TIDMGKN
RNS Number : 0813M
GKN PLC
26 July 2017
NEWS RELEASE 26 July 2017
GKN plc Results Announcement for the six months ended 30 June
2017
Group Highlights(*)
-- Another period of growth delivering earnings momentum
o Sales up 15% (organic sales up 5%) and management eps increased 14%
o Profit before tax (management basis) up 14% to GBP393 million
(2016: GBP344 million), helped by currency
o Reported profit before tax GBP559 million (2016: GBP182 million)
o Free cash flow of GBP116 million (2016: GBP40 million)
o Interim dividend increased 5% to 3.1 pence per share
o UK defined benefit pension closed to future accrual, GBP250
million lump sum payment planned to address the deficit and reduce
future deficit recovery payments
-- Continued investment in technology
o Strong technology pipeline; innovation recognised by customer and industry awards
o Focus on electrified drivetrains and additive manufacturing (3D printing)
o Industry 4.0 - expect to reduce cost and increase margin
Management basis(*) As reported
------------------------ ------------------------
2017 2016 Change 2017 2016 Change
GBPm GBPm % GBPm GBPm %
------------------ ------ ------- ------- ------ ------ --------
Sales 5,212 4,518 +15 4,879 4,237 +15
Operating profit 436 390 +12 591 209 +183(2)
Trading margin
(%) 8.4% 8.6% -20bps
Profit before
tax 393 344 +14 559 182 +207(2)
Earnings per
share (p) 17.7p 15.5p +14 24.8p 9.5p +161(2)
Interim dividend
per share (p) 3.10p 2.95p +5 3.10p 2.95p +5
Free cash flow 116 40
Net debt 697 704(1)
------------------ ------ ------- ------- ------ ------ --------
(1) As at 31 December 2016
(2) Primarily higher due to mark to market valuation of FX
contracts
Commenting on the results, Nigel Stein, Chief Executive of GKN
said:
"We made progress in the first half and are on track for the
full year. We are performing well against our key markets,
demonstrating once again the strength of our businesses, strong
market positions and leading technology. We continue to invest for
growth and have made significant progress to address our UK pension
deficit.
Our focus on innovation in key areas such as electrified
drivetrains, additive manufacturing and Industry 4.0 is paying
dividends and underpins our confidence in the longer term.
2017 is expected to be another year of growth. Our reputation
for technological leadership in our key markets, our focus on
driving flexibility and productivity through our manufacturing
plants and our market leading position in all three divisions mean
we are well placed for the future."
Divisional Highlights
GKN Aerospace
-- Headline sales growth of 11%, reflecting a benefit from
currency translation and organic growth in line with the market
-- Organic sales growth of 1%, comprising slower commercial
sales (-3%) more than offset by an increase in military (+15%)
-- Margin of 9.3% (2016: 9.9%), primarily impacted by higher UK
pension costs, lower profits resulting from asset write-downs at
SABCA (equity accounted investment) and programme transitions and
operational challenges in North America, partly offset by a benefit
from programme pricing adjustments
-- New and replacement work packages won of c.$2.3 billion over contract lives
GKN Driveline
-- Organic sales growth of 8%, significantly ahead of global
auto production, helped by our broad geographic footprint and
increased content per vehicle
-- Trading margin of 7.8% (2016: 7.9%, restated to include part
of GKN Land Systems), with a good performance in Europe offset by
lower margins in China, as expected, and increased costs to support
the high number of launches in the Americas
-- Around GBP230 million of annualised new and replacement business won
GKN Powder Metallurgy
-- Organic sales growth of 4%, including the pass-through of higher raw material surcharges
-- Trading margin of 11.3% (2016: 12.6%), reflecting principally
the higher raw material surcharge and an investment in powder
capability in China
-- Strong focus on technology and GBP110 million of annualised
new and replacement business won
Outlook
According to Teal forecasts, in 2017, the overall aerospace
market is expected to be up 1%, with commercial deliveries 1% lower
and military sales up 8%. Against that backdrop, GKN Aerospace's
2017 organic sales are expected to grow slightly above the
market.
In automotive, external forecasts predict annual growth in
global light vehicle production of around 2% with increases in
China and Europe, but decreases in North America. Against this
background, GKN Driveline and GKN Powder Metallurgy are expected to
grow organically above the market.
2017 is expected to be another year of growth, helped by the
benefits of actions taken in 2016 and GKN's constant focus on
continuous improvement.
Notes
(*) Financial information set out in this announcement, unless
otherwise stated, is presented on a management basis as defined on
pages 13 and 14.
Cautionary Statement
This announcement contains forward looking statements which are
made in good faith based on the information available at the time
of its approval. It is believed that the expectations reflected in
these statements are reasonable but they may be affected by a
number of risks and uncertainties that are inherent in any forward
looking statement which could cause actual results to differ
materially from those currently anticipated. Nothing in this
document should be regarded as a profits forecast.
Further Enquiries
Analysts/Investors:
Guy Stainer, Investor Relations Director, GKN plc
T: +44 (0)207 463 2382
M: +44 (0)7739 778187
E: guy.stainer@gkn.com
Media:
Nicola Foster, Head of Group Communications, GKN plc
T: +44 (0)1527 533495
M: +44 (0)7795 618320
E: nicola.foster@gkn.com
Andrew Lorenz, FTI Consulting
T: +44 (0)203 727 1323
M: +44 (0)7775 641807
There will be an analyst and investor meeting today at 09.00am
at UBS, 5 Broadgate, London, EC2M 2QS in their Conference Suite
located on the first floor.
A live videocast of the presentation will be available at
http://www.gkn.com/en/investors/results-centre/webcasts/
Slides will be put onto the GKN website approximately 60 minutes
before the presentation is due to begin, and will be available to
download from the GKN website at:
http://www.gkn.com/en/investors/results-centre/results-and-presentations/
Questions will only be taken at the event.
A live dial in facility will be available by telephoning: +44
(0) 1452 555 566, Conf ID: 53120005
Following the event, a replay of the conference call will be
uploaded onto the GKN website and the on-demand archive webcast
will be available via the link
http://www.gkn.com/en/investors/results-centre/results-and-presentations/
GKN plc LEI: 213800QNZ22GS95OSW84
NEWS RELEASE
GKN plc Results Announcement for the six months ended 30 June
2017
Group Overview
Markets
The Group operates in the global aerospace and automotive
markets. GKN Aerospace sells to manufacturers of commercial and
military aircraft, aircraft engines and equipment. In the
automotive market, GKN Driveline sells to manufacturers of
passenger cars and light vehicles. Around 80% of GKN Powder
Metallurgy sales are also to the automotive market, with the
balance to other industrial customers.
Results
Group First half Change (%)
2017 2016 Headline Organic
Sales (GBPm) 5,212 4,518 15 5
Trading profit (GBPm) 436 390 12 2
Trading margin (%) 8.4% 8.6%
Return on average
invested capital
(%) 15.8% 16.6%(1)
----------------------- ------ --------- --------- --------
(1) excludes GKN Aerospace Fokker which had not been owned for a
full 12 month period
Organic sales increased GBP252 million (5%). The benefit from
currency translation on management sales was GBP482 million and
there was a GBP40 million net reduction from
acquisitions/divestments.
Overall organic trading profit increased by GBP7 million. There
was a benefit from currency translation of GBP47 million and an
GBP8 million net reduction due to acquisitions/divestments.
Group trading margin in the first half reduced to 8.4% (2016:
8.6%). Return on average invested capital (ROIC) reduced to 15.8%
(2016: 16.6%, GKN Aerospace Fokker not included as it had not been
owned for a full 12 month period).
At 30 June 2017, the Group had net debt of GBP697 million (31
December 2016: GBP704 million) and the total deficit on
post-employment obligations totalled GBP1,849 million (31 December
2016: GBP2,033 million). During the period, the group issued a new
GBP300 million 3.375% annual unsecured bond. It is the intention to
pay GBP250 million into the UK pension scheme in the second half of
the year.
Divisional Performance
GKN Aerospace
GKN Aerospace is a leading global tier one supplier of airframe
and engine structures, landing gear, electrical interconnection
systems, transparencies and aftermarket services. Its technology
influences the performance and efficiency of the world's leading
commercial and military aircraft.
According to Teal forecasts, in 2017, overall aircraft
deliveries are expected to be up 1%. Commercial deliveries are
expected to be 1% lower as the decline in wide-body and business
jets more than offsets growth in single aisle aircraft. Military
sales are expected to be up 8% due to the ramp up in production of
the F-35 fighter and growth in rotorcraft and transport
aircraft.
The key financial results for the period are as follows:
GKN Aerospace First half Change (%)
2017 2016 Headline Organic
Sales (GBPm) 1,809 1,631 11 1
Trading profit (GBPm) 168 161 4 (5)
Trading margin (%) 9.3% 9.9%
Return on average
invested capital
(%) 14.4% 16.8%(1)
----------------------- ------ --------- --------- --------
(1) excluding Fokker in the comparative period which had not
been owned for a full 12 months
Overall, GKN Aerospace's organic sales were GBP20 million higher
(1%) and there was a GBP158 million benefit from currency
translation.
The division's sales were weighted commercial 73%, military 27%.
Organic commercial aerospace sales declined 3%, principally due to
the greater exposure to the wide-body market. GKN Aerospace
recorded reduced sales of the A380, Boeing 737 MAX (due to the end
of a temporary development contract in 2016), business jets, CFM56
engine and Boeing 777 partly offset by stronger production of the
A350 and A320. Military sales were organically 15% higher,
primarily due to an increase in production of the F/A-18 Super
Hornet and F-35, as well as development sales for advanced
proprietary military programmes.
Trading profit was GBP168 million (2016: GBP161 million),
benefiting from a favourable currency translation impact of GBP16
million.
In addition to the changes in production rates across the many
commercial and military platforms as set out above, trading profit
in the period was impacted by: GBP5 million higher UK pension
costs; recognising GBP4 million of lower profits from the SABCA
equity accounted investment, principally due to asset write-downs;
and programme transitions and operational challenges in North
America. The engine business is performing well, helped by GBP13
million of programme pricing adjustments and investment continues
in the PW PurePower(R) Geared Turbofan(TM) (GTF) engines across
four different platforms. Fokker continues to trade in line with
expectations. Across our production facilities worldwide we are
driving ongoing productivity programmes to mitigate historical
price downs.
Progress in the development and application of additive
manufacturing (AM) continued in the first half. Momentum increased
in both free form and powder bed with both technologies in
production, new orders won and parts now flying on seven platforms
across the commercial, military and space markets. This is a key
area of focus for the Group.
During the period, new and replacement work packages totalling
$2.3 billion over their contract lives have been won and a number
of important milestones were achieved, including:
-- Securing new work packages and extensions of long-term agreements on key engine platforms;
-- Winning a three year contract extension worth over $175
million, covering the technical product support, maintenance and
parts supply for the Gripen RM12 Engines used in Sweden, Hungary,
Czech Republic and Thailand;
-- Signing a contract with Honda Aircraft Company to manufacture
the complete electrical wiring and interconnection system for the
market-leading HondaJet;
-- Securing a long-term agreement with Kawasaki Heavy Industries
to supply Low-Pressure Compressor Vanes for the PW1100G-JM and
PW1400G-JM PurePower(R) Geared Turbofan(TM) engines;
-- Delivering the first advanced 2.5m diameter Ariane 6 nozzle
(SWAN) to ArianeGroup for the Vulcain 2.1 engine incorporating
laser-welded technology and AM structures; resulting in 90% fewer
component parts, 40% cost reduction and 30% improvement in
production time; and
-- Signing research/partnership agreements with the U.S.
Department of Energy's Oak Ridge National Laboratory, focused on AM
in order to progress its use in the manufacture of major,
structural components for aircraft.
Automotive market
In the first half of 2017, global car and light vehicle
production volumes increased 2.8% to 47.3 million vehicles (2016:
46.1 million), with all major markets, except North America,
enjoying increased volumes.
Car and light vehicle production First half Growth
(rounded millions of units)
2017 2016 (%)(#)
Europe 11.6 11.4 1.3
North America 9.0 9.1 -0.7
Brazil 1.2 1.0 23.0
Japan 4.6 4.3 8.3
China 12.8 12.4 3.1
India 2.2 2.0 8.5
Others 5.9 5.9 0.8
---------------------------------- ------ ----- ---------
Total - global 47.3 46.1 2.8
---------------------------------- ------ ----- ---------
Source: IHS Markit; (#) Growth is derived from unrounded
production figures
Production in Europe increased in the first half with some major
markets reaching historically high levels. The Russian market
remained weak, although production increased compared to the first
half of 2016.
Production in North America was down due to a weaker US market,
with lower fleet demand offsetting good retail sales. Cheap credit
and the low price of fuel continued to support increased demand and
production for full-size pickups and Sport Utility Vehicles (SUVs),
which outpaced that of passenger cars. Production in Brazil rose
strongly as the local market started to recover and exports
increased.
Growth in China slowed as a result of an increase in the sales
tax on small cars, following strong demand at the end of 2016.
Production in India recovered from the weak 2016, driven by
improved consumer sentiment and demand for newly launched models.
Japan also grew compared to the prior year.
External forecasts anticipate global production for 2017 will
increase 1.9% to 94.9 million vehicles.
GKN Driveline
GKN Driveline is the world's leading supplier of automotive
driveline systems and solutions. As a global business serving the
leading vehicle manufacturers, it develops, builds and supplies an
extensive range of automotive driveline products and systems, for
use in everything from the smallest low-cost car to the most
sophisticated premium vehicles that demand complex driving
dynamics.
The key financial results for the period are as follows:
GKN Driveline First half Change (%)
2017 2016(4) Headline Organic
Sales (GBPm) 2,654 2,202 21 8
Trading profit (GBPm) 207 173 20 7
Trading margin (%) 7.8% 7.9%
Return on average
invested capital
(%) 18.0% 18.2%
----------------------- ------ -------- --------- --------
(4) Restated to include Off-Highway Powertrain, previously part
of GKN Land Systems
Organic sales increased by GBP206 million (8%) compared with
global light vehicle production which was up 3%. The beneficial
effect from currency translation was GBP246 million.
GKN Driveline's market outperformance was mainly in North
America (reflecting strong recent all-wheel drive (AWD) programme
gains slightly offset by lower light truck platform exposure) and
in China due to new programme launches (particularly due to
additional content from AWD sales, including to a number of
domestic manufacturers). In Europe, production continued ahead of
the market, benefitting from good demand for premium vehicles.
Trading profit increased GBP34 million to GBP207 million,
including the favourable impact of currency translation of GBP21
million.
GKN Driveline's European plants continue to operate at very high
capacity utilisation with a strong conversion on the additional
sales. In China, margin reduced as expected, with the benefit of
increased sales being offset by negative pricing pressure and the
on-going investment in new programmes, engineering and technology
localisation. The Americas operations were impacted by investment
in programme management to support an unusually high number of
launches. The AWD programmes are delivering to customer
requirements, however, the necessary changes to product and process
are taking longer than expected and therefore the cost impact was
similar to the first half of 2016. The North American market
continues to be monitored closely. The benefits of the
restructuring action taken in 2016 have been realised and, as
previously communicated, GKN Driveline has increased investment in
eDrive and faced some raw material price increases that have not
been fully passed on to customers.
As the trend towards electrification of passenger vehicles
accelerates, GKN Driveline continues to make good progress with its
eDrive products, responding to the need for lower emission vehicles
in both hybrid and pure electric form. Due to its early move into
electric AWD, GKN Driveline is already a market leader with around
400,000 HEV/EV drive systems delivered to our global customer base.
During the period two large production orders were won, including
the eAxle for the Volvo XC60/V90.
During the period, around GBP230 million of annualised sales in
new and replacement business was secured and a number of important
milestones achieved, including:
-- Launching the second application of the new lightweight VL3
constant velocity joint (CVJ) on the new BMW 5 series;
-- Commencing production of its latest technologies in China,
through its joint venture: a complete AWD disconnect system for
small to medium-sized vehicles, the new SX8 CVJ as well as
production of its Disconnect four-wheel drive system;
-- Providing innovative electric drive technology to
StreetScooter - an emissions free parcel delivery service in
Germany, owned by Deutsche Post DHL Group;
-- Winning an Automotive News PACE Innovation Award for the
integrated co-axial eAxle on the Volvo XC90 T8 twin engine;
-- Announcing that China will become a global production hub for
electrified driveline in 2018, when production of the latest eDrive
technologies commences, including the production of the GKN
Multimode eTransmission for a domestic Chinese automaker; and
-- Opening a new winter test facility in Michigan, USA to
complement the existing proving grounds for extreme cold-weather
testing in Sweden and China.
GKN Powder Metallurgy
GKN Powder Metallurgy comprises GKN Sinter Metals and Hoeganaes.
GKN Sinter Metals is the world's leading manufacturer of precision
automotive sintered components as well as components for industrial
and consumer applications. Hoeganaes is one of the world's leading
manufacturers of metal powder, the essential raw material for
powder metallurgy.
The key financial results for the period are as follows:
GKN Powder Metallurgy First half Change (%)
2017 2016 Headline Organic
Sales (GBPm) 601 499 20 4
Trading profit (GBPm) 68 63 8 (3)
Trading margin (%) 11.3% 12.6%
Return on average
invested capital
(%) 19.4% 21.3%
----------------------- ------ ------ --------- --------
Organic sales were GBP23 million higher, including GBP17 million
pass through to customers of higher scrap steel prices and other
commodities. There was a GBP62 million benefit from currency
translation and a GBP17 million increase from acquisitions, mostly
the purchase of a majority share of a powder manufacturer in
China.
Organic sales growth before raw material pass through was 1%,
lower than global light vehicle production which was up 3%. Strong
underlying sales growth was achieved in China, Europe and Brazil
but sales in North America fell due to weaker automotive
demand.
Trading profit increased GBP5 million to GBP68 million,
benefiting from favourable currency translation of GBP8
million.
The divisional trading margin was 11.3% (2016: 12.6%),
reflecting the powder investment in China, tougher market
conditions in the US and a GBP4 million impact of higher raw
material prices.
The European business, principally focused on small parts, grew
well increasing its sales into the automotive market. Good progress
continues in Asia with double digit sales growth. North America was
tougher reflecting a slowdown in the automotive market.
Digitisation across the shop floor is assisting with productivity
gains across GKN Powder Metallurgy.
Commercial titanium powder production for AM started in
Cinnaminson, USA as part of the venture with TLS Technik. Interest
in powder continues to be strong and a number of production orders
have been received from key customers for both standard and
customised titanium AM powder alloys. There is also increased
demand for AM parts for use in the automotive and industrial
sectors.
During the period, around GBP110 million of annualised sales in
new and replacement business was secured and a number of important
milestones achieved, including:
-- Completing the acquisition of Turkish powder metal parts
manufacturer Tozmetal Ticaret Ve Sanayi AS (Tozmetal), adding pump
part capacity;
-- Making further steps towards Industry 4.0 with a new
dedicated digital area for metal AM which will reduce lead times in
prototype development and production;
-- Launching a new e-commerce platform, InstAMetal, a
revolutionary digitized quoting and design experience for metal AM
that will bring speed and simplicity of online ordering to
engineering prototypes;
-- Receiving the Best Supplier Award for quality performance by
Somfy for the high-class planetary gears and components that it
supplies for electrical shutter motors; and
-- Receiving two prestigious Grand Prize Design Excellence
Awards from the Metal Powder Industries Federation in the
Automotive Transmission category (planetary carrier assembly for
Ford Motor Company) and the Automotive Chassis category
(copper-steel output pulley for Nidec Automotive Motor
Americas).
Other Businesses and corporate costs
GKN's Other Businesses now comprise Wheels and Structures
(previously part of GKN Land Systems) and Cylinder Liners (a 59%
owned venture mainly in China, manufacturing engine liners for the
truck market in the US, Europe and China). First half 2016
comparators are restated for the inclusion of Stromag and Wheels
and Structures, previously part of GKN Land Systems.
GKN's Other Businesses reported combined sales in the period of
GBP148 million (2016: GBP186 million). The change reflects a GBP3
million organic increase in sales due to good growth in Cylinder
Liners and Wheels, a GBP16 million benefit from currency
translation and a reduction due to the disposal of Stromag of GBP57
million.
A trading profit of GBP9 million was reported in the first half
(2016: GBP4 million) reflecting a strong performance in Cylinder
Liners and the absence of a restructuring charge in 2016 for GKN
Hybrid Power. Trading profit was GBP7 million lower due to the
disposal of Stromag.
Corporate costs, which comprise the costs of stewardship of the
Group and operating charges and credits associated with the Group's
legacy businesses, were GBP16 million (2016: GBP11 million), due to
GBP4 million of additional costs associated with closure of the UK
pension scheme.
Other Financial Information
Items excluded from management trading profit
In order to achieve consistency and comparability of underlying
results between reporting periods, certain items are presented
separately from management basis results which are used in many of
the Group's Key Performance Indicators. In addition, management
basis results aggregate the sales and trading profit of
subsidiaries with the Group's share of the sales and trading
profits of equity accounted investments.
The Group uses management measures, which are non-GAAP measures,
for certain remuneration targets and to assess operating
performance on a consistent basis, as we believe this gives a
fairer assessment from period to period of the underlying activity
of the business. 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.
The items excluded from management basis results are adjusted
because of their size or nature. The Group considers the following
matters when assessing the nature of items to be excluded; whether
the charge or income is significantly impacted by fair value
movements outside of management control (change in value of
derivative and other financial instruments and fair value changes
on cross currency interest rate swaps), it is non-cash (interest
charge on post-employment benefits and unwind of discounts) or it
does not relate to trading performance but rather acquisition or
divestment activity (amortisation of non-operating intangible
assets arising on business combinations, gains and losses on
changes in Group structure and acquisition-related restructuring
charges).
A full reconciliation of statutory to management basis numbers
is provided in note 3 to the consolidated financial statements on
page 26 and further information on the items excluded from
management trading profit is provided below:
Change in value of derivative and other financial
instruments
The change in value of derivative and other financial
instruments during the period resulted in a credit of GBP242
million (2016: GBP71 million charge).
When the business wins long term customer contracts that are in
a foreign currency, the Group seeks to mitigate the potential
volatility of future cash flows by hedging through forward foreign
currency exchange contracts. At each period end, the Group is
required to mark to market these contracts even though it has no
intention of closing them out in advance of their maturity dates.
At 30 June 2017, the net fair value of such instruments was a
liability of GBP242 million (31 December 2016: GBP482 million
liability) and the change in fair value during the period was a
GBP240 million credit (2016: GBP52 million charge).
There was also a GBP2 million charge arising from the change in
fair value of embedded derivatives in the period (2016: GBP3
million credit) and a net gain of GBP4 million attributable to the
currency impact on Group funding balances (2016: GBP22 million net
loss).
Amortisation of non-operating intangible assets arising on
business combinations
The charge for amortisation of non-operating intangible assets
arising on business combinations (for example, customer contracts,
order backlog, technology and intellectual property rights) was
GBP45 million (2016: GBP46 million).
Gains and losses on changes in Group structure
The net loss on changes in Group structure was GBP1 million
(2016: nil) and represents further costs relating to closure of the
GKN Aerospace business in Yeovil, announced in 2016.
Acquisition-related restructuring charges
There were no charges regarding acquisition-related
restructuring in the period (2016: GBP22 million).
Post-tax earnings of equity accounted investments
On a management basis, the sales and trading profits of equity
accounted investments are included pro-rata in the individual
divisions to which they relate, although shown separately post-tax
in the statutory income statement.
The Group's share of post-tax earnings on a management basis was
GBP35 million (2016: GBP34 million), with trading profit of GBP41
million (2016: GBP42 million). The Group's share of the tax and
financing charges amounted to GBP6 million (2016: GBP8 million).
The organic decrease in trading profit was GBP4 million,
principally impacted by asset write-downs in SABCA (Aerospace).
Net financing costs
Net financing costs totalled GBP67 million (2016: GBP61 million)
and comprise the net interest payable of GBP37 million (2016: GBP38
million), the non-cash interest charge on post-employment benefits
of GBP24 million (2016: GBP27 million), a loss from fair value
changes on cross currency interest rate swaps of GBP5 million
(2016: GBP5 million gain) and a charge for unwind of discounts of
GBP1 million (2016: GBP1 million charge). The non-cash interest
charge on post-employment benefits, fair value changes on cross
currency interest rate swaps and unwind of discounts are not
included in management figures. Details of the assumptions used in
calculating post-employment obligations are provided in note 10 to
the consolidated financial statements.
Interest payable was GBP42 million (2016: GBP41 million), whilst
interest receivable was GBP5 million (2016: GBP3 million) resulting
in net interest payable of GBP37 million (2016: GBP38 million).
Profit before tax
Management profit before tax was GBP393 million (2016: GBP344
million). Profit before tax on a statutory basis was GBP559 million
(2016: GBP182 million). The main differences between management and
statutory figures for the first half 2017 are the change in value
of derivative and other financial instruments, amortisation of
non-operating intangible assets arising on business combinations
and non-cash interest charge on post-employment benefits. Further
details are provided in note 3 to the consolidated financial
statements.
Taxation
The book tax rate on management profits of subsidiaries was 24%
(2016: 25%), arising as a GBP86 million tax charge (2016: GBP76
million charge) on management profits of subsidiaries of GBP358
million (2016: GBP310 million).
The tax rate on statutory profits of subsidiaries was 25% (2016:
11%), arising as a GBP131 million tax charge (2016: GBP17 million
charge) on statutory profits of subsidiaries of GBP524 million
(2016: GBP148 million).
Non-controlling interests
The profit attributable to non-controlling interests was GBP3
million (2016: GBP2 million).
Earnings per share
Management earnings per share was 17.7 pence (2016: 15.5 pence).
On a statutory basis earnings per share was 24.8 pence (2016: 9.5
pence), impacted by a significant credit from the change in value
of derivatives and other financial instruments.
Dividend
The Board has declared an interim dividend of 3.1 pence per
share (2016: 2.95 pence), an increase of 5%. The interim dividend
will be paid on 18 September 2017 to shareholders on the register
at 11 August 2017. Shareholders may choose to use the Dividend
Reinvestment Plan (DRIP) to reinvest the interim dividend. The
closing date for receipt of new DRIP mandates is 25 August
2017.
Cash flow
Operating cash flow, which is defined as cash generated from
operations of GBP379 million (2016: GBP252 million) adjusted for
capital expenditure (net of proceeds from government capital
grants) of GBP254 million (2016: GBP227 million), repayment of
principal on government refundable advances of GBP4 million (2016:
nil) and proceeds from the disposal of fixed assets of GBP6 million
(2016: GBP25 million), was an inflow of GBP127 million (2016: GBP50
million).
Cash generated from operations includes movements in working
capital totalling a net outflow of GBP165 million (2016: GBP188
million outflow).
Capital expenditure (net of proceeds from government capital
grants) on both tangible and intangible assets totalled GBP254
million (2016: GBP227 million). Of this, GBP217 million (2016:
GBP192 million) was on tangible fixed assets and was 1.5 times
(2016: 1.5 times) the depreciation charge. Expenditure on
intangible assets, mainly non-recurring costs on Aerospace
programmes, totalled GBP37 million (2016: GBP35 million).
Net interest paid totalled GBP21 million (2016: GBP23 million).
Tax paid in the period was GBP49 million (2016: GBP42 million).
Free cash flow
Free cash flow, is defined as operating cash flow, an inflow of
GBP127 million (2016: GBP50 million), including dividends received
from equity accounted investments of GBP59 million (2016: GBP55
million) and after net interest paid of GBP21 million (2016: GBP23
million), tax paid of GBP49 million (2016: GBP42 million) and
amounts paid to non-controlling interests of nil (2016: nil) but
before dividends paid to GKN shareholders, was an inflow of GBP116
million (2016: GBP40 million).
Net debt
At the end of the period, the Group had net debt of GBP697
million (31 December 2016: GBP704 million). The Group has a series
of cross currency interest rate swaps, used to better align its
foreign currency income receipts with its debt coupon payments. The
fair value of these derivative instruments at the end of the period
was a liability of GBP187 million (31 December 2016: a liability of
GBP214 million) which is included in the net debt figure of GBP697
million.
Pensions and post-employment obligations
GKN operates a number of defined benefit pension schemes and
historical retiree medical plans across the Group.
At 30 June 2017, the total deficit on post-employment
obligations of the Group totalled GBP1,849 million (31 December
2016: GBP2,033 million), comprising deficits on funded obligations
of GBP1,160 million (31 December 2016: GBP1,322 million) and on
unfunded obligations of GBP689 million (31 December 2016: GBP711
million).
The amount included within trading profit for the period
comprises a current service cost of GBP31 million (2016: GBP25
million) and administrative costs of GBP2 million (2016: GBP2
million). The interest charge on net defined benefit plans, which
is excluded from management figures, was GBP24 million (2016: GBP27
million).
Cash contributions to the various defined benefit pension
schemes and retiree medical arrangements totalled GBP70 million
(2016: GBP71 million).
UK pensions
The accounting deficit for UK schemes, which closed to future
accrual with effect from 1 July 2017, decreased to GBP1,063 million
(31 December 2016: GBP1,221 million) in part as a result of the
latest study into mortality improvements indicating that life
expectancy has not improved as quickly as previously expected
(GBP72 million reduction).
The Group's two UK defined benefit pension schemes are
conducting their 2016 triennial funding valuations (GKN2 as at 5
April 2016 and GKN3 as at 31 December 2016). It is expected that a
lump sum of GBP250 million will be paid into the GKN2 Scheme in the
second half and that the current annual deficit recovery payments
of GBP42 million are expected to reduce slightly, from 2018.
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 GBP32 million (2016: GBP28
million).
Net assets
Net assets of GBP2,546 million were GBP384 million higher than
the 31 December 2016 figure of GBP2,162 million. The increase is
primarily driven by a statutory profit after tax (GBP428 million)
and a favourable remeasurement of defined benefit plans, net of tax
(GBP147 million), partially offset by an adverse currency
retranslation from subsidiaries (including net investment hedges)
and equity accounted investments, net of tax (GBP93 million) and
dividends paid to equity shareholders (GBP101 million).
Exchange rates
Exchange rates used for currencies most relevant to the Group's
operations are:
Average Period End
------------ -------------
2017 2016 2017 2016
Euro 1.16 1.28 1.14 1.20
US dollar 1.26 1.43 1.30 1.33
----------- ----- ----- ------ -----
The approximate impact on 2017 trading profit of subsidiaries
and equity accounted investments of a 1% movement in the average
rate would be euro - GBP1 million, US dollar - GBP2 million.
Funding, liquidity and going concern
At 30 June 2017, UK committed bank facilities were GBP846
million (31 December 2016: GBP863 million). Within this amount
there are committed Revolving Credit Facilities of GBP800 million
(31 December 2016: GBP800 million), GBP32 million outstanding on an
eight-year amortising facility from the European Investment Bank
(31 December 2016: GBP48 million) and GBP14 million outstanding on
a seven-year amortising facility from KfW (31 December 2016: GBP15
million). There were no drawings against the Revolving Credit
Facilities.
At 31 December 2016 the Group had capital market borrowings
comprising a GBP350 million 6.75% annual unsecured bond maturing in
October 2019 and a GBP450 million 5.375% semi-annual unsecured bond
maturing in September 2022. During the period, the group issued a
new GBP300 million 3.375% annual unsecured bond maturing in May
2032.
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 6 months to 30 June
2017 EBITDA was 14.0 times greater than net interest payable
(2016:13.4 times), whilst net debt was 0.6 times EBITDA (2016:1.0
times).
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. Having carried out sensitivity analysis, 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.
Basis of Reporting
The interim financial statements for the period are shown on
pages 16 to 34 and have been prepared using accounting policies
which were used in the preparation of audited financial statements
for the year ended 31 December 2016 and which will form the basis
of the 2017 Annual Report.
Definitions
Financial information set out in this announcement, unless
otherwise stated, is presented on a management basis which excludes
certain items. The items excluded from management trading results
and the reasons for their exclusion are set out on pages 9 and
10.
Management results aggregates the sales and trading profit of
subsidiaries with the Group's share of the sales and trading profit
of equity accounted investments. References to trading margins are
to management trading profit expressed as a percentage of
management sales. Management profit or loss before tax is
management trading profit less net subsidiary interest payable and
receivable and the Group's share of net interest payable and
receivable and taxation of equity accounted investments.
Organic results are management results excluding 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, repayment of
principal on government refundable advances and proceeds from the
disposal of fixed assets.
Free cash flow is operating cash flow including interest, tax,
equity accounted investment dividends and amounts paid to
non-controlling interests, but excluding dividends paid to GKN
shareholders.
Return on average invested capital (ROIC) is calculated on a
rolling 12 month basis comprising management trading profit as a
percentage of average total net assets of continuing subsidiaries
and equity accounted investments, excluding current and deferred
tax, net debt, post-employment obligations and derivative financial
instruments.
Management earnings per share (as set out in note 3(a) to the
consolidated financial statements) is calculated using management
earnings for the Group divided by the weighted average number of
ordinary shares in issue (excluding treasury shares).
Working capital comprises inventories, trade and other
receivables, trade and other payables and provisions. Management
working capital (as set out in note 1(f) to the consolidated
financial statements) excludes; accrued interest, restructuring
provisions, equity accounted investment funding, deferred and
contingent consideration and government refundable advances.
Principal risks and uncertainties
The principal risks faced by the Group in the remaining six
months of the year remain largely unchanged from those reported on
pages 42 to 49 of the 2016 Annual Report. These risks relate to the
following: highly competitive markets; supply chain; customer
concentration; operating in global markets; laws, regulations and
corporate reputation; technology and innovation; people capability;
product quality; contract risk; programme management; health and
safety; information systems resilience; and pension funding.
As noted in the 2016 Annual Report, the UK's decision to leave
the EU has resulted in increased uncertainty in future trading
arrangements between the UK and the rest of the world. That
uncertainty remains; however, as around 90% of GKN's products are
manufactured outside of the UK, the direct effect on our major
markets will be limited. As outlined in the 2016 Annual Report, the
effects of the vote and the accompanying reduction in interest
rates and fall in bond yields increased our UK pension liability
during 2016. We have subsequently taken steps to manage that
liability as described below.
During the first half of 2017 good progress was made towards
reducing both ongoing cash contributions and volatility in respect
of the Group's UK defined benefit pension schemes, though the
schemes remain exposed to changes in asset values, interest rates,
inflation and mortality assumptions. As discussed on page 12, we
have largely completed discussions with the Trustees of these
schemes in relation to the 2016 funding valuations and are now
working to finalise the contractual documentation.
Directors' Responsibility Statement
The half yearly financial report is the responsibility of the
Directors who confirm that to the best of their knowledge:
-- the condensed set of financial statements has been prepared
in accordance with IAS 34 'Interim Financial Reporting' as endorsed
and adopted by the EU;
-- the interim management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being
an indication of important events that have occurred during the
first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being
related party transactions that have taken place in the first six
months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the 2016 Annual Report that could do so.
The Directors of GKN plc are listed in the GKN annual report for
2016.
Approved by the Board of GKN plc and signed on its behalf
by:
Mike Turner
Chairman
25 July 2017
APPICES
Page
GKN Condensed Consolidated Financial Statements
Consolidated Income Statement for the half
year ended 30 June 2017 17
Consolidated Statement of Comprehensive Income
for the half year ended 30 June 2017 18
Condensed Consolidated Statement of Changes
in Equity for the half year ended 30 June
2017 19
Consolidated Balance Sheet at 30 June 2017 20
Consolidated Cash Flow Statement for the half
year ended 30 June 2017 21
Notes to the Half Year Consolidated Financial 22
Statements - 33
Independent Review Report 34
CONSOLIDATED INCOME STATEMENT
FOR THE HALF YEARED 30 JUNE 2017
Unaudited
------------
First First Full
Notes half half year
2017 2016 2016
GBPm GBPm GBPm
----------------------------------------- ----- ----- ----- -----
Sales 1a 4,879 4,237 8,822
----------------------------------------- ----- ----- ----- -----
Trading profit 1b 395 348 684
Change in value of derivative
and other financial instruments 4 242 (71) (154)
Amortisation of non-operating
intangible assets arising on
business combinations (45) (46) (103)
Gains and losses on changes
in Group structure (1) - (9)
Impairment charges - - (52)
Acquisition-related restructuring
charges 5 - (22) (31)
Operating profit 591 209 335
Share of post-tax earnings of
equity accounted
investments 6 35 34 73
Interest payable (42) (41) (86)
Interest receivable 5 3 7
Other net financing charges 7 (30) (23) (37)
---------------------------------------- ----- ----- ----- -----
Net financing costs (67) (61) (116)
Profit before taxation 559 182 292
Taxation 8 (131) (17) (48)
Profit after taxation for the
period 428 165 244
----------------------------------------- ----- ----- ----- -----
Profit attributable to non-controlling
interests 3 2 2
Profit attributable to owners
of the parent 425 163 242
----------------------------------------- ----- ----- ----- -----
428 165 244
----------------------------------------- ----- ----- ----- -----
Earnings per share - pence
Continuing operations - basic 24.8 9.5 14.1
Continuing operations - diluted 24.6 9.5 14.0
----------------------------------------- ----- ----- ----- -----
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE HALF YEARED 30 JUNE 2017
Unaudited
------------
First First Full
Notes half half year
2017 2016 2016
GBPm GBPm GBPm
----------------------------------------- ----- ----- ----- -----
Profit after taxation for the
period 428 165 244
Other comprehensive income:
Items that may be reclassified
to profit or loss
Currency variations - subsidiaries
Arising in period (122) 431 671
Reclassified in period - - 2
Currency variations - equity
accounted investments
Arising in period (4) 20 22
Net investment hedge changes
in fair value
Arising in period 32 (108) (177)
Taxation 8 1 (36) (14)
----- ----- -----
(93) 307 504
----------------------------------------- ----- ----- ----- -----
Items that will not be reclassified
to profit or loss
Remeasurement of defined benefit
plans
Subsidiaries 10 180 (466) (396)
Taxation 8 (33) 110 63
----- ----- -----
147 (356) (333)
----------------------------------------- ----- ----- ----- -----
Other comprehensive income/(expense)
for the period 54 (49) 171
Total comprehensive income for
the period 482 116 415
----------------------------------------- ----- ----- ----- -----
Total comprehensive income attributable
to
non-controlling interests 2 4 6
Total comprehensive income attributable
to owner of the parent 480 112 409
482 116 415
----------------------------------------- ----- ----- ----- -----
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE HALF YEARED 30 JUNE 2017
Equity
attributable
to
equity
holders
Capital Share of
Share redemption premium Retained Other the Non-controlling Total
capital reserve account earnings reserves parent interests equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ----- -------- ---------- -------- --------- --------- ------------ --------------- -------
At 1 January
2017 173 298 330 981 345 2,127 35 2,162
Profit for the
period - - - 425 - 425 3 428
Other
comprehensive
income/(expense) - - - 147 (92) 55 (1) 54
Total
comprehensive
income/(expense) - - - 572 (92) 480 2 482
Share-based
payments - - - 3 - 3 - 3
Dividends paid
to equity
shareholders 9 - - - (101) - (101) - (101)
At 30 June 2017
(unaudited) 173 298 330 1,455 253 2,509 37 2,546
----------------- ----- -------- ---------- -------- --------- --------- ------------ --------------- -------
At 1 January
2016 173 298 330 1,217 (155) 1,863 23 1,886
Profit for the
period - - - 163 - 163 2 165
Other
comprehensive
income/(expense) - - - (356) 305 (51) 2 (49)
Total
comprehensive
income/(expense) - - - (193) 305 112 4 116
Share-based
payments - - - 4 - 4 - 4
Addition of
non-controlling
interests - - - - - - 9 9
Dividends paid
to equity
shareholders 9 - - - (99) - (99) - (99)
At 30 June 2016
(unaudited) 173 298 330 929 150 1,880 36 1,916
----------------- ----- -------- ---------- -------- --------- --------- ------------ --------------- -------
At 1 January
2016 173 298 330 1,217 (155) 1,863 23 1,886
Profit for the
year - - - 242 - 242 2 244
Other
comprehensive
income/(expense) - - - (333) 500 167 4 171
----------------- ----- -------- ---------- -------- --------- --------- ------------ --------------- -------
Total
comprehensive
income/(expense) - - - (91) 500 409 6 415
Share-based
payments - - - 5 - 5 - 5
Share options
exercised - - - 1 - 1 - 1
Addition of
non-controlling
interest - - - - - - 9 9
Purchase of
non-controlling
interest - - - (1) - (1) (1) (2)
Dividends paid
to equity
shareholders 9 - - - (150) - (150) - (150)
Dividends paid
to
non-controlling
interests - - - - - - (2) (2)
----------------- ----- -------- ---------- -------- --------- --------- ------------ --------------- -------
At 31 December
2016 173 298 330 981 345 2,127 35 2,162
----------------- ----- -------- ---------- -------- --------- --------- ------------ --------------- -------
CONSOLIDATED BALANCE SHEET
AT 30 JUNE 2017
Unaudited
----------------
Notes 30 June 30 June 31 December
2017 2016 2016
GBPm GBPm GBPm
---------------------------------- ----- ------- ------- -----------
Assets
Non-current assets
Goodwill 577 665 588
Other intangible assets 1,253 1,341 1,320
Property, plant and equipment 12 2,648 2,484 2,670
Equity accounted investments 204 194 233
Other receivables and investments 161 47 49
Derivative financial instruments 4 32 28 25
Deferred tax assets 498 509 557
5,373 5,268 5,442
---------------------------------- ----- ------- ------- -----------
Current assets
Inventories 1,521 1,370 1,431
Trade and other receivables 1,750 1,652 1,648
Current tax assets 10 4 7
Derivative financial instruments 4 22 16 19
Other financial assets 5 5 5
Cash and cash equivalents 11 649 227 411
3,957 3,274 3,521
---------------------------------- ----- ------- ------- -----------
Total assets 9,330 8,542 8,963
---------------------------------- ----- ------- ------- -----------
Liabilities
Current liabilities
Borrowings (44) (136) (64)
Derivative financial instruments 4 (119) (166) (206)
Trade and other payables (2,254) (2,028) (2,186)
Current tax liabilities (151) (151) (142)
Provisions (57) (78) (71)
---------------------------------- ------- ------- -----------
(2,625) (2,559) (2,669)
---------------------------------- ----- ------- ------- -----------
Non-current liabilities
Borrowings (1,121) (849) (842)
Derivative financial instruments 4 (353) (430) (521)
Deferred tax liabilities (256) (165) (227)
Trade and other payables (510) (447) (427)
Provisions (70) (75) (82)
Post-employment obligations 10 (1,849) (2,101) (2,033)
(4,159) (4,067) (4,132)
---------------------------------- ----- ------- ------- -----------
Total liabilities (6,784) (6,626) (6,801)
---------------------------------- ----- ------- ------- -----------
Net assets 2,546 1,916 2,162
---------------------------------- ----- ------- ------- -----------
Shareholders' equity
Share capital 173 173 173
Capital redemption reserve 298 298 298
Share premium account 330 330 330
Retained earnings 1,455 929 981
Other reserves 253 150 345
---------------------------------- ----- ------- ------- -----------
Equity attributable to equity
holders of the parent 2,509 1,880 2,127
Non-controlling interests 37 36 35
---------------------------------- ----- ------- ------- -----------
Total equity 2,546 1,916 2,162
---------------------------------- ----- ------- ------- -----------
CONSOLIDATED CASH FLOW STATEMENT
FOR THE HALF YEARED 30 JUNE 2017
Unaudited
------------
First First Full
Notes half half year
2017 2016 2016
GBPm GBPm GBPm
-------------------------------------- ----- ----- ----- -----
Cash flows from operating activities
Cash generated from operations 11 379 252 778
Interest received 5 3 7
Interest paid (26) (26) (83)
Tax paid (49) (42) (93)
Dividends received from equity
accounted investments 59 55 57
368 242 666
-------------------------------------- ----- ----- ----- -----
Cash flows from investing activities
Purchase of property, plant
and equipment (218) (198) (416)
Receipt of government capital
grants 1 6 6
Purchase of intangible assets (37) (35) (84)
Repayment of government refundable
advances (4) - (6)
Proceeds from sale and realisation
of fixed assets 6 25 37
Payment of deferred and contingent
consideration (2) (1) (1)
Costs associated with disposal
of subsidiaries (1) - -
Acquisitions of subsidiaries
(net of cash acquired) 14 (25) (8) (17)
Purchase of investment - - (5)
Proceeds from disposal of subsidiary,
net of cash - - 151
Equity accounted investments
loan settlement - 4 4
(280) (207) (331)
-------------------------------------- ----- ----- ----- -----
Cash flows from financing activities
Purchase of non-controlling
interests - - (2)
Proceeds from exercise of share
options - - 1
Proceeds from borrowing facilities 298 102 102
Repayment of other borrowings (26) (134) (243)
Dividends paid to equity shareholders 9 (101) (99) (150)
Dividends paid to non-controlling
interests - - (2)
171 (131) (294)
-------------------------------------- ----- ----- ----- -----
Movement in cash and cash equivalents 259 (96) 41
Cash and cash equivalents at
beginning of period 385 291 291
Currency variations on cash
and cash equivalents (6) 29 53
-------------------------------------- ----- ----- ----- -----
Cash and cash equivalents at
end of period 11 638 224 385
-------------------------------------- ----- ----- ----- -----
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS
FOR THE HALF YEARED 30 JUNE 2017
1 Segmental analysis
The Group's reportable segments have been determined
based on reports reviewed by the Executive Committee
led by the Chief Executive. The operating activities
of the Group are largely structured according
to the markets served; aerospace and automotive.
Automotive is managed according to product groups;
driveline and powder metallurgy. Reportable segments
derive their sales from the manufacture of product
and sale of service.
a) Sales
Automotive
----------------------
Powder
Aerospace Driveline Metallurgy Total
GBPm GBPm GBPm GBPm
----------------------------------- --------- ---------- ---------- -----
FIRST HALF 2017 (unaudited)
----------------------------------- --------- ---------- ---------- -----
Subsidiaries 1,770 2,360 601
Equity accounted investments 39 294 -
--------------------------------------- --------- ---------- ----------
1,809 2,654 601 5,064
--------------------------------------- --------- ---------- ----------
Other businesses 148
--------------------------------------- --------- ---------- ---------- -----
Management sales 5,212
Less: Equity accounted investments
sales (333)
--------------------------------------- --------- ---------- ---------- -----
Income statement - sales 4,879
--------------------------------------- --------- ---------- ---------- -----
FIRST HALF 2016 - restated*
(unaudited)
----------------------------------- --------- ---------- ---------- -----
Subsidiaries 1,598 1,964 499
Equity accounted investments 33 238 -
--------------------------------------- --------- ---------- ----------
1,631 2,202 499 4,332
--------------------------------------- --------- ---------- ----------
Other businesses 186
--------------------------------------- --------- ---------- ---------- -----
Management sales 4,518
Less: Equity accounted investments
sales (281)
--------------------------------------- --------- ---------- ---------- -----
Income statement - sales 4,237
--------------------------------------- --------- ---------- ---------- -----
FULL YEAR 2016 - restated*
-----------------------------------------------------------------------------
Subsidiaries 3,352 4,109 1,032
Equity accounted investments 71 505 -
--------------------------------------- --------- ---------- ----------
3,423 4,614 1,032 9,069
--------------------------------------- --------- ---------- ----------
Other businesses 345
--------------------------------------- --------- ---------- ---------- -----
Management sales 9,414
Less: Equity accounted investments
sales (592)
--------------------------------------- --------- ---------- ---------- -----
Income statement - sales 8,822
--------------------------------------- --------- ---------- ---------- -----
* As previously announced, following disposal of the Stromag
business on 30 December 2016 the Group has changed its segments to
remove Land Systems for reporting in 2017. The two businesses
remaining in the Group that were part of Land Systems have been
reported as follows: Wheels and Structures in Other Businesses and
Driveshafts and Aftermarket Services, now renamed Off-Highway
Powertrain, in Driveline. For the purpose of comparative
information in 2016, Stromag has been included in Other Businesses.
There is no change to Aerospace or Powder Metallurgy segmental
reporting.
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FOR THE HALF YEARED 30 JUNE 2017
1 Segmental analysis (continued)
b) Trading profit
Automotive
---------------------
Powder
Aerospace Driveline Metallurgy Total
GBPm GBPm GBPm GBPm
----------------------------------- --------- --------- ---------- -----
FIRST HALF 2017 (unaudited)
----------------------------------- --------- --------- ---------- -----
Trading profit before depreciation
and amortisation 243 245 94
Depreciation of property,
plant and equipment (43) (74) (25)
Amortisation of operating
intangible assets (30) (7) (1)
--------------------------------------- --------- --------- ----------
Trading profit - subsidiaries 170 164 68
Trading profit/(loss) -
equity accounted investments (2) 43 -
--------------------------------------- --------- --------- ----------
168 207 68 443
--------------------------------------- --------- --------- ----------
Other businesses 9
Corporate and unallocated
costs (16)
--------------------------------------- --------- --------- ---------- -----
Management trading profit 436
Less: Equity accounted investments
trading profit (41)
--------------------------------------- --------- --------- ---------- -----
Income Statement - trading
profit 395
--------------------------------------- --------- --------- ---------- -----
FIRST HALF 2016 - restated*
(unaudited)
----------------------------------- --------- --------- ---------- -----
Trading profit before depreciation
and amortisation 221 197 85
Depreciation of property,
plant and equipment (38) (58) (21)
Amortisation of operating
intangible assets (24) (5) (1)
--------------------------------------- --------- --------- ----------
Trading profit - subsidiaries 159 134 63
Trading profit - equity
accounted investments 2 39 -
--------------------------------------- --------- --------- ----------
161 173 63 397
--------------------------------------- --------- --------- ----------
Other businesses 4
Corporate and unallocated
costs (11)
--------------------------------------- --------- --------- ---------- -----
Management trading profit 390
Less: Equity accounted investments
trading profit (42)
--------------------------------------- --------- --------- ---------- -----
Income Statement - trading
profit 348
--------------------------------------- --------- --------- ---------- -----
FULL YEAR 2016 - restated*
----------------------------------------------------------------------------
Trading profit before depreciation
and amortisation 464 388 164
Depreciation of property,
plant and equipment (78) (128) (44)
Amortisation of operating
intangible assets (51) (12) (2)
--------------------------------------- --------- --------- ----------
Trading profit - subsidiaries 335 248 118
Trading profit - equity
accounted investments 4 82 -
--------------------------------------- --------- --------- ----------
339 330 118 787
--------------------------------------- --------- --------- ----------
Other businesses 7
Corporate and unallocated
costs (21)
Management trading profit 773
Less: Equity accounted investments
trading profit (89)
--------------------------------------- --------- --------- ---------- -----
Income Statement - trading
profit 684
--------------------------------------- --------- --------- ---------- -----
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.
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FOR THE HALF YEARED 30 JUNE 2017
1 Segmental analysis (continued)
Goodwill, fixed assets and working capital - subsidiaries
c) only
Automotive
----------------------
Powder
Aerospace Driveline Metallurgy Total
GBPm GBPm GBPm GBPm
---------------------------- --------- ---------- ---------- -----------------------
FIRST HALF 2017 (unaudited)
---------------------------- --------- ---------- ---------- -----------------------
Property, plant and
equipment
and operating intangible
assets 1,334 1,401 480 3,215
Working capital 349 190 150 689
---------------------------- --------- ---------- ---------- -----------------------
Net operating assets 1,683 1,591 630
Goodwill and non-operating
intangible assets 817 292 51
---------------------------- --------- ---------- ----------
Net investment 2,500 1,883 681
---------------------------- --------- ---------- ----------
FIRST HALF 2016 - restated*
(unaudited)
---------------------------- --------- ---------- ---------- -----------------------
Property, plant and
equipment
and operating intangible
assets 1,285 1,286 436 3,007
Working capital 258 186 147 591
---------------------------- --------- ---------- ---------- -----------------------
Net operating assets 1,543 1,472 583
Goodwill and non-operating
intangible assets 901 302 36
---------------------------- --------- ---------- ----------
Net investment 2,444 1,774 619
---------------------------- --------- ---------- ----------
FULL YEAR 2016 - restated*
----------------------------------------------------------------------------------------
Property, plant and
equipment
and operating intangible
assets 1,373 1,406 475 3,254
Working capital 319 68 131 518
---------------------------- --------- ---------- ---------- -----------------------
Net operating assets 1,692 1,474 606
Goodwill and non-operating
intangible assets 868 309 39
---------------------------- --------- ---------- ----------
Net investment 2,560 1,783 645
---------------------------- --------- ---------- ----------
d) Inter segment sales
Subsidiary segmental sales gross of inter segment
sales are; Aerospace GBP1,770 million (first half
2016: GBP1,599 million, full year 2016: GBP3,352
million), Driveline GBP2,376 million (first half
2016 - restated*: GBP1,985 million, full year
2016 - restated*: GBP4,140 million) and Powder
Metallurgy GBP604 million (first half 2016: GBP501
million, full year 2016: GBP1,036 million).
e) Reconciliation of segmental property, plant and
equipment and operating intangible assets to the
Balance Sheet
----------------------------------------------------------------------------------------
Unaudited
----------------------
First First Full
half half year
2017 2016 2016
restated* restated*
GBPm GBPm GBPm
------------------------- --------- ---------- ---------- -----------------------
Segmental analysis - property, plant
and equipment and operating intangible
assets 3,215 3,007 3,254
Segmental analysis - goodwill and
non-operating intangible assets 1,160 1,239 1,216
Goodwill (577) (665) (588)
Other businesses 95 235 99
Corporate assets 8 9 9
---------------------------------------------------- ---------- ---------- -----------------------
Balance Sheet - property, plant
and equipment and other intangible
assets 3,901 3,825 3,990
---------------------------------------------------- ---------- ---------- -----------------------
Reconciliation of segmental
working capital to the
Balance
f) Sheet
---------------------------- --------- ---------- ---------- -----------------------
Unaudited
----------------------
First First Full
half half year
2017 2016 2016
restated* restated*
GBPm GBPm GBPm
--------------------------------------- ---------- ---------- -----------------------
Segmental analysis - working capital 689 591 518
Other businesses 18 31 13
Corporate items (25) (24) (22)
Accrued interest (37) (34) (25)
Restructuring provisions - (1) (10)
Equity accounted investment funding (11) (14) (10)
Deferred and contingent consideration (4) (11) (6)
Government refundable advances (89) (97) (96)
Balance Sheet - inventories, trade
and other receivables, trade and
other
payables and provisions 541 441 362
--------------------------------------------------- ---------- ---------- -----------------------
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FOR THE HALF YEARED 30 JUNE 2017
2 Basis of preparation
These half year condensed consolidated financial
statements for the six months ended 30 June 2017
have been prepared in accordance with International
Accounting Standard (IAS) 34 Interim Financial
Reporting as adopted by the European Union and
the Disclosure and Transparency Rules of the Financial
Conduct Authority. These financial statements
have been prepared on a going concern basis. These
financial statements, which are unaudited but
have been reviewed by the auditors, provide an
update of previously reported information and
should be read in conjunction with the audited
consolidated financial statements for the year
ended 31 December 2016, which were prepared in
accordance with International Financial Reporting
Standards as adopted by the European Union (IFRS).
These financial statements do not constitute statutory
accounts as defined in section 434 of the Companies
Act 2006. A copy of the audited consolidated statutory
financial statements for the year ended 31 December
2016 has been delivered to the Registrar of Companies.
The auditors' report on these financial statements
was unqualified, did not contain an emphasis of
matter paragraph and did not contain any statement
under section 498(2) or (3) of the Companies Act
2006.
Accounting policies
The accounting policies and methods of presentation
applied in these financial statements are the
same as those applied in the audited consolidated
financial statements for the year ended 31 December
2016.
IFRS 15
The Group will adopt IFRS 15 Revenue from Contracts
with Customers for the year ending 31 December
2018 which will change the way that revenue is
recognised and expand disclosure for arrangements
with customers. Details on implementation of the
change, potential consequences and progress were
provided in the 31 December 2016 annual report.
Further progress has been made during the period;
developing policies, benchmarking initial findings
against market announcements and scoping the contract
review exercise planned for the second half of
the year. Nothing has come from the incremental
work that detracts from the update provided in
February. It is planned to provide further information
later in 2017 once the contract review work has
been concluded.
Estimates, judgements and assumptions
The Group's significant accounting policies are
set out in the audited consolidated financial
statements for the year ended 31 December 2016.
Application of the Group's accounting policies
requires the use of estimates, subjective judgement
and assumptions. 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, derivative and other financial instruments,
provisions and impairment of non-current assets.
Details of the principal estimates, judgements
and assumptions are set out in notes 24, 4b, 20,
21 and 11 of the audited consolidated financial
statements for the year ended 31 December 2016.
Date of approval
These financial statements were approved by the
Board of Directors on Tuesday 25 July 2017.
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FOR THE HALF YEARED 30 JUNE 2017
3 Adjusted performance measures
(a) Reconciliation of reported and management performance
measures
FIRST HALF 2017 (unaudited)
---------------------------------------- ----------------------------------------------
Adjusting
and
Equity non-
As accounted trading Management
reported investments items basis
GBPm GBPm GBPm GBPm
---------------------------------------- --------- ------------ --------- ----------
Sales 4,879 333 - 5,212
---------------------------------------- --------- ------------ --------- ----------
Trading profit 395 41 - 436
Change in value of derivative
and other financial instruments 242 - (242) -
Amortisation of non-operating
intangible assets arising
on
business combinations (45) - 45 -
Gains and losses on changes
in Group Structure (1) - 1 -
Operating profit 591 41 (196) 436
Share of post-tax earnings
of equity accounted investments 35 (41) - (6)
Interest payable (42) - - (42)
Interest receivable 5 - - 5
Other net financing charges (30) - 30 -
---------------------------------------- --------- ------------ --------- ----------
Net financing costs (67) - 30 (37)
---------------------------------------- --------- ------------ --------- ----------
Profit before taxation 559 - (166) 393
Taxation (131) - 45 (86)
---------------------------------------- --------- ------------ --------- ----------
Profit after taxation for
the period 428 - (121) 307
Profit attributable to non-controlling
interests (3) - - (3)
---------------------------------------- --------- ------------ --------- ----------
Profit attributable to owners
of the parent 425 - (121) 304
---------------------------------------- --------- ------------ --------- ----------
Earnings per share - pence 24.8 - (7.1) 17.7
---------------------------------------- --------- ------------ --------- ----------
FIRST HALF 2016 (unaudited)
---------------------------------------- ----------------------------------------------
Adjusting
and
Equity non-
As accounted trading Management
reported investments items basis
GBPm GBPm GBPm GBPm
---------------------------------------- --------- ------------ --------- ----------
Sales 4,237 281 - 4,518
---------------------------------------- --------- ------------ --------- ----------
Trading profit 348 42 - 390
Change in value of derivative
and other financial instruments (71) - 71 -
Amortisation of non-operating
intangible assets arising
on
business combinations (46) - 46 -
Acquisition-related restructuring
charges (22) - 22 -
Operating profit 209 42 139 390
Share of post-tax earnings
of equity accounted investments 34 (42) - (8)
Interest payable (41) - - (41)
Interest receivable 3 - - 3
Other net financing charges (23) - 23 -
---------------------------------------- --------- ------------ --------- ----------
Net financing costs (61) - 23 (38)
---------------------------------------- --------- ------------ --------- ----------
Profit before taxation 182 - 162 344
Taxation (17) - (59) (76)
---------------------------------------- --------- ------------ --------- ----------
Profit after taxation for
the period 165 - 103 268
Profit attributable to non-controlling
interests (2) - - (2)
---------------------------------------- --------- ------------ --------- ----------
Profit attributable to owners
of the parent 163 - 103 266
---------------------------------------- --------- ------------ --------- ----------
Earnings per share - pence 9.5 - 6.0 15.5
---------------------------------------- --------- ------------ --------- ----------
FULL YEAR 2016
---------------------------------------- ----------------------------------------------
For the year ended 31 December 2016, management
sales were GBP9,414 million, management trading
profit was GBP773 million, management profit before
tax was GBP678 million and management earnings
per share was 31.0 pence.
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FOR THE HALF YEARED 30 JUNE 2017
3 Adjusted performance measures (continued)
(b) Summary by segment
FIRST HALF 2017 (unaudited)
---------------------------------------- ----- ------- ------
Trading
Sales profit Margin
GBPm GBPm
---------------------------------------- ----- ------- ------
Aerospace 1,809 168 9.3%
Driveline 2,654 207 7.8%
Powder Metallurgy 601 68 11.3%
Other businesses 148 9
Corporate and unallocated costs - (16)
--------------------------------------------- ----- ------- ------
5,212 436 8.4%
FIRST HALF 2016 - restated* (unaudited)
---------------------------------------- ----- ------- ------
Trading
Sales profit Margin
GBPm GBPm
---------------------------------------- ----- ------- ------
Aerospace 1,631 161 9.9%
Driveline 2,202 173 7.9%
Powder Metallurgy 499 63 12.6%
Other businesses 186 4
Corporate and unallocated costs - (11)
--------------------------------------------- ----- ------- ------
4,518 390 8.6%
--------------------------------------------- ----- ------- ------
FULL YEAR 2016 - restated*
---------------------------------------- ----------------------
Trading
Sales profit Margin
GBPm GBPm
---------------------------------------- ----- ------- ------
Aerospace 3,423 339 9.9%
Driveline 4,614 330 7.2%
Powder Metallurgy 1,032 118 11.4%
Other businesses 345 7
Corporate and unallocated costs - (21)
--------------------------------------------- ----- ------- ------
9,414 773 8.2%
* Restated for the change in segmental information, see note
1
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FOR THE HALF YEARED 30 JUNE 2017
Change in value of derivative and other financial
4 instruments
-------------------------------------------------------------------------------
Unaudited
----------------
First First Full
half half year
2017 2016 2016
GBPm GBPm GBPm
----------------------------------------------- --------- ----- ------------
Forward currency contracts (not
hedge accounted) 240 (52) (135)
Embedded derivatives (2) 3 4
----------------------------------------------- --------- ----- ------------
238 (49) (131)
Net gains and losses on intra-group
funding
Arising in period 4 (22) (23)
--------------------------------------------------- --------- ----- ------------
Change in value of derivative
and other financial instruments 242 (71) (154)
----------------------------------------------- --------- ----- ------------
Forward foreign currency contracts, cross currency
interest rate swaps and embedded derivatives (all
level 2) are valued using observable rates and
published prices together with forecast cash flow
information where applicable, consistent with
the prior year. The amount in respect of embedded
derivatives represents a commercial contract denominated
in US dollars between European Aerospace subsidiaries
and a customer outside the USA.
Carrying values of derivative instruments at 30
June 2017 were; forward currency contracts liability
of GBP242 million (31 December 2016: liability
of GBP482 million), embedded derivatives asset
of GBP11 million (31 December 2016: asset of GBP13
million) and cross currency interest rate swaps
liability of GBP187 million (31 December 2016:
liability of GBP214 million).
5 Acquisition-related restructuring charges
-------------------------------------------------------------------------------
Unaudited
----------------
First First Full
half half year
2017 2016 2016
GBPm GBPm GBPm
----------------------------------------------- --------- ----- ------------
Redundancy and other employee-related
amounts - (20) (27)
Integration and other expenses - (2) (4)
Acquisition-related restructuring
charges - (22) (31)
---------------------------------------------------- --------- ----- ------------
Restructuring charges separately identified in
2016, related to the recently acquired Fokker
Technologies Group B.V. business within Aerospace.
Share of post-tax earnings of equity accounted
6 investments
-------------------------------------------------------------------------------
Unaudited
----------------
First First Full
half half year
2017 2016 2016
GBPm GBPm GBPm
----------------------------------------------- --------- ----- ------------
Sales 333 281 592
Operating costs (292) (239) (503)
---------------------------------------------------- --------- ----- ------------
Trading profit 41 42 89
Net financing costs (1) - (1)
---------------------------------------------------- ------------
Profit before taxation 40 42 88
Taxation (5) (8) (15)
---------------------------------------------------- --------- ----- ------------
Share of post-tax earnings 35 34 73
---------------------------------------------------- --------- ----- ------------
7 Other net financing charges
-------------------------------------------------------------------------------
Unaudited
----------------
First First Full
half half year
2017 2016 2016
GBPm GBPm GBPm
----------------------------------------------- --------- ----- ------------
Interest charge on net defined
benefit plans (24) (27) (53)
Fair value changes on cross currency
interest rate swaps (5) 5 18
Unwind of discounts (1) (1) (2)
Other net financing charges (30) (23) (37)
---------------------------------------------------- --------- ----- ------------
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FOR THE HALF YEARED 30 JUNE 2017
8 Taxation
The tax charge for the period is based on an estimate
of the Group's expected annual effective rate
of tax for 2017 based on tax legislation substantively
enacted at 30 June 2017 applied to taxable profit
for the period ended 30 June 2017.
Unaudited
------------
First First Full
half half year
2017 2016 2016
GBPm GBPm GBPm
------------------------------------------ ----- ----- -----
Tax included in the income statement
Analysis of tax charge in the
period
Current tax (charge)/credit
Current period charge (70) (66) (67)
Utilisation of previously unrecognised
tax losses and other assets - - 1
Adjustments in respect of prior
periods (1) 3 9
Net movement on provisions for
uncertain tax positions 2 - 9
--------------------------------------------- ----- ----- -----
(69) (63) (48)
Deferred tax (62) 46 -
------------------------------------------ ----- ----- -----
Total tax charge for the period (131) (17) (48)
------------------------------------------ ----- ----- -----
Analysed as:
------------------------------------------ ----- ----- -----
Tax in respect of management profit
Current tax (72) (63) (40)
Deferred tax (14) (13) (104)
------------------------------------------ ----- ----- -----
(86) (76) (144)
------------------------------------------ ----- ----- -----
Tax in respect of items excluded
from management profit
Current tax 3 - (8)
Deferred tax (48) 59 104
------------------------------------------ ----- ----- -----
(45) 59 96
------------------------------------------ ----- ----- -----
Total tax charge for the period (131) (17) (48)
------------------------------------------ ----- ----- -----
Unaudited
------------
First First Full
half half year
2017 2016 2016
GBPm GBPm GBPm
------------------------------------------ ----- ----- -----
Tax included in other comprehensive
income
Current tax on post-employment
obligations 2 2 3
Current tax on foreign currency
gains and losses on intra-group
funding 7 - (50)
Deferred tax on post-employment
obligations (35) 108 60
Deferred tax on hedged foreign
currency gains and losses (6) - 39
Deferred tax on other foreign
currency gains and losses on
intra-group funding - (36) (3)
--------------------------------------------- ----- ----- -----
(32) 74 49
------------------------------------------ ----- ----- -----
Management tax rate
The tax charge arising on management profits of
subsidiaries of GBP358 million (first half 2016:
GBP310 million, full year 2016: GBP605 million)
was GBP86 million (first half 2016: GBP76 million
charge, full year 2016: GBP144 million charge)
giving an effective tax rate of 24% (first half
2016: 25%, full year 2016: 24%).
UK tax rate reduction
The mainstream rate of UK corporation tax reduced
to 19% from 1 April 2017. A further reduction
to 17% from 1 April 2020 has been substantively
enacted. Temporary differences are measured at
the rate they are expected to reverse.
New legislation restricting the use of brought
forward losses is expected to have effect from
1 April 2017. However, this legislation is not
yet substantively enacted. It is anticipated this
will not affect the ability to utilise recognised
deferred tax assets but may affect the period
over which the losses can be utilised.
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FOR THE HALF YEARED 30 JUNE 2017
9 Dividends
An interim dividend of 3.1 pence per share (first
half 2016: 2.95 pence per share, full year 2016:
8.85 pence per share) has been declared by the
Directors and will be paid on 18 September 2017
to shareholders on the register at 11 August 2017.
Based on the number of shares ranking for dividend
at 30 June 2017, the interim dividend is expected
to absorb GBP53 million.
During the period GBP101 million (first half 2016:
GBP99 million, full year 2016: GBP150 million)
was paid in respect of dividends to equity shareholders.
10 Post-employment obligations
Actuarial assessments of the key defined benefit
pension and post-employment medical plans (representing
97% of liabilities and 97% of assets) were carried
out as at 30 June 2017.
Movement in post-employment obligations during
the period:
-------------------------------------------------------------------------------------------
Unaudited
-------------------------
First First Full
half half Year
2017 2016 2016
GBPm GBPm GBPm
------------------------------------------- -------- --------------- -------------------
At 1 January (2,033) (1,558) (1,558)
Current service cost (31) (25) (48)
Settlements and curtailments - - 5
Businesses disposed - - 11
Administrative costs (2) (2) (3)
Interest charge on net defined
benefit plans (24) (27) (53)
Remeasurement of defined benefit
plans 180 (466) (396)
Contributions/benefits paid 70 71 121
Currency variations (9) (94) (112)
At end of period (1,849) (2,101) (2,033)
------------------------------------------------- -------- --------------- -------------------
Post-employment obligations as at the period end
comprise:
-------------------------------------------------------------------------------------------
Unaudited
-------------------------
30 June 30 June 31 December
2017 2016 2016
GBPm GBPm GBPm
------------------------------------------- -------- --------------- -------------------
Pensions - funded (1,124) (1,329) (1,285)
- unfunded (641) (683) (662)
Medical - funded (36) (38) (37)
- unfunded (48) (51) (49)
------------------------------------------------ -------- --------------- -------------------
(1,849) (2,101) (2,033)
------------------------------------------------ -------- --------------- -------------------
UK Americas Europe ROW Total
GBPm GBPm GBPm GBPm GBPm
----------------------------- ------------ -------- ------ ------- -------------------
At 30 June 2017 - unaudited (1,063) (142) (631) (13) (1,849)
At 30 June 2016 - unaudited (1,234) (173) (676) (18) (2,101)
At 31 December 2016 (1,221) (148) (651) (13) (2,033)
----------------------------- ------------ -------- ------ ------- -------------------
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FOR THE HALF YEARED 30 JUNE 2017
10 Post-employment obligations (continued)
Assumptions
The major assumptions used were:
UK Americas Europe ROW
--------------------------------
GKN GKN GKN
1 2 3
% % % % % %
----------------------------- ------- -------------- ------- -------- ------- -----
At 30 June 2017 -
unaudited
Rate of increase
in pensionable salaries n/a n/a n/a n/a 2.50 -
Rate of increase
in payment and
deferred pensions n/a 3.15 3.10 n/a 1.75 n/a
Discount rate n/a 2.55 2.40 3.80 1.90 0.50
Inflation assumption n/a 3.20 3.15 n/a 1.75 n/a
Rate of increase
in medical costs:
Initial/long term 5.4/5.4 6.75/5.0 n/a n/a
----------------------------
At 30 June 2016 -
unaudited
Rate of increase
in pensionable salaries n/a 3.80 n/a n/a 2.50 -
Rate of increase
in payment and
deferred pensions 2.80 2.80 n/a n/a 1.75 n/a
Discount rate 2.75 2.95 n/a 3.60 1.30 0.80
Inflation assumption 2.80 2.80 n/a n/a 1.75 n/a
Rate of increase
in medical costs:
Initial/long term 5.4/5.4 7.0/5.0 n/a n/a
----------------------------
At 31 December 2016
Rate of increase
in pensionable salaries n/a 4.30/4.25 n/a n/a 2.50 -
Rate of increase
in payment and
deferred pensions n/a 3.20 3.30 n/a 1.75 n/a
Discount rate n/a 2.60/2.70 2.45 4.10 1.60 0.50
Inflation assumption n/a 3.30/3.25 3.35 n/a 1.75 n/a
Rate of increase
in medical costs:
Initial/long term 5.4/5.4 6.75/5.0 n/a n/a
---------------------------- -------------------------------- -------- ------- -----
The UK discount rate at 30 June 2017 is based
on AA corporate bonds with duration weighted to
the UK pension schemes' liabilities, derived from
the Mercer pension discount yield curve. The methodologies
used to derive the German and US discount rates
were similarly consistent with those used at 31
December 2016.
The UK scheme mortality assumptions are based
on S2PA (year of birth) mortality tables with
CMI 2016 improvements and a 1.5% per annum long
term improvement trend. In Germany RT2005-G tables
were used, whilst RP-2014 tables were used in
the US.
Assumption sensitivity analysis
The impact of a one percentage point movement
in the primary assumptions for the defined benefit
net obligations as at 30 June 2017 is set out
below:
UK Americas Europe ROW
GBPm GBPm GBPm GBPm
------------------------------------------------------ ------- -------- ------- -----
Discount rate +1% 543 42 102 3
Discount rate -1% (720) (53) (129) (2)
Rate of inflation +1% (565) (1) (106) -
Rate of inflation -1% 464 - 89 -
Life expectancy +1 year (129) (9) (22) -
Life expectancy -1 year 127 9 24 -
----------------------------------------------------------- ------- -------- ------- -----
UK deficit funding
During the period, the Company consulted with
the active members of the UK's defined benefit
scheme (the Scheme) over closure of the Scheme
to future accrual. From 1 July 2017 all Scheme
members will accrue benefits on a defined contribution
basis.
The triennial statutory valuation of GKN 2 as
at 5 April 2016 is nearing completion. It is expected
that the Company will make a lump sum payment
of GBP250 million, funded by the proceeds from
the recent bond issue, during the second half
of 2017.
The effective date for the statutory valuation
of GKN 3 is 31 December 2016 and discussions with
the Trustee are ongoing.
During the period the Group paid GBP30 million
(first half 2016: GBP30 million, full year 2016:
GBP30 million) to the 2 UK pension schemes through
its pension partnership arrangement.
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FOR THE HALF YEARED 30 JUNE 2017
11 Cash flow notes
Unaudited
---------------------
First First Full
half half year
2017 2016 2016
GBPm GBPm GBPm
-------------------------------------------- ---------- --------- ---------
Cash generated from operations
Operating profit 591 209 335
Adjustments for:
Depreciation, impairment and amortisation
of fixed assets
Charged to trading profit
Depreciation 147 124 263
Amortisation 38 31 67
Amortisation of non-operating
intangible assets arising on business
combinations 45 46 103
Impairment charges - - 52
Change in value of derivative and
other financial instruments (242) 71 154
Gains and losses on changes in
Group structure 1 - 9
Amortisation of government capital
grants (2) (1) (2)
Net profit on sale/realisation
of fixed assets - - (3)
Charge for share-based payments 3 4 5
Movement in post-employment obligations (37) (44) (75)
Change in inventories (122) (63) (78)
Change in receivables (246) (184) (151)
Change in payables and provisions 203 59 99
379 252 778
-------------------------------------------- ---------- --------- ---------
Movement in net debt
-------------------------------------------- ---------- --------- ---------
Net movement in cash and cash equivalents 259 (96) 41
Net movement in borrowings and
deposits (272) 32 141
Movement on cross currency interest
rate swaps 27 (96) (145)
Movement on other net investment
hedges (3) (12) (17)
Amortisation of debt issue costs (1) (1) (2)
Currency variations (3) 24 47
---------- --------- ---------
Movement in period 7 (149) 65
Net debt at beginning of period (704) (769) (769)
-------------------------------------------- ---------- --------- ---------
Net debt at end of period (697) (918) (704)
-------------------------------------------- ---------- --------- ---------
Reconciliation of cash and cash
equivalents
-------------------------------------------- ---------- --------- ---------
Cash and cash equivalents per balance
sheet 649 227 411
Bank overdrafts included within
"current liabilities - borrowings" (11) (3) (26)
Cash and cash equivalents per cash
flow 638 224 385
-------------------------------------------- ---------- --------- ---------
The fair values of most financial instruments approximate
to carrying value either due to the short-term
maturity of the instruments or because interest
rates are reset frequently, with the exception
of borrowings and government refundable advances
which are carried at amortised cost. The carrying
value of borrowings at 30 June 2017 was GBP1,165
million (first half 2016: GBP985 million) with
a fair value of GBP1,278 million (first half 2016:
GBP1,035 million) and the carrying value of government
refundable advances at 30 June 2017 was GBP89 million
(first half 2016: GBP97 million) with a fair value
of GBP107 million (first half 2016: GBP115 million).
Gross borrowings has been increased by issuance
of a new GBP300 million unsecured bond, with an
annual fixed interest rate of 33/8% maturing in
May 2032.
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FOR THE HALF YEARED 30 JUNE 2017
12 Property, plant and equipment (unaudited)
During the period ended 30 June 2017 the Group
asset additions were GBP177 million (first half
2016: GBP166 million). Assets with a carrying value
of GBP2 million (first half 2016: GBP25 million)
were disposed of during the period ended 30 June
2017.
13 Related party transactions (unaudited)
In the ordinary course of business, sales and purchases
of goods take place between subsidiaries and equity
accounted investment companies priced on an 'arm's
length' basis. The Group also provides short-term
financing facilities to equity accounted investment
companies. There have been no significant changes
in the nature of transactions between subsidiaries
and equity accounted investment companies that
have materially affected the financial statements
in the period. Similarly, there has been no material
impact on the financial statements arising from
changes in the aggregate compensation of key management.
14 Other financial information (unaudited)
Commitments relating to future capital expenditure
not provided by subsidiaries at 30 June 2017 amounted
to GBP255 million (30 June 2016: GBP189 million)
and the Group's share not provided by equity accounted
investments amounted to GBP8 million (30 June 2016:
GBP23 million).
During the period a total of 2,941,829 ordinary
shares (first half 2016: 189,505 ordinary shares)
were issued in connection with the exercise/release
of options/awards under the Company's share incentive
schemes, all of which were transferred from treasury.
On 22 June 2017, the Group repaid the third of
five annual instalments of GBP16 million on its
GBP80 million European Investment Bank Loan.
On 31 May 2017 the Group purchased the entire equity
shareholding of Tozmetal Ticaret ve Sanayi Anonim
irketi (Tozmetal), a Turkish based sintering business,
to broaden the division's manufacturing footprint.
The consideration of GBP26 million comprised a
cash payment only. The provisional fair value of
net assets acquired of GBP26 million has been allocated
as follows: property, plant and equipment of GBP7
million, inventory of GBP2 million, receivables
of GBP6 million, cash of GBP1 million payables
of GBP4 million and provisional intangible assets
and goodwill of GBP14 million.
Due to the proximity of the transaction to the
reporting date, a formal valuation exercise will
be concluded in the second half of the year to
appropriately allocate the fair value of assets
and liabilities acquired. Tozmetal has been included
in Powder Metallurgy for segmental reporting.
15 Contingent assets and liabilities (unaudited)
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 on foreign dividends
which, in its view, were levied by HMRC in breach
of the Group's EU community law rights. The most
recent judgement in the main case was published
in November 2016. This judgement was broadly positive,
but HMRC have sought leave to appeal.
The continuing complexity of the case and uncertainty
over the remaining issues means that it is not
possible to predict the final outcome with any
reasonable degree of certainty. A successful outcome
could result in the Group being able to recognise
additional deferred tax assets in the UK and receiving
cash payments from HMRC.
There are no other material contingent assets at
30 June 2017 or 30 June 2016. At 30 June 2017 the
Group had no contingent liabilities in respect
of bank arrangements and no guarantees (30 June
2016: none). In the case of certain businesses,
performance bonds and customer finance obligations
have been entered into in the normal course of
business.
Independent review report to GKN plc
We have been engaged by the Company to review the condensed
consolidated financial statements in the half-yearly financial
report for the six months ended 30 June 2017 which comprises the
Consolidated income statement, the Consolidated statement of
comprehensive income, the Condensed consolidated statement of
changes in equity, the Consolidated balance sheet, the Consolidated
cash flow statement and related notes 1 to 15. We have read the
other information contained in the half-yearly financial report and
considered whether it contains any apparent misstatements or
material inconsistencies with the information in the condensed set
of consolidated financial statements.
This report is made solely to the Company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Auditing Practices
Board. Our work has been undertaken so that we might state to the
Company those matters we are required to state to it in an
independent review report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company, for our review work, for this
report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the
group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of consolidated financial
statements included in this half-yearly financial report has been
prepared in accordance with International Accounting Standard 34
"Interim Financial Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of consolidated financial statements in the
half-yearly financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK and Ireland) and consequently does not enable us to
obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed consolidated financial
statements in the half-yearly financial report for the six months
ended 30 June 2017 is not prepared, in all material respects, in
accordance with International Accounting Standard 34 as adopted by
the European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Deloitte LLP
Statutory Auditor
London, United Kingdom
25 July 2017
This information is provided by RNS
The company news service from the London Stock Exchange
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