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    GKN   GB0030646508

GKN

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GKN PLC : - Annual Financial Report

03/29/2018 | 01:09pm EDT

GKN plc (the "Company")

Legal Entity Identifier: 213800QNZ22GS95OSW84

 Classification of Information: 1.1 Annual financial and audit reports

GKN plc 2017 annual report

GKN plc has today published its 2017 annual report and circular to shareholders incorporating the notice of the 2018 annual general meeting.  Both documents can be viewed at or downloaded from http://www.gkn.com/en/investors/.

Copies of both documents, together with the form of proxy for the 2018 AGM, have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

Printed copies of these documents have today been posted to shareholders who have requested hard copies.

The 2018 AGM will be held at 2.00 pm on Thursday 3 May 2018 at 195 Piccadilly, London W1J 9LN.

In compliance with DTR 6.3.5, a description of the principal risks and uncertainties, details of related party transactions and a responsibility statement prepared for and contained within GKN's 2017 annual report are set out below.  A condensed set of financial statements were appended to GKN’s 2017 full year results announcement issued on 27 February 2018, which included an indication of important events that occurred during the year.

Page references below refer to page numbers in GKN’s 2017 annual report. 

Risk Management

The Board is responsible for setting the Group’s risk appetite and ensuring that appropriate risk management systems are in place.

The Board sets the Group’s risk appetite annually and reviews the Group’s principal risks throughout the year as part of its normal agenda, adopting an integrated approach to risk management by regularly discussing principal risks. In addition, in the middle and at the end of each year, the Board assesses the Group’s principal risks through our enterprise risk management (ERM) programme described below, taking the strength of the Group’s control systems and our appetite for risk into account. We have a risk matrix which ensures that, between the Board and its committees, all the Group’s principal risks are reviewed during the course of the year.

The Board delegates responsibility for day-to-day risk management to the Executive Committee, including the identification, evaluation and monitoring of key risks facing the Group and the implementation of Group-wide risk management processes and controls. The Executive Committee is supported in this by its Sub-Committee on Governance and Risk.

The Audit & Risk Committee keeps the effectiveness of the Group’s risk management systems under review and reports to the Board on the results of its review. Any material control issues, serious accidents or major commercial, financial or reputational issues, or the identification of new risks, are reported to the Board and/or Audit & Risk Committee as appropriate.

In the final quarter of 2017, executive management carried out a thorough investigation into potential accounting misstatements in Aerospace North America (see page 26). In response to the findings of this investigation, we considered the impact on our principal risks and our internal control and risk management system. Where relevant, we updated our principal risks, as set out below, and commenced a targeted improvement plan to address identified issues and further strengthen our risk management systems.

Our risk management procedures clearly let us down in 2017, so we are strengthening our cultural, organisational and people capability to ensure that we do not have similar issues again.

How GKN manages risk

The Group has four levels of defence through which it manages significant risks.

Level 1: Risk ownership and control

Our businesses are responsible for maintaining an effective risk and control environment as part of day-to-day operations under the direction of the Chief Executive and the Executive Committee. This includes implementation and regular monitoring and review by divisional management of processes and controls which are designed to ensure compliance with the Board’s appetite for risk, Group policies and delegated authority levels, and the GKN Code. These front line controls are regularly updated to respond to the Group’s changing risk profile.

Level 2: Monitoring and compliance

Group functions monitor adherence to the procedures set out by the Executive Committee and provide guidance to the businesses on their application. This includes ongoing reviews by our health and safety audit team, Group IT and financial control functions as well as our trade compliance function. Representatives of these functions report their findings to the Executive Sub-Committee on Governance and Risk or directly to the Executive Committee. The Sub-Committee reports twice a year to the Executive Committee on matters relating to the Group’s governance, risk management and assurance framework, including areas of concern or proposals for improvement.

Level 3: Independent assurance

Independent assurance over the Group’s risk management, control and governance processes is provided by the Group’s Corporate Audit team, the Head of Risk and external assurance providers.

Level 4: Oversight

The Board, Executive Committee and Audit & Risk Committee provide oversight and direction in accordance with their respective responsibilities, more information on which is set out in the governance section of this annual report.

Our ERM programme

GKN’s enterprise risk management (ERM) programme facilitates a common, Group-wide approach to the identification, analysis, and assessment of risks and the way in which they are managed, controlled and monitored.

1.   Identify and analyse: A broad spectrum of risks is considered through the ERM process. The Executive Committee and the Board review the output from ERM at both divisional and Group levels.

2.   Manage and mitigate: Management controls designed to monitor and mitigate the risks are documented. Risk owners are assigned for each risk.

3.   Assess: The ERM process provides a consistent set of definitions and a common approach to risk evaluation and assesses both risk likelihood and impact.

4.   Respond: The risk response is based on the assessment of potential risk exposure and an acceptable level of tolerance. The response reflects whether we ‘accept’ the risk on the basis of its assessed level of exposure and mitigating controls currently in place, or ‘reduce’ the risk through additional mitigation to bring it in line with required levels of tolerance.

5.   Monitor: The output from the ERM process is regularly reviewed together with the ongoing monitoring of progress against planned improvement actions.

Principal risks and uncertainties

The Board has carefully considered the type and extent of the principal risks to the Group achieving its objectives and delivering a satisfactory return for shareholders. These are summarised below, categorised according to the strategic objective to which they relate most closely. We seek to carefully manage risk, while at the same time recognising that we need to take some risk to achieve our stated objectives of transforming our business and achieving world class financial and operational performance.

In February 2018 the Group announced a new strategy (see page 7). We have reassessed our principal risks in light of the objectives of this new strategy and updated them accordingly, describing the impact, where relevant, below.

Over time, our risk profile evolves and the Board’s view of the principal risks facing the Group is updated accordingly. Each principal risk is described on the following pages together with the corresponding mitigating actions that are in place and an overview of the risk trends during 2017 and the outlook for each risk into 2018.

Risk trend

Improve cash flow and margin
Deliver improved cash flow and margins across the Group.
Grow
Grow the ‘improve’ segments in line with market, and grow the ‘grow’ and ‘develop’ segments above the market.
Separate
Operationally now and formally when it maximises shareholder value.
Increasing
 
·  People capability ·     Technology and innovation
Stable
 
·     Highly competitive markets
·     Customer concentration
·     Product quality
·     Health and safety
·     Information systems resilience
·     Laws, regulations and corporate reputation
·  Programme management
·  Supply chain
·  Contract risk
·  Pension funding
·     Operating in global markets
Reducing
 

People capability

Description
The Group’s ability to deliver its strategy is dependent on the recruitment and retention of sufficiently qualified, experienced and motivated people.
It is critical for the Group to secure and maintain the relevant capabilities in specific geographical regions and disciplines in both existing markets and to support growth markets.
 
Potential impact
The failure to recruit, or the loss of, key personnel, and the failure to plan adequately for succession
or develop the potential of employees may impact the Group’s ability to deliver its strategic and financial objectives.
Mitigation
Competitive reward packages together with focused training and development programmes.
A culture that motivates individuals to perform to the best of their abilities.
Strong succession and development programmes.
Local initiatives designed to engage young people, promote science, technology, engineering and mathematics (STEM) subjects and encourage the next generation of young engineers.
Changes in 2017 and outlook
Attracting and retaining talent has been challenging during the year, with increasing turnover at management level in certain divisions and regions, particularly in North America.
As part of our new strategy announced in February, we confirmed the Group’s intention to dispose of some non-core businesses and to split the remaining businesses when the time is right. While we are confident this approach will maximise shareholder value, it is natural that some uncertainty will be created for certain employees within the Group which may challenge our ability to recruit and retain talent in the short term.
During the year we rolled out performance management training to over 3,300 managers, as well as linking management reward more closely to our performance evaluations; however, we plan to go further in 2018. As a part of Project Boost, we have realigned our management incentive schemes more closely to the operational and financial focuses of the Group as outlined in the new strategy. We are confident that the closer correlation between performance and reward will help us retain our best talent and recruit additional talent.
In addition to the measures announced with our new strategy, during 2017 we established two recruitment Centres of Excellence in the US and UK. These will improve control, visibility and consistency across our recruitment process, and are producing encouraging early results.
The recruitment and development of young engineering talent continues to be a focus. This is supported by Group-wide and divisional graduate programmes and a strong apprenticeship programme.
We develop and align resources and capabilities through the Group-wide organisation planning process. We are implementing a functional competency framework to further improve the process of defining and assessing levels of competency in key functions across the Group.

Highly competitive markets

Description
GKN operates in highly competitive markets with customer decisions typically based on price, quality, technology and service. Contracts for major programmes are subject to highly competitive bidding processes and the strength of our competitors and general market conditions continue to drive pricing pressure and challenging contractual terms.
Our margins may come under pressure if competition increases or as a result of customer actions. An inability or delay in developing or maintaining sufficient or appropriate engineering and manufacturing capabilities in our markets could further increase the risk.
Customer vertical integration (including OEMs taking production in-house), the entry of new competitors and the consolidation of existing competitors also contribute to increased competition.
 
Potential impact
Competition risk, if not addressed, could result in reduced sales and profit margins and potentially lost growth opportunities. An inability to secure new business awards on major programmes could significantly impact future growth, cash flow and profitability.
Mitigation
·  Maintaining a balanced portfolio of businesses across different end markets provides some protection against competition in particular markets.
·  Regular review of competition and market trends.
·  Targeted investment in engineering, and a commitment to Lean manufacturing, quality and customer relationships.
·  Flexible management of our variable and fixed-cost base including outsourcing and low-cost sourcing initiatives where appropriate.
Changes in 2017 and outlook
Strong competition and customer pricing pressures have continued throughout 2017. Aerospace margins continue to experience pressure from existing competitors, as well as emerging ones, such as the maturing Chinese aerospace industry. In GKN Driveline, change is being driven by the high growth electric and hybrid automotive vehicle markets, as well as rising costs of raw materials. Despite these challenges, we continue to win new business and differentiate ourselves through our technology.
We have continued a GKN-wide fixed-cost optimisation programme and taken actions to progressively redirect expenditure towards productivity improvements. Within the aerospace division, the integration of Aerostructures Europe and Fokker Technologies into GKN Aerospace, Aerostructures and Systems Europe and Asia was announced in October 2017 aiming to improve customer focus and operational efficiency. Project Boost will further strengthen the competitive position of the Group.
GKN Driveline has continued to benefit from improved strategic and customer alignment following its reorganisation into two global product lines at the end of 2016.

Customer concentration

Description
There is significant customer concentration in the automotive and aerospace industries so a large portion of the Group’s revenues comes from a relatively small number of customers. Around 50% of the Group’s revenue is derived from its top ten customers.
 
Potential impact
The insolvency of, damage to relations with, or significant worsening of commercial terms with a major customer could seriously affect the Group’s future results, and could result in loss of market share and future business opportunities, asset write-offs and restructuring actions.
Mitigation
·  Regular review of the Group’s relations with and exposure to key customers.
·  Extensive and regular dialogue with key customers and strong commercial and engineering relationships.
·  Quality, service and delivery performance are regularly reviewed based on customer KPIs.
·  Credit exposure is actively reviewed and managed.
Changes in 2017 and outlook
There have been no significant changes in the OEM customer landscape with the proportion of business from the Group’s top ten customers remaining stable during 2017. No individual customer accounts for more than 10% of Group revenue.
Because most of our major OEM customers are within the automotive and aerospace industries it is unlikely that the disposals of non-core businesses as outlined in our strategy will affect this risk in the short term.

Product quality

Description
Maintaining a high level of quality and safety in our products is essential. We are exposed to warranty, product recall and liability claims in the event that our products fail to perform as expected.
In automotive, the industry in general has experienced higher levels of recalls in recent years and the OEMs often seek contributions from throughout the supply chain. This risk increases where:
·  vehicle manufacturers offer longer warranty periods;
·  more vehicles are being built on standard platforms, so a single quality issue can affect a large number of vehicles;
·  more complex products are involved, such as electric and all-wheel drive; and
·  regulators and our customers are taking a more stringent approach to recalling vehicles, particularly if there is a possible safety issue.
In aerospace, customers and regulators impose very strict product safety and quality obligations on all aircraft suppliers.
 
Potential impact
A product failure could result in serious losses, damaging GKN’s financial performance and potentially our reputation. In particular, the costs associated with vehicle or aircraft recalls can be significantly higher than the cost of simply replacing defective products.
Mitigation
·  Robust engineering design and validation processes from initial design and development through production and into service.
·  High levels of quality assurance are embedded in robust manufacturing systems.
·  Ongoing assessments of supply chain quality.
·  Regular reporting and monitoring of quality performance based on customer KPIs.
·  Maintenance of critical parts lists.
·  External agency quality reviews and certifications.
·  Robust contract terms and conditions.
Changes in 2017 and outlook
Excellence in quality has continued to be a priority during the year with continuous improvement programmes ongoing in each of our businesses. We continue to monitor quality and delivery performance as viewed by our customers and strive to continuously improve product quality, safety and delivery key performance indicators.
Our cross-divisional Quality Committee has introduced an annual quality control checklist and started a process of peer reviews to accelerate the sharing of best practice. During 2017 we have intensified the rigour of certain key controls and processes around product quality, and have also put in place the foundations for an enhanced quality
auditing programme.

Health and safety

Description
Safety is our number one priority. We manage safety carefully through extensive Group-wide processes, yet we recognise we can never be complacent. Therefore we continue to include this as a principal risk and an area which will always be a priority for GKN.
 
Potential impact
A serious accident in the workplace could have a major impact on employees as well as their families, colleagues and communities. Such an incident could also result in legal claims, reputational damage and financial loss.
Mitigation
·  Consistent Group-wide application of health and safety programmes.
·  Regular reporting and monitoring of health and safety performance.
·  Health and safety audits to ensure adherence to Group policies and procedures.
·  A focus on process and behavioural safety through a number of Group-wide risk assessment and training programmes.
·  Maintenance of insurance for costs associated with injury-related actions or claims against the Group.
Changes in 2017 and outlook
Regrettably, there was one fatality during the year – see page 42 for further details. A full investigation has been carried out and lessons learned have been incorporated into our processes and systems Group-wide.
After several years of reduced accident rates the Group’s AFR and ASR increased slightly during 2017 compared to 2016. We continued to increase our near-miss reporting as a key leading indicator of our health and safety performance.
Our global contractor accreditation programme has been successfully piloted in 2017 with plans to roll out globally in 2018. Hazard awareness and risk assessment programmes continued with a particular focus on identifying and addressing potential catastrophic hazards.
We have also made good progress through
the year in preparing for the roll out of
ISO 45001 (Occupational Health and Safety Management).

Information systems resilience

Description
The Group could be impacted negatively by information technology security threats including unauthorised access to intellectual property or other controlled information. Interruptions to the Group’s information systems could also adversely affect its day-to-day operations.
The inherent security threat is considered highest in GKN Aerospace where data is held in relation to civil aerospace technology and controlled military contracts.
 
Potential impact
A major disruption to information systems could have a significant adverse impact on the Group’s operations or its ability to trade. The loss of confidential information, intellectual property or controlled data could result in fines and damage to the Group’s reputation, and could adversely affect its ability to win future contracts.
Mitigation
·  Formal risk-based governance framework including dedicated IT security policies and related compliance processes, ongoing risk reviews, IT security awareness training and robust systems and processes to manage access, information assets, threats and vulnerabilities.
·  External support and benchmarking of best practice information systems security and resilience.
·  Ongoing development of appropriate incident detection and response plans and capabilities.
·  Disaster recovery contingency plans which are regularly tested including data centres where the risk is deemed to be the greatest.
·  Executive Committee oversight of IT security and assurance matters.
Changes in 2017 and outlook
The Group has continued to strengthen its mitigating processes and controls over the security of our information systems. During 2017, we completed a project to ensure compliance with new US Government information security standards at all relevant sites across the Group. We have also prepared for a 2018 project which will focus on further strengthening system segregation between office environments and manufacturing areas. A programme to introduce automated vulnerability scanning was also successfully introduced during 2017.
Our information systems will be a key enabler during 2018 as we roll out Industry 4.0 and increase the pace of our automation agenda as a part of Project Boost.

Laws, regulations and corporate reputation

Description
The Group is subject to applicable laws and regulations in the global jurisdictions and industries in which it operates. This includes certain territories where strong ethical standards may not be well established or where parts of the markets in which we operate are highly regulated. Regulations include those related to export controls, environmental and safety requirements, product safety,
tax laws, intellectual property rights, competition laws and other ethical business practices.
 
Potential impact
Non-compliance could expose the Group to fines, penalties, damage to reputation, suspension or debarment from government contracting or suspension of export privileges.
Mitigation
·  A strong culture of ‘doing the right thing’ which is regularly emphasised by senior management.
·  Group-wide governance policies and procedures, ongoing compliance training and strong oversight.
·  Ongoing monitoring of regulatory developments in major jurisdictions.
·  Ongoing monitoring of employee concerns through our independent employee disclosure hotline.
Changes in 2017 and outlook
There have been no significant new regulations impacting the Group during 2017, but our markets continue to be subject to robust enforcement activities in relation to existing regulations, particularly in relation to vehicle safety.
We continue to regularly remind our senior managers about the importance of ‘doing the right thing’ in all our activities. We emphasised its importance to all senior managers as part of our divisional leadership conferences and as an integral part of the GKN DNA. We also continue to rely on our GKN Governance Handbook to remind employees of our key Group policies and procedures, and during 2017, launched refresher training on export controls and anti-bribery.
During the year, GKN has started to prepare for the implementation of the European General Data Protection Regulation (‘GDPR’) which will become fully enforceable in the EU member states as from 25 May 2018.
In response to the findings of our North American Balance Sheet Review, we have commenced a detailed improvement plan to address identified issues and prevent similar issues occurring in the future (see page 26).

Technology and innovation

Description
Developing innovative technologies for our customers is critical to maintaining our differentiation and competitive advantage. We may lose market share or be subject to additional market pressure if we fail to develop innovative technologies that our customers want or need.
 
Potential impact
The failure to launch new products, new product applications or derivatives of existing products to meet customer requirements could have a significant impact on future profitable growth.
Mitigation
·  Regular assessment of market and technology trends and drivers.
·  Close relationships and technical partnerships with customers.
·  Divisional technology plans aligned to emerging and future trends and business strategy.
·  Technical leadership and promotion of engineering best practice by our Engineering Fellowship.
·  Regular review of current and future technology plans by the Group Technology Strategy Board.
·  Consideration of technology plans as part of the Board’s annual strategy review.
·  Focused investment in research and development.
Changes in 2017 and outlook
During 2017, the pace of change has continued to increase. This is especially true in our automotive business where products are also becoming more complex.
We continue to invest in technology and develop internal capabilities to help meet customers’ expectations for improving efficiency of aircraft, cars and other vehicles with solutions that are lighter and more fuel-efficient. We monitor developments and refresh our eDrive strategy regularly.
We have continued to diversify into targeted areas of new technology including additive manufacturing, bionic tooling and vehicle electrification. We have continued to prioritise our projects around automation and data exchange as we move toward Industry 4.0.
A key part of the Group’s new strategy (page 7) is differentiated capital allocation models across our main product segments. This will enable us to direct the investment of capital towards the areas of our business where returns will be greatest. This new approach to capital allocation will help us maintain our early leadership positions on technologies which we see as key to our markets in the future, such as eDrive and additive manufacturing. It will also enable us to get the most out of more mature segments of the business by investing where there is opportunity to grow in a way which boosts margins and returns.

Programme management

Description
Many of the programmes entered into by the Group are complex and long term and are subject to various performance conditions which must be adhered to throughout the programme. The management of such programmes brings risks related to:
·  delays in product development or launch schedules;
·  failure to meet customer specifications or predict technical problems;
·  inability to manufacture on time for the start of production or to required production volumes;
·  dependence on key or customer-nominated suppliers;
·  failure to manage effectively internal or customer-driven change; and
·  inability to forecast accurately and to manage costs.
· 
Potential impact
Ineffective programme management could result in damage to customer relationships or cancellation of a contract resulting in claims for loss and reputational damage.
Poor performance against a contract could also undermine the Group’s ability to win future contracts and could result in cost overruns and significantly lower returns than expected.
Mitigation
·  Embedded programme management, including investment phasing and product testing activities.
·  Periodic impairment reviews of capitalised development costs, including formal review at half year and year end.
·  Ongoing review and approval of key programmes by the Executive Committee and the Board.
·  Regular review of ‘lessons learned’ and best practice sharing.
·  Periodic inspection of programmes by customers.
Changes in 2017 and outlook
During the year we continued to implement the improved programme management framework which was introduced in 2016 and to implement the lessons learned from programme management issues we experienced that year. We have further strengthened a number of standard procedures, gate reviews and reporting.
This will continue in 2018, where we plan to extend our process of peer reviews and sharing of lessons learnt. Our programme management processes will also benefit from the upgrade in skills and capabilities and an improvement in our product launch processes which will be achieved as part of Project Boost. This will include an investment in both our methodology and the tools we use to deploy it.

Supply chain

Description
Our suppliers are key to our success. It is essential that suppliers and subcontractors continue to meet our high standards of technical competence, innovation, product quality, reliability, delivery performance, cost, financial stability, safety, ethics and social responsibility.
Our supply chain network is exposed to potentially adverse events such as physical disruptions, environmental and industrial accidents, scarcity of supply and the insolvency of a key supplier, any of which could impact our ability to deliver orders to  our customers.
The cost of our products can be significantly affected by the cost of the underlying commodities and materials from which they are made. Fluctuations in these costs cannot always be passed on to our customers.
 
Potential impact
A sustained supply chain disruption, or the delivery of defective product to us, could impact our ability to meet customer requirements, result in additional contractual liabilities and have a consequential impact on financial performance.
Mitigation
·  Ongoing communication of our expectations of suppliers through our Supplier Code of Conduct.
·  Contract terms and conditions that require our suppliers to meet specified performance standards.
·  Ongoing assessment of supplier technology and dependency.
·  Monitoring of the financial and operational viability of key suppliers.
·  Ongoing monitoring of inventory levels to ensure availability in times of production volatility.
·  Contingency plans designed to enable us to secure alternative key material supplies at short notice, to transfer or share production between manufacturing sites and to use substitute materials where required.
·  Dual sourcing where appropriate to reduce dependence on single suppliers.
·  Supplier quality reviews and audits.
Changes in 2017 and outlook
We continue to carefully manage and monitor our supply chains and, where appropriate, build on long-term supplier relationships. During the year, we have undertaken enhanced supplier risk assessment and benchmarking exercises as part of a longer term project to improve visibility and monitoring of key parts of our supply chain.
We have also continued to roll out the Supply Chain Excellence Model alongside a maturity mapping project focused on sales, inventory and operations planning (SIOP). This project will help track our progress towards becoming a world class supply chain function.
We continue to place an emphasis on developing our people and equipping them with the skills to succeed. 180 supply chain professionals and business leaders have attended our Supply Chain Excellence programme during 2017. We have continued to focus on our supply chain talent management agenda through the year in order to continue to build capability and strength in depth throughout the function.
Projects to improve our procurement processes for both direct and indirect materials have been underway since mid-2017. We expect these to begin mitigating some of the risk in our supply chains during 2018 as well as delivering significant margin and cash benefits.

Contract risk

Description
Across our businesses, an increasing percentage of revenues are generated through contracts which are long-term in nature and subject to complex terms and conditions. Contracts include commitments relating to pricing, quality and safety, and technical and customer requirements.
Both our aerospace and automotive businesses enter into design and build contracts. These are complex contracts that are often long-term, so it is important that the contracted risk is carefully managed.
Specifically within GKN Aerospace, the Group has risk and revenue sharing partnerships with key engine manufacturers. These contain formalised risk-sharing arrangements relating to risks which are not always within GKN management control.
 
Potential impact
A failure to fully understand contract risks or to anticipate technical challenges and estimate costs accurately at the outset of a contract can lead to unexpected liabilities, increased outturn costs and reduced profitability.
Mitigation
·  Robust bid and contract management processes including thorough reviews of contract terms and conditions, contract-specific risk assessments and clear delegation of authority for approvals.
·  Continuous review of contract performance.
Changes in 2017 and outlook
During the year, we continued to follow the strengthened contract management processes previously introduced in each division. These processes aim to ensure effective management of risks associated with complex design and build contracts.

Pension funding

Description
The Group has a number of defined benefit pension plans with aggregate net liabilities of £1,504 million at 31 December 2017. These plans are exposed to the risk of changes in asset values, discount rates, inflation and mortality assumptions.
 
Potential impact
Increases to the pension deficit could lead to a requirement for additional cash contributions to these plans, thereby reducing the amount of cash available to meet the Group’s other operating, investment and financing requirements.
Mitigation
·  Close cooperation with scheme fiduciaries regarding management of pension scheme assets and liabilities, including asset selection and hedging actions.
·  Alternative funding and risk mitigation actions are implemented where appropriate.
·  Agreed recovery plans where required.
Changes in 2017 and outlook
Following the conclusion of the 2016 valuation exercise, the Group reduced the volatility of future deficit recovery payments as it closed the UK defined benefit pension to future accrual and made a £250 million lump sum payment to the scheme in October 2017.
The uncertainty following the UK’s decision to leave the EU continues to have a potential impact on the yields on long term bonds and, thereby, on the UK pension liability, as will any wider issues in global financial markets. We will continue to monitor the impact of future market volatility, and seek to reduce volatility where appropriate.
While the initial takeover offer has been rejected, as this process continues there remains a level of uncertainty over the future impact on our pension schemes. Any changes in the Group’s ownership structure and financing may impact the level of covenant support provided to the schemes, and the contributions required by the schemes’ independent Trustees in the future. We continue to maintain an open and constructive dialogue with the Trustees on these matters.

Operating in global markets

Description
We operate globally and, as such, results could be impacted by global or regional changes in the macroeconomic or political environment, leading to changing consumer demand and preferences.
Our businesses could be affected by changing consumer preference and associated volatility in automotive demand; challenging credit conditions resulting in lack of access to finance by customers and end consumers; delay or cancellation of orders for civil aircraft and changes in the amount or timing of US military spending; volatility in agricultural and construction and mining markets; exchange rate fluctuations; and changing oil prices.
 
Potential impact
Major or prolonged economic or financial market deterioration, including movements in exchange rates of key currencies or political uncertainty in one of our key markets, may significantly impact the Group’s operational performance and financial condition. Sustained market weakness could lead to impairment of assets or site closures. It may also materially impact our customers, suppliers and other parties with whom we do business.
Mitigation
·  The Group has a diversified portfolio of businesses across markets providing some protection against individual market or country risks.
·  Lead market indicators are regularly reviewed so that we can respond quickly to changing trading conditions.
·  Our mitigation strategy includes:
-  planning, budgeting and forecasting processes;
-  flexible management of variable and fixed cost base, investment spending and working capital;
-  further diversification into other sectors which present new opportunities;
-  focused restructuring activities, where necessary, to respond to markets which have suppressed levels of economic activity; and
-  regular review of our financial risk management processes, including foreign currency hedging.
·  Alignment of our debt to the principal currencies in which our revenues and cash flows are generated through cross currency swaps.
·  Currency hedging within our hedging policy.
·  A strong balance sheet.
Changes in 2017 and outlook
Market conditions are discussed in the Chief Executive’s review on pages 5 and 6 and the markets overview section on pages 8 and 9.
Political and economic uncertainty continued into 2017, with geopolitical tensions remaining and impacted by policy changes from the new US administration. Despite encouraging economic development in 2017, there remains a level of uncertainty from the gradual normalisation of monetary policy by the US Federal Reserve, the Bank of Japan and the European Central Bank. We expect to receive a significant benefit following tax reforms enacted in a number of key territories for the Group. These should see the long term group tax rate drop by 2%. We also believe the US tax reforms will limit tax leakage on the planned disposals of non-core businesses which we outlined in our strategy.
The UK’s vote to leave the EU and the absence of detailed agreements between the UK and the EU has resulted in uncertainty in future trading arrangements between the UK and the rest of the world, and lower expectations for UK GDP in the short to medium term. GKN is a global business with 90% of its sales generated outside the UK; this will limit the effect of the vote on the Group.

Related party transactions

In the ordinary course of business, sales and purchases of goods take place between subsidiaries and equity accounted investment companies priced on an arm’s-length basis. Sales by subsidiaries to equity accounted investments in 2017 totalled £43 million (2016: £44 million). The amount due at the year end in respect of such sales was £18 million (2016: £11 million). Purchases by subsidiaries from equity accounted investments in 2017 totalled £16 million (2016: £10 million). The amount due at the year end in respect of such purchases was £3 million (2016: £3 million).

At 31 December 2017, a Group subsidiary had £8 million payable to equity accounted investments companies in respect of unsecured financing facilities bearing interest at one month LIBOR plus 1/8% (2016: £10 million).

Statement of Directors’ responsibilities

Each of the Directors as at the date of the annual report, whose names and functions are set out on pages 52 and 53, confirm that to the best of their knowledge:

·   the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole

·   the strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face

·   the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.

Approved by the Board of GKN plc and signed on its behalf by

Mike Turner CBE

Chairman

26 February 2018

CAUTIONARY STATEMENT

This announcement contains forward looking statements which were made in good faith based on information available at 26 February 2018, being the date of approval of the 2017 annual report.  It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ materially from those currently anticipated. Nothing in this document should be regarded as a profits forecast.


© PRNewswire 2018
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