amendments to standards and
interpretations issued but not yet adopted
The Group does not intend to adopt any standard, revision or
amendment before the required implementation date. At the date of
authorisation of these financial statements, the following standards
which have not been applied in these financial statements were in
issue but not yet effective (and in some cases had not yet been
adopted by the EU):
• IFRS 9 Financial Instruments (effective from 1 January 2018); and
• IFRS 15 Revenue from contracts with customers (effective from
1 January 2017).
These standards and other revisions to standards and
interpretations which have an implementation date in 2015 or
thereafter are still being assessed.
For defined contribution arrangements the cost charged to the
income statement represents the Group’s contributions to the
relevant schemes in the year in which they fall due.
GKN plc Annual Report and Accounts 2014 119
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
1 Accounting policies and presentation continued
Significant judgements, key assumptions and estimates
The Group’s significant accounting policies are set out above. The preparation of financial statements, in conformity with IFRS, requires the
use of estimates, subjective judgement and assumptions that may affect the amounts of assets and liabilities at the balance sheet date and
reported profit and earnings for the year. The Directors base these estimates, judgements and assumptions on a combination of past
experience, professional expert advice and other evidence that is relevant to the particular circumstance.
The accounting policies where the Directors consider the more complex estimates, judgements and assumptions have to be made are those
in respect of post-employment obligations (note 24), derivative and other financial instruments (notes 4b and 20), taxation (note 6),
provisions (note 21) and impairment of non-current assets (note 11). Details of the principal estimates, judgements and assumptions made
are set out in the related notes as identified.
2 Segmental analysis
The Group’s reportable segments have been determined based on reports reviewed by the Executive Committee led by the Chief Executive.
The operating activities of the Group are largely structured according to the markets served; aerospace, automotive and the land systems
markets. Automotive is managed according to product groups; driveline and powder metallurgy. Reportable segments derive their sales from
the manufacture of products and sale of service. Revenue from inter segment trading and royalties is not significant.
(a) Sales
Automotive
2014
Subsidiaries
Joint ventures
Aerospace £m Driveline £m Powder Metallurgy £m Land Systems £m 2,226 – 3,050 394 916 – 752 24 2,226 3,444 916 776 Total £m 7,362 94 Other businesses
Management sales
Less: Joint venture sales
7,456 (474)
Income statement – sales
6,982 2013
Subsidiaries
Joint ventures
Other businesses
2,243 – 3,062 354 932 – 870 29 2,243 3,416 932 899 7,490 104 Management sales
Less: Joint venture sales
7,594 (458)
Income statement – sales
7,136 Subsidiary sales comprise £6,694 million (2013: £6,861 million) from the manufacture of product and £288 million (2013: £275 million) from
the sale of service.
120 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
(b) Trading profit
Automotive
Aerospace £m Driveline £m Powder Metallurgy £m Land Systems £m 2014
Trading profit before depreciation, impairment and amortisation
Depreciation and impairment of property, plant and equipment
Amortisation of operating intangible assets
356
(55)
(24)
325
(109)
(6)
137
(35)
(1)
60
(17)
(1)
Trading profit – subsidiaries
Trading profit – joint ventures
277 – 210 70 101 – 42 2 277 280 101 44 Total £m 702 Other businesses
Corporate and unallocated costs
5 (20)
Management trading profit
Less: Joint venture trading profit
687 (75)
Income statement – trading profit
612 2013
Trading profit before depreciation, impairment and amortisation
Depreciation and impairment of property, plant and equipment
Amortisation of operating intangible assets
355
(60)
(26)
309
(122)
(5)
129
(35)
–
92
(18)
(1)
Trading profit – subsidiaries
Trading profit/(loss) – joint ventures
269 (3) 182 64
94 – 73
2 266 246 94 75 681 Other businesses
Corporate and unallocated costs
5 (25)
Management trading profit
Less: Joint venture trading profit
661 (64)
Income statement – trading profit
597 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 2014, the Group has recorded a net credit of £2 million in the trading profit of Driveline relating to;
commercial settlement of a supply agreement (credit £14 million) and other resolved items (credit £5 million) partially offset by warranty
related matters (charge £17 million). In addition the Group has recorded a net credit of £12 million in the trading profit of Aerospace relating
to; achievement of specific milestones subsequent to the 2013 sale of rights to certain of its intellectual property (credit £8 million,
2013: £5 million) and commercial progress on an onerous contract (credit £11 million) partially offset by contractual matters with a customer
(charge £7 million).
During the year ended 31 December 2013, the Group charged £25 million of restructuring costs in trading profit relating to: Driveline
(£16 million), Powder Metallurgy (£5 million), Land Systems (£3 million) and other businesses (£1 million). In relation to a restructuring
charge recorded in 2012 for Aerospace Engine Systems, £4 million was released in 2013.
GKN plc Annual Report and Accounts 2014 121
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
2 Segmental analysis continued
(c) Goodwill, fixed assets and working capital – subsidiaries only
Automotive
Aerospace £m Driveline £m Powder Metallurgy £m Land Systems £m Total £m 2014
Property, plant and equipment and operating intangible assets
Working capital
1,024 148 995 47 363 89 132 75 2,514 359 Net operating assets
Goodwill and non-operating intangible assets
1,172 507 1,042 268 452 27 207 146 Net investment
1,679 1,310 479 353 934 113 932 76 335 90 142 85 Net operating assets
Goodwill and non-operating intangible assets
1,047 566 1,008 280 425 26 227 181 Net investment
1,613 1,288 451 408 2013
Property, plant and equipment and operating intangible assets
Working capital
2,343 364 (d) Fixed asset additions, investments in joint ventures and other non-cash items
Automotive
Aerospace £m Driveline £m Powder Metallurgy £m Land Systems £m Other £m Total £m 2014
Fixed asset additions
– property, plant and equipment
– intangible assets
Investments in joint ventures
Other non-cash items
– share-based payments
– impairment charges
73 71 – 193 8 165 65 3 – 19 –
9 3 – – 353 82 174 1 39 1 –
–
– –
26 1 4 3 69 2013
Fixed asset additions
– property, plant and equipment
– intangible assets
Investments in joint ventures
Other non-cash items – share-based payments
58 44 – 3 152 10 152 4 56 3 – 2 23 1 8 2 2 – 23 3 291 58 183 14 United Kingdom £m USA £m Germany £m Other countries £m Total non-UK £m Total
£m 950 2,313 964 3,229 6,506 7,456 474 943 444 1,815 3,202 3,676 972 2,265 1,019 3,338 6,622 7,594 458 914 487 1,745 3,146 3,604 (e) Country analysis
2014
Management sales by origin
Goodwill, other intangible assets, property, plant and equipment and
investments in joint ventures
2013
Management sales by origin
Goodwill, other intangible assets, property, plant
and equipment and investments in associate
and joint ventures
122 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
(f) Other sales information
Subsidiary segmental sales gross of inter segment sales are; Aerospace £2,226 million (2013: £2,243 million), Driveline £3,106 million
(2013: £3,124 million), Powder Metallurgy £919 million (2013: £934 million) and Land Systems £754 million (2013: £872 million). Inter
segment transactions take place on an arm’s length basis using normal terms of business.
In 2014 and 2013, no customer accounted for 10% or more of subsidiary sales or management sales.
Management sales by product are: Aerospace – aerostructures 47% (2013: 45%), engine components and sub-systems 47% (2013: 50%) and
special products 6% (2013: 5%). Driveline – CVJ systems 60% (2013: 63%), all-wheel drive and e-drive systems 39% (2013: 36%) and other
goods 1% (2013: 1%). Powder Metallurgy – sintered components 84% (2013: 84%) and metal powders 16% (2013: 16%). Land Systems –
power management devices 41% (2013: 42%), wheels and structures 32% (2013: 33%) and aftermarket 27% (2013: 25%).
(g) Reconciliation of segmental property, plant and equipment and operating intangible fixed assets to the balance sheet
2014 £m 2013 £m Segmental analysis – property, plant and equipment and operating intangible assets
Segmental analysis – goodwill and non-operating intangible assets
Goodwill
Other businesses
Corporate assets
2,514 948 (498)
31 9 2,343 1,053 (544)
17 8 Balance sheet – property, plant and equipment and other intangible assets
3,004 2,877 2014 £m 2013 £m Segmental analysis – working capital
Other businesses
Corporate items
Accrued interest
Restructuring provisions
Deferred and contingent consideration
Government refundable advances
359 11 (31)
(17)
(2)
(9)
(46)
364 11 (34)
(15)
(4)
(12)
(93)
Balance sheet – inventories, trade and other receivables, trade and other payables and provisions
265 217 (h) Reconciliation of segmental working capital to the balance sheet
GKN plc Annual Report and Accounts 2014 123
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
3 Adjusted performance measures
(a) Reconciliation of reported and management performance measures
2014
Sales
As
reported
£m
Joint
ventures
£m
Exceptional
and nontrading items
£m
Management
basis
£m
6,982
474
–
7,456
Trading profit
Change in value of derivative and other financial instruments
Amortisation of non-operating intangible assets arising on business combinations
Gains and losses on changes in Group structure
Impairment charges
612
(209)
(69)
24
(69)
75
–
–
–
–
–
209
69
(24)
69
687
–
–
–
–
Operating profit
289
75
323
687
Share of post-tax earnings of joint ventures
Interest payable
Interest receivable
Other net financing charges
61
(75)
(75)
2
(56)
–
–
–
1
(13)
–
–
56
(75)
2
–
Net financing costs
(129)
–
56
(73)
Profit before taxation
221
–
380
601
Taxation
(47)
–
Profit after tax for the year
Profit attributable to non-controlling interests
174
(5)
–
–
306
–
(74)
480
(5)
(121)
Profit attributable to owners of the parent
169
–
306
475
Earnings per share – pence
10.3
–
18.7
29.0
2013
Sales
As
reported
£m
Joint
ventures
£m
Exceptional
and nontrading items
£m
Management
basis
£m
7,136
458
–
7,594
Trading profit
Change in value of derivative and other financial instruments
Amortisation of non-operating intangible assets arising on business combinations
Gains and losses on changes in Group structure
597
26
(75)
12
64
–
–
–
–
(26)
75
(12)
661
–
–
–
Operating profit
560
64
37
661
52
(64)
2
(10)
(76)
3
(55)
–
–
–
–
–
55
(76)
3
–
Net financing costs
(128)
–
55
(73)
Profit before taxation
484
–
94
578
Share of post-tax earnings of joint ventures
Interest payable
Interest receivable
Other net financing charges
Taxation
(77)
–
(28)
(105)
Profit after tax for the year
Profit attributable to non-controlling interests
407
(12)
–
–
66
8
473
(4)
Profit attributable to owners of the parent
395
–
74
469
24.2
–
4.5
28.7
Earnings per share – pence
Basic and management earnings per share use a weighted average number of shares of 1,640.6 million (2013: 1,634.7 million). Also see note 7.
124 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
(b) Summary of management performance measures by segment
2014
Aerospace
Driveline
Powder Metallurgy
Land Systems
Other businesses
Corporate and unallocated costs
Sales £m Trading profit £m 2,226 3,444 916 776 94 – 277 280 101 44 5 (20)
7,456 687 2013
Sales £m Trading profit £m 12.4% 8.1% 11.0% 5.7% 2,243 3,416 932 899 104 – 266 246 94 75 5 (25)
11.9% 7.2% 10.1% 8.3% 9.2% 7,594 661 8.7%
2014 £m 2013 £m 6,982 7,136 44 (3,127)
(1,809)
46 (3,233)
(1,847)
(3)
(216)
(4)
(32)
(24)
(235)
(2)
(32)
(17)
(29)
(5)
2 8 – (1,182)
(16)
(30)
(3)
3 (11)
4 (1,159)
(6,370)
(6,539)
612 597 Margin Margin 4 Operating profit
The analysis of the additional components of operating profit is shown below:
(a) Trading profit
Sales by subsidiaries
Operating costs
Change in stocks of finished goods and work in progress
Raw materials and consumables
Staff costs (note 9)
Reorganisation costs (ii):
Redundancy and other employee related amounts
Depreciation of property, plant and equipment (iii)
Impairment of property, plant and equipment
Amortisation of operating intangible assets
Operating lease rentals payable:
Plant and equipment
Property
Impairment of trade receivables
Amortisation of government capital grants
Net exchange differences on foreign currency transactions
Acquisition restructuring accrual release
Other costs
Trading profit
(i) EBITDA is subsidiary trading profit before depreciation, impairment and amortisation charges included in trading profit. EBITDA was
£864 million (2013: £866 million).
(ii) Reorganisation costs reflect actions in the ordinary course of business to reduce costs, improve productivity and rationalise facilities in
continuing operations. This cost is included in trading profit.
(iii) Including depreciation charged on assets held under finance leases of less than £1 million (2013: £1 million).
(iv) Research and development expenditure in subsidiaries included in other costs above was £161 million (2013: £149 million), net of
customer and government funding.
GKN plc Annual Report and Accounts 2014 125
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
4 Operating profit continued
(a) Trading profit continued
(v) Auditors’ remuneration
The analysis of auditors’ remuneration is as follows:
2014 £m 2013 £m Fees payable to PricewaterhouseCoopers LLP for the audit of the parent company
Fees payable to PricewaterhouseCoopers LLP and their associates for other services to the Group:
– Audit of the accounts of subsidiaries
(0.5)
(0.5)
(4.0)
(4.1)
Total audit fees
(4.5)
(4.6)
– Audit related assurance services
– Tax advisory services
– Tax compliance services
– Corporate finance transaction services
– Other services
(0.1)
(0.2)
(0.5)
– (0.1)
(0.1)
(0.2)
(0.6)
–
(0.2)
Total fees for other services
(0.9)
(1.1)
Fees payable to PricewaterhouseCoopers LLP and their associates in respect of associated pension schemes:
– Audit
(0.1)
(0.1)
(0.1)
(0.1)
(5.5)
(5.8)
Total fees payable to PricewaterhouseCoopers LLP and their associates
All fees payable to PricewaterhouseCoopers LLP, the Company’s auditors, include amounts in respect of expenses. All fees payable to
PricewaterhouseCoopers LLP have been charged to the income statement.
(b) Change in value of derivative and other financial instruments
Forward currency contracts (not hedge accounted)
Embedded derivatives
Net gains and losses on intra-group funding
Arising in year
Reclassified in year
2014 £m 2013 £m (232)
4 19 (4)
(228)
15 19 – 11 –
19 11 (209)
26 IAS 39 requires derivative financial instruments to be valued at the balance sheet date and any difference between that value and the
intrinsic value of the instrument to be reflected in the balance sheet as an asset or liability. Any subsequent change in value is reflected in
the income statement unless hedge accounting is achieved. Such movements do not affect cash flow or the economic substance of the
underlying transaction. In 2014 and 2013 the Group used transactional hedge accounting in a limited number of instances.
(c) Amortisation of non-operating intangible assets arising on business combinations
Marketing related
Customer related
Technology based
126 GKN plc Annual Report and Accounts 2014
2014 £m 2013 £m (1)
(56)
(12)
–
(56)
(19)
(69)
(75)
Strategic Report
Governance
Financial Statements
Other Information
(d) Gains and losses on changes in Group structure
Business sold
Profit on sale of joint venture
2014 £m 2013 £m –
24 9 3 24 12 On 31 July 2014, the Group sold its 50% share in Emitec, a joint venture company, for cash consideration of £37 million. The carrying value on
the date of disposal was £14 million and £1 million of previous currency variations were reclassified from other reserves resulting in a profit
on sale of £24 million.
On 7 November 2013, the Group sold its controlling interest in GKN Driveline Torque Technology (Shanghai) Co. Ltd (TSH) to Shanghai GKN
HUAYU Driveline Systems Co Limited (SDS), a joint venture company. The transaction took the Group’s ownership in TSH from 100% to 50%.
The profit on sale of £9 million, comprised the fair value of consideration received (increased equity interest in SDS of £15 million) less the
previous carrying value of TSH of £6 million. TSH had a net overdraft of £2 million on the date of disposal.
On 24 December 2013, the Group sold its 49% share in a joint venture company, Composite Technology and Applications Ltd for cash
consideration of £3 million. The carrying value on the date of disposal was nil, resulting in a profit on sale of £3 million.
5 Net financing costs
(a) Interest payable and fee expense
Short term bank and other borrowings
Repayable within five years
Repayable after five years
Government refundable advances
Finance leases
Interest receivable
Short term investments, loans and deposits
Net interest payable and receivable
(b) Other net financing charges
Interest charge on net defined benefit plans
Fair value changes on net investment hedges
Unwind of discounts
2014 £m 2013 £m (7)
(36)
(25)
(7)
– (6)
(11)
(52)
(6)
(1)
(75)
(76)
2 3 (73)
(73)
2014 £m 2013 £m (50)
3 (9)
(45)
–
(10)
(56)
(55)
GKN plc Annual Report and Accounts 2014 127
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
6 Taxation
(a) Tax expense
Analysis of charge in year
2014 £m 2013 £m Current tax (charge)/credit
Current year charge
Utilisation of previously unrecognised tax losses and other assets
Net movement on provisions for uncertain tax positions
Adjustments in respect of prior years
(86)
1 9 (4)
(85)
4 8 4 (80)
(69)
36 (51)
44 4 (65)
1 52 4 33 (8)
(47)
(77)
Tax in respect of management profit
2014 £m 2013 £m Current tax
Deferred tax
(77)
(44)
(65)
(40)
(121)
(105)
Current tax
Deferred tax
(3)
77 (3)
31 74 28 Total for tax charge for the year
(47)
(77)
Deferred tax (charge)/credit
Origination and reversal of temporary differences
Tax on change in value of derivative financial instruments
Other changes in unrecognised deferred tax assets
Adjustments in respect of prior years
Total tax charge for the year
Analysed as:
Tax in respect of items excluded from management profit
Management tax rate
The tax charge arising on management profits of subsidiaries of £539 million (2013: £524 million) was £121 million (2013: £105 million charge)
giving an effective tax rate of 22% (2013: 20%). Details of the effective tax rate for the Group and the underlying events and transactions
affecting this are given in the business review.
Significant judgements and estimates
The Group operates in many jurisdictions and is subject to tax audits which are often complex and can take several years to conclude.
Therefore, the accrual for current tax includes provisions for uncertain tax positions which require estimates for each matter and the exercise
of judgement in respect of the interpretation of tax laws and the likelihood of challenge to historic tax positions. Where appropriate,
estimates of interest and penalties are included in these provisions. As amounts provided for in any year could differ from eventual tax
liabilities, subsequent adjustments which have a material impact on the Group’s tax rate and/or cash tax payments may arise. Tax payments
comprise payments on account and payments on the final resolution of open items and, as a result, there can be substantial differences
between the charge in the income statement and cash tax payments. Where companies utilise brought forward tax losses such that little or
no tax is paid, this also results in differences between the tax charge and cash tax payments. With regard to deferred tax, judgement is
required for the recognition of deferred tax assets, which is based on expectations of future financial performance in particular legal entities
or tax groups.
128 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
2014
Tax reconciliation
£m Other Information
2013
% £m % Profit before tax
Less share of post-tax earnings of joint ventures
221 (61)
484 (52)
Profit before tax excluding joint ventures
160 432 Tax charge calculated at 21.5% (2013: 23.25%) standard UK corporate tax rate
Differences between UK and overseas corporate tax rates
Non-deductible and non-taxable items
Recognition of previously unrecognised tax losses
Utilisation of previously unrecognised tax losses and other assets
Changes in tax rates
Other changes in deferred tax assets
(34)
(16)
(49)
43 1 (3)
2 (21)
(10)
(31)
27 1 (2)
1 (100)
(39)
6 52 4 (11)
(5)
(23)
(9)
1 12 1 (3)
(1)
Tax charge on ordinary activities
Net movement on provision for uncertain tax positions
Adjustments in respect of prior years
(56)
9 – (35)
6 – (93)
8 8 (22)
2 2 Total tax charge for the year
(47)
(29)
(77)
(18)
2014 £m 2013 £m 118 (4)
4 13 (49)
1 21 – 131 (27)
2014 £m 2013 £m 8 (125)
11
(135)
(117)
(124)
2014 £m 2013 £m 407 (223)
225 (178)
184 47 (b) Tax included in other comprehensive income
Deferred tax on post-employment obligations
Deferred tax on foreign currency gains and losses on intra-group funding
Current tax on post-employment obligations
Current tax on foreign currency gains and losses on intra-group funding
(c) Current tax
Assets
Liabilities
(d) Recognised deferred tax
Assets
Liabilities
There is a net £33 million deferred tax credit to the income statement in the year (2013: £8 million charge) and a further deferred tax credit of
£114 million has been recorded directly in other comprehensive income (2013: £48 million charge). These credits are impacted by the
recognition and use of deferred tax assets (primarily in respect of actuarial losses).
GKN plc Annual Report and Accounts 2014 129
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
6 Taxation continued
(d) Recognised deferred tax continued
The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by IAS 12)
during the year are shown below:
Assets
Liabilities
Postemployment
obligations £m Tax
losses
£m Other £m Fixed
assets £m Other £m Total £m At 1 January 2014
Included in the income statement
Included in other comprehensive income
Businesses acquired
Currency variations
169 –
118 –
(2)
127 (32)
–
–
(2)
63 28 –
–
4 (287)
15 –
(1)
(10)
(25)
22 (4)
–
1 47 33 114 (1)
(9)
At 31 December 2014
285 93 95 (283)
(6)
184 At 1 January 2013
Included in the income statement
Included in other comprehensive income
Currency variations
224 (7)
(49)
1 148 (19)
–
(2)
55 8 –
–
(313)
20 –
6 (16)
(10)
1 –
98 (8)
(48)
5 At 31 December 2013
169 127 63 (287)
(25)
47 Deferred tax assets are recognised where management projections indicate the future availability of taxable profits to absorb the deductions.
‘Other’ deferred tax arises mainly in relation to items that are taxable or tax deductible in a different period than the income or expense is
accrued in the accounts.
(e) Unrecognised deferred tax assets
Certain deferred tax assets have not been recognised on the basis that the Group’s ability to utilise them is uncertain as shown below.
2014
Tax value
£m Gross £m 2013
Expiry period Tax value
£m 76 16 44 Gross £m Tax losses – with expiry: national
Tax losses – with expiry: local
Tax losses – without expiry
38 9 52 114 2015-2033
237 2015-2033
242 Total tax losses
Other temporary differences
99 1 593 5 136 1 828 3 100 598 137 831 Unrecognised deferred tax assets
Expiry period 222 2014-2032
397 2014-2032
209 No deferred tax is recognised on the unremitted earnings of overseas subsidiaries except where the distribution of such profits is planned. If
these earnings were remitted in full, tax of £16 million (2013: £14 million) would be payable.
(f) Changes in UK tax rate
A reduction in the mainstream rate of UK corporation tax from 23% to 21% took effect from April 2014 which gives rise to an effective rate of
21.5% for the year. A further reduction to 20% from 1 April 2015 has been substantively enacted. UK temporary differences are measured at
the rate at which they are expected to reverse.
(g) Franked investment income – litigation
Since 2003, the Group has been involved in litigation with HMRC in respect of various advance corporate tax payments and corporate tax
paid on certain foreign dividends which, in its view, were levied by HMRC in breach of the Group’s EU community law rights. The most recent
High Court judgement in the case was published in December 2014. Although the judgement was broadly positive, it is anticipated that
HMRC will appeal at least some of the technical points decided.
GKN have historically received payments from HMRC in respect of the case, which have been recognised as received. The continuing
complexity of the case and uncertainty over the issues raised (and in particular which points HMRC may seek to appeal) means that it is not
possible to predict the final outcome of the litigation with any reasonable degree of certainty.
130 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
7 Earnings per share
2014
2013
Earnings £m Weighted average number of shares million Earnings
per share pence Basic
Dilutive securities
169 –
1,640.6 11.5 Diluted
169 1,652.1 Earnings £m Weighted
average number of shares million Earnings
per share pence 10.3 (0.1)
395 –
1,634.7 22.1 24.2 (0.4)
10.2 395 1,656.8 23.8 Management basis earnings per share of 29.0p (2013: 28.7p) is presented in note 3 and uses the weighted average number of shares
consistent with basic earnings per share calculations.
8 Dividends
Paid or proposed in
respect of
2012 final dividend paid
2013 interim dividend paid
2013 final dividend paid
2014 interim dividend paid
2014 final dividend proposed
Recognised
2014 pence 2013 pence 2015 £m 2014 £m 2013 £m –
–
–
2.8 5.6 –
2.6 5.3 –
–
–
–
–
–
92 –
–
87 46 –
78 43 –
–
–
8.4 7.9 92 133 121 The 2014 final proposed dividend will be paid on 18 May 2015 to shareholders who are on the register of members at close of business on 10 April 2015.
9 Employees including Directors
2014 £m 2013 £m (1,446)
(285)
(75)
(3)
(1,452)
(296)
(85)
(14)
(1,809)
(1,847)
2014 Number 2013 Number By business
Aerospace
Driveline
Powder Metallurgy
Land Systems
Other businesses
Corporate
12,114 19,962 6,791 5,109 1,012 198 11,399 18,727 6,528 5,241 902 201 Total
45,186 42,998 Employee benefit expense
Wages and salaries
Social security costs
Post-employment costs
Share-based payments
Average monthly number of employees (including Executive Directors)
GKN plc Annual Report and Accounts 2014 131
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
9 Employees including Directors continued
Key management
The key management of the Group comprises GKN plc Board Directors and members of the Group’s Executive Committee during the year and their
aggregate compensation is shown below. More detailed disclosure on Directors’ remuneration is set out in the Directors’ remuneration report.
Key management compensation
2014 £m 2013 £m Salaries and short term employee benefits
Post-employment benefits
Share-based and medium term incentives and benefits
6.8 0.3 1.4 5.0 0.3 3.6 8.5 8.9 The amount outstanding at 31 December 2014 in respect of annual short term variable remuneration payable in cash was £1.5 million
(2013: £1.8 million). Key management participate in certain incentive arrangements where the key performance metric is management
earnings per share using the cash tax rate which is discussed on page 39 of the Strategic Report. Management EPS using the cash tax rate
is 32.1p (2013: 31.9p). A total of £267,158 in dividends was received by key management in 2014 (2013: £227,000).
10 Share-based payments
The Group has granted options over shares to employees for a number of years under different schemes. Where grants were made after
7 November 2002 they have been accounted for as required by IFRS 2 “Share-based payment”. Awards made before that date have not been
so accounted. Details of awards made since 7 November 2002 that impact the 2014 accounting charge are:
Sustainable Earnings Plan (SEP)
Awards comprising Core and Sustainability Awards were made to Directors and certain senior employees in August 2012, March 2013 and
March 2014. Core and Sustainability Awards are subject to performance targets with Core Awards subject to achievement of EPS growth
targets over an initial three year performance period and Sustainability Awards subject to the highest level of EPS attained in any year during
the core performance period being achieved or exceeded in years four and five. Sustainability Awards will be reduced to the extent that the
target in the core performance period has not been met. Sustainability Awards are measured independently in years four and five. 50% of
Core Awards will be released at the end of year three; the balance of Core Awards and any Sustainability Awards will be released at the end of
year five. There is no provision for retesting performance for either the Core or Sustainability Awards. On vesting, dividends are treated as
having accrued on the shares from the date of grant to the date of release with the value delivered in either shares or cash.
Details of SEP awards (Core and Sustainability Awards) granted during the year are set out below:
Weighted average
fair value at Shares granted
during year measurement date 2014 SEP awards
6,196,849 396.0p The fair value of shares awarded under the SEP is calculated using the share price on the grant date.
A reconciliation of ESOS option movements over the year to 31 December 2014 is shown below:
2014
Outstanding at 1 January
Forfeited
Exercised
2013
Weighted average Number exercise price pence 000s Weighted
average
Number exercise price
pence 000s 4,860 143.76 11,379 132.37 (25)
(838)
110.08 166.00 (176)
(6,343)
153.58 123.06 Outstanding at 31 December
3,997 139.31 4,860 143.76 Exercisable at 31 December
3,997 139.31 3,335 119.89 132 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
For options outstanding at 31 December the range of exercise prices and weighted average contractual life is shown in the following table:
2014
Range of exercise price
110p-145p
195p-220p
2013
Number
of shares 000s Contractual weighted
average remaining
life
years Number of shares 000s Contractual weighted
average remaining
life years 3,054 943 4.92 6.25 3,429 1,431 5.92 7.25 The weighted average share price during the year for options exercised over the year was 373.8p (2013: 308.9p). The total charge for the year
relating to share-based payment plans was £3 million (2013: £14 million) all of which related to equity-settled share-based payment
transactions. After deferred tax, the total charge was £3 million (2013: £14 million).
Liabilities in respect of share-based payments were not material at either 31 December 2014 or 31 December 2013. There were no vested
rights to cash or other assets at either 31 December 2014 or 31 December 2013.
11 Goodwill and other intangible assets
(a) Goodwill
2014 £m 2013 £m Cost
At 1 January
Businesses acquired
Currency variations
698 2 14 720 – (22)
At 31 December
714 698 Accumulated impairment
At 1 January
Charge for the year
Currency variations
154 57 5 168 – (14)
At 31 December
216 154 Net book amount at 31 December
498 544 The carrying value of goodwill at 31 December comprised:
Reportable segment
Business
Geographical location
2014 £m 2013 £m Driveline
Driveline
Driveline
Hoeganaes
Aerostructures
Engine Systems
Engine Products – West
Engine Products – East
Power Management Devices
Wheels and Structures
Americas
Europe
North America
North America
North America & Europe
North America
North America
Europe
Europe
118 56 22 32 39 97 5 67 – 113 63 21 30 37 92 36 72 20 436 62 484 60 498 544 Powder Metallurgy
Aerospace
Land Systems
Other businesses not individually significant to the carrying value of goodwill
Impairment charges have been recorded in the Income Statement as an exceptional item within the line item “impairment charges”.
GKN plc Annual Report and Accounts 2014 133
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
11 Goodwill and other intangible assets continued
(b) Other intangible assets
2014
Assets arising on business combinations
Development costs £m Participation fees £m Computer software £m Marketing related £m Customer related £m Technology based £m Total £m Cost
At 1 January 2014
Businesses acquired
Additions
Disposals
Currency variations
366 – 63 (6)
13 128 – 9 – 4 98 – 10 (1)
– 12 2 – – – 461 – – – 14 233 7 – – 8 1,298 9 82 (7)
39 At 31 December 2014
436 141 107 14 475 248 1,421 78 11 79 3 147 48 366 18 – 1 7 – – 7 – – – 1 – – 56 7 – 12 2 32 69 10 97 18 86 4 210 62 477 339 123 21 10 265 186 944 Accumulated amortisation
At 1 January 2014
Charge for the year
Charged to trading profit
Non-operating intangible assets
Currency variations
At 31 December 2014
Net book amount at 31 December 2014
2013
Assets arising on business combinations
Marketing related £m Customer related £m Technology based £m 12 – – – 467 – – (6)
239 – – (6)
98 12 461 233 1,298 2 76 3 94 31 270 10 – – (1)
6 – (2)
(1)
– – – – – 56 – (3)
– 19 – (2)
32 75 (2)
(9)
78 11 79 3 147 48 366 288 117 19 9 314 185 932 Development costs £m Participation fees £m Computer software £m Cost
At 1 January 2013
Additions
Disposals
Currency variations
320 47 – (1)
133 1 – (6)
91 10 (2)
(1)
At 31 December 2013
366 128 64 16 – – (2)
Accumulated amortisation
At 1 January 2013
Charge for the year
Charged to trading profit
Non-operating intangible assets
Disposals
Currency variations
At 31 December 2013
Net book amount at 31 December 2013
Total £m 1,262 58 (2)
(20)
Development costs of £117 million (2013: £96 million) and £7 million (2013: £9 million) in respect of two aerospace programmes are being
amortised on a units of production basis. There is £26 million (2013: £35 million) in respect of a customer relationship asset arising from one
previous business combination with a remaining amortisation period of 3 years (2013: 4 years). There are other intangible assets of
£279 million (2013: £323 million) in respect of four programmes with a remaining amortisation period of 23 years (2013: 24 years).
(c) Impairment testing
An impairment test is a comparison of the carrying value of the assets of a business or cash generating unit (CGU) to their recoverable
amount. Where the recoverable amount is less than the carrying value, an impairment results. For the purposes of carrying out impairment
tests, the Group’s total goodwill has been allocated to a number of CGUs and each of these CGUs has been separately assessed and tested.
The size of a CGU varies but is never larger than a primary or secondary reportable segment. In some cases, a CGU is an individual subsidiary
or operation.
134 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Consistent with previous years all goodwill was tested for impairment. An impairment charge of £69 million has been recorded in
respect of 3 CGUs; 2 in Aerospace and 1 in Land Systems of £65 million and the carrying value of an investment balance of £4 million in
Other Businesses.
An impairment charge in Engine Products – East, North America (Aerospace) of £33 million follows a downturn in the market and loss of
business during the year. The charge only comprises goodwill. The remaining recoverable amount of £59 million represents its value in use,
using a discount rate of 12% (2013: 12%). The impairment charge is most sensitive to operating cash flows and a 5% change in this
assumption would have impacted the impairment charge by £3 million.
An impairment charge in Special Products Europe (Aerospace) of £6 million follows a reduction in sales for a key product. The charge only
comprises goodwill. The remaining recoverable amount of £6 million represents its value in use, using a discount rate of 9% (2013: 11%).
The impairment charge is most sensitive to operating cash flows but a 5% change in this assumption would not have impacted the
impairment charge.
An impairment charge in Wheels and Structures Europe (Land Systems) of £26 million follows a significant downturn in the market during the
year and loss of future orders. The charge comprises goodwill of £18 million and property, plant and equipment of £8 million. The remaining
recoverable amount of £17 million represents its value in use, using a discount rate of 12% (2013: 13%). The impairment charge is most
sensitive to operating cash flows and a 5% change in this assumption would have impacted the impairment charge by £2 million.
Significant judgements, assumptions and estimates
One CGU within the Group, Power Management Devices (Land Systems), has been assessed for impairment using an estimation of fair value
less costs of disposal based on a multiple of EBITDA and recent comparable market prices. Due to market conditions in the year value in use
was not considered to be a representative assessment for impairment testing. The relevant assets of Power Management Devices have been
assessed against fair value less costs of disposal. The assessment used an assumed EBITDA taking into account past performance, and a
market based multiple following a review of comparable companies within a peer group. Sensitivity analysis on this CGU is provided below.
All other CGUs’ recoverable amounts were measured based on value in use. Detailed forecasts for the next five years have been used which
are based on approved annual budgets and strategic projections representing the best estimate of future performance. In the case of certain
CGUs within the Group’s Aerospace business, value in use was measured using operating cash flow projections covering the next ten years
which incorporate the anticipated timing of volumes on current programmes. Management consider forecasting over this period to more
appropriately reflect the length of business cycle of those CGU’s programmes.
In determining the value in use of CGUs it is necessary to make a series of assumptions to estimate the present value of future cash flows.
In each case, these key assumptions have been made by management reflecting past experience and are consistent with relevant external
sources of information.
Operating cash flows
The main assumptions within forecast operating cash flow include the achievement of future sales prices and volumes (including reference
to specific customer relationships, product lines and the use of industry relevant external forecasts of global vehicle production within
Driveline businesses and consideration of specific volumes on certain military and civil programmes within Aerospace), raw material
input costs, the cost structure of each CGU and the ability to realise benefits from annual productivity improvements, the impact of
foreign currency rates upon selling price and cost relationships and the levels of maintaining capital expenditure required to support
forecast production.
Pre-tax risk adjusted discount rates
Pre-tax risk adjusted discount rates are derived from risk-free rates based upon long term government bonds in the territory, or territories,
within which each CGU operates. A relative risk adjustment (or “beta”) has been applied to risk-free rates to reflect the risk inherent in each
CGU relative to all other sectors on average, determined using an average of the betas of comparable listed companies.
The range of pre-tax risk adjusted discount rates set out below have been used for impairment testing. The range of rates reflects the mix of
geographical territories within CGUs within the reportable segments.
Aerospace:
Driveline:
Powder Metallurgy:
Land Systems:
UK 9% (2013: 11%), Europe 8% (2013: 11%) and North America 12% (2013: 12%)
North and South America 14%-25% (2013: 13%-24%), Europe 9%-12% (2013: 12%-14%) and Japan and Asia Pacific
region countries 10%-20% (2013: 10%-19%)
Europe 10% (2013: 12%) and North America 14% (2013: 13%)
Europe 9%-12% (2013: 11%-14%) and North America 14% (2013: 13%)
GKN plc Annual Report and Accounts 2014 135
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
11 Goodwill and other intangible assets continued
(c) Impairment testing continued
Long term growth rates
To forecast beyond the detailed cash flows into perpetuity, a long term average growth rate has been used. In each case, this is not greater
than the published International Monetary Fund average growth rate in gross domestic product for the next five year period in the territory or
territories where the CGU is primarily based. This results in a range of nominal growth rates:
Aerospace:
Driveline:
Powder Metallurgy:
Land Systems:
UK 3% (2013: 3%), Europe 2% (2013: 3%) and North America 3% (2013: 3%)
North and South America 3%-6% (2013: 3%-8%), Europe 2%-4% (2013: 2%-7%) and Japan and Asia Pacific region
countries 2%-10% (2013: 2%-10%)
Europe 2% (2013: 4%) and North America 3% (2013: 3%)
Europe 2%-4% (2013: 2%-4%) and North America 3% (2013: 3%)
Goodwill sensitivity analysis
The results of the Group’s impairment tests are dependent upon estimates and judgements made by management, particularly in relation to
the key assumptions described above. Sensitivity analysis to potential changes in key assumptions has therefore been reviewed.
At 31 December 2014, the date of the Group’s annual impairment test, the estimated recoverable amount of one CGU within the Group’s
Aerospace operations using value in use and one CGU within the Group’s Land Systems operations using fair value less costs of disposal
exceeded their carrying value by £199 million and £23 million respectively.
The table below shows the discount rate, long term growth rate and forecast operating cashflow assumptions used in the calculation of
value in use and the amount by which each assumption must change in isolation in order for the estimated recoverable amount to equal the
carrying value.
Segment
Aerospace
Business
Engine Products - West Value in use excess over carrying value
Assumptions used in calculation of value in use
Pre-tax adjusted discount rate
Long term growth rate
Total pre-discounted forecast operating cashflow
Change required for the carrying value to exceed the recoverable amount
Pre-tax adjusted discount rate
Long term growth rate
Total pre-discounted forecast operating cashflow
£199m 12% 3% £1,030m 7.2%pts 88%pts 54% The table below shows the assumptions used in the calculation of fair value less costs of disposal and the amount by which each assumption
must change in isolation in order for the estimated recoverable amount to equal the carrying value.
Segment
Business
Fair value less costs of disposal excess over carrying value
Assumptions used in calculation of fair value less costs of disposal
EBITDA
Multiple
Change required for the carrying value to exceed the recoverable amount
EBITDA
Multiple
136 GKN plc Annual Report and Accounts 2014
Land Systems
Power Management
Devices £23m £19m 8.5 16% 14%pts Strategic Report
Governance
Financial Statements
Other Information
12 Property, plant and equipment
2014
Capital work in progress £m Other tangible assets £m Land and buildings £m Plant and machinery £m 776 – 16 (13)
6 (5)
3,806 1 85 (96)
164 (37)
780 3,923 149 245 5,097 237 2,600 117 – 2,954 21 – – (8)
1 185 4 8 (90)
(37)
10 – – (7)
(4)
– – – – – 216 4 8 (105)
(40)
At 31 December 2014
251 2,670 116 – 3,037 Net book amount at 31 December 2014
529 1,253 33 245 2,060 Cost
At 1 January 2014
Businesses acquired
Additions
Disposals
Transfers
Currency variations
At 31 December 2014
Accumulated depreciation and impairment
At 1 January 2014
Charge for the year
Charged to trading profit
Depreciation
Impairments
Impairment charges
Disposals
Currency variations
149 – 4 (7)
8 (5)
168 – 248 – (178)
7 Total £m 4,899 1 353 (116)
– (40)
2013
Land and buildings £m Plant and machinery £m Other tangible assets £m Capital work in progress £m Total £m Cost
At 1 January 2013
Additions
Disposals
Businesses sold
Transfers
Currency variations
764 20 (7)
– 16 (17)
3,773 101 (68)
(17)
125 (108)
145 5 (8)
– 2 5 148 165 – (2)
(143)
– 4,830 291 (83)
(19)
– (120)
At 31 December 2013
776 3,806 149 168 4,899 228 2,521 121 – 2,870 19 – (5)
– (5)
208 2 (67)
(6)
(58)
8 – (9)
– (3)
– – – – – 235 2 (81)
(6)
(66)
At 31 December 2013
237 2,600 117 – 2,954 Net book amount at 31 December 2013
539 1,206 32 168 1,945 Accumulated depreciation and impairment
At 1 January 2013
Charge for the year
Charged to trading profit
Depreciation
Impairments
Disposals
Businesses sold
Currency variations
Included within other tangible assets at net book amount are fixtures, fittings and computers £32 million (2013: £31 million) and commercial
vehicles and cars £1 million (2013: £1 million). The net book amount of assets under finance leases is land and buildings £1 million
(2013: £1 million), plant and machinery nil (2013: £3 million) and other tangible assets nil (2013: nil).
GKN plc Annual Report and Accounts 2014 137
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
13 Investments in joint ventures
Group share of results
2014 £m 2013 £m 474 (399)
458 (394)
Trading profit
Net financing costs
75 (1)
64 (1)
Profit before taxation
Taxation
74 (12)
63 (9)
Share of post-tax earnings – before exceptional and non-trading items
Exceptional and non-trading items
62 (1)
54 (2)
Share of post-tax earnings
61 52 Sales
Operating costs
Exceptional and non-trading items represent amortisation of non-operating intangible assets arising on business combinations and
other net financing charges including tax of nil (2013: nil).
Group share of net book amount
2014
£m 2013
£m At 1 January
Share of post-tax earnings
Dividends paid
Additions
Disposals
Currency variations
179 61 (44)
– (14)
2 153 52 (44)
19 – (1)
Financial guarantee contract
184 (10)
179 – At 31 December
174 179 2014 £m 2013 £m Non-current assets
Current assets
Current liabilities
Non-current liabilities
116 159 (95)
(6)
156 160 (111)
(36)
Financial guarantee contract
174 – 169 10 174 179 The joint ventures have no significant contingent liabilities to which the Group is exposed and nor has the Group any significant contingent
liabilities in relation to its interest in the joint ventures. The share of capital commitments of the joint ventures is shown in note 27.
On 31 July 2014, the Group sold its 50% share in Emitec, a joint venture company, for cash consideration of £37 million. The carrying value on
the date of disposal was £14 million, see note 4d for further details. A loan of £8 million was repaid on closing (provided originally in January
2013) and a guarantee contract was waived (2013: £10 million).
On 24 December 2013, the Group sold its 49% joint venture interest in Composite Technology and Applications Ltd (CTAL) for £3 million. The
carrying value on the date of disposal was nil, resulting in a profit on sale of £3 million, shown in note 4d. Prior to disposal the Group had
invested £4 million of cash during 2013.
On 7 November 2013, the Group sold its controlling interest in GKN Driveline Torque Technology (Shanghai) Co. Ltd (TSH) to Shanghai GKN
HUAYU Driveline Systems Co Limited (SDS), a joint venture company. The transaction took the Group’s ownership in TSH from 100% to 50%.
The addition to joint ventures of £15 million was matched by a £15 million cash contribution into SDS by the other venturer.
138 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
The Group has 1 significant joint venture within Driveline with sales of £351 million (2013: £329 million), trading profit of £66 million
(2013: £62 million) and a tax charge of £11 million (2013: £9 million) leaving retained profit of £55 million (2013: £52 million). Net assets
of £138 million (2013: £122 million) comprise non-current assets of £91 million (2013: £82 million), current assets of £122 million
(2013: £108 million), current liabilities of £75 million (2013: £68 million) and non-current liabilities of nil (2013: nil).
14 Other receivables and investments
Other investments
Indirect taxes and amounts recoverable under employee benefit plans
Other receivables
Amounts due from joint ventures
2014 £m 2013 £m – 20 24 – 4 23 17 8 44 52 The other investment has been impaired during the year. The impairment charge of £4 million follows a reduction in forecast cash flow
projections in the near term.
Included in other receivables is a £7 million (2013: £7 million) indemnity asset.
15 Inventories
Raw materials
Work in progress
Finished goods
2014 £m 2013 £m 395 383 193 404 337 190 971 931 Inventories of £36 million (2013: £79 million) are carried at net realisable value. The amount of any write down of inventory recognised as an
expense in the year was nil (2013: £1 million).
16 Trade and other receivables
2014 £m 2013 £m Trade receivables
Amounts owed by joint ventures
Other receivables
Prepayments
Indirect taxes recoverable
1,024 12 119 31 40 951 11 109 29 42 1,226 1,142 (8)
(8)
(5)
1 2 (3)
2 1 Provisions for doubtful debts against trade receivables
At 1 January
Charge for the year
Additions
Unused amounts reversed
Amounts used
At 31 December
(10)
(8)
Trade receivables subject to provisions for doubtful debts
10 8 Ageing analysis of trade receivables and amounts owed by joint ventures past due but not impaired
Up to 30 days overdue
31 – 60 days overdue
61 – 90 days overdue
More than 90 days overdue
46 8 3 8 44 8 3 6 There is no provision against other receivable categories.
GKN plc Annual Report and Accounts 2014 139
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
17 Trade and other payables
2014
Amounts owed to suppliers and customers
Amounts owed to joint ventures
Accrued interest
Government refundable advances
Deferred and contingent consideration
Payroll taxes, indirect taxes and audit fees
Amounts due to employees and employee benefit plans
Government grants
Customer advances and deferred income
2013
Current £m Non–current £m Current £m Non–current £m (1,202)
(8)
(17)
(3)
(6)
(98)
(176)
(1)
(100)
(26)
– – (43)
(3)
(1)
(38)
(7)
(84)
(1,047)
(8)
(15)
(5)
(6)
(100)
(206)
(1)
(97)
(15)
– – (88)
(6)
(1)
(42)
(8)
(77)
(1,611)
(202)
(1,485)
(237)
Government refundable advances are forecast to fall due for repayment between 2015 and 2055.
In May 2014, the Group repaid a government refundable advance in the UK, received in 2009 and 2010 relating to the A350 programme.
The principal repaid was £38 million and the associated accrued interest was £16 million.
Non-current deferred and contingent consideration falls due as follows: one-two years nil (2013: £6 million), two-five years £1 million
(2013: nil) and over five years £2 million (2013: nil). Non-current amounts owed to suppliers and customers fall due within two years.
Contingent consideration of £6 million (2013: £6 million) is based on; the Filton site achieving certain levels of sales in 2015 (£3 million) and
sales levels in GKN Hybrid Power Limited (£3 million). The range of contingent consideration for GKN Hybrid Power Limited, an acquisition during
the year, is unlimited (2013: nil to £6 million). During 2014, a further £6 million was paid in cash relating to the Filton acquisition during 2009.
During 2013, £62 million of deferred consideration relating to the purchase of Aerospace Engine Systems in 2012 was paid in cash.
Included within amounts owed to suppliers and customers is £33 million (2013: nil) payable to banks in respect of supply chain finance
arrangements.
18 Net borrowings
(a) Analysis of net borrowings
Current Non-current
Total Notes Within one year £m One to two years £m Two to five years £m More than five years £m Total £m £m i
i
– – – – – (348)
(445)
– (445)
(348)
(445)
(348)
i
(16)
– (4)
– (2)
(21)
(16)
– (14)
– – – (48)
– (5)
(1)
– – – – – – – – (64)
– (19)
(1)
– – (80)
– (23)
(1)
(2)
(21)
Borrowings
(43)
(30)
(402)
(445)
(877)
(920)
Bank balances and cash
Short term bank deposits
145 174 – – – – – – – – 145 174 319 3 – – – – – – – – 319 3 Net borrowings (excluding cross currency interest rate swaps)
Cross currency interest rate swaps
279 – (30)
– (402)
– (445)
(26)
(877)
(26)
(598)
(26)
Net debt
279 (30)
(402)
(471)
(903)
(624)
2014
Unsecured capital market borrowings
£450 million 5⅜% 2022 unsecured bond
£350 million 6¾% 2019 unsecured bond
Unsecured committed bank borrowings
European Investment Bank
2019 Committed Revolving Credit Facility
Other (net of unamortised issue costs)
Finance lease obligations
Bank overdrafts
Other short term bank borrowings
Cash and cash equivalents
Other financial assets – bank deposits
140 GKN plc Annual Report and Accounts 2014
iii
ii
iv
Strategic Report
Governance
Current 2013
Unsecured capital market borrowings
£450 million 5⅜% 2022 unsecured bond
£350 million 6¾% 2019 unsecured bond
Unsecured committed bank borrowings
European Investment Bank
2016 Committed Revolving Credit Facility
2017 Committed Revolving Credit Facility
Other (net of unamortised issue costs)
Finance lease obligations
Bank overdrafts
Other short term bank borrowings
Financial Statements
Other Information
Non-current
Total Notes Within one year £m One to two years £m Two to five years £m More than five years £m Total £m £m i
i
– – – – – – (445)
(348)
(445)
(348)
(445)
(348)
i
– – – – – (3)
(24)
(16)
– – (8)
– – – (48)
– – (7)
(1)
– – (16)
– – – – – – (80)
– – (15)
(1)
– – (80)
– – (15)
(1)
(3)
(24)
iii
Borrowings
(27)
(24)
(56)
(809)
(889)
(916)
Bank balances and cash
Short term bank deposits
ii
153 31 – – – – – – – – 153 31 Cash and cash equivalents
iv
184 – – – – 184 157 (24)
(56)
(809)
(889)
(732)
Net borrowings
Unsecured capital market borrowings include: an unsecured £350 million (2013: £350 million) 6¾% bond maturing in 2019 less unamortised
issue costs of £2 million (2013: £2 million) and an unsecured £450 million (2013: £450 million) 5⅜% bond maturing in 2022 less unamortised
issue costs of £5 million (2013: £5 million).
Unsecured committed bank borrowings include £80 million (2013: £80 million) drawn under the Group’s European Investment Bank
unsecured facility. The loan is due for repayment in five equal annual instalments of £16 million, commencing in June 2015 and attracts a
fixed interest rate of 4.1% per annum payable annually in arrears. There were no drawings against the Group’s 2019 Committed Revolving
Credit Facilities of £800 million (2013: £837 million). Unamortised issue costs on the 2019 Committed Revolving Credit Facilities were
£5 million (2013: £5 million).
Notes
(i) Denotes borrowings at fixed rates of interest until maturity. All other borrowings and cash and cash equivalents are at variable interest
rates unless otherwise stated.
(ii) The average interest rate on short term bank deposits was 0.4% (2013: 0.4%). Deposits at both 31 December 2014 and 31 December 2013
had a maturity date of less than one month.
(iii) Finance lease obligations gross of finance charges fall due as follows: nil within one year (2013: nil), £1 million in one to five years
(2013: £1 million) and nil in more than five years (2013: nil).
(iv) £8 million (2013: £6 million) of the Group’s cash and cash equivalents and bank deposits are held by the Group’s captive insurance
company to maintain solvency requirements and as collateral for Letters of Credit issued to the Group’s principal external insurance
providers. These funds cannot be circulated within the Group on demand.
(b) Fair values
2014
Book value £m Borrowings, other financial assets and cash and cash equivalents
Other borrowings
Finance lease obligations
Bank overdrafts and other short term bank borrowings
Bank balances and cash
Short term bank deposits and other financial assets
Trade and other payables
Government refundable advances
Deferred and contingent consideration
2013
Fair value £m Book value £m Fair value £m (1,025)
(1)
(23)
145 177 (888)
(1)
(27)
153 31 (939)
(1)
(27)
153 31 (598)
(727)
(732)
(783)
(46)
(9)
(51)
(9)
(93)
(12)
(111)
(12)
(55)
(60)
(105)
(123)
(896)
(1)
(23)
145 177 GKN plc Annual Report and Accounts 2014 141
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
18 Net borrowings continued
(b) Fair values continued
The following methods and assumptions were used in estimating fair values for financial instruments:
Unsecured bank overdrafts, other short term bank borrowings, bank balances and cash, short term bank deposits and other financial assets
approximate to book value due to their short maturities. For other amounts, the repayments which the Group is committed to make have
been discounted at the relevant interest rates applicable at 31 December 2014. Bonds included within other borrowings have been valued
using quoted closing market values.
19 Financial risk management
The Group’s activities give rise to a number of financial risks: market risk, credit risk and liquidity risk. Market risk includes foreign currency
risk, cash flow and fair value interest rate risk and commodity price risk. The Group has in place risk management policies that seek to limit
the effects of financial risk on financial performance. Derivative financial instruments include; forward foreign currency contracts, which are
used to hedge risk exposures that arise in the ordinary course of business and cross currency interest rate swaps which hedge cash flows on
the Group’s debt. Further information is provided in the treasury management section of the Strategic Report.
Risk management policies have been set by the Board and are implemented by the central Treasury Department that receives regular reports
from all the operating companies to enable prompt identification of financial risks so that appropriate actions may be taken. The Treasury
Department has a policy and procedures manual that sets out specific guidelines to manage foreign currency risks, interest rate risk,
financial credit risk and liquidity risk and the use of financial instruments to manage these.
(a) Foreign currency risk
The Group has transactional currency exposures arising from sales or purchases by operating subsidiaries in currencies other than the
subsidiaries’ functional currency. These exposures are forecast on a monthly basis by operating companies and are reported to the central
Treasury Department. Under the Group’s foreign currency policy, such exposures are hedged on a reducing percentage basis over a number
of forecast time horizons using forward foreign currency contracts.
On 3 September 2014 the Group entered a series of cross currency interest rate swap instruments with its relationship banks which in
substance convert the 2019 and 2022 sterling bonds into US dollars ($951 million) and Euros (€284 million). These derivative instruments
have been designated as net investment hedges of US dollar and Euro net assets.
The Group’s reporting currency for its consolidated financial statements is sterling. Changes in exchange rates will affect the translation of
results and net assets of operations outside of the UK. The Group’s largest exposures are the Euro and the US dollar where a 1% movement in
the average rate impacts trading profit of subsidiaries and joint ventures by £1 million and £4 million respectively.
Regarding financial instruments a 1% strengthening of sterling against the currency rates indicated below would have the following impact
on operating profit:
Trading profit:
Euro
US dollar
Payables and receivables £m Derivative financial instruments £m Intra-group funding £m 0.2
(0.5)
1.2
22.9
2.8
2.0
The derivative sensitivity analysis has been prepared by reperforming the calculations used to determine the balance sheet values adjusted
for the changes in the individual currency rates indicated with all other cross currency rates remaining constant. The sensitivity is a fair value
change relating to derivatives for which the underlying transaction has not occurred at 31 December 2014. The Group intends to hold all such
derivatives to maturity. The analysis of other items has been prepared based on an analysis of a currency balance sheet.
142 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Analysis of net borrowings (excluding cross currency interest rate swaps) by currency:
2014
Sterling
US dollar
Euro
Others
2013
Borrowings £m Cash and bank deposits £m Total £m (869)
(1)
– (50)
188 31 24 79 (920)
322 Borrowings £m Cash and cash equivalents £m Total £m (681)
30 24 29 (869)
(1)
– (46)
40 10 23 111 (829)
9 23 65 (598)
(916)
184 (732)
(b) Interest rate risk
The Group is exposed to fair value interest rate risk on fixed rate borrowings and cash flow interest rate risk on variable rate net borrowings/
funds. The Group’s policy is to optimise interest cost in reported earnings and reduce volatility in the debt related element of the Group’s
cost of capital. This policy is achieved by maintaining a target range of fixed and floating rate debt for discrete annual periods, over a defined
time horizon. The Group’s normal policy is to require interest rates to be fixed for 50% to 80% of the level of underlying borrowings forecast
to arise over a 12 month horizon. At 31 December 2014, 96% (2013: 96%) of the Group’s gross borrowings were subject to fixed interest rates.
As at 31 December 2014, £174 million (2013: £31 million) was in bank deposits, £3 million of which was on deposit with banks on the Isle of
Man (2013: £3 million).
(c) Credit risk
The Group is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments. In terms of
substance, and consistent with the related balance sheet presentation, the Group considers it has two types of credit risk; operational and
financial. Operational credit risk relates to non-performance by customers in respect of trade receivables and by suppliers in respect of other
receivables. Financial credit risk relates to non-performance by banks and similar institutions in respect of cash and deposits, facilities and
financial contracts, including forward foreign currency contracts and cross currency interest rate swaps.
Operational
As tier-one suppliers to aerospace, automotive and land systems original equipment manufacturers the Group may have substantial amounts
outstanding with a single customer at any one time. The credit profiles of such original equipment manufacturers are available from credit rating
agencies. The failure of any such customer to honour its debts could materially impact the Group’s results. However, there are many advantages
in these relationships. In Land Systems there are a greater proportion of amounts receivable from small and medium sized customers.
Credit risk and customer relationships are managed at a number of levels within the Group. At a subsidiary level documented credit control
reviews are required to be held at least every month. The scope of these reviews includes amounts overdue and credit limits. At a divisional
level debtor ratios, overdue accounts and overall performance are reviewed regularly. Provisions for doubtful debts are determined at these
levels based upon the customer’s ability to pay and other factors in the Group’s relationship with the customer.
At 31 December the largest 5 trade receivables as a proportion of total trade receivables analysed by major segment is as follows:
Aerospace
Driveline
Powder Metallurgy
Land Systems
2014 % 2013 % 74 57 24 24 69 54 21 23 The amount of trade receivables outstanding at the year end does not represent the maximum exposure to operational credit risk due to the
normal patterns of supply and payment over the course of a year. Based on management information collected as at month ends the
maximum level of trade receivables at any one point during the year was £1,199 million (2013: £1,156 million).
Financial
Credit risk is mitigated by the Group’s policy of only selecting counterparties with a strong investment grade long term credit rating, normally
at least A- or equivalent, and assigning financial limits to individual counterparties.
The maximum exposure with a single bank for deposits is £35 million (2013: £28 million), however, the Group is not exposed to mark to
market risk for forward foreign currency contracts at 31 December 2014 as all counterparties were in a liability position (2013: £11 million
exposure to a single bank).
GKN plc Annual Report and Accounts 2014 143
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
19 Financial risk management continued
(c) Credit risk continued
Financial
Credit risk is mitigated by the Group’s policy of only selecting counterparties with a strong investment grade long term credit rating, normally
at least A- or equivalent, and assigning financial limits to individual counterparties.
The maximum exposure with a single bank for deposits is £35 million (2013: £28 million), however, the Group is not exposed to mark to
market risk for forward foreign currency contracts at 31 December 2014 as all counterparties were in a liability position (2013: £11 million
exposure to a single bank).
(d) Capital risk management
The Group defines capital as total equity. The Group’s objectives when managing capital are to safeguard its ability to continue as a going
concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain a capital structure which optimises
the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders,
return capital to shareholders or issue new shares.
The Group’s two external banking covenants require an EBITDA of subsidiaries to net interest payable and receivable ratio of 3.5 times or
more and net debt to EBITDA of subsidiaries of 3 times or less measured at 30 June and 31 December. The ratios at 31 December 2014 and
2013 were as follows:
EBITDA
Net interest payable and receivable (excluding borrowing costs capitalised)
EBITDA to net interest payable and receivable ratio
Net debt
EBITDA
Net debt to EBITDA ratio
2014 £m 2013 £m 864 (73)
866 (73)
11.8 times 11.9 times 2014 £m
2013 £m
624 864 732 866 0.7 times 0.8 times The Group monitors these ratios on a rolling basis and they are part of the budgeting and forecasting processes.
(e) Liquidity risk
The Group is exposed to liquidity risk as part of its normal financing and trading cycle at times when peak borrowings are required.
Borrowings normally peak in May and September following dividend and bond coupon payments. The Group’s policies are to ensure that
sufficient liquidity is available to meet obligations when they fall due and to maintain sufficient flexibility in order to fund investment and
acquisition objectives. Liquidity needs are assessed through short and long term forecasts. Committed bank facilities under a revolving
credit facility total £800 million which expires in 2019. There were no drawings on these facilities at 31 December 2014. In addition the
Group’s European Investment Bank unsecured facility (£80 million) is repayable in five equal annual instalments of £16 million commencing
in June 2015. Committed facilities are provided through 14 banks.
The Group also maintains £98 million of uncommitted facilities, provided by 4 banks. There were no drawings against these facilities at
31 December 2014.
144 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Maturity analysis of borrowings, derivatives and other financial liabilities
2014
Borrowings (note 18)
Contractual interest payments and finance lease charges
Government refundable advances
Deferred and contingent consideration
Derivative financial instruments liabilities – receipts
Derivative financial instruments liabilities – payments
2013
Borrowings (note 18)
Contractual interest payments and finance lease charges
Government refundable advances
Deferred and contingent consideration
Derivative financial instruments liabilities – receipts
Derivative financial instruments liabilities – payments
(43)
(53)
(3)
(6)
819 (894)
(27)
(53)
(8)
(6)
250 (260)
(30)
(51)
(3)
– 606 (653)
More than five years £m Two to five years £m One to two years £m Within one year £m (24)
(52)
(9)
(6)
181 (185)
(402)
(151)
(12)
(2)
1,214 (1,310)
(56)
(151)
(31)
– 212 (219)
(445)
(74)
(56)
(7)
643 (662)
Total £m (809)
(124)
(126)
– 40 (39)
(920)
(329)
(74)
(15)
3,282 (3,519)
(916)
(380)
(174)
(12)
683 (703)
There is no significant difference in the contractual undiscounted value of other financial assets and liabilities from the amounts stated in
the balance sheet and balance sheet notes.
The maturity analysis for derivative financial instruments in 2014 includes cross currency interest rate swaps taken out in the year.
(f) Commodity price risk
The Group is exposed to changes in commodity prices, particularly of metals, which has a significant impact on input costs and the overall
financial results. The Group seeks to mitigate this exposure in a variety of ways including medium term price agreements, surcharges and
advance purchasing. In rare circumstances and only in respect of certain specified risks the Group uses derivative commodity hedging
instruments. The impact of such financial instruments in respect of the overall commodity price risk is not material.
(g) Categories of financial assets and financial liabilities
Held for trading
2014
Other receivables
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Other financial assets – bank deposits
Borrowings
Trade and other payables
Provisions
2013
Other receivables
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Borrowings
Trade and other payables
Provisions
Financial liabilities £m Financial assets £m Amortised cost £m Loans and receivables £m Total £m 24 1,155 – 319 3 – – – – – – – – (920)
(1,308)
(66)
– – 26 – – – – – – – (224)
– – – – – 24 1,155
(198)
319 3 (920)
(1,308)
(66)
1,501 (2,294)
26 (224)
(991)
25 1,071 – 184 – – – – – – – (916)
(1,190)
(81)
– – 94 – – – – – – (48)
– – – – 25 1,071 46 184 (916)
(1,190)
(81)
1,280 (2,187)
94 (48)
(861)
GKN plc Annual Report and Accounts 2014 145
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
19 Financial risk management continued
(g) Categories of financial assets and financial liabilities continued
IFRS13
The financial instruments that are measured subsequent to initial recognition at fair value are forward currency contracts, cross currency
interest rate swaps and embedded derivatives. All of these financial instruments are classified as Level 2 fair value measurements, as
defined by IFRS 7, being those derived from inputs other than quoted prices that are observable.
The fair values of financial assets and financial liabilities have been determined with reference to available market information at the
balance sheet date, using the methodologies described in their relevant notes:
• Forward currency contracts, cross currency interest rate swaps and embedded derivatives, see note 20;
• Unsecured bank overdrafts, other short term bank borrowings, bank balances and cash, short term bank deposits and other financial
assets, see note 18;
• Fair value less costs of disposal for impairment testing of one CGU, see note 11;
• Bonds included within other borrowings, see note 18; and
• Fair values of trade receivables and payables, short term investments and cash and cash equivalents are assumed to approximate to cost
due to the short term maturity of the instruments and as the impact of discounting is not significant.
The discounted contingent element of deferred and contingent consideration of £6 million (2013: £6 million) is categorised as a Level 3 fair
value measurement, see note 17.
(h) Hedge accounting
The Group entered into a series of cross currency interest rate swaps during the year to better align its foreign currency income receipts in
US dollars and Euros with its debt. The cross currency interest rate swaps have been designated as a net investment hedge of the Group’s
US dollar and Euro net assets. The fair value of the cross currency interest rate swaps at 31 December 2014 was a liability of £26 million
(2013: nil).
20 Derivative financial instruments
2014
Assets
Forward currency contracts
Not hedge accounted
Embedded derivatives
Financial guarantee
contract
Cross currency interest
rate swaps
2013
Liabilities
Current £m Non- current
£m Current £m 4 12 7 3 (116)
(6)
(75)
(1)
–
–
Non- current
£m –
–
Assets
Current £m Current £m Total
£m 41 11 41 1 (20)
(7)
(10)
(1)
52 4 –
– (10)
–
(10)
Total
£m (180)
8 –
Liabilities
Non- current
£m Non- current
£m –
–
(26)
–
(26)
–
–
–
–
–
16 10 (148)
(76)
(198)
52 42 (37)
(11)
46 Significant judgement and estimates
Forward foreign currency contracts, cross currency interest rate swaps and embedded derivatives are marked to market using market observable
rates and published prices together with forecast cash flow information where applicable. The amounts in respect of embedded derivatives
represent commercial contracts denominated in US dollars between European Aerospace subsidiaries and customers outside the USA.
146 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
21 Provisions
Contract provisions £m Warranty £m Claims and litigation £m Employee obligations £m Other £m Total £m At 1 January 2014
Net charge for the year:
Additions
Unused amounts reversed
Unwind of discounts
Amounts used
Currency variations
(81)
(40)
(17)
(22)
(14)
(174)
(4)
16 (7)
13 (3)
(22)
5 (1)
15 (1)
(4)
– –
4 –
(4)
–
–
3 –
(2)
1 –
2 –
(36)
22 (8)
37 (4)
At 31 December 2014
(66)
(44)
(17)
(23)
(13)
(163)
Due within one year
Due in more than one year
(15)
(51)
(22)
(22)
(8)
(9)
(3)
(20)
(3)
(10)
(51)
(112)
(66)
(44)
(17)
(23)
(13)
(163)
Significant estimates and judgement
Whilst estimating provisions requires judgement, the range of reasonably possible outcomes is narrow. After consideration of sensitivity
analysis, amounts stated represent management’s best estimate of the likely outcome.
Contract provisions
The Group has a small number of onerous contracts and a non-beneficial lease arrangement, primarily arising on business combinations and
contractual dispute matters. Onerous contracts relate to customer programmes where the unavoidable costs of delivering product are in
excess of contracted sales prices.
Utilisation of the provision due in more than one year is estimated as £7 million in 2016 and £44 million from 2017.
Warranty
Provisions set aside for warranty exposures either relate to amounts provided systematically based on historical experience under
contractual warranty obligations attaching to the supply of goods or specific provisions created in respect of individual customer issues
undergoing commercial resolution and negotiation. In the event of a claim, settlement will be negotiated with the customer based on supply
of replacement products and compensation for the customer’s associated costs. Amounts set aside represent management’s best estimate
of the likely settlement and the timing of any resolution with the relevant customer.
Utilisation of the provision due in more than one year is estimated as £13 million in 2016 and £9 million from 2017.
Claims and litigation
Claims provisions are held in the Group’s captive insurance company and amount to £9 million (2013: £8 million). Claims provisions and
charges are established in accordance with external insurance and actuarial advice.
Legal provisions amounting to £5 million (2013: £4 million) relate to management estimates of amounts required to settle or remove litigation
actions that have arisen in the normal course of business. Further details are not provided to avoid the potential of seriously prejudicing the
Group’s stance in law. Amounts unused and reversed only arise when the matter is formally settled or when a material change in the
litigation action occurs where legal advice confirms lower amounts need to be retained to cover the exposure.
As a consequence of primarily legacy activities a small number of sites in the Group are subject to environmental remediation actions, which
in all cases are either agreed formally with relevant local and national authorities and agencies or represent management’s view of the likely
outcome having taken appropriate expert advice and following consultation with appropriate authorities and agencies. Amounts of £3
million (2013: £5 million) are provided.
Utilisation of the provision due in more than one year is estimated as £4 million in 2016 and £5 million from 2017.
GKN plc Annual Report and Accounts 2014 147
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
21 Provisions continued
Employee obligations
Long service non-pension and other employee related obligations arising primarily in the Group’s continental European subsidiaries amount
to £23 million (2013: £22 million).
Utilisation of the provision due in more than one year is estimated as £3 million in 2016 and £17 million from 2017.
Other
Other provisions include £2 million (2013: £4 million) in relation to previous reorganisation arising from the Group’s strategic restructuring
programmes and £11 million (2013: £10 million) relating to other customer and supplier exposures. Utilisation of the provision due in more
than one year is estimated as £5 million in 2016 and £5 million from 2017.
22 Share capital
Issued and Fully Paid
Ordinary shares of 10p each
Ordinary shares of 10p each
At 1 January and 31 December
2014 £m 2013 £m 166 166 2014 Number 000s 2013 Number 000s 1,660,530 1,660,530 At 31 December 2014, there were 17,797,916 ordinary shares of 10p each, with a total nominal value of £1.8 million, held as treasury shares
(2013: 20,558,781 ordinary shares of 10p each, with a total nominal value of £2 million). A total of 2,760,865 (2013: 7,684,420) shares were
transferred out of treasury during 2014 to satisfy the exercise of options by participants under share option schemes. The remaining treasury
shares, which represented 1.1% (2013: 1.2%) of the called up share capital at the end of the year, have not been cancelled but are held as
treasury shares and represent a deduction from shareholders’ equity.
At 31 December 2014, the GKN Employee Share Ownership Plan Trust (“the Trust”) held 186,652 ordinary shares (2013: 1,887,665). A total of
130,000 shares were purchased by the Trust in the open market during 2014 for cash consideration of less than £1 million (2013: 1,768,040
shares were purchased for cash consideration of £5 million). During the year a total of 1,831,013 (2013: 2,992,373) shares were transferred
out of the Trust to satisfy the vesting and exercise of awards of ordinary shares made under the Group’s share-based incentive arrangements.
The remaining Trust shares will be used to satisfy future exercises. A dividend waiver operates in respect of shares held by the Trust.
During the year shares issued from Treasury under share incentive schemes generated a cash inflow of £1 million (2013: £8 million).
148 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
23 Cash flow reconciliations
2014 £m 2013 £m 289 560 216 4 32 69 69 209 (24)
(2)
(2)
3 (65)
(31)
(76)
74 235 2 32 75 – (26)
(12)
(3)
(1)
14 (47)
(74)
(74)
101 765 782 132 – 3 – (26)
(3)
2 67 83 – (1)
– (2)
(8)
Movement in year
Net debt at beginning of year
108 (732)
139 (871)
Net debt at end of year
(624)
(732)
Reconciliation of cash and cash equivalents
Cash and cash equivalents per balance sheet
Bank overdrafts included within “current liabilities - borrowings”
319 (2)
184 (3)
Cash and cash equivalents per cashflow
317 181 Cash generated from operations
Operating profit
Adjustments for:
Depreciation, impairment and amortisation of fixed assets
Charged to trading profit
Depreciation
Impairment
Amortisation
Amortisation of non-operating intangible assets arising on business combinations
Impairment charges
Change in value of derivative and other financial instruments
Gains and losses on changes in Group structure
Amortisation of government capital grants
Net profits on sale and realisation of fixed assets
Charge for share-based payments
Movement in post-employment obligations
Change in inventories
Change in receivables
Change in payables and provisions
Movement in net debt
Movement in cash and cash equivalents
Net movement in other borrowings and deposits
Costs associated with refinancing
Finance leases
Cross currency interest rate swaps
Amortisation of debt issue costs
Currency variations
Cash outflow in respect of previous restructuring plans was £2 million (2013: £2 million).
During the year the Group paid £1 million in cash to increase its investment in Lianyungang GKN Hua Ding Wheels Company Limited from 65%
to 80% of the equity share capital.
GKN plc Annual Report and Accounts 2014 149
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
24 Post-employment obligations
Post-employment obligations as at the year end comprise:
Pensions
Medical
– funded
– unfunded
– funded
– unfunded
2014 £m 2013 £m (1,067)
(564)
(28)
(52)
(742)
(462)
(21)
(46)
(1,711)
(1,271)
The Group’s pension arrangements comprise various defined benefit and defined contribution schemes throughout the world. In addition, in
the USA and UK various plans operate which provide members with post-retirement medical benefits. The Group’s post-employment plans in
the UK, USA and Germany together account for 98% of plan assets and 97% of plan liabilities.
The Group’s post-employment plans include both funded and unfunded arrangements. The UK pension schemes are funded, albeit in deficit
in common with many other UK pension schemes, with the scheme assets held in trustee administered funds. The German and other
European plans are generally unfunded, with pension payments made from company funds as they fall due, rather than from scheme assets.
The USA includes a combination of funded and unfunded pension and medical plans, whilst Japan also operates a funded pension plan.
The Group’s defined benefit pension arrangements provide benefits to members in the form of an assured level of pension payable for life.
The level of benefits provided typically depends on length of service and salary levels in the years leading up to retirement. In the UK and
Germany, pensions in payment are generally updated in line with inflation, whereas in the USA pensions generally do not receive inflationary
increases once in payment. The UK and German schemes are closed to new entrants, whilst the USA schemes are closed to future accrual.
Independent actuarial valuations of all major defined benefit scheme assets and liabilities were carried out at 31 December 2014. 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 – significant judgements, assumptions and estimates
Key assumptions:
UK
GKN1
%
2014
Rate of increase in pensionable salaries (past/future service)
Rate of increase in payment and deferred pensions
Discount rate (past/future service)
Inflation assumption (past/future service)
Rate of increase in medical costs:
Initial/long term
2013
Rate of increase in pensionable salaries
Rate of increase in payment and deferred pensions
Discount rate
Inflation assumption
Rate of increase in medical costs:
Initial/long term
GKN2
%
Americas
%
Europe
%
ROW
%
n/a 4.05/4.10
3.05
3.05
3.25 3.55/3.80
3.05 3.05/3.10
n/a
n/a
3.90
n/a
2.50
1.75
1.90
1.75
–
n/a
0.80
n/a
7.0/5.0
n/a
n/a
n/a
n/a
4.80
n/a
2.50
1.75
3.50
1.75
–
n/a
1.25
n/a
7.5/5.0
n/a
n/a
5.5/5.5
n/a
3.25
4.20
3.25
5.5/5.5
4.30
3.30
4.50
3.30
The assumptions table above specifies separate assumptions for past and future service in relation to the UK pension scheme. This
represents a change in approach, whereby a different, “future service” set of assumptions will be used to determine the service cost for the
following year. There is no impact on the 2014 reported numbers as a result of this change. This approach reflects evolving 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 3.80%, as at 31 December 2014.
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 USA, 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.
150 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
The underlying mortality assumptions for the major schemes, are as follows:
United Kingdom
The key current year mortality assumptions for both GKN1 and GKN2 use S1NA year of birth mortality tables with CMI 2013 improvements and
a 1.25% p.a. long term improvement trend. These assumptions give the following expectations for each scheme: for GKN1 a male aged 65
lives for a further 21.8 years and a female aged 65 lives for a further 23.8 years whilst a male aged 45 is expected to live a further 23.5 years
from age 65 and a female aged 45 is expected to live a further 25.7 years from age 65. For GKN2 a male aged 65 lives for a further 22.8 years
and a female aged 65 lives for a further 25.1 years whilst a male aged 45 is expected to live a further 24.6 years from age 65 and a female
aged 45 is expected to live a further 27.1 years from age 65.
Overseas
In the USA, RP-2014 tables have been used whilst in Germany the RT2005-G tables have been used. In the USA, the longevity assumption for
a male aged 65 is that he lives a further 21.6 years (female 23.8 years) whilst in Germany a male aged 65 lives for a further 18.6 years (female
22.8 years). The longevity assumption for a USA male currently aged 45 is that he also lives for a further 23.2 years once attaining 65 years
(female 25.7 years), with the German equivalent assumption for a male being 21.5 years (female 25.5 years). These assumptions are based on
the prescribed tables, rather than GKN experience.
Assumption sensitivity analysis
The impact of a one percentage point movement in the primary assumptions (longevity: 1 year) on the defined benefit obligations as at 31
December 2014 is set out below:
UK
Discount rate +1%
Discount rate -1%
Rate of inflation +1%
Rate of inflation -1%
Life expectancy +1 year
Life expectancy -1 year
Health cost trend +1%
Health cost trend -1%
Americas
Europe
ROW
Liabilities £m Liabilities £m
Liabilities £m Liabilities £m
472 (601)
(523)
408 (110)
109 (2)
2 39 (48)
– – (8)
8 (2)
1 89 (115)
(75)
63 (21)
19 – – 3 (2)
– – – – – – The above sensitivity analyses are based on isolated changes in each assumption, whilst holding all other assumptions constant. In
practice, this is unlikely to occur, and there is likely to be some level of correlation between movements in different assumptions. In addition,
these sensitivities relate only to potential movement in the defined benefit obligations. The assets, including derivatives held by the
schemes, have been designed to mitigate the impact of these movements to some extent, such that the movements in the defined benefit
obligations shown above would, in practice be partly offset by movements in asset valuations. However, the above sensitivities are shown to
illustrate at a high level the scale of sensitivity of the defined benefit obligations to key actuarial assumptions.
The same actuarial methods have been used to calculate these sensitivities as are used to calculate the relevant balance sheet values, and
have not changed compared to the previous period.
Judgements and estimates
USA Lump Sum settlements
During 2014 the Group undertook a voluntary lump sum programme in the USA, whereby deferred members of its USA pension schemes were
offered the no-obligation opportunity to exchange their future pension rights for a cash lump sum. A settlement credit (£8 million) has been
recognised in relation to this programme which is based on the differential between the actuarial valuations used for accounting purposes
(£32 million) and the cash lump sum amounts (£24 million). The £8 million has been recorded within trading profit of Aerospace (£3 million),
Driveline (£3 million) and Powder Metallurgy (£2 million).
Buy In
During the year, a bulk annuity pensioner “buy-in” was transacted in relation to the UK pension scheme, GKN 1, as a result of which a
proportion of GKN 1 liabilities are now fully insured. The transaction involved a payment to Rothesay Life of £123 million, made from GKN 1’s
assets. The bulk annuity covers £110 million of pensioner liabilities valued on an IAS 19 accounting basis, as at 31 December 2014.
GKN plc Annual Report and Accounts 2014 151
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
24 Post-employment obligations continued
(a) Defined benefit schemes – significant judgements, assumptions and estimates continued
Pension partnership interest
On 31 March 2010, the Group entered into a pension partnership arrangement with the Trustee of the UK pension scheme, which entitled the
UK pension scheme to a distribution of £30 million per annum for 20 years, subject to discretion exercisable by the Group in certain
circumstances.
The accounting and disclosure for this arrangement changed during 2013 following amendments to the pension partnership agreement
which resulted in the income interest no longer meeting the criteria for recognition as an IAS 19 plan asset. This increased the Group’s
reported post-employment obligation deficit by an amount of £342 million and eliminated the non-controlling interest of £332 million which
was previously recognised in equity. The remaining difference of £10 million was recognised in equity within retained earnings, as it
represented a transaction with equity holders.
During the year the Group has paid £30 million (2013: combined amount of £30 million) to the two UK pension schemes through the pension
partnership and this is included within the amount of contributions/benefits paid. In 2013 £10 million was paid before the partnership
agreement was amended and was treated as a distribution from the pension partnership, whilst £20 million was treated as a contribution/
benefit paid.
(b) Defined benefit schemes – reporting
The amounts included in operating profit are:
Total £m 2014
Current service cost and administrative expenses
Settlements/curtailment
(52)
9 (43)
2013
Current service cost and administrative expenses
Settlements/curtailment
(54)
– (54)
The amounts recognised in the balance sheet are:
2014
UK £m Americas £m Europe £m ROW £m Total £m 2013 £m Present value of unfunded obligations
Present value of funded obligations
Fair value of plan assets
(18)
(3,364)
2,377 (43)
(288)
195 (553)
(40)
37 (2)
(30)
18 (616)
(3,722)
2,627 (508)
(3,295)
2,532 Net obligations recognised in the balance sheet
(1,005)
(136)
(556)
(14)
(1,711)
(1,271)
In the UK, the Group is required to complete a statutory valuation of its pension schemes at least every three years and to agree a recovery
plan to eliminate any resulting deficit. Both UK pension schemes had a funding valuation as at 5 April 2013 and during the year final
agreement on recovery plans with the scheme trustees was reached. The Group’s UK pension funding deficit is lower than the equivalent UK
accounting deficit.
This has resulted in additional UK deficit recovery payments of £10 million per year which commenced in 2014 and the potential for further
additional payments commencing in 2016, contingent upon asset performance. In addition the Group also agreed, during the year, to pay
£2 million per year for 4 years to UK scheme, GKN1, to cover a funding requirement arising from a £123 million bulk annuity purchase.
The combined contribution for deficit funding and future accrual expected to be paid by the Group during 2015 to the UK schemes is
£47 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 2015, which brings the total expected UK cash requirement for 2015 to £77 million. The expected 2015 contribution to overseas
schemes is £28 million.
152 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Cumulative remeasurement of defined benefit plan differences recognised in equity are as follows:
At 1 January
Remeasurement of defined benefit plans
At 31 December
2014 £m 2013 £m (727)
(485)
(787)
60 (1,212)
(727)
Movement in schemes’ obligations (funded and unfunded) during the year
UK £m Americas £m Europe £m ROW £m Total £m At 1 January 2014
Current service cost
Settlements and curtailments
Administrative expenses
Interest
Remeasurement of defined benefit plans
Benefits and administrative expenses paid
Currency variations
(2,989)
(37)
– (2)
(130)
(367)
143 – (290)
(1)
9 (1)
(14)
(54)
39 (19)
(491)
(9)
– – (16)
(139)
22 40 (33)
(2)
– – – (1)
2 2 (3,803)
(49)
9 (3)
(160)
(561)
206 23 At 31 December 2014
(3,382)
(331)
(593)
(32)
(4,338)
At 1 January 2013
Current service cost
Administrative expenses
Interest
Remeasurement of defined benefit plans
Benefits and administrative expenses paid
Currency variations
(2,863)
(39)
(3)
(116)
(106)
138 – (344)
(2)
– (15)
30 37 4 (490)
(8)
– (16)
17 21 (15)
(40)
(2)
– (1)
(1)
4 7 (3,737)
(51)
(3)
(148)
(60)
200 (4)
At 31 December 2013
(2,989)
(290)
(491)
(33)
(3,803)
UK £m Americas £m Europe £m ROW £m Total £m At 1 January 2014
Interest
Remeasurement of defined benefit plans
Contributions by Group
Benefits paid
Currency variations
2,275 99 70 75 (142)
–
203 10 1 7 (37)
11 36 1 4 1 (2)
(3)
18 –
1 2 (2)
(1)
2,532 110 76 85 (183)
7 At 31 December 2014
2,377 195 37 18 2,627 At 1 January 2013
Interest
Remeasurement of defined benefit plans
Contributions by Group
Benefits paid
Removal of pension partnership plan asset
Currency variations
2,522 95 86 49 (135)
(342)
–
181 7 30 4 (13)
–
(6)
36 1 –
–
(1)
–
–
20 –
4 2 (4)
–
(4)
2,759 103 120 55 (153)
(342)
(10)
At 31 December 2013
2,275 203 36 18 2,532 Movement in schemes’ assets during the year
GKN plc Annual Report and Accounts 2014 153
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
24 Post-employment obligations continued
(b) Defined benefit schemes – reporting continued
Remeasurement gains and losses in relation to schemes’ obligations are as follows
2014
Experience gains and losses
Changes in financial assumptions
Change in demographic assumptions
2013
Experience gains and losses
Changes in financial assumptions
Change in demographic assumptions
UK
£m Americas
£m Europe
£m ROW
£m Total £m –
(367)
–
(5)
(31)
(18)
–
(139)
–
–
(1)
–
(5)
(538)
(18)
(367)
(54)
(139)
(1)
(561)
(5)
(30)
(71)
3 28 (1)
(5)
22 –
–
(1)
–
(7)
19 (72)
(106)
30 17 (1)
(60)
UK
£m Americas
£m Europe
£m ROW
£m Total £m 936 250 349 567 121 9 145 93 –
27 70 –
5 –
–
–
–
–
–
–
37 8 –
6 1 –
–
3 1,037 250 382 638 121 14 185 2,377 195 37 18 2,627 882 443 736 104 78 32 123 33 37 –
10 –
–
–
–
–
–
36 9 5 1 –
–
3 1,014 481 774 104 88 71 2,275 203 36 18 2,532 The fair values of the assets in the schemes were:
At 31 December 2014
Equities (inc. hedge funds)
Diversified growth funds
Bonds – government
Bonds – corporate
Property
Cash, derivatives and net current assets
Other assets
At 31 December 2013
Equities (inc. hedge funds)
Bonds – government
Bonds – corporate
Property
Cash, derivatives and net current assets
Other assets
As at 31 December 2014, the equities in the UK asset portfolio were split 26% domestic (2013: 26%); 74% foreign (2013: 74%), whilst bond
holdings were 91% domestic (2013: 89%) and 9% foreign (2013: 11%). The equivalent proportions for the USA plans were: equities 41%/59%
(2013: 75%/25%); bonds 91%/9% (2013: 97%/3%).
(c) Defined benefit scheme – risk factors
Through its various post-employment pension and medical plans, the Group is exposed to a number of risks, the most significant of which
are detailed below. The Group’s focus is on managing the cash demands which the various pension plans place on the Group, rather than
balance sheet volatility in its own right. For funded schemes cash requirements are generally determined by funding valuations which are
performed on a different basis from accounting valuations.
Asset volatility: Plan liabilities are calculated using discount rates set with reference to bond yields (although the discount rate methodology
differs for accounting and funding purposes). If plan assets deliver a return which is lower than the discount rate, this will create or increase
a plan deficit. GKN’s various pension plans hold a significant proportion of equities and similar ‘growth assets’, which are expected to
out-perform bonds in the long term, albeit at the risk of short term volatility.
As the plans mature, with a shorter time horizon to cope with volatility, the Group will gradually reduce holdings of growth assets in favour of
increased matching assets (bonds and similar). In the meantime, the Group considers that equities and similar assets are an appropriate means
of managing pension funding requirements, given the long term nature of the liabilities and the strength of the Group to withstand volatility.
154 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Changes in bond yields: A decrease in bond yields will typically increase plan liabilities (and vice-versa), although this will be offset partially
by an increase in the value of bonds held in the asset portfolios of the various plans. The effect of changes in bond yields is more
pronounced in unfunded schemes where there is no potential for an offsetting movement in asset values.
Inflation risk: As UK and some European pension obligations are linked to inflation, higher inflation expectations will lead to higher
liabilities, although caps are in place to protect against unusually high levels of inflation. The UK asset portfolio includes some inflation
linked bonds to provide an element of protection against this risk, whilst additional protection is provided by inflation derivatives.
Member longevity: As the Group’s post-employment obligations are generally to provide benefits for the life of the member, increases in life
expectancy will generally result in an increase in plan liabilities (and vice versa).
(d) Defined benefit schemes – demographic factors
Weighted average duration is a measurement technique designed to represent the estimated average time to payment of all cash-flows
arising as a result of defined benefit obligations (i.e. pension payments and similar). The weighted average duration (years) of the defined
benefit obligations in the UK, USA and Germany are as follows:
UK
USA
Germany
GKN 1
GKN 2
2014 2013 11 17 13 16 11 17 13 16 Defined benefit obligations are classified into those representing “active” members of a scheme or plan (i.e. those who are currently
employed by the Group), “deferred” members (i.e. those who have accrued benefit entitlements, but who are no longer employed by the
Group and are not yet drawing a pension) and “pensioner” members who are currently in receipt of a pension. Additional information
regarding the average age, number of members and value of the defined benefit obligation in each of these categories for the UK, USA and
Germany are given below:
Active
UK
USA
Germany
GKN 1
GKN 2
Deferred
Age Number Value (£m) –
46 53 51 –
5,757 2,685 2,571 –
730 110 247 Age 53 52 56 56 Pensioner
Number Value (£m) Age Number Value (£m) 7,094 7,090 1,396 883 109 745 39 44 78 72 74 71 19,814 6,805 4,417 2,966 808 971 168 252 Within the UK, there are two pension schemes referred to as GKN1 and GKN2. GKN1 is a mature scheme, comprised primarily of pensioner
members, which is already at peak annual cash outflow (benefit payments); whilst GKN2 is less mature, with a larger active and deferred
population. Benefit payments from GKN2 are forecast to continue to rise until the mid 2030s, when they will peak, before beginning to decline.
(e) Defined contribution schemes
The Group operates a number of defined contribution schemes outside the United Kingdom. The charge to the income statement in the year
was £35 million (2013: £34 million).
25 Contingent assets and liabilities
Aside from the unrecognised contingent asset referred to in note 6 in respect of Franked Investment Income, there were no other material
contingent assets at 31 December 2014 or 31 December 2013.
In the case of certain businesses, performance bonds and customer finance obligations have been entered into in the normal course of business.
GKN plc Annual Report and Accounts 2014 155
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
For the year ended 31 December 2014
26 Operating lease commitments – minimum lease payments
The minimum lease payments which the Group is committed to make at 31 December are:
2014
Payments under non-cancellable operating leases:
Within one year
Later than one year and less than five years
After five years
2013
Property £m Vehicles, plant and equipment £m Property £m Vehicles, plant and equipment £m 30 106 158 13 22 2 26 86 119 13 24 3 294 37 231 40 27 Capital expenditure
Contracts placed against capital expenditure sanctioned at 31 December 2014 which are not provided by subsidiaries amounted to
£126 million property, plant and equipment, £19 million intangible assets (2013: £91 million property, plant and equipment, £17 million
intangible assets) and the Group’s share not provided by joint ventures amounted to £9 million property, plant and equipment, nil intangible
assets (2013: £5 million property, plant and equipment, nil intangible assets).
28 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 2014 totalled £45 million (2013: £44 million). The amount due at the year
end in respect of such sales was £12 million (2013: £11 million). Purchases by subsidiaries from joint ventures in 2014 totalled £5 million
(2013: £2 million). The amount due at the year end in respect of such purchases was £1 million (2013: nil).
At 31 December 2014, a Group subsidiary had £7 million payable to joint venture companies in respect of unsecured financing facilities
bearing interest at 1 month LIBOR plus ⅛% (2013: £8 million).
There was no loan receivable from a joint venture at 31 December 2014 (2013: £8 million interest bearing at 4.5%).
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 £6,815.
29 Principal Subsidiaries
The following represent the principal subsidiary undertakings of the GKN Group at 31 December 2014. These subsidiaries were included in
the consolidation and are held indirectly by GKN plc through intermediate holding companies. The undertakings located overseas operate
principally in the country of incorporation. The equity share capital of these undertakings is wholly owned by the GKN Group.
A full list of subsidiaries and joint ventures will be attached to the next annual return of GKN plc.
Subsidiary
Country of incorporation
GKN Aerospace Chem-tronics Inc
GKN Aerospace North America Inc
GKN Aerospace Services Ltd
GKN Aerospace Sweden AB
GKN do Brasil Ltda
GKN Driveline Celaya SA de CV
GKN Driveline Deutschland GmbH
GKN Driveline Japan Ltd
GKN Driveline Köping AB
GKN Driveline Newton LLC*
GKN Driveline North America Inc
GKN Driveline Polska Sp. Zo.o
GKN Sinter Metals LLC**
GKN Sinter Metals SpA
GKN Westland Aerospace Inc
Hoeganaes Corporation
GKN Driveline Bowling Green Inc
GKN Aerospace Norway AS
USA
USA
England
Sweden
Brazil
Mexico
Germany
Japan
Sweden
USA
USA
Poland
USA
Italy
USA
USA
USA
Norway
* The principal place of business of GKN Driveline Newton LLC is 1848 GKN Way, Newton, North Carolina, USA.
**The principal place of business of GKN Sinter Metals LLC is 2200 North Opdyke Road, Auburn Hills, Michigan, USA.
156 GKN plc Annual Report and Accounts 2014
Interest
Common stock
Common stock
Ordinary shares
Ordinary shares
Quota capital
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Membership interest (no share capital)
Common stock
Ordinary shares
Membership interest (no share capital)
Ordinary shares
Common stock
Common stock
Common stock
Ordinary shares
Strategic Report
Governance
Financial Statements
Other Information
30 Business Combination
On 1 April 2014 the Group acquired 100% of the equity share capital of Williams Hybrid Power Limited, now renamed GKN Hybrid Power
Limited, from Williams Grand Prix Engineering Limited. GKN Hybrid Power Limited specialises in the design and manufacture of composite
flywheel-based energy storage systems, initially exploring options for the bus, truck and tram markets.
The fair value consideration of £11 million comprises an initial cash investment of £8 million, plus contingent consideration estimated at
£3 million. The range of the contingent consideration payment, based on specific sales from GKN Hybrid Power Limited at a contractual royalty
rate is unlimited. The fair value of net assets acquired of £11 million, comprises; property, plant and equipment of £1 million, a technology based
non-operating intangible asset of £7 million, a marketing related non-operating intangible asset of £2 million, a deferred tax liability of
£1 million and goodwill of £2 million. GKN Hybrid Power Limited has been included in Other businesses for segmental reporting.
From the date of acquisition to the balance sheet date, GKN Hybrid Power Limited contributed £6 million to sales and a trading loss of
£2 million. If the acquisition had been completed on 1 January 2014 the Group’s statutory sales and trading profit for the year ended
31 December 2014 are estimated at £6,983 million and £611 million respectively.
Goodwill (which is not tax deductible) is attributable to the value of the assembled workforce and expected future sales synergies from
combination with the Group’s existing business.
GKN plc Annual Report and Accounts 2014 157
FINANCIAL STATEMENTS
Independent auditors’ report to the members of GKN plc
Report on the Company financial statements
Our opinion
In our opinion, GKN plc’s Company financial statements (the
“financial statements”):
• give a true and fair view of the state of the Company’s affairs
as at 31 December 2014;
• have been properly prepared in accordance with United Kingdom
Generally Accepted Accounting Practice; and
• have been prepared in accordance with the requirements of the
Companies Act 2006.
What we have audited
GKN plc’s financial statements comprise:
• the Balance sheet of GKN plc as at 31 December 2014; and
• the notes to the financial statements, which include a
summary of significant accounting policies and other
explanatory information.
Certain required disclosures have been presented elsewhere in the
Annual Report and Accounts (the “Annual Report”), rather than in
the notes to the financial statements. These are cross-referenced
from the financial statements and are identified as audited.
The financial reporting framework that has been applied in the
preparation of the financial statements is applicable law and United
Kingdom Accounting Standards (United Kingdom Generally Accepted
Accounting Practice).
Other required reporting
Consistency of other information
Companies Act 2006 opinion
In our opinion, the information given in the Strategic Report and the
Directors’ report for the financial year for which the financial
statements are prepared is consistent with the financial statements.
ISAs (UK & Ireland) reporting
Under International Standards on Auditing (UK and Ireland) (“ISAs
(UK & Ireland)”) we are required to report to you if, in our opinion,
information in the Annual Report is:
• materially inconsistent with the information in the audited
financial statements; or
• apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the company acquired in the
course of performing our audit; or
• otherwise misleading.
We have no exceptions to report arising from this responsibility.
158 GKN plc Annual Report and Accounts 2014
Adequacy of accounting records and information and
explanations received
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
• we have not received all the information and explanations we
require for our audit; or
• adequate accounting records have not been kept by the Company,
or returns adequate for our audit have not been received from
branches not visited by us; or
• the financial statements and the part of the Directors’
remuneration report to be audited are not in agreement with the
accounting records and returns.
We have no exceptions to report arising from this responsibility.
Directors’ remuneration
Directors’ remuneration report –
Companies Act 2006 opinion
In our opinion, the part of the Directors’ remuneration report to be
audited has been properly prepared in accordance with the
Companies Act 2006.
Other Companies Act 2006 reporting
Under the Companies Act 2006 we are required to report to you if,
in our opinion, certain disclosures of Directors’ remuneration
specified by law are not made. We have no exceptions to report
arising from this responsibility.
Responsibilities for the financial statements
and the audit
Our responsibilities and those of the Directors
As explained more fully in the Statement of Directors’
responsibilities set out on page 102, the Directors are responsible
for the preparation of the financial statements and for being
satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial
statements in accordance with applicable law and ISAs (UK &
Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only
for the Company’s members as a body in accordance with Chapter 3
of Part 16 of the Companies Act 2006 and for no other purpose.
We do not, in giving these opinions, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly
agreed by our prior consent in writing.
Strategic Report
Governance
Financial Statements
Other Information
What an audit of financial statements involves
We conducted our audit in accordance with ISAs (UK & Ireland).
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an
assessment of:
• whether the accounting policies are appropriate to the Company’s
circumstances and have been consistently applied and
adequately disclosed;
• the reasonableness of significant accounting estimates made by
the Directors; and
• the overall presentation of the financial statements.
We primarily focus our work in these areas by assessing the
Directors’ judgements against available evidence, forming
our own judgements, and evaluating the disclosures in the
financial statements.
We test and examine information, using sampling and other auditing
techniques, to the extent we consider necessary to provide a
reasonable basis for us to draw conclusions. We obtain audit
evidence through testing the effectiveness of controls, substantive
procedures or a combination of both.
In addition, we read all the financial and non-financial information
in the Annual Report to identify material inconsistencies with the
audited financial statements and to identify any information that is
apparently materially incorrect based on, or materially inconsistent
with, the knowledge acquired by us in the course of performing the
audit. If we become aware of any apparent material misstatements
or inconsistencies we consider the implications for our report.
Other matter
We have reported separately on the Group financial statements of
GKN plc for the year ended 31 December 2014.
Ian Chambers (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Birmingham
23 February 2015
GKN plc Annual Report and Accounts 2014 159
FINANCIAL STATEMENTS
Balance sheet of GKN plc
Company number: 4191106
At 31 December 2014
Fixed assets
Investment in subsidiaries at cost
Notes
2014
£m
2013
£m
3
3,601
3,598
7
8
Current assets
Amounts owed by subsidiaries
Creditors: amounts falling due within one year
Amounts owed to subsidiaries
(2,056)
(2,231)
Net current liabilities
(2,049)
(2,223)
Total assets less current liabilities
1,552
1,375
Net assets
1,552
1,375
Capital and reserves
Share capital
Capital redemption reserve
Share premium account
Profit and loss account
4
5
5
5
166
298
139
949
166
298
139
772
Total shareholders’ equity
6
1,552
1,375
The financial statements on pages 160 to 162 were approved by the Board of Directors and authorised for issue on 23 February 2015. They
were signed on its behalf by:
Nigel Stein, Adam Walker
Directors
160 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Notes to the financial statements of GKN plc
1 Significant accounting policies and basis of preparation
The separate financial statements of the Company, incorporated and domiciled in the UK, are presented as required by the Companies Act
2006. They have been prepared on a going concern basis under the historical cost convention except where other measurement bases are
required to be applied and in accordance with applicable United Kingdom Accounting Standards and law. In accordance with FRS 8 the
Company has taken advantage of the exemption not to disclose transactions with related parties. As the consolidated financial statements
have been prepared in accordance with IFRS 7, the Company is exempt from the disclosure requirements of FRS 29.
The principal accounting policies are summarised below. They have been applied consistently in both years presented.
Investments
Fixed asset investments in subsidiaries are shown at cost less provision for impairment.
Treasury shares
GKN shares which have been purchased and not cancelled are held as treasury shares and deducted from shareholders’ equity.
Share-based payments
Equity-settled share-based payments are measured at fair value at the date of grant. The Company has no employees. Equity-settled
share-based payments that are made available to employees of the Company’s subsidiaries are treated as increases in equity over the
vesting period of the award, with a corresponding increase in the Company’s investments in subsidiaries, based on an estimate of the
number of shares that will eventually vest.
Profit and loss account
Interest income is recognised using the effective interest method. Dividend income is recognised when the right to receive payment is
established. Current tax is recognised in the profit and loss account unless items relate to equity.
Dividends
The annual final dividend is not provided for until approved at the Annual General Meeting whilst interim dividends are charged in the period
they are paid.
2 Profit and loss account
As permitted by section 408 of the Companies Act 2006 the Company has elected not to present its own profit and loss account for the year.
The profit for the year ended 31 December 2014 was £306 million (2013: £4 million).
Auditors’ remuneration for audit services to the Company was £0.5 million (2013: £0.5 million).
3 Fixed asset investments
Cost and net book amount
£m
At 1 January 2014
Additions – share-based payments
3,598
3
At 31 December 2014
3,601
Principal subsidiary companies, the investments in which are held through intermediate holding companies, are shown in note 29 of the
consolidated financial statements.
4 Share capital
Share capital disclosure is shown in note 22 of the consolidated financial statements.
GKN plc Annual Report and Accounts 2014 161
FINANCIAL STATEMENTS
Notes to the financial statements of GKN plc continued
5 Reserves
Profit
and loss
account
£m
Capital
redemption
reserve
£m
Share
premium
account
£m
At 1 January 2014
Profit for the year
Share-based payments
Dividends paid to equity shareholders
Proceeds from exercise of share options
298
–
–
–
–
139
–
–
–
–
772
306
3
(133)
1
At 31 December 2014
298
139
949
2014
£m
2013
£m
6 Reconciliation of movements in shareholders’ funds
At 1 January
Profit for the year
Share-based payments
Dividends paid to equity shareholders
Proceeds from exercise of share options
1,375
306
3
(133)
1
1,470
4
14
(121)
8
At 31 December
1,552
1,375
162 GKN plc Annual Report and Accounts 2014
Strategic Report
Governance
Financial Statements
Other Information
Group financial record
Consolidated income statements
Sales
2014
£m
2013
£m
2012**
£m
2011
£m
2010
£m
6,982
7,136
6,510
5,746
5,084
Trading profit
Restructuring and impairment charges
Change in value of derivative and other financial instruments
Amortisation of non-operating intangible assets arising on business combinations
Gains and losses on changes in Group structure
Reversal of inventory fair value adjustment arising on business combinations
Pension scheme curtailments
Impairment charges
612
–
(209)
(69)
24
–
–
(69)
597
–
26
(75)
12
–
–
–
504
–
126
(37)
5
(37)
63
–
419
–
(31)
(22)
8
–
–
–
367
(39)
12
(19)
(4)
–
68
–
Operating profit
Share of post-tax earnings of continuing joint ventures
Net financing costs
289
61
(129)
560
52
(128)
624
38
(94)
374
38
(61)
385
35
(75)
Profit before taxation from continuing operations
Taxation
221
(47)
484
(77)
568
(80)
351
(45)
345
(20)
Profit for the year
Profit attributable to non-controlling interests
174
(5)
407
(12)
488
(23)
306
(27)
325
(20)
Profit attributable to equity shareholders
169
395
465
279
305
Earnings per share – pence **
Dividend per share – pence
10.3
8.4
24.2
7.9
29.3
7.2
18.0
6.0
19.6
5.0
Management performance measures *
Sales
Trading profit
Profit before taxation
Earnings per share – p **
7,456
687
601
29.0
7,594
661
578
28.7
6,904
553
493
26.3
6,112
468
417
22.6
5,429
411
363
20.7
Consolidated balance sheets
Non-current assets
Intangible assets (including goodwill)
Property, plant and equipment
Investments in joint ventures
Deferred tax assets
Other non-current assets
1,442
2,060
174
407
60
1,476
1,945
179
225
104
1,544
1,960
153
302
92
958
1,812
147
224
58
550
1,651
143
171
42
4,143
3,929
4,051
3,199
2,557
971
1,226
322
18
931
1,142
184
53
885
1,102
181
51
749
962
156
21
637
762
442
23
2,537
2,310
2,219
1,888
1,864
(43)
(1,611)
(125)
(127)
(27)
(1,485)
(135)
(66)
(115)
(1,392)
(157)
(58)
(228)
(1,308)
(138)
(76)
(61)
(1,065)
(100)
(70)
(1,906)
(1,713)
(1,722)
(1,750)
(1,296)
(877)
(223)
(350)
(112)
(1,711)
(889)
(178)
(274)
(119)
(1,271)
(937)
(204)
(367)
(135)
(978)
(466)
(96)
(192)
(91)
(868)
(532)
(63)
(169)
(74)
(600)
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents and other financial assets
Other (including assets held for sale)
Current liabilities
Borrowings
Trade and other payables
Current income tax liabilities
Other current liabilities (including liabilities associated with assets held for sale)
Non-current liabilities
Borrowings
Deferred tax liabilities
Other non-current liabilities
Provisions
Post-employment obligations
(3,273)
(2,731)
(2,621)
(1,713)
(1,438)
Net assets
1,501
1,795
1,927
1,624
1,687
Net debt
(624)
(732)
(871)
(538)
(151)
* Management sales and trading profit aggregate the sales and trading profit of subsidiaries (excluding certain subsidiary businesses sold and closed) with the Group’s share of the
sales and trading profit of joint ventures. Management profit 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 joint ventures. Management earnings includes subsidiary tax related to subsidiary management profit before tax less other
non-controlling interests.
** As restated for the impact of IAS 19 (revised) and for the impact of the changes to the acquisition balance sheet related to the purchase of Volvo Aerospace on 1 October 2012.
GKN plc Annual Report and Accounts 2014 163
OTHER INFORMATION
Key subsidiaries and joint ventures
Aerospace
Europe
GKN Aerospace Deutschland GmbH Germany
GKN Aerospace Norway AS Norway
GKN Aerospace Services Ltd England
GKN Aerospace Sweden AB Sweden
Americas
GKN Aerospace Bandy Machining Inc USA
GKN Aerospace Chem-tronics Inc USA
GKN Aerospace Cincinnati Inc USA
GKN Aerospace Monitor Inc USA
GKN Aerospace Muncie Inc USA
GKN Aerospace New England Inc USA
GKN Aerospace Newington LLC USA
GKN Aerospace North America Inc USA
GKN Aerospace Precision Machining Inc USA
GKN Aerospace Services Structures Corp. USA
GKN Aerospace South Carolina Inc USA
GKN Aerospace Transparency Systems Inc USA
GKN Westland Aerospace Inc USA
Automotive
Europe
GKN Automotive Ltd England
GKN Driveline Birmingham Ltd England
GKN Driveline Bruneck AG Italy
GKN Driveline Deutschland GmbH Germany
GKN Driveline Firenze SpA Italy
GKN Driveline International GmbH Germany
GKN Driveline Köping AB Sweden
GKN Driveline Polska Sp. z o.o. Poland
GKN Driveline SA France
GKN Driveline Slovenija d.o.o. Slovenia
GKN Driveline Trier GmbH Germany
GKN Driveline Vigo SA Spain
GKN Driveline Zumaia SA Spain
GKN Eskisehir Automotive Products Manufacture
and Sales A.S. Turkey
GKN Freight Services Ltd England
GKN Gelenkwellenwerk Kaiserslautern GmbH Germany
Americas
GKN do Brasil Ltda Brazil
GKN Driveline Bowling Green Inc USA
GKN Driveline Celaya SA de CV Mexico
GKN Driveline Newton LLC USA
GKN Driveline North America Inc USA
GKN Driveline Villagran SA de CV Mexico
GKN Freight Services Inc USA
Transejes Transmisiones Homocinéticas de Colombia SA (49%)
Colombia
164 GKN plc Annual Report and Accounts 2014
Rest of World
GKN Driveline (India) Ltd (97%) India
GKN Driveline Japan Ltd Japan
GKN Driveline (Thailand) Ltd Thailand
GKN Driveline Korea Ltd South Korea
GKN Driveline Malaysia Sdn Bhd (68.4%) Malaysia
GKN Driveline Singapore Pte Ltd Singapore
Shanghai GKN HUAYU Driveline Systems Co Ltd (50%) China
Shanghai GKN HUAYU Driveline Systems Torque
Technology Co. Ltd (50%) China
GKN HUAYU Driveline Systems (Chongqing) Co Ltd (34.5%) China
Taiway Ltd (36.25%) Taiwan
Unidrive Pty Ltd (60%) Australia
Powder Metallurgy
Sinter Metals
Europe
GKN Sinter Metals Components GmbH Germany
GKN Sinter Metals Engineering GmbH Germany
GKN Sinter Metals Filters GmbH Radevormwald Germany
GKN Sinter Metals GmbH, Bad Brückenau Germany
GKN Sinter Metals GmbH, Bad Langensalza Germany
GKN Sinter Metals GmbH Radevormwald Germany
GKN Sinter Metals Holding GmbH Germany
GKN Sinter Metals Holdings Ltd England
GKN Sinter Metals SpA Italy
Americas
GKN Sinter Metals LLC USA
GKN Sinter Metals Ltda Brazil
GKN Sinter Metals St Thomas Ltd Canada
Rest of World
GKN Danyang Industries Co Ltd China
GKN Sinter Metals Cape Town (Pty) Ltd South Africa
GKN Sinter Metals Private Ltd India
GKN Sinter Metals Yizheng Co Ltd China
Hoeganaes
Hoeganaes Corporation USA
Hoeganaes Corporation Europe GmbH Germany
Hoeganaes Corporation Europe SA Romania
Strategic Report
Governance
Financial Statements
Other Information
Land Systems
Other Businesses
Chassis Systems Ltd (50%) England
GKN AutoStructures Ltd England
GKN Ayra Servicio SA Spain
GKN Driveline Service Ltd England
GKN Driveline Service Scandinavia AB Sweden
GKN Driveline Ribemont SARL France
GKN Land Systems Ltd England
GKN Service Austria GmbH Austria
GKN Service Benelux BV Netherlands
GKN Service France SAS France
GKN Service International GmbH Germany
GKN Walterscheid Getriebe GmbH Germany
GKN Walterscheid GmbH Germany
GKN Wheels Carpenedolo SpA Italy
GKN Wheels Nagbøl A/S Denmark
GKN Stromag AG Germany
GKN Stromag Benelux NV Belgium
GKN Stromag Dessau GmbH Germany
GKN Service Italia SpA Italy
GKN Stromag France SAS France
GKN Stromag Scandinavia AB Sweden
GKN Stromag UK Ltd England
GKN Land Systems SAS France
GKN Zhongyuan Cylinder Liner Co Ltd (59%) China
Europe
Cylinder Liners
EVO Electric
GKN EVO eDrive Systems Ltd (50%) England
Corporate
Europe
GKN Group Services Ltd England
GKN Holdings plc England
GKN Industries Ltd England
GKN Investments LP Scotland
GKN Sweden Holdings AB Sweden
GKN (United Kingdom) plc England
Ipsley Insurance Ltd Isle of Man
Americas
GKN America Corp USA
GKN North America Services Inc USA
Rest of World
GKN China Holding Co Ltd China
Americas
GKN Armstrong Wheels Inc USA
GKN Rockford Inc USA
GKN Walterscheid Inc USA
GKN Stromag Inc USA
Rest of World
GKN Power Solutions (Liuzhou) Co Ltd China
Matsui-Walterscheid Ltd (40%) Japan
GKN Stromag Brasil Equipamentos Ltda Brazil
GKN Land Systems India Pvt. Ltd India
GKN Stromag (Taicang) Co Ltd China
Lianyungang GKN Hua Ding Wheels Company Limited (80%) China
GKN do Brasil Ltda Brazil
GKN plc Annual Report and Accounts 2014 165
OTHER INFORMATION
Shareholder information
Financial calendar 2015
Ex-dividend date for 2014 final dividend 2014 final dividend record date
Final date for receipt of DRIP mandates
Annual general meeting
2014 final dividend payable
Ex- dividend date for 2015 interim dividend*
2015 interim dividend record date*
2015 interim dividend payable*
9 April 2015
10 April 2015
24 April 2015
7 May 2015
18 May 2015
13 August 2015
14 August 2015
21 September 2015
GKN does not endorse or recommend any particular share dealing
service. The value of shares can fall and you may get back less than
you invest; if you are unsure as to the suitability of an investment
you should seek professional advice.
Dividend reinvestment plan (DRIP)
* please note that these dates are provisional and may be subject to change.
GKN offers a DRIP which enables shareholders to reinvest their cash
dividends to buy additional GKN shares. If you would like more
information about the DRIP or would like to apply online, please go
to Equiniti’s website www.shareview.co.uk or call the shareholder
helpline on 0871 384 2962**.
Annual general meeting
American Depositary Receipts
The annual general meeting (AGM) will be held on Thursday 7 May
2015 at 195 Piccadilly, London W1J 9LN, commencing at 2.00 pm. The
notice of meeting, together with an explanation of the resolutions to
be considered at the meeting, is contained within the AGM circular.
GKN website and share price information
Information on GKN, including this and prior years’ annual reports,
results announcements and presentations together with the GKN
share price, is available on our website at www.gkn.com.
Shareholding enquiries and information
GKN’s register of members is maintained by Equiniti who act as our
registrar. If you have any questions about your shareholding or you
require any other guidance you can contact Equiniti as follows:
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Tel: 0871 384 2962**
(+44 121 415 7039 from outside the UK)
Correspondence should refer to GKN and include your full name,
address and, if available, the 8 or 11 digit reference number which
can be found on your GKN share certificate, dividend stationery or
proxy card.
A range of shareholder information is available online at Equiniti’s
website www.shareview.co.uk. Here you can also view information
on your shareholding and obtain forms that you may need to manage
your shareholding, such as a change of address form or a stock
transfer form.
Share dealing service
GKN shares can be traded via the internet or by phone through
Shareview Dealing, a service provided by Equiniti Financial Services
Ltd. For further details, visit www.shareview.co.uk/dealing or call
Equiniti on 08456 037 037. Equiniti Financial Services Ltd is
authorised and regulated by the UK Financial Conduct Authority. The
registered details of the provider are available from the above number.
A telephone dealing service is also available through Stocktrade.
For further details telephone 0845 601 0995 (+44 131 240 0414 from
outside the UK) and quote reference Low Co139.
166 GKN plc Annual Report and Accounts 2014
GKN has a sponsored Level 1 American Depositary Receipt (ADR)
facility in the US, with each ADR representing one GKN ordinary
share. GKN’s ADRs are traded on the US over-the-counter (OTC)
market under the symbol ‘GKNLY’. The ADR facility is managed by
The Bank of New York Mellon.
Dividend payments are generally taxable and will be distributed to
ADR holders in US Dollars by The Bank of New York Mellon.
Any queries relating to GKN’s ADR facility should be directed to
The Bank of New York Mellon:
BNY Mellon Shareowner Services
P.O. Box 30170
College Station, TX 77842-3170
Tel. +1 888-269-2377
(toll-free number in the U.S.)
Tel. +1 201 680 6825 (international)
Website: www.mybnymdr.com
E-Mail: shrrelations@cpushareownerservices.com
Electronic communications
As an alternative to receiving documents in hard copy, shareholders
can elect to be notified by email as soon as shareholder documents
such as our annual report and notice of meeting are published. This
notification includes details of where you can view or download the
documents on our website. Shareholders who wish to register for
email notification can do so via Equiniti’s website
www.shareview.co.uk.
Capital gains tax
A capital gains tax (CGT) liability may arise when you dispose of an
asset (e.g. shares) which is worth more when you sell it than when
you acquired it.
Over the years the capital structure of GKN plc has changed. Events
that may need to be considered when calculating any CGT liability in
relation to our shares are set out in the following paragraphs.
**Calls to this number cost 8p per minute plus network extras. Lines are open 8.30 am
to 5.30 pm, Monday to Friday excluding UK bank holidays.
Strategic Report
Governance
Financial Statements
Other Information
2001 demerger of the industrial services businesses
1982 base values
2000 ‘B’ share issue
This information is provided primarily for the purpose of individual
shareholders resident in the UK when calculating their personal tax
liability. Shareholders who are in any doubt as to their tax position or
who may be subject to tax in a jurisdiction other than the UK should
seek professional advice. Neither GKN plc nor our registrar can
advise on CGT matters.
The market values of a GKN ordinary share and a Brambles
Industries plc (Brambles) ordinary share on 7 August 2001 (the first
day of trading of Brambles shares) to be used to allocate the base
cost of GKN ordinary shares acquired since 31 March 1982 are:
GKN ordinary shares – 282.5p (43.943224%) and Brambles ordinary
shares – 360.375p (56.056776%).
The market values of a GKN ordinary share and a GKN ‘B’ share
on 30 May 2000 (the first day of trading of ‘B’ shares) to be used
to allocate the base cost of GKN ordinary shares acquired since
31 March 1982 are: GKN ordinary shares – 914.5p (98.736774%)
and GKN ‘B’ shares – 11.7p (1.263226%).
The adjusted 31 March 1982 base value of one GKN ordinary share
held immediately before the 2009 capital reorganisation and rights
issue was 45.501p. The adjusted base value immediately after the
capital reorganisation and rights issue was 47.955p.
Shareholder analysis
Holdings of ordinary shares at 31 December 2014.
Shareholders
Shares
Holdings
Number
%
Number
(million)
Holdings
1–500
501–1,000
1,001–5,000
5,001–50,000
50,001–100,000
100,001–500,000
500,001–1,000,000
above 1,000,000
6,427
3,954
9,817
3,178
170
302
84
219
26.6
16.4
40.6
13.2
0.7
1.2
0.4
0.9
1.4
3.0
23.2
37.2
12.1
72.1
60.0
1,434
0.1
0.2
1.4
2.3
0.7
4.4
3.6
87.3
24,151
100
1,643
100
18,591
1,592
3,968
77.0
6.6
16.4
49.4
1,432.0
161.6
3.0
87.2
9.8
24,151
100
1,643
100
%
Shareholder type
Individuals
Institutions
Other corporates
In addition, GKN held 17,797,916 ordinary shares in treasury as at 31 December 2014.
GKN plc Annual Report and Accounts 2014 167
OTHER INFORMATION
Shareholder information continued
Shareholder security
We are aware that a small number of shareholders have received unsolicited telephone calls concerning their investment in GKN.
These calls are from overseas based organisations who offer to buy GKN shares for considerably more than the current market price.
In some cases the caller has suggested that there is currently a takeover offer for GKN. There is no such offer and we suspect that the
calls are bogus.
Shareholders are advised to be very wary of any unsolicited investment advice, offers to buy shares or offers of free company reports.
Operations, commonly known as ‘boiler rooms’, are targeting UK shareholders and callers can be very persistent and extremely
persuasive. We are aware that they attempt to persuade individuals to provide email addresses or other personal information;
shareholders are strongly advised not to provide any such details.
The Financial Conduct Authority (FCA) provides the following guidance should you be contacted in this manner:
• obtain the name of the person calling and the organisation they represent;
• check that they are properly authorised by the Financial Conduct Authority by checking the FCA register of regulated firms at
www.fca.org.uk/firms/systems-reporting/register/search;
• call the organisation back to verify their identity using the telephone number listed for them on the FCA register;
• search the FCA list of unauthorised firms and individuals to avoid doing business with at www.fca.org.uk/consumers/protectyourself/unauthorised-firms/unauthorised-firms-to-avoid. If you deal with an unauthorised firm you will not be eligible to receive
payment under the Financial Services Compensation Scheme;
• report any suspicions to the FCA either by calling 0800 111 6768 or completing the online form at www.fca.org.uk/consumers/scams/
report-scam/share-fraud-form; and
• if the calls persist, hang up.
To reduce the risk of becoming a victim of fraud you should:
• Ensure all your certificates are stored in a safe place, or hold your shares electronically in CREST (electronic settlement system for UK
and Irish securities) via a nominee.
• Reduce the number of cold calls you receive by registering with the Telephone Preference Service on 0845 070 0707 or by
visiting www.tpsonline.org.uk. Alternatively you can also register by writing to Telephone Preference Service, DMA House,
70 Margaret Street, London, W1W 8SS.
• Keep all correspondence containing your shareholder reference number in a safe place.
• Shred all unwanted correspondence.
• Inform Equiniti as soon as possible if you change your address. If you receive a letter from Equiniti regarding a change of address and
have not recently moved house, please contact them immediately. You may be a victim of identity theft.
• Know when dividends will be paid. You can request that dividends be paid direct to your bank, reducing the risk of cheques being
intercepted or lost in the post. If you change your bank account, inform Equiniti of the details of your new account.
• Consider getting independent professional advice before making any investment decision, particularly if the type of investment is
unfamiliar to you.
168 GKN plc Annual Report and Accounts 2014
Contact information
GKN is a global engineering business. Every day we
drive the wheels of hundreds of millions of cars,
we help thousands of aircraft to fly, we deliver the
power to move earth and harvest crops, and we
make essential components for industries that
touch lives across the globe.
Engineering
that moves
the world
Visit our website for more information
www.gkn.com
GKN plc
Registrar
Tel +44 (0)1527 517715
Fax +44 (0)1527 517700
Tel 0871 384 2962*
(+44 121 415 7039 from outside UK)
London Office
50 Pall Mall
London
SW1Y 5JH
Tel +44 (0)20 7930 2424
Fax +44 (0)20 7930 3255
Fax 0871 384 2100
(+44 1903 833113 from outside UK)
PO Box 55
Ipsley House
Ipsley Church Lane
Redditch
Worcestershire
B98 0TL
enquiries@gkn.com
www.gkn.com
Registered in England No. 4191106
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
www.equiniti.com
www.shareview.co.uk
* Calls to this number cost 8p per minute plus network extras.
Lines are open 8.30 am to 5.30 pm, Monday to Friday,
excluding bank holidays.
This annual report is available on our website.
Cautionary statement
This annual report and accounts has been prepared for the members of GKN plc and should not be relied upon
by any other party or for any other purpose. It 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.
Annual Report and Accounts 2014
GKN plc Annual Report and Accounts 2014
ENGINEERING
THAT MOVES THE WORLD
ENGINEERING
THAT MOVES THE WORLD
MOVES THE WORLD
MOVES THE WORLD
ENGINEERING
THAT MOVES THE WORLD
ENGINEERING
THAT MOVES THE WORLD
→ Visit our website for more information www.gkn.com