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GKN Holdings PLC (16DW)

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Monday 30 April, 2018

GKN Holdings PLC

Annual Financial Report

GKN Holdings plc

2017 Annual Report

GKN Holdings plc LEI: 213800WS7P9FYSAIJ240

This announcement is made in connection with GKN Holdings plc’s 6.75% Bonds due 2019, 5.375% Bonds due 2022 and 3.375% Bonds due 2032.  The shares of GKN Holdings plc (the ‘Company’) are not listed.

The Company has today published its 2017 Annual Report on the GKN plc website.  The document can be viewed at or downloaded from http://www.gkn.com/en/investors/results-centre/annual-reports/annual-reports-archive/.

A copy of the 2017 Annual Report has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

In compliance with DTR 6.3.5, a description of the Company’s principal risks and uncertainties and a responsibility statement are set out below.  A condensed set of financial statements are also appended, which have been extracted from the full set of financial statements that have been prepared on a  going concern basis in accordance with International Financial Reporting Standards (IFRS) as endorsed and adopted for use by the European Union. These condensed financial statements should be read in conjunction with the full audited financial statements of GKN Holdings plc for the year ended 31 December 2017, which include the accounting policies and information regarding estimations, judgements and assumptions relevant to these condensed financial statements. The 2017 full year results announcement issued by GKN plc on 27 February 2018 included an indication of important events that occurred during the year for the Group.  The announcement can be viewed at or downloaded from http://www.gkn.com/en/investors/regulatory-news/.

Principal Risks and Uncertainties

The Company’s risk management process includes an assessment of the likelihood and potential impact of a range of events to determine the overall risk level and to identify actions necessary to mitigate their impact.  As a finance, investment and holding company within the GKN Holdings Group, aside from holding the Group’s external term loans and sponsorship of the GKN UK pension schemes, the Company’s dealings are almost exclusively intra Group transactions.  In this context, the Company’s significant risks and uncertainties are identified below.  In addition, risks which could have a material impact on the Group’s strategic objectives are given in the annual report of GKN plc for 2017 which does not form part of this report. 

Additional risks not currently known or which are regarded as immaterial could also affect future performance.

Pension deficit volatility

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. 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.

This risk is managed through 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 along with agreed recovery plans where required.


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.

Currency translation

Movements in exchange rates of key currencies may significantly impact the Group’s financial results. Our mitigation strategy includes foreign currency hedging and using cross currency swaps to align our debt to the principal currencies in which our revenues and cash flows are generated.

During the year, the Group designated Swedish SEK loans as part of a net investment hedge of

SEK net assets.

All divisions continue to focus on risk mitigation, including the production, refinement and testing of business continuity and disaster recovery plans, and ongoing reviews of critical assets and prioritisation of capital investment.

DIRECTORS’ RESPONSIBILITY STATEMENT

Directors:        Mr N M Stein (resigned 14 March 2018)

                Mr A C Walker (resigned 10 November 2017)

                Mr M J Sclater (resigned 19 April 2018)

                Mr S A Peckham (appointed 19 April 2018)

                Mr J C F Crawford (appointed 19 April 2018)

                Mr A W Curral (appointed 13 November 2017)

Each of the Directors as at the date of this report, whose names are set out above, confirm that to the best of their knowledge:

  • the Group financial statements, prepared in accordance with IFRSs as adopted by the EU,give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

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

GKN Holdings plc condensed financial statements

Consolidated Income Statement
For the year ended 31 December 2017
Notes 2017  2016 
£m  £m 
Sales 1 9,671  8,822 
Trading profit 1 568  684 
Change in value of derivative and other financial instruments 2 364  (154)
Amortisation of non-operating intangible assets arising on
business combinations 2 (100) (103)
Gains and losses on changes in Group structure 2 (2) (9)
Acquisition-related restructuring charges 2 –  (31)
Impairment charges 2 (131) (52)
Operating profit 699  335 
Share of post-tax earnings of equity accounted investments 5 80  73 
Interest payable (86) (86)
Interest receivable 10 
Other net financing charges (45) (37)
Net financing costs 3 (121) (116)
Profit before taxation 658  292 
Taxation 4 (143) (54)
Profit after taxation for the year 515  238 
Profit attributable to non-controlling interests
Profit attributable to owners of the parent 509  236 
515  238 

   

Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017
Notes 2017  2016 
£m  £m 
Profit after taxation for the year 515  238 
Other comprehensive (loss)/ income
Items that may be reclassified to profit or loss
Currency variations – subsidiaries
Arising in year (214) 671 
Reclassified in year (3)
Currency variations – equity accounted investments
Arising in year 5 (4) 22 
Net investment hedge changes in fair value
Arising in year 55  (177)
Taxation 4 (14)
(163) 504 
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit plans
Subsidiaries 8 291  (396)
Taxation 4 (64) 63 
227  (333)
Other comprehensive income for the year 64  171 
Total comprehensive income for the year 579  409 
Total comprehensive income attributable to non-controlling interests
Total comprehensive income attributable to owners of the parent 575  403 
579  409 

   

Consolidated Statement of Changes in Equity
For the year ended 31 December 2017
Other reserves
Notes Share 
capital 
£m 
Share 
premium 
account 
£m 
Retained 
earnings 
£m 
Exchange 
reserve 
£m 
Hedging 
reserve 
£m 
Other 
reserves 
£m 
Equity 
attributable 
to equity 
holders of 
the parent 
£m 
Non-
controlling
interests 
£m 
Total 
equity 
£m 
At 1 January 2017 362  301  3,255  881  (402) (134) 4,263  35  4,298 
Profit for the year –  –  509  –  –  –  509  515 
Other comprehensive (loss)/ income:
Remeasurement of defined benefit
plans and related tax –  –  227  –  –  –  227  –  227 
Currency variations and related tax –  –  –  (204) –  –  (204) (2) (206)
Net investment hedge changes in
fair value and related tax –  –  –  –  43  –  43  –  43 
–  –  227  (204) 43  –  66  (2) 64 
Total comprehensive (loss)/ income –  –  736  (204) 43  –  575  579 
Share-based payments –  –  –  –  –  – 
Dividend paid to parent undertaking –  –  (877) –  –  –  (877) –  (877)
At 31 December 2017 362  301  3,118  677  (359) (134) 3,965  39  4,004 
At 1 January 2016 362  301  3,358  243  (264) (134) 3,866  23  3,889 
Profit for the year –  –  236  –  –  –  236  238 
Other comprehensive (loss)/ income:
Remeasurement of defined benefit
plans and related tax –  –  (333) –  –  –  (333) –  (333)
Currency variations and related tax –  –  –  638  –  –  638  642 
Net investment hedge changes in
fair value and related tax –  –  –  –  (138) –  (138) –  (138)
–  –  (333) 638  (138) –  167  171 
Total comprehensive (loss)/ income –  –  (97) 638  (138) –  403  409 
Share-based payments –  –  –  –  –  – 
Shares received from Employee Share Ownership
   Plan Trust
–  –  (10) –  –  –  (10) –  (10)
Addition of non-controlling interest –  –  –  –  –  –  – 
Purchase of non-controlling interest –  –  (1) –  –  –  (1) (1) (2)
Dividends paid to non-controlling
interests –  –  –  –  –  –  –  (2) (2)
At 31 December 2016 362  301  3,255  881  (402) (134) 4,263  35  4,298 

Other reserves include accumulated reserves where distribution has been restricted due to legal or fiscal requirements and accumulated adjustments in respect of piecemeal acquisitions.

Consolidated Balance Sheet
At 31 December 2017
Notes 2017  2016 
£m  £m 
Assets
Non-current assets
Goodwill 492  588 
Other intangible assets 1,179  1,320 
Property, plant and equipment 2,677  2,670 
Equity accounted investments 5 249  233 
Other receivables and investments 153  49 
Derivative financial instruments 37  25 
Deferred tax assets 4 374  557 
5,161  5,442 
Current assets
Inventories 1,431  1,431 
Trade and other receivables 1,748  1,648 
Amounts receivable from parent undertaking 1,431  2,148 
Current tax assets 4 68 
Derivative financial instruments 28  19 
Other financial assets 6
Cash and cash equivalents 6 421  411 
5,132  5,669 
Total assets 10,293  11,111 
Liabilities
Current liabilities
Borrowings 6 (38) (64)
Derivative financial instruments (78) (206)
Trade and other payables (2,333) (2,186)
Amounts payable to parent undertaking (7) (12)
Current tax liabilities 4 (132) (142)
Provisions (80) (71)
(2,668) (2,681)
Non-current liabilities
Borrowings 6 (1,126) (842)
Derivative financial instruments (248) (521)
Deferred tax liabilities 4 (184) (227)
Trade and other payables (485) (427)
Provisions (74) (82)
Post-employment obligations 8 (1,504) (2,033)
(3,621) (4,132)
Total liabilities (6,289) (6,813)
Net assets 4,004  4,298 
Shareholders’ equity
Share capital 362  362 
Share premium account 301  301 
Retained earnings 3,118  3,255 
Other reserves 184  345 
Equity attributable to equity holders of the parent 3,965  4,263 
Non-controlling interests 39  35 
Total equity 4,004  4,298 

   

Consolidated Cash Flow Statement
For the year ended 31 December 2017
Notes 2017  2016 
£m  £m 
Cash flows from operating activities
Cash generated from operations 7 562  645 
Interest received
Interest paid (79) (83)
Tax paid (107) (99)
Dividends received from equity accounted investments 5 60  57 
1,194  527 
Cash flows from investing activities
Purchase of property, plant and equipment (442) (416)
Receipt of government capital grants
Purchase of intangible assets (79) (84)
Repayment of government refundable advance (8) (6)
Proceeds from sale and realisation of fixed assets 37 
Payment of deferred and contingent consideration (2) (1)
Acquisition of subsidiaries (net of cash acquired) 9 (25) (17)
Costs associated with disposal of subsidiaries (2) – 
Purchase of investment –  (5)
Proceeds from disposal of subsidiary, net of cash 2 151 
Equity accounted investments loan settlement – 
(542) (331)
Cash flows from financing activities
Shares received from Employee Share Ownership
Plan Trust –  (10)
Purchase of non-controlling interests 9 –  (2)
Proceeds from borrowing facilities 302  102 
Repayment of other borrowings (37) (243)
Dividends paid to parent undertaking (127) – 
Dividends paid to non-controlling interests –  (2)
138  (155)
Movement in cash and cash equivalents 40  41 
Cash and cash equivalents at 1 January 385  291 
Currency variations on cash and cash equivalents (13) 53 
Cash and cash equivalents at 31 December 7 412  385 

   

Notes to the Consolidated Financial Statements
1 Segmental analysis
The Group’s reportable segments in 2017 have been determined based on reports reviewed by the Executive Committee led by the Chief Executive. The operating activities of the Group are largely structured according to the markets served; aerospace and automotive markets. Automotive is managed according to product groups; driveline and powder metallurgy. Reportable segments derive their sales from the manufacture of products and sale of service. Revenue from royalties is not significant.
(a) Sales
Automotive
Powder 
Aerospace  Driveline  Metallurgy  Total 
£m  £m  £m  £m 
2017
Subsidiaries 3,556  4,652  1,174 
Equity accounted investments 82  656  – 
3,638  5,308  1,174  10,120 
Other businesses 289 
Management sales 10,409 
Less:  equity accounted investments sales (738)
Income statement – sales 9,671 
2016 – restated*
Subsidiaries 3,352  4,109  1,032 
Equity accounted investments 71  505  – 
3,423  4,614  1,032  9,069 
Other businesses 345 
Management sales 9,414 
Less:  equity accounted investments sales (592)
Income statement – sales 8,822 
Subsidiary sales comprise £9,016 million (2016: £8,281 million) from the manufacture of product and £655 million (2016: £541 million) from the sale of services.
* As previously announced, following disposal of its Stromag business on 30 December 2016 the Group changed its segments to remove Land Systems for reporting in 2017. The two businesses remaining in the Group that were part of Land Systems have been reported as follows: Wheels and Structures in Other Businesses and Driveshafts and Aftermarket Services, now renamed Off-Highway Powertrain, in Driveline. For the purpose of comparative information in 2016, Stromag has been included in Other Businesses. There is no change to Aerospace or Powder Metallurgy segmental reporting.
(b) Trading profit
Automotive
Powder 
Aerospace  Driveline  Metallurgy  Total 
£m  £m  £m  £m 
2017
Trading profit before depreciation and amortisation 330  445  176 
Depreciation of property, plant and equipment (92) (151) (49)
Amortisation of operating intangible assets (61) (13) (2)
Trading profit – subsidiaries 177  281  125 
Trading (loss)/profit – equity accounted investments (2) 96  – 
175  377  125  677 
Other businesses 16 
Corporate and unallocated costs (31)
Management trading profit 662 
Less: equity accounted investments trading profit (94)
Income statement – trading profit 568 
During the year, the Group has recorded net charges in the trading profit of Aerospace amounting to £119 million which are set out below.

The results of the overall North American Aerospace balance sheet review (£108 million) and the initial inventory and other asset write-downs at the Alabama plant (£15 million) total £123 million. This combined charge contains inventory write-downs of £79 million, charges for onerous contracts of £18 million, re-assessment of customer recoveries and claims of £19 million and corrections to fixed asset carrying values of £7 million.

   

Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2017
1 Segmental analysis (continued)
(b) Trading profit (continued)

Additionally, the Aerospace trading profit has absorbed the impact of costs of £28 million associated with performance-related claims arising from a risk and revenue sharing partnership within the Engine Systems business. In the year credits amounting to £32 million arose from programme pricing adjustments; £19 million in the North American Aerostructures business and £13 million in the Engine Systems business.

As highlighted in our Trading Update in November 2017, the Driveline trading profit has borne estimated product warranty charges amounting to £10 million.

Professional fees associated with the North American Aerospace balance sheet review, £4 million, are charged in corporate and unallocated costs.
Automotive
Powder 
Aerospace  Driveline  Metallurgy  Total 
£m  £m  £m  £m 
2016 – restated*
Trading profit before depreciation and amortisation 464  388  164 
Depreciation of property, plant and equipment (78) (128) (44)
Amortisation of operating intangible assets (51) (12) (2)
Trading profit – subsidiaries 335  248  118 
Trading profit – equity accounted investments 82  – 
339  330  118  787 
Other businesses
Corporate and unallocated costs (21)
Management trading profit 773 
Less: equity accounted investments trading profit (89)
Income Statement – trading profit 684 
During the year ended 31 December 2016, the Group recorded a charge of £39 million in trading profit in respect of a Group-wide restructuring programme. The charge arose in: Aerospace £10 million, Driveline £22 million, Powder Metallurgy £3 million, Other Businesses £2 million and Corporate costs £2 million.

   

Notes to the Consolidated Financial Statements (continued)
2 Operating profit
The analysis of the additional components of operating profit is shown below:
(a) Trading profit
2017  2016 
£m  £m 
Sales by subsidiaries 9,671  8,822 
Operating costs
Change in stocks of finished goods and work in progress 33  68 
Raw materials and consumables (4,398) (3,850)
Inventories recognised as an expense (4,365) (3,782)
Staff costs (note 7) (2,457) (2,309)
Redundancy and other employee-related amounts (1) (43)
Depreciation of property, plant and equipment (302) (263)
Amortisation of operating intangible assets (78) (67)
Operating lease rentals payable (75) (68)
Impairment of trade receivables (6) (5)
Amortisation of government capital grants
Net exchange differences on foreign currency transactions (50) (25)
Other costs (1,771) (1,578)
(9,103) (8,138)
Trading profit 568  684 
(i) EBITDA is subsidiary trading profit before depreciation and amortisation charges included in trading profit. EBITDA was £948 million (2016: £1,014 million).
(ii) Research and development expenditure in subsidiaries was £201 million (2016: £186 million), net of customer and grant funding of £61 million (2016: £59 million).
Auditors’ remuneration
The analysis of auditors’ remuneration is as follows:
2017  2016 
£m  £m 
Fees payable to the Group’s auditors for the audit of the parent company (0.1) (0.1)
Fees payable to the Group’s auditors and their associates for other
services to the Group:
Audit of the financial statements of subsidiaries (6.8) (4.4)
Total audit fees payable to the Group’s auditors (6.9) (4.5)
Audit-related assurance services (0.8) (0.2)
Total fees for other services (0.8) (0.2)
Total fees payable to the Group’s auditors and their associates (7.7) (4.7)
All fees payable to the Group’s auditors include amounts in respect of expenses. All fees payable to the Group’s auditors have been charged to the income statement.

   

Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2017
2 Operating profit (continued)
(b) Change in value of derivative and other financial instruments
2017  2016 
£m  £m 
Forward currency contracts (not hedge accounted) 364  (135)
Embedded derivatives (6)
358  (131)
Net gains and losses on intra-group funding
Arising in year (23)
364  (154)
IAS 39 requires derivative financial instruments to be valued at the balance sheet date and reflected in the balance sheet as an asset or liability. Any subsequent change in value is reflected in the income statement unless hedge accounting is achieved. Such movements do not affect cash flow or the economic substance of the underlying transaction.
(c) Amortisation of non-operating intangible assets arising on business combinations
2017  2016 
£m  £m 
Marketing-related (3) (4)
Customer-related (71) (67)
Technology-based (26) (32)
(100) (103)
(d) Gains and losses on changes in Group structure
2017  2016 
£m  £m 
Business disposed
Business closures (4) (18)
(2) (9)
On 29 December 2017, the Group sold its GKN Applied Composites AB business for a cash consideration of £7 million before professional fees. The profit on sale of £3 million comprises profit on disposal of net assets including £2 million cash, with no impact from reclassification of previous currency variations from other reserves.

On 14 August 2017, the Group sold its GKN Aerospace Bandy Machining, Inc. business for a cash consideration of £1 million before professional fees. The loss on sale of £1 million comprises £5 million loss on disposal of net assets and £3 million gain from reclassification of previous currency from other reserves.

On 30 December 2016, the Group sold its Stromag business (part of the Land Systems division) to Altra Industrial Motion Corp. for cash consideration of £159 million excluding an overdraft disposed of £7 million and before professional and completion fees (£1 million). The profit on sale of £9 million comprises an £11 million profit on disposal of net assets and £2 million loss from reclassification of previous currency variations from other reserves.

On 17 November 2016, the Group confirmed the closure of its Aerospace business in Yeovil. The company previously had a contract to make airframes for the Royal Navy AW159 Wild Cat helicopters but its main customer which assembles the helicopters, announced that it was taking this contract in-house. The site closure has resulted in a further charge in 2017 of £4 million comprising: transition costs of £2 million and other associated costs of £2 million. In 2016, a reorganisation charge of £12 million was recorded, comprising: redundancy of £4 million; impairment of property, plant and equipment of £4 million; write down of inventories of £2 million; and other associated costs of £2 million. Cash flows in 2017 amounted to £7 million. There was a further decision in 2016 to curtail operations of a Driveline business with an associated reorganisation charge of £6 million comprising redundancy of £4 million and impairment of goodwill of £2 million. Redundancy cash flows in 2017 amounted to £4 million.
(e) Acquisition-related restructuring charges
2017  2016 
£m  £m 
Redundancy and other employee-related amounts –  (27)
Integration and other expenses –  (4)
Restructuring charges –  (31)
In 2016, restructuring charges, separately identified, relate to the acquisition of Fokker Technologies Group B.V. business within Aerospace in 2015. The cash flows related to this totalled £13 million in 2017.

   

Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2017
2 Operating profit (continued)
(f) Impairment charges
2017  2016 
£m  £m 
Goodwill (72) (38)
Other intangible assets (2) – 
Property, plant and equipment (57) (14)
(131) (52)

   

Notes to the Consolidated Financial Statements (continued)
3 Net financing costs 
2017  2016 
£m  £m 
(a) Interest payable and fee expense
Short-term bank and other borrowings (13) (12)
Interest on debt repayable within five years (61) (41)
Interest on debt repayable after five years (6) (27)
Government refundable advances (6) (6)
(86) (86)
Interest receivable
Short-term investments, loans and deposits
Tax case interest recoveries – 
10 
Net interest payable and receivable (76) (79)
Short-term bank and other borrowings includes a finance cost of £7 million (2016: £5 million) for factoring and customer supply chain finance programmes.
2017  2016 
£m  £m 
(b) Other net financing charges
Interest charge on net defined benefit plans (47) (53)
Fair value changes on cross currency interest rate swaps 18 
Unwind of discounts (2) (2)
(45) (37)
4 Taxation
(a) Tax expense
2017  2016 
Analysis of charge in year £m  £m 
Current tax (charge)/credit
Current year charge (107) (73)
Utilisation of previously unrecognised tax losses and other assets – 
Net movement on provisions for uncertain tax positions 30 
Adjustments in respect of prior years – 
(77) (54)
Deferred tax (charge)/credit
Origination and reversal of temporary differences 52  – 
Tax on change in value of derivative financial instruments (79) 14 
Other changes in unrecognised deferred tax assets (51) (3)
Adjustments in respect of prior years 12  (11)
(66) – 
Total tax charge for the year (143) (54)
Analysed as:
2017  2016 
Tax in respect of management profit £m  £m 
Current tax (72) (46)
Deferred tax (38) (104)
(110) (150)
Tax in respect of items excluded from management profit
Current tax (5) (8)
Deferred tax (28) 104 
(33) 96 
Total for tax charge for the year (143) (54)

   

Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2017
4 Taxation (continued)
(a) Tax expense (continued)
Judgements and estimates

The Group operates in many jurisdictions and is subject to tax audits which are often complex and can take several years to conclude. Therefore, the accrual for current tax includes provisions for uncertain tax positions of £121 million which require estimates for each matter and the exercise of judgement in respect of the interpretation of tax laws and the likelihood of challenge to historical tax positions. Management uses in-house tax experts, professional advisers and previous experience when assessing tax risks. Where appropriate, estimates of interest and penalties are included in these provisions. As amounts provided for in any year could differ from eventual tax liabilities, subsequent adjustments which have a material impact on the Group’s tax rate and/or cash tax payments may arise. Tax payments comprise payments on account and payments on the final resolution of open items and, as a result, there can be substantial differences between the charge in the income statement and cash tax payments. Where companies utilise brought forward tax losses such that little or no tax is paid, this also results in differences between the tax charge and cash tax payments. With regard to deferred tax, judgement is required for the recognition of deferred tax assets, which is based on expectations of future financial performance in particular legal entities or tax groups.
2017 2016
Tax reconciliation £m  £m 
Profit before taxation 658  292 
Less share of post-tax earnings of equity accounted investments (80) (73)
Profit before taxation excluding equity accounted investments 578  219 
Tax charge calculated at 19.25% (2016: 20%) standard UK corporate
tax rate (111) (19) (44) (20)
Differences between UK and overseas corporate tax rates (16) (3) (30) (14)
Non-deductible and non-taxable items (10) (2) 30  14 
Recognition of previously unrecognised tax losses –  –  –  – 
Utilisation of previously unrecognised tax losses and other assets –  – 
Changes in tax rates (17) (8)
Other changes in deferred tax assets (55) (9) (1) – 
Tax charge before prior year and adjustment and movement in uncertain
tax positions (185) (32) (61) (28)
Net movement on provision for uncertain tax positions 30 
Adjustments in respect of prior years 12  (2) (1)
Total tax charge for the year (143) (25) (54) (25)
Non-deductible and non-taxable items include foreign exchange movements that are not deductible (£14 million charge), impairment of assets which are not deductible for tax purposes (£33 million), partially offset by the benefit of tax incentives in a number of jurisdictions (£25 million). Other changes in deferred tax assets relate to an increase in unrecognised tax losses where it is not considered probable the losses will expire before they are utilised. The rate change primarily relates to the change of rate in the US discussed below.
(b) Tax included in other comprehensive income
2017  2016 
Analysis of (charge)/credit in year £m  £m 
Deferred tax on post-employment obligations (89) 60 
Deferred tax on hedged foreign currency gains and losses (12) 39 
Deferred tax on other foreign currency gains and losses on intra-group funding –  (3)
Current tax on post-employment obligations 25 
Current tax on foreign currency gains and losses on intra-group funding 15  (50)
(61) 49 
(c) Current tax
2017  2016 
£m  £m 
Assets 68 
Liabilities (132) (142)
(64) (135)

   

Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2017
4 Taxation (continued)
(d) Recognised deferred tax
2017  2016 
£m  £m 
Assets 374  557 
Liabilities (184) (227)
190  330 
The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by IAS 12) during the year are shown below:
Assets Liabilities
Post- 
employment  Tax  Fixed 
obligations  losses  Other  assets  Other  Total 
£m  £m  £m  £m  £m  £m 
At 1 January 2017 325  177  229  (391) (10) 330 
Businesses disposed –  –  –  –  –  – 
Included in the income statement (60) (75) 63  (66)
Included in other comprehensive income (89) –  (12) –  –  (101)
Currency variations (6) 23  –  27 
At 31 December 2017 240  124  136  (305) (5) 190 
At 1 January 2016 245  176  157  (339) (8) 231 
Businesses disposed (1) (1) 15  –  14 
Included in the income statement (2) (19) 18  (2) – 
Included in other comprehensive income 60  –  36  –  –  96 
Currency variations 23  19  19  (72) –  (11)
At 31 December 2016 325  177  229  (391) (10) 330 
The primary territories which have tax losses and other temporary differences are the UK and the Netherlands. These territories have both recognised and unrecognised deferred tax assets. Deferred tax assets are recognised where, based on management projections, the future availability of taxable profits to absorb the deductions before any applicable time limits expire is probable. Deferred tax assets (including tax losses) are not recognised where the Group’s ability to utilise them is not probable, for example where management projections indicate there will be insufficient future profits before losses expire, or in cases where the quantum of losses is uncertain (i.e. subject to cases such as the FII GLO).

‘Other’ deferred tax arises mainly in relation to items that are taxable or tax deductible in a different period than the income or expense is accrued in the financial statements. Other deferred tax assets include £46 million relating to derivatives (2016: £139 million).

   

Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2017
Notes to the Consolidated Financial Statements (continued)
5 Equity accounted investments

Group share of results
2017  2016 
£m  £m 
Sales 738  592 
Operating costs (644) (503)
Trading profit 94  89 
Net financing costs (1)
Profit before taxation 96  88 
Taxation (16) (15)
Share of post-tax earnings 80  73 
Group share of net book amount
2017  2016 
£m  £m 
At 1 January 233  195 
Share of post-tax earnings 80  73 
Dividends paid to the Group (60) (57)
Currency variations (4) 22 
At 31 December 249  233 
2017  2016 
£m  £m 
Non-current assets 166  171 
Current assets 376  326 
Current liabilities (283) (259)
Non-current liabilities (10) (5)
249  233 

Equity accounted investments have no significant contingent liabilities to which the Group is exposed, nor has the Group any significant contingent liabilities in relation to its interest in the equity accounted investments.

The Group has one significant joint venture within Driveline, Shanghai GKN HUAYU Driveline Systems Co Limited (SDS), with 100% of sales of £1,159 million (2016: £870 million), trading profit of £181 million (2016: £153 million), an interest charge of £1 million (2016: £1 million) and a tax charge of £29 million (2016: £26 million) leaving retained profit of £153 million (2016: £126 million). Net assets of £348 million (2016: £341 million) comprise non-current assets of £224 million (2016: £236 million), current assets of £445 million (2016: £384 million), current liabilities of £321 million (2016: £279 million) and non-current liabilities of nil (2016: nil). During 2017, SDS paid a dividend to the Group of £59 million (2016: £54 million). Further information about SDS can be found in note 5 to the GKN plc company financial statements.

Notes to the Consolidated Financial Statements (continued)
6 Net borrowings
(a) Analysis of net borrowings
Notes  Current  Non-current Total 
Within  One to two  Two to five  More than  Total 
one year  years  years  five years 
£m  £m  £m  £m  £m  £m 
2017
Unsecured capital market borrowings
£450 million 5?% 2022 unsecured bond –  –  (447) –  (447) (447)
£350 million 6¾% 2019 unsecured bond  –  (349) –  –  (349) (349)
£300 million 3?% 2032 unsecured bond  –  –  –  (296) (296) (296)
Unsecured committed bank borrowings
European Investment Bank (16) (16) –  –  (16) (32)
2019 Committed Revolving Credit Facility –  –  –  –  –  – 
Other (net of unamortised issue costs) (2) (2) (6) (2) (10) (12)
Finance lease obligations (1) (1) (3) (4) (8) (9)
Bank overdrafts (9) –  –  –  –  (9)
Other short-term bank borrowings (10) –  –  –  –  (10)
Borrowings (38) (368) (456) (302) (1,126) (1,164)
Bank balances and cash 257  –  –  –  –  257 
Short-term bank deposits 164  –  –  –  –  164 
Cash and cash equivalents 421  –  –  –  –  421 
Other financial assets – bank deposits –  –  –  – 
Net borrowings (excluding cross
currency interest rate swaps) 388  (368) (456) (302) (1,126) (738)
Cross currency interest rate swaps –  (76) (75) –  (151) (151)
Net debt 388  (444) (531) (302) (1,277) (889)
2016
Unsecured capital market borrowings
£450 million 5?% 2022 unsecured bond –  –  –  (446) (446) (446)
£350 million 6¾% 2019 unsecured bond  –  –  (349) –  (349) (349)
Unsecured committed bank borrowings
European Investment Bank (16) (16) (16) –  (32) (48)
2019 Committed Revolving Credit Facility –  –  –  –  –  – 
Other (net of unamortised issue costs) –  (2) (7) (4) (13) (13)
Finance lease obligations (1) –  –  (2) (2) (3)
Bank overdrafts (26) –  –  –  –  (26)
Other short-term bank borrowings (21) –  –  –  –  (21)
Borrowings (64) (18) (372) (452) (842) (906)
Bank balances and cash 236  –  –  –  –  236 
Short-term bank deposits 175  –  –  –  –  175 
Cash and cash equivalents 411  –  –  –  –  411 
Other financial assets – bank deposits –  –  –  – 
Net borrowings (excluding cross
currency interest rate swaps) 352  (18) (372) (452) (842) (490)
Cross currency interest rate swaps –  –  (122) (92) (214) (214)
Net debt 352  (18) (494) (544) (1,056) (704)
Unsecured capital market borrowings include: an unsecured £350 million (2016: £350 million) 6¾% bond maturing in 2019 less unamortised issue costs of £1 million (2016: £1 million) and an unsecured £450 million (2016: £450 million) 5?% bond maturing in 2022 less unamortised issue costs of £3 million (2016: £4 million) and a new unsecured £300 million 3?% bond maturing in 2032 less unamortised issue costs of £4 million.

Unsecured committed bank borrowings include £32 million (2016: £48 million) drawn under the Group’s European Investment Bank (EIB) unsecured facility which attracts a fixed interest rate of 4.1% per annum payable annually in arrears and a borrowing of £12 million (2016: £15 million) drawn against a KfW amortising unsecured facility which attracts a fixed interest rate of 1.65%. On 22 June 2017, the Group repaid the third of five annual instalments of £16 million on the EIB facility. There were no drawings (2016: nil) at the year end against the Group’s 2019 Committed Revolving Credit Facilities of £800 million (2016: £800 million). Unamortised issue costs on the 2019 Committed Revolving Credit Facilities were £2 million (2016: £3 million).

   

Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2017
7 Cash flow reconciliations
2016  2015 
Cash generated from operations £m  £m 
Operating profit 335  324 
Adjustments for:
Depreciation, impairment and amortisation of fixed assets
Charged to trading profit
Depreciation 263  218 
Amortisation 67  43 
Amortisation of non-operating intangible assets arising on business combinations 103  80 
Impairment charges 52  71 
Change in value of derivative and other financial instruments 154  122 
Gains and losses on changes in Group structure
Amortisation of government capital grants (2) (2)
Net profits on sale and realisation of fixed assets (3) (3)
Charge for share-based payments
Movement in post-employment obligations (75) (51)
Change in amounts due from parent undertaking (139) 55 
Change in amounts due to parent undertaking (1)
Change in inventories (78) (33)
Change in receivables (151) 110 
Change in payables and provisions 99 
645  940 
Movement in net debt
Movement in cash and cash equivalents 41  (11)
Net movement in other borrowings and deposits 141  (60)
Movement on finance leases (2)
Movement on cross-currency interest rate swaps (145) (43)
Movement on other net investment hedges (17) (11)
Amortisation of debt issue costs (2) (2)
Currency variations 47  (16)
Movement in year 65  (145)
Net debt at beginning of year (769) (624)
Net debt at end of year (704) (769)
Reconciliation of cash and cash equivalents
Cash and cash equivalents per balance sheet 411  299 
Bank overdrafts included within ‘current liabilities – borrowings’ (26) (8)
Cash and cash equivalents per cash flow 385  291 

   

Notes to the Consolidated Financial Statements (continued)
8 Post-employment obligations
2017  2016 
Post-employment obligations as at the year end comprise: £m  £m 
Pensions – funded (743) (1,285)
– unfunded (675) (662)
Medical – funded (39) (37)
– unfunded (47) (49)
(1,504) (2,033)
The Group’s pension arrangements comprise various defined benefit and defined contribution schemes throughout the world. In addition, in the US and UK various plans operate which provide members with post-retirement medical benefits. The Group’s post-employment plans in the UK, US and Germany together account for 98% of plan assets and 98% of plan liabilities.

The Group’s post-employment plans include both funded and unfunded arrangements. The UK pension schemes are funded, albeit in deficit in common with many other UK pension schemes, with the scheme assets held in trustee-administered funds. The German and other European plans are generally unfunded, with pension payments made from company funds as they fall due, rather than from scheme assets. The US schemes include a combination of funded and unfunded pension and medical plans, while Japan also operates a funded pension plan.

The Group’s defined benefit pension arrangements provide benefits to members in the form of an assured level of pension payable for life. The level of benefits provided typically depends on length of service and salary levels in the years leading up to retirement. In the UK and Germany, pensions in payment are generally updated in line with inflation, whereas in the US pensions generally do not receive inflationary increases once in payment. The UK and German schemes are closed to new entrants, while the US schemes are closed to future accrual.

Independent actuarial valuations of all major defined benefit scheme assets and liabilities were carried out at 31 December 2017. The present value of the defined benefit obligation and the related service cost elements were measured using the projected unit credit method.
(a)  Defined benefit schemes – assumptions and estimates

Estimating the post-employment obligation involves a number of significant assumptions, which are detailed below.

Key assumptions and estimates:
UK
GKN2 GKN3 Americas Europe ROW
% %  %  %  %
2017
Rate of increase in pensionable salaries (past service) n/a n/a n/a 2.50 – 
Rate of increase in payment and deferred pensions 3.00 3.00 n/a 1.75 n/a
Discount rate (past service) 2.60 2.40 3.60 1.70 0.50
Inflation assumption (past service) 3.20 3.15 n/a 1.75 n/a
Rate of increase in medical costs:
Initial/long-term 5.4/5.4 6.5/5.0 n/a n/a
2016
Rate of increase in pensionable salaries (past/future service) 4.30/4.25 n/a n/a 2.50 – 
Rate of increase in payment and deferred pensions 3.20 3.30 n/a 1.75 n/a
Discount rate (past/future service) 2.60/2.70 2.45 4.10 1.60 0.50
Inflation assumption (past/future service) 3.30/3.25 3.35 n/a 1.75 n/a
Rate of increase in medical costs:
Initial/long-term 5.4/5.4 6.75/5.0 n/a n/a

In prior years, there were separate assumptions for past and future service in relation to the UK pension scheme. However, following the closure of GKN2 to future accrual from 1 July 2017, this is no longer relevant.

The UK schemes each use a duration-specific discount rate derived from the LCP Treasury Model, which is based on corporate bonds with two or more AA-ratings. The European discount rate was calculated with reference to Aon Hewitt’s German discount rate yield curve. For the US, the discount rate referenced the Citigroup intermediate pension liability index, the Merrill Lynch US corporate AA 10+ years index and the Towers Watson Rate:LINK benchmark. The approach taken in Europe and the US is consistent with the prior year.

During the year, the Group has taken the decision to change the model used in deriving the discount rates used in post-employment obligation valuations. Previously, gilt yields were used to extrapolate AA rated corporate bond yields to durations where no deep market in corporate bonds existed.

The current year approach looks at a number of different factors to set discount rates and is intended to remove the distortions inherent in the gilt yield curve resulting from high demand from institutional investors. This change increased the discount rate by 0.1% and remains consistent with the requirements of IAS 19.

   

Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2017
8 Post-employment obligations (continued)
(a)  Defined benefit schemes – assumptions and estimates (continued)
The underlying mortality assumptions for the major schemes, are as follows:

UK
The key current year mortality assumptions for both GKN2 and GKN3 use S2PA year of birth mortality tables (adjusted for GKN experience) with CMI 2016 improvements and a 1.25% per annum long-term improvement trend. These assumptions give the following expectations for each scheme: for GKN3 a male aged 65 lives for a further 22.0 years and a female aged 65 lives for a further 24.6 years, while a male aged 40 is expected to live a further 24.8 years from age 65 and a female aged 40 is expected to live a further 26.5 years from age 65. For GKN2 a male aged 65 lives for a further 22.3 years and a female aged 65 lives for a further 25.1 years, while a male aged 40 is expected to live a further 24.2 years from age 65 and a female aged 40 is expected to live a further 27.0 years from age 65.
Overseas
In the US, RP-2014 tables have been used, while in Germany the RT2005-G tables have been used. In the US, the longevity assumption for a male aged 65 is that he lives a further 20.7 years (female 22.7 years), while in Germany a male aged 65 lives for a further 19.1 years (female 23.2 years). The longevity assumption for a US male currently aged 45 is that he also lives for a further 22.3 years once attaining 65 years (female 24.2 years), with the German equivalent assumption for a male being 21.8 years (female 25.7 years). These assumptions are based on the prescribed tables, rather than GKN experience.
Assumption sensitivity analysis
The impact of a one percentage point movement in the primary assumptions (longevity: 1 year) on the defined benefit obligations as at 31 December 2017 is set out below:
UK  Americas  Europe  ROW 
Liabilities 
£m 
Liabilities 
£m 
Liabilities 
£m 
Liabilities 
£m
Discount rate +1% 478  39  102 
Discount rate -1% (622) (48) (132) (1)
Rate of inflation +1% (525) (1) (89) – 
Rate of inflation -1% 407  –  74  – 
Life expectancy +1 year (122) (10) (25) – 
Life expectancy -1 year 124  10  23  – 
Health cost trend +1% (2) (2) –  – 
Health cost trend -1% –  – 
The above sensitivity analyses are based on isolated changes in each assumption, while holding all other assumptions constant. In practice, this is unlikely to occur, and there is likely to be some level of correlation between movements in different assumptions. In addition, these sensitivities relate only to potential movement in the defined benefit obligations. The assets, including derivatives held by the schemes, have been designed to mitigate the impact of these movements to some extent, such that the movements in the defined benefit obligations shown above would, in practice, be partly offset by movements in asset valuations. However, the above sensitivities are shown to illustrate at a high level the scale of sensitivity of the defined benefit obligations to key actuarial assumptions.

The same actuarial methods have been used to calculate these sensitivities as are used to calculate the relevant balance sheet values, and have not changed compared to the previous period.
Key estimates
It has been determined that the key estimates within the calculation of the defined benefit plans are discount rates, the rates of inflation and life expectancies. It is reasonably probable that a change in these could occur within the next year that could materially change the value of the defined benefit plans. Sensitivity analysis has been undertaken in the above table to illustrate the impact of a 1% or one-year increase and decrease in these metrics.
Pension partnership interest
During the year, the Group has paid £30 million (2016: £30 million) to the UK pension schemes through its pension partnership arrangement and this is included within the amount of contributions/benefits paid.
Funding update and closure of GKN2 to future accrual
During the year, the Group’s two UK defined benefit pension schemes completed their triennial funding valuations as at 5 April 2016 for GKN2 and 31 December 2016 for GKN3.

The outcome of these discussions resulted in a lump sum contribution of £250 million paid in October 2017 to GKN2, and annual contributions of £6 million until 2022 to GKN3.  These contributions along with investment outperformance is expected to close the deficits on the Trustee’s funding basis by April 2022 for GKN3 and June 2031 for GKN2.

During the year, a decision was also taken to close GKN2 to future accrual and following a consultation process with the scheme members, the closure took place effective 30 June 2017. UK pension benefits are now provided on a defined contribution basis.

   

Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2017
8 Post-employment obligations (continued)
(b)   Defined benefit schemesreporting
The amounts included in operating profit are:
2017  2016 
£m  £m 
Current service cost and administrative expenses (43) (51)
Settlements/curtailments – 
(43) (46)
The amounts recognised in the balance sheet are:
2017
UK  Americas  Europe  ROW  Total  2016 
£m   £m  £m   £m   £m  £m 
Present value of unfunded obligations (16) (40) (662) (4) (722) (711)
Present value of funded obligations (3,293) (321) (38) (31) (3,683) (3,902)
Fair value of plan assets 2,618  224  34  25  2,901  2,580 
Net obligations recognised in the balance sheet (691) (137) (666) (10) (1,504) (2,033)
The triennial funding valuations for the UK defined benefit pension schemes were completed during the year. Following the completion of these valuations, in order to fund the deficits, the Company agreed to make a lump sum contribution of £250 million to GKN2 and annual contributions of £6 million to GKN3 until 2022 in addition to the distributions from the UK pension partnership.

The contribution for deficit funding expected to be paid by the Group during 2018 to the UK schemes is £6 million. In addition, a distribution of £30 million is expected to be made from the UK pension partnership to GKN2 in the first half of 2018, which brings the total expected UK cash requirement for 2018 to £36 million. The expected 2018 contribution to overseas schemes is £35 million.
Cumulative remeasurement of defined benefit plan differences recognised in equity are as follows:
2017  2016 
£m  £m 
At 1 January (1,469) (1,073)
Remeasurement of defined benefit plans 291  (396)
At 31 December (1,178) (1,469)
Movement in schemes’ obligations (funded and unfunded) during the year
UK  Americas   Europe  ROW  Total 
£m   £m   £m   £m   £m 
At 1 January 2017 (3,514) (375) (688) (36) (4,613)
Current service cost (24) (1) (11) (2) (38)
Employee contributions –  (1) –  –  (1)
Administrative expenses (4) (1) –  –  (5)
Interest (89) (15) (11) –  (115)
Remeasurement of defined benefit plans 174  (22) 13  –  165 
Benefits and administrative expenses paid 148  21  27  198 
Currency variations –  33  (30)
At 31 December 2017 (3,309) (361) (700) (35) (4,405)
At 1 January 2016 (3,234) (319) (531) (34) (4,118)
Current service cost (35) (1) (9) (3) (48)
Businesses disposed –  –  12  –  12 
Settlements and curtailments 268  –  –  270 
Administrative expenses (3) –  –  –  (3)
Interest (119) (15) (13) –  (147)
Remeasurement of defined benefit plans (540) (82) (612)
Benefits and administrative expenses paid 149  17  22  191 
Currency variations –  (62) (89) (7) (158)
At 31 December 2016 (3,514) (375) (688) (36) (4,613)

   

Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2017
8 Post-employment obligations (continued)
(b) Defined benefit schemes – reporting (continued)
Movement in schemes’ assets during the year
UK  Americas   Europe  ROW   Total 
 £m   £m   £m   £m   £m 
At 1 January 2017 2,293  227  37  23  2,580 
Interest 58  –  68 
Employee contributions –  –  – 
Remeasurement of defined benefit plans 102  21  –  126 
Contributions by Group 308  –  317 
Benefits paid (143) (21) (5) (2) (171)
Currency variations –  (20) (1) (20)
At 31 December 2017 2,618  224  34  25  2,901 
At 1 January 2016 2,322  186  33  19  2,560 
Interest 85  –  94 
Settlements and curtailments (263) –  (2) –  (265)
Businesses disposed –  –  (1) –  (1)
Remeasurement of defined benefit plans 207  –  216 
Contributions by Group 87  96 
Benefits paid (145) (17) (2) (2) (166)
Currency variations –  37  46 
At 31 December 2016 2,293  227  37  23  2,580 
Remeasurement gains and losses in relation to schemes’ obligations are as follows
UK  Americas  Europe  ROW  Total 
£m  £m  £m  £m  £m 
2017
Experience gains and losses 10  (3) –  11 
Changes in financial assumptions 64  (20) –  53 
Change in demographic assumptions 100  –  –  101 
174  (22) 13  –  165 
2016
Experience gains and losses 210  –  217 
Changes in financial assumptions (715) (8) (83) (801)
Change in demographic assumptions (35) –  –  (28)
(540) (82) (612)
The fair values of the assets in the schemes were:
UK  Americas  Europe  ROW  Total 
£m  £m  £m  £m  £m 
At 31 December 2017
Equities (including hedge funds) 507  106  –  14  627 
Diversified growth funds 824  –  –  –  824 
Bonds – government 464  50  –  –  514 
Bonds – corporate 315  62  –  385 
Property 127  –  –  –  127 
Cash, derivatives and net current assets 214  –  –  220 
Other assets 167  –  34  204 
2,618  224  34  25  2,901 
At 31 December 2016
Equities (including hedge funds) 607  107  –  12  726 
Diversified growth funds 558  –  –  –  558 
Bonds – government 540  53  –  602 
Bonds – corporate 245  63  –  –  308 
Property 138  –  –  –  138 
Cash, derivatives and net current assets 23  –  –  27 
Other assets 182  –  37  221 
2,293  227  37  23  2,580 
As at 31 December 2017, the equities in the UK asset portfolio were split 26% domestic (2016: 27%); 74% foreign (2016: 73%), while bond holdings were 100% domestic (2016: 97%) and 0% foreign (2016: 3%). The equivalent proportions for the US plans were: equities 40%/60% (2016: 41%/59%); bonds 87%/13% (2016: 89%/11%).

   

Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2017
8 Post-employment obligations (continued)
(c) Defined benefit scheme – risk factors
Through its various post-employment pension and medical plans, the Group is exposed to a number of risks, the most significant of which are detailed below. The Group’s focus is on managing the cash demands which the various pension plans place on the Group, rather than balance sheet volatility in its own right. For funded schemes, cash requirements are generally determined by funding valuations which are performed on a different basis from accounting valuations.

Asset volatility: plan liabilities are calculated using discount rates set with reference to bond yields (although the discount rate methodology differs for accounting and funding purposes). If plan assets deliver a return which is lower than the discount rate, this will create or increase a plan deficit. GKN’s various pension plans hold a significant proportion of equities and similar ‘growth assets’, which are expected to out-perform bonds in the long term, albeit at the risk of short-term volatility.

As the plans mature, with a shorter time horizon to cope with volatility, the Group will gradually reduce holdings of growth assets in favour of increased matching assets (bonds and similar). In the meantime, the Group considers that equities and similar assets are an appropriate means of managing pension funding requirements, given the long-term nature of the liabilities and the strength of the Group to withstand volatility.

Changes in bond yields: a decrease in bond yields will typically increase plan liabilities (and vice versa), although this will be offset partially by an increase in the value of bonds held in the asset portfolios of the various plans. The effect of changes in bond yields is more pronounced in unfunded schemes where there is no potential for an offsetting movement in asset values.  

Inflation risk: as UK and some European pension obligations are linked to inflation, higher inflation expectations will lead to higher liabilities, although caps are in place to protect against unusually high levels of inflation. The UK asset portfolio includes some inflation-linked bonds to provide an element of protection against this risk, while additional protection is provided by inflation derivatives.

Member longevity: as the Group’s post-employment obligations are generally to provide benefits for the life of the member, increases in life expectancy will generally result in an increase in plan liabilities (and vice versa).
(d) Defined benefit schemes – demographic factors
Weighted average duration is a measurement technique designed to represent the estimated average time to payment of all cash flows arising as a result of defined benefit obligations (i.e. pension payments and similar). The weighted average duration (years) of the defined benefit obligations in the UK, US and Germany are as follows:
2017 
years 
2016 
years 
UK GKN2 19  19 
GKN3 11  11 
US 12  12 
Germany 17  18 

Defined benefit obligations are classified into those representing ‘active’ members of a scheme or plan (i.e. those who are currently employed by the Group), ‘deferred’ members (i.e. those who have accrued benefit entitlements, but who are no longer employed by the Group and are not yet drawing a pension) and ‘pensioner’ members (i.e. those who are currently in receipt of a pension). Additional information regarding the average age, number of members and value of the defined benefit obligation in each of these categories for the UK, US and Germany are given below:
Active Deferred Pensioner
Age  Number  Value 
£m 
Age  Number  Value 
£m 
Age  Number  Value 
£m 
UK GKN2 –  –  –  53  10,070  1,583  72  7,843  1,161 
GKN3 –  –  –  56  2,913  58  80  9,490  490 
US 54  2,367  111  57  1,216  43  75  4,413  206 
Germany 55  2,386  293  57  843  53  72  3,068  280 
Within the UK, there are two pension schemes referred to as GKN2 and GKN3. GKN3 is a mature scheme, comprised primarily of pensioner members, which is already at peak annual cash outflow (benefit payments); while GKN2 is less mature, with a larger deferred population. Benefit payments from GKN2 are forecast to continue to rise until the mid 2030s, when they will peak, before beginning to decline.
(e) Defined contribution schemes
The Group operates a number of defined contribution schemes. The charge to the income statement in the year was £84 million (2016: £62 million).

   

Notes to the Consolidated Financial Statements (continued)
9 Business combinations
On 31 May 2017, the Group purchased the entire equity shareholding of Tozmetal Ticaret ve Sanayi Anonim ?irketi (Tozmetal), a Turkey-based sintering business, to broaden the division’s manufacturing footprint. The acquired company has since been renamed GKN Sinter Istanbul Metal Sanayi Ve Ticaret Anonim Sirketi. The consideration of £26 million comprised a cash payment only. The fair value of net assets acquired comprised: property, plant and equipment of £7 million, inventory of £2 million, receivables of £6 million, cash of £1 million, payables of £4 million, intangible assets of £9 million and goodwill of £5 million. This has been included in Powder Metallurgy for segmental reporting.

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 subsequently paid of £9 million. The fair value of net assets acquired, before non-controlling interests (£9 million), of £26 million comprises: property, plant and equipment of £15 million, inventory of £3 million, receivables of £4 million and goodwill of £4 million. Bazhou is included in Powder Metallurgy for segmental reporting.

During 2016, the Group also paid £2 million to purchase a non-controlling interest from the other investor in Lianyungang GKN Hua Ding Wheels Co Ltd. The Group now owns 100% of the share capital in this company.

   

10 Post balance sheet events
On 29 March 2018 GKN plc shareholders voted in favour of a proposed takeover bid by Melrose Industries plc. It is not possible to estimate the financial effect on the Company as a result of this change in ultimate parent ownership.

a d v e r t i s e m e n t