NEWS RELEASE
26 July 2016
GKN plc Results Announcement for the six months ended 30 June 2016
Group Highlights(*)
•
Another period of growth – in line with expectations
o
Sales up 17% and management eps increased 7%
o Continued market outperformance with organic sales up 2%
o Fokker integration on track and performing well
Sharpening the focus
•
o
o
•
Reducing fixed costs; annualised savings of £30 million from 2017 through a GKN wide fixed
cost optimisation programme; charge of £35 million in the second half of 2016
Capital allocation to be progressively directed towards productivity improvement in core
aerospace and automotive divisions
Continued investment in technology
o
o
Strong technology pipeline; innovation recognised by customer and industry awards
Momentum of new business wins continues to support growth ahead of markets
Management basis
(*)
As reported
2016
£m
2015
£m
Change
%
2016
£m
2015
£m
Change
%
4,518
3,853
+17
4,237
3,616
+17
390
346
+13
209
245
-15
8.6%
9.0%
-40bps
344
307
+12
182
212
-14
Earnings per share (p)
15.5p
14.5p
+7
9.5p
9.9p
-4
Interim dividend per share (p)
2.95p
2.90p
+2
2.95p
2.90p
+2
40
21
Sales
Operating profit
Trading margin (%)
Profit before tax
Free cash flow
Net debt
(1)
(2)
918
(2)
(2)
(1)
769
As at 31 December 2015
Primarily lower due to mark to market valuation of FX contracts
Commenting on the results, Nigel Stein, Chief Executive of GKN said:
“This is a good set of first half results with GKN continuing to make underlying progress in line with
our expectations. Each division has continued to deliver against our strategy. GKN is in good
shape with excellent technology and strong positions in the aerospace and automotive markets.
Capital allocation will continue to be focussed on these divisions, with greater emphasis on internal
productivity.
We expect 2016 to be another year of growth, helped by currency translation and Fokker. To
increase momentum going into 2017, we will reduce our fixed costs by £30 million.
With our excellent technologies, global footprint and strong focus on costs we are very well placed
to compete and succeed in the future.”
Page 1 of 33
Divisional Highlights
GKN Aerospace
• Strong headline sales growth, driven by good Fokker performance with integration on track
• Organic sales growth of 2%, comprising commercial (+8%) partially offset by a decline in
military (-14%)
• Margin of 9.9% (2015: 11.4%), primarily impacted by the inclusion of Fokker and mature
programmes declining
• New and replacement work packages won of c.$5 billion over contract lives
GKN Driveline
• Organic sales growth of 5%, significantly ahead of global auto production helped by our broad
geographic footprint and increased content per vehicle
• Trading margin of 8.2% (2015: 8.3%), a good performance in Europe offset by excess launch
costs on an US all-wheel drive (AWD) programme
• More than £400 million of annualised new and replacement business won
GKN Powder Metallurgy
• Organic sales growth in line with the market, before the pass-through of lower raw material
surcharges
• Trading margin increased to 12.6% (2015: 11.8%), benefiting partly from the lower surcharges
• Strong focus on technology and £120 million annualised new and replacement business won
• Chinese powder production commenced
GKN Land Systems
• Organic sales down 6% due to challenging agricultural and construction equipment markets
and the ending of chassis contracts
• Good cost control results in trading margin of 4.6% (2015: 4.0%)
Outlook
Aerospace markets generally remain in transition as some aircraft programmes run down and
others ramp up. The overall market in 2016 will be broadly flat, according to external forecasts.
Against that backdrop, GKN Aerospace’s 2016 organic sales are expected to be slightly up on last
year, and the results will benefit from the contribution of Fokker. In the medium term, our strong
commercial order book supports continuing growth for GKN Aerospace.
In automotive, external forecasts predict growth in global light vehicle production of around 3% with
increases in China, North America, Europe and India. Against this background, GKN Driveline and
GKN Powder Metallurgy are expected to continue to grow organically above the market.
GKN Land Systems sales are expected to continue to decline due to softer agricultural and
construction equipment markets, although the rate of decline is slowing.
GKN is sharpening its focus on costs and also directing capital expenditure more towards
productivity. Fixed cost reductions of £30 million will benefit 2017. There will be a charge to
achieve these savings of £35 million (included within management results) in the second half of
2016. This is in addition to the Fokker integration charge that was previously announced.
Despite market uncertainty following the EU Referendum, there should be little impact on GKN
over the medium term and 2016 is expected to be another year of growth, helped by currency
translation and Fokker.
Page 2 of 33
Notes
(*)
Financial information set out in this announcement, unless otherwise stated, is presented on a
management basis as defined on page 13.
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: [email protected]
Media:
Chris Fox, Group Communications Director, GKN plc
T: +44 (0)1527 533238
M: +44 (0)7920 540051
E: [email protected]
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 08.30am at UBS, Ground Floor
Presentation Suite, 1 Finsbury Avenue, London EC2M 2PP.
A live videocast of the presentation will be available at
http://www.gkn.com/investorrelations/Pages/Webcasts.aspx.
Slides will be put onto the GKN website approximately 45 minutes before the presentation is due to
begin, and will be available to download from the GKN website at:
http://www.gkn.com/investorrelations/Pages/results-and-presentations.aspx?year=2016.
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: 46551273
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/investorrelations/Pages/Webcasts.aspx.
Page 3 of 33
NEWS RELEASE
GKN plc Results Announcement for the six months ended 30 June 2016
Group Overview
Markets
The Group operates in the global aerospace, automotive and land systems 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. GKN Land Systems sells to producers of
agricultural, industrial and construction equipment.
Results
Group
Sales (£m)
Trading profit (£m)
Trading margin (%)
Return on average invested capital (%)
First half
2016
GKN
Fokker
base
4,149
369
362
28
8.7%
7.6%
16.6%
First half
2015
Total
4,518
390
8.6%
3,853
346
9.0%
17.5%
Change (%)
Headline
Organic
17
13
2
(3)
Organic sales increased £92 million (2%). The effect of currency translation on management sales
was a £202 million benefit and there was a £371 million benefit from acquisitions.
Overall organic trading profit reduced by £10 million (3%). There was a benefit from currency
translation of £22 million and a £32 million increase due to acquisitions (including the absence of
£3 million acquisition costs in the first half of 2015).
Group trading margin in the first half was 8.6% (2015: 9.0%). Return on average invested capital
(ROIC) was 16.6% (2015: 17.5%), excluding Fokker which has not been owned for a full 12 month
period.
At 30 June 2016, the Group had net debt of £918 million (31 December 2015: £769 million) and the
total deficit on post-employment obligations totalled £2,101 million (31 December 2015: £1,558
million).
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. It supplies
products and services to a wide range of commercial and military aircraft and engine prime
contractors and other tier one suppliers.
According to external forecasts, the overall aerospace market is expected to be slightly down in
2016. In commercial, both Airbus and Boeing continued to benefit from higher deliveries and a
record order backlog, and both have announced plans to increase production levels for single aisle
aircraft in the future. The short term outlook for wide-body aircraft has been mixed with A330 and
Boeing 777 rate reductions in advance of their next generation successors and plans for a
reduction in A380 deliveries, while the A350 continues to ramp-up to full rate production. Sales of
business jets and commercial rotorcraft are both expected to fall. Military sales are higher and will
benefit from the ramp up in the production rate of the F-35.
Page 4 of 33
The key financial results for the period are as follows:
GKN Aerospace
Sales (£m)
Trading profit (£m)
Trading margin (%)
Return on average invested capital (%)
First half 2016
GKN
base
1,262
133
10.5%
16.8%
First half
2015
Fokker
Total
369
28
7.6%
1,631
161
9.9%
1,171
133
11.4%
17.7%
Change (%)
Headline
Organic
39
21
2
(6)
Overall, GKN Aerospace’s organic sales were £30 million higher (2%). There was a £59 million
(5%) benefit from currency translation and sales from acquisitions amounted to £371 million.
The organic reduction in trading profit was £9 million, due to the transition from more profitable
mature military and commercial programmes, partly offset by good growth and catch-up payments
in engine spares and the benefit from the ramping up of structures production on new
programmes. There was a favourable currency translation impact of £8 million and the profit
contribution from acquisitions was £29 million.
Trading margin was 9.9% (2015: 11.4%). Return on average invested capital, excluding Fokker
which has not been owned for a full 12 month period, was 16.8% (2015: 17.7%).
The division’s commercial sales were 76%, with military 24%. Organic commercial aerospace
sales were 8% higher, benefiting from stronger orders for the A350, A320 and Boeing 737 partly
offset by a reduction in A330 production. Military organic sales were 14% lower, primarily due to
lower sales for F/A-18 Super Hornet, F-15 Eagle and rotorcraft.
The integration of Fokker Technologies, acquired on 28 October 2015, is proceeding well. It added
sales of £369 million and a profit of £28 million. Restructuring costs, which are excluded from
Management profits, were £22 million during the first half and are expected to total around €50
million (£39 million) in the year, as previously announced. During the period, the outstanding preacquisition fine that was agreed with the Department of Justice was settled.
During the period, new and replacement work packages totalling $5 billion over their contract lives
have been won and a number of important milestones were achieved, including:
• An agreement to extend to the risk and revenue sharing partnership (RRSP) with RollsRoyce on the Trent XWB engine. The agreement covers the design and supply of a lower
weight, higher performance intermediate compressor case for the enhanced performance
Trent XWB-84 engine;
• Signing a long term agreement with Mitsubishi Heavy Industries Ltd. to manufacture aeroengine casings for Rolls-Royce Trent engines which will power Airbus A330neo and Boeing
787 aircraft;
• Partnering with Rolls-Royce on the UltraFan™ large engine programme, with responsibility
for the intercase;
• Being named by the US Air Force as one of seven major contractors who will join Northrop
Grumman in building the next-generation B-21 bomber;
• Signing a four-year contract extension with FMV (Swedish Defence Material Administration)
to provide comprehensive support for the GKN Aerospace RM12 engine, which powers the
JAS 39 Gripen C/D fighter; and
• Extending an agreement with Boeing for a further three years to continue manufacturing
electrical wiring systems and junction boxes for the 777 and 737 aircraft programmes and
signing a memorandum of agreement with UTC Aerospace Systems to develop electrical
integrated systems for the More Electric Aircraft initiative.
Page 5 of 33
Automotive market
The major automotive markets of China, India, Europe, and North America experienced increased
production in the first half of the year compared to 2015, while Brazil and Japan declined. Overall,
global production volumes increased 2.4% to 45.9 million vehicles (2015: 44.9 million).
Car and light vehicle production (rounded millions of units)
First half
Growth
(#)
2016
2015
(%)
11.4
10.9
4.5
North America
9.1
8.8
3.3
Brazil
1.0
1.2
-22.2
Europe
Japan
4.3
4.4
-2.7
China
12.4
11.7
5.9
India
2.0
1.9
6.4
5.7
45.9
6.0
44.9
-5.0
2.4
Others
Total – global
Source: IHS Automotive;
(#)
Growth is derived from unrounded production figures
Production in Europe increased in the first half of 2016 as demand in Western Europe continued to
recover, partly offset by the decline in Russia.
Production in North America benefitted from continuing consumer confidence and localisation of
foreign manufacturers’ capacity. Cheap credit and the low price of fuel supported increased
demand and production for full-size pickups and Sport Utility Vehicles (SUVs), which outpaced that
of passenger cars. The recession in the Brazilian vehicle market deepened, resulting in a further
decline in output.
Production growth in China resulted from the positive impact of the reduction in sales tax on small
cars. Production in India increased due to improved economic conditions and higher demand for
newly launched models. Japanese production, however, was adversely affected by the
earthquakes in southern Japan and output stoppages at some manufacturers due to fuel economy
irregularities.
External forecasts anticipate global production for full year 2016 will increase 2.9% to 91.3 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 vehicle demanding complex driving
dynamics.
The key financial results for the period are as follows:
GKN Driveline
Sales (£m)
Trading profit (£m)
Trading margin (%)
Return on average invested capital (%)
First half
2016
2015
2,002
1,814
164
150
8.3%
8.2%
19.6%
18.5%
Change (%)
Headline
Organic
10
5
9
3
Organic sales increased by £95 million (5%) compared with global light vehicle production which
was up 2%. The beneficial effect of currency translation was £93 million (5%). Constant Velocity
Jointed (CVJ) Systems accounted for 60% of sales and non-CVJ sales were 40%.
Page 6 of 33
The organic improvement in trading profit was £5 million and the positive impact of currency
translation was £9 million. GKN Driveline’s trading margin was 8.2% (2015: 8.3%). Return on
average invested capital was 18.5% (2015: 19.6%).
GKN Driveline’s market outperformance was mainly in Europe reflecting recent market share gains
and new customer programme launches, for example, with Daimler and Volvo. It also benefited
from a stronger position in premium vehicles, demand for which continued to be positive, and a
broadening product mix, particularly with AWD systems. GKN Driveline performed broadly in line
with the market in the Americas (reflecting its lower content on truck-based platforms) and slightly
below the market in China (recognising its greater exposure to global brands, which performed less
strongly than domestic producers). Growth in North America and China is expected to be above
the market in the second half due to the strong order book and new programme launches.
In terms of profitability, European plants were running at very high capacity utilisation with a strong
conversion on the additional sales. In China, production was relatively stable following the tax
incentives available for small cars, but margin was slightly lower, due to negative pricing, in-line
with expectations. The Americas operations were impacted by short term production issues at
AWD facilities as customers struggled to obtain parts following the Japanese earthquake and
sizeable additional launch costs on a new global AWD programme. These launch problems have
now been addressed with production reaching target levels, however, some further launch costs
will be incurred in the second half. The technology developed provides an excellent platform for
continued success in AWD.
To provide better strategic and customer alignment, GKN Driveline is reorganising in the second
half of the year from three regions into two global product lines (CVJ and AWD/eDrive) which will
provide a more efficient, leaner organisation.
During the period, more than £400 million of annualised sales in new and replacement business
was secured and a number of important milestones achieved, including:
• Being selected by BMW to supply its eAxle on the BMW 2 Series Active Tourer;
• Winning an Automotive News PACE award for VL3 sideshaft technology, which debuted on
the BMW 7 Series, whilst also picking up an innovation partnership award for work on the
Ford Focus RS; and
• GKN Driveline Brazil being awarded Toyota’s prestigious South America Supplier Quality
Excellence Performance Award for the third year in a row.
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
Sales (£m)
Trading profit (£m)
Trading margin (%)
Return on average invested capital (%)
First half
2016
2015
499
474
63
56
11.8%
12.6%
22.0%
21.3%
Change (%)
Headline
Organic
5
(1)
13
5
Organic sales were £3 million lower, after the £14 million pass through to customers of lower steel
prices and other surcharges. There was a £28 million (6%) benefit from currency translation.
Underlying growth (before raw material pass through) was 2%, in line with global light vehicle
production. Underlying sales growth was achieved in all regions with the strongest performance
being in Asia.
Page 7 of 33
The organic increase in trading profit was £3 million and there was a £4 million gain on currency
translation. The divisional trading margin was 12.6% (2015: 11.8%) reflecting the move towards
higher value “design for powder metallurgy” parts and a small margin benefit from lower raw
material prices passed through to customers. Return on average invested capital was 21.3%
(2015: 22.0%).
During the period, GKN Powder Metallurgy achieved a number of important milestones, which
included:
• Winning, in just six months, around £120 million of annualised sales in new and
replacement business;
• The commencement of production of high quality automotive grade powders in China for
the Asian market; and
• Receiving three prestigious design awards from the Metal Powder Industries Federation
(MPIF) at the annual technical conference POWDERMET2016.
GKN Land Systems
GKN Land Systems is a leading supplier of power management products and services. It designs,
manufactures and supplies products and services for the agricultural and construction markets and
key industrial segments, offering integrated powertrain solutions and complete in-service support.
Sales in GKN Land Systems were lower than the prior period primarily due to a significant decline
in North American agricultural equipment markets and the ending of a chassis contract. Demand
for construction equipment was also weaker while industrial sales remained relatively stable.
The key financial results for the period are as follows:
GKN Land Systems
Sales (£m)
Trading profit (£m)
Trading margin (%)
Return on average invested capital (%)
First half
2016
2015
368
371
17
15
4.0%
4.6%
7.6%
7.4%
Change (%)
Headline
Organic
(1)
(6)
13
6
The organic decrease in sales was £24 million (6%) and the beneficial impact of currency
translation was £21 million (5%). The first of two chassis contracts ending in 2016 reduced sales
by £5 million in the first half. The second contract ends during the third quarter of 2016.
Trading profit was £1 million higher on an organic basis and there was a £1 million benefit from
currency translation. Trading margin was 4.6% (2015: 4.0%). Return on average invested capital
was 7.4% (2015: 7.6%).
End markets remain tough, particularly in North American agricultural equipment. Nevertheless,
progress has been made with many mid-tier customers and important new business won in the
industrial, shaft and wheels operations, whilst continuing to invest in technology.
Other Businesses and corporate costs
GKN’s Other Businesses comprise Cylinder Liners (which is a 59% owned venture mainly in
China, manufacturing engine liners for the truck market in the US, Europe and China), EVO eDrive
Systems (a developer of axial flux motors) and GKN Hybrid Power (a flywheel energy storage and
hybrid system manufacturer).
GKN’s Other Businesses reported combined sales in the period of £18 million (2015: £23 million).
The change reflects a £6 million organic decrease in sales and £1 million benefit from currency
translation. A trading loss of £4 million was reported in the first half (2015: £2 million loss) reflecting
a restructuring charge at GKN Hybrid Power. Following changes in the commercial landscape of
the UK bus market, it has been decided to scale back this operation back and combine it with GKN
Driveline’s hybrid and electric engineering resource.
Page 8 of 33
Corporate costs, which comprise the costs of stewardship of the Group and operating charges and
credits associated with the Group’s legacy businesses, were £11 million (2015: £6 million,
including a £7 million past service credit following completion of a Pension Increase Exchange
exercise in the UK and £3 million of costs in relation to the Fokker acquisition).
Other Financial Information
All comparative information provided below relates to the first half of 2015, unless otherwise stated.
Items excluded from management trading profit
In order to achieve consistency and comparability between reporting periods the following items
are excluded from management measures as they do not reflect trading activity:
Change in value of derivative and other financial instruments
The change in value of derivative and other financial instruments during the period resulted
in a loss of £71 million (2015: £20 million loss).
When the business wins long term customer contracts that are in a foreign currency, the
Group offsets 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 2016, the net fair value of such instruments was a liability of £399 million (31
December 2015: liability of £351 million) and the change in fair value during the period was
a £52 million charge (2015: £31 million charge).
There was also a £3 million credit arising from the change in fair value of embedded
derivatives in the period (2015: nil) and a net loss of £22 million attributable to the currency
impact on Group funding balances (2015: £11 million net gain).
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 £46 million (2015: £36 million).
Gains and losses on changes in Group structure
There was no change in Group structure during the period (2015: £5 million loss).
Restructuring charges
During the period there has been a charge of £22 million in relation to redundancy and
integration costs relating to the Group’s acquisition of Fokker in 2015.
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 posttax in the statutory income statement.
The Group’s share of post-tax earnings on a management basis was £34 million (2015: £34
million), with trading profit of £42 million (2015: £40 million). The Group’s share of the tax charge
amounted to £8 million (2015: £6 million) with no net financing costs in either period. The organic
decrease in trading profit was £1 million.
Page 9 of 33
Net financing costs
Net financing costs totalled £61 million (2015: £67 million) and comprise the net interest payable of
£38 million (2015: £33 million), the non-cash charge on post-employment benefits of £27 million
(2015: £25 million), a gain from fair value changes on cross currency interest rate swaps of £5
million (2015: £6 million charge) and charge for unwind of discounts of £1 million (2015: £3 million).
The non-cash 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 costs are provided in note 10.
Profit before tax
Management profit before tax was £344 million (2015: £307 million). Profit before tax on a statutory
basis was £182 million (2015: £212 million). The main differences between management and
statutory figures for 2016 are the change in value of derivative and other financial instruments,
amortisation of non-operating intangible assets arising on business combinations, restructuring
charges and non-cash charge on post-employment benefits. Further details are provided in note 3
to the interim financial statements.
Taxation
The book tax rate on management profits of subsidiaries was 25% (2015: 24%), arising as a £76
million tax charge (2015: £66 million charge) on management profits of subsidiaries of £310 million
(2015: £273 million).
The tax rate on statutory profits of subsidiaries was 11% (2015: 26%), arising as a £17 million tax
charge (2015: £46 million charge) on statutory profits of subsidiaries of £148 million (2015: £178
million). The decrease is largely as a result of certain foreign exchange gains which are not
taxable.
Non-controlling interests
The profit attributable to non-controlling interests was £2 million (2015: £3 million).
Earnings per share
Management earnings per share was 15.5 pence (2015: 14.5 pence). On a statutory basis
earnings per share was 9.5 pence (2015: 9.9 pence), impacted by an increased charge on the
change in value of derivatives and other financial instruments and restructuring charges.
Dividend
The Board has declared an interim dividend of 2.95 pence per share (2015: 2.9 pence), an
increase of 2%. The interim dividend will be paid on 19 September 2016 to shareholders on the
register at 12 August 2016. 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 26
August 2016.
Cash flow
Operating cash flow, which is defined as cash generated from operations of £252 million (2015:
£242 million) adjusted for capital expenditure (net of proceeds from capital grants) of £227 million
(2015: £198 million), proceeds from the disposal/realisation of fixed assets of £25 million (2015: £2
million), was an inflow of £50 million (2015: £46 million).
Cash generated from operations includes movements in working capital and provisions totalling a
net outflow of £188 million (2015: £142 million outflow), driven by a VAT payment following the
substantial one-off customer advance received at the end of 2015.
Page 10 of 33
Capital expenditure (net of proceeds from capital grants) on both tangible and intangible assets
totalled £227 million (2015: £198 million). Of this, £192 million (2015: £166 million) was on tangible
fixed assets and was 1.5 times (2015: 1.6 times) the depreciation charge. Expenditure on
intangible assets, mainly non-recurring costs on Aerospace programmes, totalled £35 million
(2015: £32 million).
Net interest paid totalled £23 million (2015: £21 million). Tax paid in the period was £42 million
(2015: £58 million).
Free cash flow
Free cash flow, which is operating cash flow including equity accounted investment dividends and
after interest, tax, amounts paid to non-controlling interests but before dividends paid to GKN
shareholders, was an inflow of £40 million (2015: £21 million).
Net debt
At the end of the period, the Group had net debt of £918 million (31 December 2015: £769 million).
At 30 June 2016 the fair value of cross currency interest rate swaps, taken out to better align
foreign currency income receipts with debt coupon payments, was a liability of £165 million (31
December 2015: liability of £69 million) which is included in net debt.
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 2016, the total deficit on post-employment obligations of the Group totalled £2,101
million (31 December 2015: £1,558 million), comprising deficits on funded obligations of £1,367
million (31 December 2015: £1,007 million) and on unfunded obligations of £734 million (31
December 2015: £551 million). In total, the deficit increased £543 million from 31 December 2015,
primarily due to changes in the discount rates used and adverse currency movements.
The amount included within trading profit for the period comprises current service cost of £25
million (2015: £27 million) and administrative costs of £2 million (2015: £1 million). There was no
past service credit in the period (2015: settlement credit of £6 million). The interest charge on net
defined benefit plans, which is excluded from management figures, was £27 million (2015: £25
million).
Cash contributions to the various defined benefit pension schemes and retiree medical
arrangements totalled £71 million (2015: £71 million).
UK pensions
The Group’s two UK defined benefit pension schemes are currently undergoing triennial funding
valuations as at 5 April 2016. Once the valuation process is complete, the 5 April 2016 funding
deficit in each scheme will be confirmed and any incremental deficit contributions payable by the
Group will be established. It is likely that some additional Group funding will be required, but given
the early stage of negotiations with the scheme Trustees and the many variables involved in both
establishing the valuation and agreeing any resulting recovery plan, the final outcome cannot
currently be predicted with any reasonable degree of certainty. The current deficit funding payment
is £42 million per year.
The accounting deficit for UK schemes increased to £1,234 million (31 December 2015: £912
million), following a decrease in discount rates.
Page 11 of 33
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 £28 million (2015: £20 million).
Net assets
Net assets of £1,916 million were £30 million higher than the 31 December 2015 figure of £1,886
million. The increase is primarily driven by management profit after tax of £266 million and
currency retranslation from subsidiaries of £431 million, partially offset by a loss on remeasurement
of defined benefit plans of £466 million and dividends paid to equity shareholders of £99 million.
Exchange rates
Exchange rates used for currencies most relevant to the Group’s operations are:
Average
Euro
US dollar
2016
1.28
1.43
Period End
2015
1.37
1.53
2016
1.20
1.33
2015
1.41
1.57
The approximate impact on 2016 trading profit of subsidiaries and equity accounted investments of
a 1% movement in the average rate would be euro - £1 million, US dollar - £2 million.
Funding, liquidity and going concern
At 30 June 2016, UK committed bank facilities were £865 million. Within this amount were
committed Revolving Credit Facilities of £801 million, £48 million outstanding on an eight-year
amortising facility from the European Investment Bank (EIB) and £16 million outstanding on a
seven-year £16 million amortising facility from KfW. There were drawings of £67 million against
the Revolving Credit Facilities. There were also drawings of £31 million against uncommitted bank
facilities.
Capital market borrowings at 30 June 2016 comprised a £350 million 6.75% annual unsecured
bond maturing in October 2019 and a £450 million 5.375% semi-annual unsecured bond maturing
in September 2022. At 30 June 2016, the Group had net debt of £918 million (31 December 2015:
£769 million), including the fair value of the cross currency interest rate swaps, a liability of £165
million (31 December 2015: £69 million liability).
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 2016, EBITDA was 13.4 times greater than net
interest payable, whilst net debt was 1.0 times EBITDA.
Following an assessment of the Group’s principal risks and consideration of current financial
forecasts the Directors consider it appropriate to adopt the going concern basis of accounting in
preparing the interim financial statements.
Basis of Reporting
The interim financial statements for the period are shown on pages 16 to 32 and have been
prepared using accounting policies which were used in the preparation of audited financial
statements for the year ended 31 December 2015 and which will form the basis of the 2016 Annual
Report.
Page 12 of 33
Definitions
Financial information set out in this announcement, unless otherwise stated, is presented on a
management basis which aggregates the sales and trading profit of subsidiaries (excluding certain
subsidiary businesses sold and closed) with the Group’s share of the sales and trading profit of
equity accounted investments. References to trading margins are to trading profit expressed as a
percentage of sales. Management profit or loss before tax is management trading profit less net
subsidiary interest payable and receivable and the Group’s share of net interest payable and
receivable and taxation of equity accounted investments. These figures better reflect performance
of continuing businesses. Where appropriate, reference is made to organic results which exclude
the impact of acquisitions/divestments as well as currency translation on the results of overseas
operations. Operating cash flow is cash generated from operations adjusted for capital
expenditure, government capital grants, proceeds from disposal of fixed assets and government
refundable advances. Free cash flow is operating cash flow including interest, tax, 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 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.
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 38 to 47 of the 2015 Annual Report. These risks relate to
the following: highly competitive markets; supply chain; customer concentration; operating in global
markets; joint ventures; laws, regulations and corporate reputation; technology and innovation;
acquisition integration; people capability; product quality; contract risk; programme management;
health and safety; information systems resilience; business continuity and pension funding.
On Thursday 23 June 2016 the UK voted to leave the EU, resulting in uncertain future trading
arrangements between the UK and the rest of the world, and falling expectations for UK GDP in
the short to medium term. GKN is a global business with over 90% of its products manufactured
outside the UK; this will limit the effect of the vote on the Group. Weaker sterling following the
referendum has so far had a positive effect on the Group’s reported earnings but a negative impact
on its reported debt and pension liabilities. Pension liabilities have also increased as a result of
falling yields on long term bonds. Discussions with the trustees of the UK pension schemes in
relation to the April 2016 funding valuation are progressing in a constructive manner.
Page 13 of 33
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 2015 Annual Report that could do so.
The Directors of GKN plc are listed in the GKN annual report for 2015, with the exception of Anne
Stevens who was appointed as a non-executive Director on 1 July 2016.
Approved by the Board of GKN plc and signed on its behalf by:
Mike Turner
Chairman
25 July 2016
Page 14 of 33
APPENDICES
Page
GKN Condensed Consolidated Financial Statements
Consolidated Income Statement for the half year ended 30 June 2016
16
Consolidated Statement of Comprehensive Income for the half year ended 30 June
2016
17
Condensed Consolidated Statement of Changes in Equity for the half year ended 30
June 2016
18
Consolidated Balance Sheet at 30 June 2016
19
Consolidated Cash Flow Statement for the half year ended 30 June 2016
20
Notes to the Half Year Consolidated Financial Statements
Independent Review Report
21 – 32
33
Page 15 of 33
CONSOLIDATED INCOME STATEMENT
FOR THE HALF YEAR ENDED 30 JUNE 2016
Notes
Sales
1a
Trading profit
Change in value of derivative and other financial instruments
Amortisation of non-operating intangible assets arising on
business combinations
Gains and losses on changes in Group structure
Impairment charges
Reversal of inventory fair value adjustment arising on
business combinations
Restructuring charges
1b
4
5
Operating profit
Share of post-tax earnings of equity accounted
investments
Interest payable
Interest receivable
Other net financing charges
Net financing costs
6
7
Profit before taxation
Taxation
Profit after taxation for the period
8
Profit attributable to non-controlling interests
Profit attributable to owners of the parent
Earnings per share - pence
Continuing operations - basic
Continuing operations - diluted
Page 16 of 33
Unaudited
First half
First half
2016
2015
£m
£m
Full year
2015
£m
4,237
3,616
7,231
348
(71)
306
(20)
609
(122)
(46)
-
(36)
(5)
-
(80)
(1)
(71)
(22)
-
(12)
-
209
245
323
34
34
59
(41)
3
(23)
(61)
(34)
1
(34)
(67)
(72)
7
(72)
(137)
182
212
245
(17)
165
(46)
166
(43)
202
2
163
165
3
163
166
5
197
202
9.5
9.5
9.9
9.8
11.8
11.7
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE HALF YEAR ENDED 30 JUNE 2016
Notes
Profit after taxation for the period
Unaudited
First half First half
2016
2015
£m
£m
165
166
Full year
2015
£m
202
Other comprehensive income:
Items that may be reclassified to profit or loss
Currency variations – subsidiaries
Arising in period
Reclassified in period
Currency variations – equity accounted investments
Arising in period
Reclassified in period
Derivative financial instruments – transactional hedging
Arising in period
Reclassified in period
Net investment hedge changes in fair value
Arising in period
Reclassified in period
Taxation
431
-
(102)
4
74
4
20
-
(2)
-
1
-
-
-
5
(5)
(108)
(36)
307
23
2
(75)
(37)
(5)
37
(466)
110
(356)
106
(28)
78
139
(42)
97
Other comprehensive income/(expense) for the period
(49)
3
134
Total comprehensive income for the period
116
169
336
4
112
116
2
167
169
4
332
336
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit plans
Subsidiaries
Taxation
Total comprehensive income for the period attributable to:
Non-controlling interests
Owners of the parent
Page 17 of 33
8
10
8
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE HALF YEAR ENDED 30 JUNE 2016
Share
capital
£m
Capital
redemption
reserve
£m
Share
premium
account
£m
Retained
earnings
£m
Other
reserves
£m
Equity
attributable
to equity
holders
of the
parent
£m
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
4
Notes
Noncontrolling
interests
£m
Total
equity
£m
-
-
-
4
-
4
-
Addition of non-controlling interests
14
-
-
-
-
-
-
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 2015
166
298
139
1,069
(193)
1,479
22
1,501
Profit for the period
-
-
-
163
-
163
3
166
Other comprehensive income/(expense)
-
-
-
78
(74)
4
(1)
3
Total comprehensive income/(expense)
-
-
-
241
(74)
167
2
169
1
Share-based payments
Share-based payments
-
-
-
1
-
1
-
Share options exercised
14
-
-
-
2
-
2
-
2
Dividends paid to equity shareholders
9
-
-
-
(92)
-
(92)
-
(92)
Dividends paid to non-controlling interests
-
-
-
-
-
-
(1)
(1)
At 30 June 2015 (unaudited)
166
298
139
1,221
(267)
1,557
23
1,580
At 1 January 2015
166
298
139
1,069
(193)
1,479
22
1,501
Profit for the year
-
-
-
197
-
197
5
202
Other comprehensive income/(expense)
-
-
-
97
38
135
(1)
134
Total comprehensive income/(expense)
-
-
-
294
38
332
4
336
Share-based payments
-
-
-
1
-
1
-
1
Share options exercised
-
-
-
2
-
2
-
2
Proceeds from share issue
7
-
191
-
-
198
-
198
-
-
-
(7)
-
(7)
-
(7)
-
-
-
(142)
-
(142)
-
(142)
Purchase of own shares by Employee
Share Ownership Plan Trust
Dividends paid to equity shareholders
Dividends paid to non-controlling interests
At 31 December 2015
9
-
-
-
-
-
-
(3)
(3)
173
298
330
1,217
(155)
1,863
23
1,886
Page 18 of 33
CONSOLIDATED BALANCE SHEET
AT 30 JUNE 2016
Notes
Assets
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Equity accounted investments
Other receivables and investments
Derivative financial instruments
Deferred tax assets
12
Current assets
Inventories
Trade and other receivables
Current tax assets
Derivative financial instruments
Other financial assets
Cash and cash equivalents
11
Total assets
Liabilities
Current liabilities
Borrowings
Derivative financial instruments
Trade and other payables
Current tax liabilities
Provisions
Non-current liabilities
Borrowings
Derivative financial instruments
Deferred tax liabilities
Trade and other payables
Provisions
Post-employment obligations
10
Total liabilities
Net assets
Shareholders' equity
Share capital
Capital redemption reserve
Share premium account
Retained earnings
Other reserves
Equity attributable to equity holders of the parent
Non-controlling interests
Total equity
Page 19 of 33
Unaudited
30 June
30 June
2016
2015
£m
£m
31 December
2015
£m
665
1,341
2,484
194
47
28
509
5,268
491
911
2,014
151
35
18
314
3,934
591
1,265
2,200
195
42
21
388
4,702
1,370
1,652
4
16
5
227
3,274
8,542
1,000
1,259
7
8
3
273
2,550
6,484
1,170
1,311
9
13
5
299
2,807
7,509
(136)
(166)
(2,028)
(151)
(78)
(2,559)
(103)
(87)
(1,561)
(120)
(51)
(1,922)
(137)
(151)
(1,757)
(121)
(78)
(2,244)
(849)
(430)
(165)
(447)
(75)
(2,101)
(4,067)
(6,626)
1,916
(871)
(152)
(145)
(199)
(82)
(1,533)
(2,982)
(4,904)
1,580
(867)
(294)
(157)
(425)
(78)
(1,558)
(3,379)
(5,623)
1,886
173
298
330
929
150
1,880
36
1,916
166
298
139
1,221
(267)
1,557
23
1,580
173
298
330
1,217
(155)
1,863
23
1,886
CONSOLIDATED CASH FLOW STATEMENT
FOR THE HALF YEAR ENDED 30 JUNE 2016
Unaudited
Notes
Cash flows from operating activities
Cash generated from operations
Interest received
Interest paid
Tax paid
Dividends received from equity accounted investments
Cash flows from investing activities
Purchase of property, plant and equipment
Receipt of government capital grants
Purchase of intangible assets
Proceeds from sale and realisation of fixed assets
Payment of deferred and contingent consideration
Acquisitions of subsidiaries (net of cash acquired)
Repayment of debt acquired in business combinations
Equity accounted investments loan settlement
Investment in equity accounted investments
Cash flows from financing activities
Purchase of own shares by Employee Share Ownership
Plan Trust
Proceeds from exercise of share options
Gross proceeds from issuance of ordinary shares
Costs associated with issuance of ordinary shares
Amounts placed on deposit
Proceeds from borrowing facilities
Repayment of other borrowings
Dividends paid to equity shareholders
Dividends paid to non-controlling interests
Movement in cash and cash equivalents
Cash and cash equivalents at beginning of period
Currency variations on cash and cash equivalents
Cash and cash equivalents at end of period
Page 20 of 33
11
14
14
9
11
First half
2016
£m
First half
2015
£m
Full year
2015
£m
252
3
(26)
(42)
55
242
242
1
(22)
(58)
55
218
885
15
(69)
(111)
55
775
(198)
6
(35)
25
(1)
(8)
4
(207)
(167)
1
(32)
2
(1)
(8)
(2)
(207)
(332)
2
(81)
9
(7)
(117)
(371)
3
(894)
102
(134)
(99)
(131)
(96)
291
29
224
2
75
(24)
(92)
(1)
(40)
(29)
317
(19)
269
(7)
2
200
(2)
(2)
485
(423)
(142)
(3)
108
(11)
317
(15)
291
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS
FOR THE HALF YEAR ENDED 30 JUNE 2016
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, automotive, and the land systems agricultural, construction
and industrial markets. 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.
Revenue from inter segment trading and royalties is not significant. There have been no changes to
segments in the period.
a) Sales
Aerospace
£m
FIRST HALF 2016 (unaudited)
Subsidiaries
Equity accounted investments
Automotive
Powder
Driveline Metallurgy
£m
£m
Land
Systems
£m
1,598
33
1,631
1,768
234
2,002
499
499
354
14
368
1,171
1,171
1,590
224
1,814
474
474
358
13
371
2,387
2,387
3,124
424
3,548
906
906
670
23
693
102
11
113
-
-
-
Other businesses
Management sales
Less: Equity accounted investments sales
Income statement – sales
FIRST HALF 2015 (unaudited)
Subsidiaries
Equity accounted investments
Other businesses
Management sales
Less: Equity accounted investments sales
Income statement – sales
FULL YEAR 2015
Subsidiaries
Equity accounted investments
Acquisitions
Subsidiaries
Equity accounted investments
Other businesses
Management sales
Less: Equity accounted investments sales
Income statement – sales
Page 21 of 33
Total
£m
4,500
18
4,518
(281)
4,237
3,830
23
3,853
(237)
3,616
7,534
113
42
7,689
(458)
7,231
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE HALF YEAR ENDED 30 JUNE 2016
1
Segmental analysis (continued)
b)
Trading profit
Aerospace
£m
FIRST HALF 2016 (unaudited)
Trading profit before depreciation and amortisation
Depreciation of property, plant and equipment
Amortisation of operating intangible assets
Trading profit – subsidiaries
Trading profit – equity accounted investments
Automotive
Powder
Land
Driveline Metallurgy Systems
£m
£m
£m
221
(38)
(24)
159
2
161
185
(55)
(5)
125
39
164
85
(21)
(1)
63
63
23
(7)
16
1
17
176
(28)
(15)
133
133
164
(50)
(3)
111
39
150
75
(19)
56
56
22
(8)
14
1
15
Other businesses
Corporate and unallocated costs
Management trading profit
Less: Equity accounted investments trading profit
Income Statement – trading profit
FIRST HALF 2015 (unaudited)
Trading profit before depreciation and amortisation
Depreciation of property, plant and equipment
Amortisation of operating intangible assets
Trading profit – subsidiaries
Trading profit – equity accounted investments
Other businesses
Acquisition charges – Fokker
Corporate and unallocated costs
Management trading profit
Less: Equity accounted investments trading profit
Income Statement – trading profit
FULL YEAR 2015
Trading profit before depreciation and amortisation
Depreciation of property, plant and equipment
Amortisation of operating intangible assets
Trading profit – subsidiaries
Trading profit – equity accounted investments
Acquisitions
Subsidiaries
Acquisition related charges
Other businesses
Corporate and unallocated costs
Management trading profit
Less: Equity accounted investments trading profit
Income Statement – trading profit
Total
£m
405
(4)
(11)
390
(42)
348
354
(2)
(3)
(3)
346
(40)
306
383
(59)
(33)
291
291
329
(101)
(7)
221
69
290
148
(38)
(1)
109
109
39
(15)
(1)
23
1
24
(5)
(13)
(18)
-
-
-
714
(18)
1
(18)
679
(70)
609
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.
Page 22 of 33
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE HALF YEAR ENDED 30 JUNE 2016
1
Segmental analysis (continued)
c)
Goodwill, fixed assets and working capital - subsidiaries only
Aerospace
£m
Automotive
Powder
Land
Driveline Metallurgy Systems
£m
£m
£m
Total
£m
FIRST HALF 2016 (unaudited)
Property, plant and equipment and operating intangible
assets
Working capital
Net operating assets
Goodwill and non-operating intangible assets
Net investment
1,285
258
1,543
901
2,444
1,229
115
1,344
282
1,626
436
147
583
36
619
139
91
230
147
377
3,089
611
FIRST HALF 2015 (unaudited)
Property, plant and equipment and operating intangible
assets
Working capital
Net operating assets
Goodwill and non-operating intangible assets
Net investment
1,050
208
1,258
487
1,745
949
116
1,065
253
1,318
357
100
457
27
484
121
76
197
131
328
2,477
500
FULL YEAR 2015
Property, plant and equipment and operating intangible
assets
Working capital
Net operating assets
Goodwill and non-operating intangible assets
Net investment
1,208
159
1,367
841
2,208
1,049
22
1,071
258
1,329
375
97
472
29
501
128
64
192
134
326
2,760
342
d)
Inter segment sales
Subsidiary segmental sales gross of inter segment sales are; Aerospace £1,599 million (first half 2015:
£1,171 million, full year 2015: £2,489 million), Driveline £1,796 million (first half 2015: £1,617 million, full year 2015:
£3,176 million), Powder Metallurgy £501 million (first half 2015: £475 million, full year 2015: £908 million) and Land
Systems £355 million (first half 2015: £360 million, full year 2015: £672 million).
e)
Reconciliation of segmental property, plant and equipment and operating intangible assets to the Balance
Sheet
Unaudited
First half First half Full year
2016
2015
2015
£m
£m
£m
Segmental analysis – property, plant and equipment and operating intangible
3,089
assets
2,477
2,760
1,366
Segmental analysis – goodwill and non-operating intangible assets
898
1,262
(665)
Goodwill
(491)
(591)
26
Other businesses
32
25
9
Corporate assets
9
9
3,825
Balance Sheet – property, plant and equipment and other intangible assets
2,925
3,465
f)
Reconciliation of segmental working capital to the Balance Sheet
Segmental analysis – working capital
Other businesses
Corporate items
Accrued interest
Restructuring provisions
Equity accounted investment funding
Deferred and contingent consideration
Government refundable advances
Balance Sheet – inventories, trade and other receivables, trade and other
payables and provisions
Page 23 of 33
Unaudited
First half First half
2016
2015
£m
£m
611
500
11
15
(24)
(24)
(34)
(26)
(1)
(2)
(14)
(4)
(11)
(12)
(97)
(46)
441
401
Full year
2015
£m
342
13
(45)
(25)
(1)
(10)
(3)
(86)
185
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE HALF YEAR ENDED 30 JUNE 2016
2
Basis of preparation
These half year condensed consolidated financial statements for the six months ended 30 June 2016 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 2015, 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 2015 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 2015.
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 2015. 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 business combinations, post-employment obligations, derivative and other
financial instruments, taxation, provisions and impairment of non-current assets. Details of the principal estimates,
judgements and assumptions are set out in notes 30, 24, 4b, 20, 6, 21 and 11 of the audited consolidated financial
statements for the year ended 31 December 2015 as updated in notes 14 (Business combinations), 10 (Postemployment obligations), 4 (Change in value of derivative and other financial instruments) and 8 (Taxation) of these
financial statements.
Date of approval
These financial statements were approved by the Board of Directors on Monday 25 July 2016.
Page 24 of 33
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE HALF YEAR ENDED 30 JUNE 2016
3
Adjusted performance measures
(a) Reconciliation of reported and management performance measures
FIRST HALF 2016 (unaudited)
As
reported
£m
4,237
Sales
Equity
Adjusting
accounted
and non- Management
investments trading items
basis
£m
£m
£m
281
4,518
348
(71)
42
-
71
390
-
(46)
(22)
209
42
46
22
139
390
34
(42)
-
(8)
Interest payable
Interest receivable
Other net financing charges
Net financing costs
Profit before taxation
(41)
3
(23)
(61)
182
-
23
23
162
(41)
3
(38)
344
Taxation
Profit after taxation for the period
Profit attributable to non-controlling interests
Profit attributable to owners of the parent
Earnings per share - pence
(17)
165
(2)
163
9.5
-
(59)
103
103
6.0
(76)
268
(2)
266
15.5
Trading profit
Change in value of derivative and other financial instruments
Amortisation of non-operating intangible assets arising on
business combinations
Restructuring charges
Operating profit
Share of post-tax earnings of equity accounted investments
FIRST HALF 2015 (unaudited)
As
reported
£m
3,616
Sales
Trading profit
Change in value of derivative and other financial instruments
Amortisation of non-operating intangible assets arising on
business combinations
Gains and losses on changes in Group structure
Operating profit
Equity
Adjusting
accounted
and non- Management
investments trading items
basis
£m
£m
£m
237
3,853
306
(20)
40
-
20
346
-
(36)
(5)
245
40
36
5
61
346
34
(40)
-
(6)
Interest payable
Interest receivable
Other net financing charges
Net financing costs
Profit before taxation
(34)
1
(34)
(67)
212
-
34
34
95
(34)
1
(33)
307
Taxation
Profit after taxation for the period
Profit attributable to non-controlling interests
Profit attributable to owners of the parent
Earnings per share - pence
(46)
166
(3)
163
9.9
-
(20)
75
75
4.6
(66)
241
(3)
238
14.5
Share of post-tax earnings of equity accounted investments
FULL YEAR 2015
For the year ended 31 December 2015, management sales were £7,689 million, management trading profit was
£679 million, management profit before tax was £603 million and management earnings per share was 27.8 pence.
Page 25 of 33
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE HALF YEAR ENDED 30 JUNE 2016
3
Adjusted performance measures (continued)
(b) Summary by segment
FIRST HALF 2016 (unaudited)
Aerospace
Driveline
Powder Metallurgy
Land Systems
Other businesses
Corporate and unallocated costs
Sales
£m
1,631
2,002
499
368
18
4,518
Trading
profit
£m
161
164
63
17
(4)
(11)
390
Sales
£m
1,171
1,814
474
371
23
3,853
Trading
profit
£m
133
150
56
15
(2)
(6)
346
Sales
£m
2,387
3,548
906
693
42
113
7,689
Trading
profit
£m
291
290
109
24
1
(18)
(18)
679
Margin
9.9%
8.2%
12.6%
4.6%
8.6%
FIRST HALF 2015 (unaudited)
Aerospace
Driveline
Powder Metallurgy
Land Systems
Other businesses
Corporate and unallocated costs
Margin
11.4%
8.3%
11.8%
4.0%
9.0%
FULL YEAR 2015
Aerospace
Driveline
Powder Metallurgy
Land Systems
Other businesses
Acquisition – Fokker (Aerospace)
Corporate and unallocated costs
Page 26 of 33
Margin
12.2%
8.2%
12.0%
3.5%
8.8%
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE HALF YEAR ENDED 30 JUNE 2016
4
Change in value of derivative and other financial instruments
Forward currency contracts (not hedge accounted)
Embedded derivatives
Net gains and losses on intra-group funding
Arising in period
Change in value of derivative and other financial instruments
Unaudited
First half
First half
2016
2015
£m
£m
(52)
(31)
3
(49)
(31)
(22)
(71)
Full year
2015
£m
(103)
1
(102)
11
(20)
(20)
(122)
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 2016 were; forward currency contracts liability of £399 million
(31 December 2015: liability of £351 million), embedded derivatives asset of £12 million (31 December 2015: asset
of £9 million) and cross currency interest rate swaps liability of £165 million (31 December 2015: liability of £69
million).
5
Restructuring charges
Unaudited
First half
First half
2016
2015
£m
£m
(22)
(22)
-
Redundancy and integration costs
Restructuring charges
Full year
2015
£m
-
Restructuring charges of £22 million, separately identified, relate to the recently acquired Fokker Technologies
Group B.V. business within Aerospace.
6
Share of post-tax earnings of equity accounted investments
Sales
Operating costs
Trading profit
Net financing costs
Profit before taxation
Taxation
Share of post-tax earnings – before adjusting and non-trading items
Adjusting and non-trading items
Share of post-tax earnings
7
Unaudited
First half
First half
2016
2015
£m
£m
281
237
(239)
(197)
42
40
42
40
(8)
(6)
34
34
34
34
Full year
2015
£m
458
(388)
70
(1)
69
(10)
59
59
Unaudited
First half
First half
2016
2015
£m
£m
(27)
(25)
5
(6)
(1)
(3)
(23)
(34)
Full year
2015
£m
(49)
(17)
(6)
(72)
Other net financing charges
Interest charge on net defined benefit plans
Fair value changes on cross currency interest rate swaps
Unwind of discounts
Other net financing charges
Page 27 of 33
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE HALF YEAR ENDED 30 JUNE 2016
8
Taxation
The tax charge for the period is based on an estimate of the Group’s expected annual effective rate of tax for 2016
based on tax legislation substantively enacted at 30 June 2016 applied to taxable profit for the period ended 30
June 2016.
Unaudited
First half
First half
2016
2015
£m
£m
Tax included in the income statement
Analysis of tax charge in the period
Current tax (charge)/credit
Current period charge
Utilisation of previously unrecognised tax losses and other assets
Adjustments in respect of prior periods
Net movement on provisions for uncertain tax positions
Full year
2015
£m
Deferred tax
(66)
3
(63)
46
(74)
8
3
(63)
17
(121)
38
(23)
(106)
63
Total tax charge for the period
(17)
(46)
(43)
Analysed as:
Tax in respect of management profit
Current tax
Deferred tax
(63)
(13)
(63)
(3)
(107)
(26)
(76)
(66)
(133)
59
20
1
89
59
20
90
(17)
(46)
(43)
Unaudited
First half
First half
2016
2015
£m
£m
Full year
2015
£m
Tax in respect of items excluded from management profit
Current tax
Deferred tax
Total tax charge for the period
Tax included in other comprehensive income
Current tax on post-employment obligations
Current tax on foreign currency gains and losses on intra-group funding
Deferred tax on post-employment obligations
Deferred tax on foreign currency gains and losses on intra-group funding
2
108
(36)
74
2
(30)
2
(26)
4
(6)
(46)
1
(47)
Management tax rate
The tax charge arising on management profits of subsidiaries of £310 million (first half 2015: £273 million, full year
2015: £544 million) was £76 million (first half 2015: £66 million charge, full year 2015: £133 million charge) giving an
effective tax rate of 25% (first half 2015: 24%, full year 2015: 24%).
UK tax rate reduction
A reduction in the mainstream rate of UK corporation tax from 20% to 19% from 1 April 2017 and to 18% from
1 April 2020 have been substantively enacted. UK temporary differences are measured at the rate they are
expected to reverse.
The Finance Bill 2016 provides for a further rate reduction to 17% which is expected to be substantively enacted in
the Autumn 2016. The most significant impact of this reduction will be on deferred tax assets related to postemployment obligations which have been recognised through equity.
Page 28 of 33
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE HALF YEAR ENDED 30 JUNE 2016
9
Dividends
An interim dividend of 2.95 pence per share (first half 2015: 2.9 pence per share, full year 2015: 8.7 pence per
share) has been declared by the Directors and will be paid on 19 September 2016 to shareholders on the register at
12 August 2016. Based on the number of shares ranking for dividend at 30 June 2016, the interim dividend is
expected to absorb £51 million.
During the period £99 million (first half 2015: £92 million, full year 2015: £142 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 98% of assets) were carried out as at 30 June 2016.
Movement in post-employment obligations during the period:
Unaudited
First half
First half
2016
2015
£m
£m
(1,558)
(1,711)
(25)
(27)
6
(2)
(1)
(27)
(25)
(466)
106
71
71
(94)
48
(2,101)
(1,533)
At 1 January
Current service cost
Past service
Businesses acquired
Administrative costs
Interest on net defined benefit plans
Remeasurement of defined benefit plans
Contributions/benefits paid
Currency variations
At end of period
Full Year
2015
£m
(1,711)
(50)
4
(7)
(3)
(49)
139
100
19
(1,558)
Post-employment obligations as at the period end comprise:
Unaudited
30 June
30 June 31 December
2016
2015
2015
£m
£m
£m
(1,329)
(967)
(977)
(683)
(489)
(505)
(38)
(27)
(30)
(51)
(50)
(46)
(2,101)
(1,533)
(1,558)
Pensions - funded
- unfunded
Medical - funded
- unfunded
At 30 June 2016 - unaudited
At 30 June 2015 - unaudited
At 31 December 2015
UK Americas
£m
£m
(1,234)
(173)
(920)
(117)
(912)
(133)
Page 29 of 33
Europe
£m
(676)
(483)
(498)
ROW
£m
(18)
(13)
(15)
Total
£m
(2,101)
(1,533)
(1,558)
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE HALF YEAR ENDED 30 JUNE 2016
10
Post-employment obligations (continued)
Assumptions
The major assumptions used were:
Americas
Europe
ROW
GKN1
%
UK
GKN2
%
%
%
%
n/a
2.80
2.75
2.80
3.80
2.80
2.95
2.80
n/a
n/a
3.60
n/a
2.50
1.75
1.30
1.75
n/a
0.80
n/a
7.0/5.0
n/a
n/a
n/a
n/a
4.40
n/a
2.50
1.75
2.20
1.75
n/a
0.80
n/a
7.0/5.0
n/a
n/a
n/a
n/a
4.30
n/a
2.50
1.75
2.40
1.75
n/a
0.80
n/a
7.0/5.0
n/a
n/a
At 30 June 2016 – unaudited
Rate of increase in pensionable salaries
Rate of increase in payment and deferred pensions
Discount rate
Inflation assumption
Rate of increase in medical costs:
Initial/long term
At 30 June 2015 – unaudited
Rate of increase in pensionable salaries
Rate of increase in payment and deferred pensions
Discount rate
Inflation assumption
Rate of increase in medical costs:
Initial/long term
At 31 December 2015
Rate of increase in pensionable salaries
Rate of increase in payment and deferred pensions
Discount rate
Inflation assumption
Rate of increase in medical costs:
Initial/long term
5.4/5.4
n/a
3.20
3.50
3.20
4.20
3.20
3.75
3.20
5.5/5.5
n/a
3.05
3.55
3.05
4.10/4.15
3.10
3.85/4.05
3.10/3.15
5.4/5.4
The table above at 31 December 2015 specifies separate assumptions for past and future service in relation to the
UK schemes.
Consistent with the prior period and year end, the UK discount rate at 30 June 2016 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 2015.
The UK scheme mortality assumptions are based on S1NA (year of birth) mortality tables with CMI 2013
improvements and a 1.25% long term improvement trend. In Germany RT2005-G tables were used, whilst RP2014 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 2016 is set out below:
UK
£m
509
(663)
(583)
427
(110)
109
Discount rate +1%
Discount rate -1%
Rate of inflation +1%
Rate of inflation -1%
Life expectancy +1 year
Life expectancy -1 year
Americas
£m
44
(55)
(1)
(9)
9
Europe
£m
101
(126)
(105)
89
(24)
21
ROW
£m
4
(2)
-
UK deficit funding
The Group’s two UK defined benefit pension schemes are currently undergoing triennial funding valuations as at 5
April 2016. Once the valuation process is complete, the 5 April 2016 funding deficit in each scheme will be
confirmed and any incremental deficit contributions payable by the Group will be established. It is likely that some
additional Group funding will be required, but given the early stage of negotiations with the scheme Trustees and
the many variables involved in both establishing the valuation and agreeing any resulting recovery plan, the final
outcome cannot currently be predicted with any reasonable degree of certainty. Following the previous triennial
valuation in the UK, additional deficit funding payments of £10 million per year have continued and there is potential
for further payments commencing in 2017, contingent upon asset performance. In addition the Group agreed,
during 2014, to pay £2 million per year for 4 years to the UK scheme, GKN 1, to cover a funding requirement arising
from a £123 million bulk annuity purchase.
During the period the Group paid £30 million (first half 2015: £30 million, full year 2015: £30 million) to the 2 UK
pension schemes through its pension partnership arrangement.
Page 30 of 33
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE HALF YEAR ENDED 30 JUNE 2016
11 Cash flow notes
Unaudited
First half
2016
£m
Cash generated from operations
Operating profit
Adjustments for:
Depreciation, impairment and amortisation of fixed assets
Charged to trading profit
Depreciation
Amortisation
Amortisation of non-operating intangible assets arising on business
combinations
Impairment charges
Change in value of derivative and other financial instruments
Gains and losses on changes in Group structure
Amortisation of government capital grants
Net loss/(profit) on sale/realisation of fixed assets
Charge for share-based payments
Movement in post-employment obligations
Change in inventories
Change in receivables
Change in payables and provisions
Movement in net debt
Net movement in cash and cash equivalents
Net movement in borrowings and deposits
Movement on finance leases
Movement on cross currency interest rate swaps
Movement on other net investment hedges
Amortisation of debt issue costs
Currency variations
Movement in period
Net debt at beginning of period
Net debt at end of period
Reconciliation of cash and cash equivalents
Cash and cash equivalents per balance sheet
Bank overdrafts included within “current liabilities – borrowings”
Cash and cash equivalents per cash flow
First half Full year
2015
2015
£m
£m
209
245
323
124
31
106
20
218
43
46
71
(1)
4
(44)
(63)
(184)
59
252
36
20
5
(1)
1
1
(49)
(61)
(71)
(10)
242
80
71
122
1
(2)
(3)
1
(51)
(33)
110
5
885
(96)
32
(96)
(12)
(1)
24
(149)
(769)
(918)
(29)
(51)
16
(1)
(19)
(84)
(624)
(708)
(11)
(60)
(2)
(43)
(11)
(2)
(16)
(145)
(624)
(769)
227
(3)
224
273
(4)
269
299
(8)
291
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 2016 was £930 million (first half 2015: £952 million) with a fair value of
£1,035 million (first half 2015: £1,054 million) and the carrying value of government refundable advances at
30 June 2016 was £97 million (first half 2015: £46 million) with a fair value of £115 million (first half 2015:
£45 million).
Page 31 of 33
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE HALF YEAR ENDED 30 JUNE 2016
12 Property, plant and equipment (unaudited)
During the period ended 30 June 2016 the Group asset additions were £166 million (first half 2015:
£138 million). Assets with a carrying value of £25 million (first half 2015: £3 million) were disposed of
during the period ended 30 June 2016.
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 shortterm 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 2016 amounted
to £189 million (30 June 2015: £134 million) and the Group's share not provided by equity accounted
investments amounted to £23 million (30 June 2015: £8 million).
During the period a total of 189,505 ordinary shares (first half 2015: 5,362,689 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. This generated a cash inflow of nil (first half 2015:
£2 million).
On 22 June 2016, the Group repaid the second of five annual instalments of £16 million on its £80 million
European Investment Bank Loan.
On 30 June 2016 the Group took control, through a 60% equity shareholding, of a newly formed company;
GKN (Bazhou) Metal Powder Company Limited (Bazhou). Bazhou specialises in metal powder production
in China.
The fair value of consideration for the 60% shareholding is £17 million and comprises an initial cash
payment of £8 million and deferred consideration of £9 million. The fair value of net assets acquired,
before non-controlling interests, of £26 million comprises; property, plant and equipment of £15 million,
inventory of £3 million, receivables of £4 million and provisional goodwill of £4 million. Due to the proximity
of the transaction to the reporting date, a formal valuation exercise will be performed in the second half of
the year to appropriately allocate the fair value of assets and liabilities acquired. Bazhou has been
included in Powder Metallurgy for segmental reporting.
15 Contingent assets and liabilities (unaudited)
Since 2003, the Group has been involved in litigation with HMRC in respect of various advance corporate
tax payments and corporate tax paid on certain foreign dividends which, in its view, were levied by HMRC
in breach of the Group’s EU community law rights. The most recent High Court judgment in the case was
published in December 2014. This judgement was broadly positive but HMRC appealed the decision and
a hearing took place in June 2016 in the Court of Appeal. A judgement is expected towards the end of
2016. There has been a recent judgement in the Prudential case from the Court of Appeal considering
similar issues which was also broadly favourable, however, HMRC appealed this judgement to the
Supreme Court.
The continuing complexity of the remaining case and uncertainty over the issues raised (and in particular
which points HMRC may seek to appeal) means that it is not possible to predict the final outcome of the
litigation with any reasonable degree of certainty.
There are no other material contingent assets at 30 June 2016 or 30 June 2015. At 30 June 2016 the
Group had no contingent liabilities in respect of bank arrangements and no guarantees (30 June 2015:
none). In the case of certain businesses, performance bonds and customer finance obligations have been
entered into in the normal course of business.
Page 32 of 33
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 2016 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 2016 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
Chartered Accountants and Statutory Auditor
London, United Kingdom
25 July 2016
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