Annual Report and Accounts 2014

Transcription

1 Annual Report and Accounts 2014 GKN plc Annual Report and Accounts 2014 ENGINEERING THAT MOVES THE WORLD ENGINEERING THAT MOVES THE WORLD MOVES THE WORLD MOVES THE WORLD ENGINEERING THAT MOVES THE WORLD ENGINEERING THAT MOVES THE WORLD Visit our website for more information

2 GKN is a global engineering business. Every day we drive the wheels of hundreds of millions of cars, we help thousands of aircraft to fly, we deliver the power to move earth and harvest crops, and we make essential components for industries that touch lives across the globe. Engineering that moves the world Visit our website for more information

3 Strategic Report Governance Financial Statements Other Information Global footprint Page 04 Chairman s statement Page 06 Our strategic framework Page 08 Key performance indicators Page 14 Contents STRATEGIC REPORT GKN at a glance at a glance 03 Global footprint 04 Chairman s statement 06 Our strategic framework 08 Our business model 10 Our business model / Global markets 12 Key performance indicators 14 Chief Executive s review 16 Business review / Group performance 20 Business review / GKN Aerospace 22 Business review / GKN Driveline 26 Business review / GKN Powder Metallurgy 30 Business review / GKN Land Systems 34 Business review / Other financial information 38 Risk management 42 Sustainability report 52 GOVERNANCE Board of Directors 60 Chairman s introduction to governance 62 Corporate governance 63 Nominations Committee report 70 Audit Committee report 72 Directors remuneration report 78 Additional information 99 Statement of Directors responsibilities 102 FINANCIAL STATEMENTS Independent auditors report (Group) 103 Group financial statements 111 Independent auditors report (Company) 158 Company financial statements 160 Group financial record 163 OTHER INFORMATION Key subsidiaries and joint ventures 164 Shareholder information 166 Contact information IBC Chief Executive s review Page 16 Pages 60 to 102 comprise the Directors report. GKN plc Annual Report and Accounts

4 STRATEGIC REPORT GKN at a glance GKN is a global engineering business we design, manufacture and service systems and components for original equipment manufacturers around the world. We focus on innovation and delivering exceptional customer service to create a strong business with significant opportunities for growth. 51,400 employees 33 countries 3 markets 4 divisions GKN AEROSPACE GKN DRIVELINE A leading tier one supplier of aerostructures and engine products and systems to the global aerospace industry. The leading tier one supplier of automotive driveline systems and solutions to the world s leading vehicle manufacturers. GKN POWDER METALLURGY GKN LAND SYSTEMS The world s largest manufacturer of sintered components and a leading producer of metal powder. A leading supplier of power management products and services for agricultural, construction, mining and industrial equipment. See pages for more information on our divisions 02 GKN plc Annual Report and Accounts 2014

5 Strategic Report Governance Financial Statements Other Information 2014 at a glance Financial highlights Statutory basis Sales Profit before tax Earnings per share 6,982m 221m 10.3p 2013: 7,136m 2013: 484m 2013: 24.2p Management basis* Sales Profit before tax Earnings per share 7,456m 601m 29.0p 2013: 7,594m 2013: 578m 2013: 28.7p * See page 21 for details on measurement and reporting of performance on a management basis. Sales on a management basis increased 4% organically; decline of 2% after 403 million adverse currency translation impact. Trading margin improved to 9.2%. Total dividend increased 6% to 8.4 pence per share. Net debt of 624 million, 108 million lower than last year. Management sales GKN Aerospace 2,226m GKN Driveline 3,444m GKN Powder Metallurgy 916m GKN Land Systems 776m Other Businesses 94m 7,456m Management trading profit GKN Aerospace 277m GKN Driveline 280m GKN Powder Metallurgy 101m GKN Land Systems 44m 687m* * Including corporate costs and Other Businesses. GKN plc Annual Report and Accounts

6 STRATEGIC REPORT Global footprint GKN is a global business with manufacturing facilities, service centres and offices in over 30 countries across five continents. This strong global footprint enables us to serve an international customer base and creates a platform from which we can access fastgrowing markets. 51 North America manufacturing locations Operating in close proximity to our customers helps optimise our positions in major supply chains and is an important factor in developing new technologies in partnership with customers. A global engineering company Sales by region UK Europe (excluding UK) Americas Asia Pacific and Africa 7,456m Employees by region* 13% 36% 37% 14% UK 6,300 Europe (excluding UK) 18,200 Americas 15,400 Asia Pacific and Africa 11,500 51,400 * Including subsidiaries and joint ventures. Visit locations for more information 04 GKN plc Annual Report and Accounts 2014

7 Strategic Report Governance 29 Other Information Asia Europe 63 Financial Statements manufacturing locations 1 manufacturing locations Africa South America 5 manufacturing locations manufacturing location 1 Australia manufacturing location GKN plc Annual Report and Accounts

8 STRATEGIC REPORT Chairman s statement Continued progress We are a long term business with the right strategy. MIKE TURNER CBE CHAIRMAN Results and dividend 2014 was another year of progress for GKN. We have delivered a good set of results. I am particularly pleased with the results because in some respects 2014 was not a straightforward year: we faced considerable currency headwinds with sterling unusually strong against all major currencies for much of the year, the agricultural market fell sharply and the military aerospace market continued to decline. Despite this, we have grown both our organic sales and overall profit. This shows the resilience of our business model and strength of our strategy. We have continued with our progressive dividend policy and are recommending a final dividend of 5.6 pence per share, making a total of 8.4 pence per share for the year, an increase of 6% over the prior year. Over the course of the past five years we have seen the dividend rise 68% from 5.0 pence per share in 2010 to 8.4 pence in respect of Our strategy Our strategy is central to the year s good results. We successfully positioned our automotive businesses to grow above the market and in 2014 they grew 8% organically compared to market growth of 3%. We have repositioned our aerospace business so that 73% is now in the higher growth commercial sector, compared to just 42% in Following the successful acquisition and integration as a whole of Volvo Aero, we have a leading aerospace engine systems business with excellent exposure to some fast-growing platforms. In the medium term our aerospace business is very well positioned to take advantage of growing platforms such as the Boeing 787, the A350 and the F-35 Joint Strike Fighter. Each year we seek to improve our strategy process. In 2014 we refined how we review and develop the Group s strategic objectives by increasing our focus on long term market, economic and technology trends. There are some exciting changes ahead of us, including the increasing electrification of vehicles and the use of additive manufacturing in aerospace. We continue to invest to take advantage of the opportunities presented by these changes. Our strategic objectives are described in further detail on page 9. See pages for more information on our financial results 06 GKN plc Annual Report and Accounts 2014

9 Strategic Report Governance Financial Statements Other Information We did not make any major acquisitions in 2014, taking a disciplined approach to potential opportunities and choosing to focus on thoroughly integrating our engine systems business following the acquisition of Volvo Aero in During 2014 we were awarded investment grade status with all three of the major rating agencies and continued to pay down our debt. We are now in a strong position to make further acquisitions, but will continue to take a focused approach. Sustainability and risk GKN has a long history of behaving ethically; of doing the right thing. We recognise that we continuously need to ensure that we set the right tone from the top and engage with our people to ensure that they understand the behaviours that we expect of them. For this reason we revised the GKN Code during 2014, making it clearer and more engaging, and updating it to bring additional focus to areas such as diversity and inclusion, and quality. We have also strengthened our diversity and inclusion programme, which is visibly supported by the Board, and we have worked hard to improve quality and product safety through the Voice of the Customer initiative described by Nigel on page 18. We have well developed risk management processes, but are not complacent and note the emphasis on risk management in the revised 2014 UK Corporate Governance Code. We continue to work to improve our risk management processes and control systems. We have described our work in this area in greater detail on pages The Board Adam Walker joined the Board at the start of 2014 and quickly became an effective member of the team. I am confident that he will be an asset to the Company. On 31 December 2014 Marcus Bryson CBE retired from his role as Chief Executive Aerospace and Land Systems and from the Board. Marcus joined GKN in 1994 and since then his contribution to the creation of the GKN we see today, and in particular our aerospace division, has been significant. He fully deserves the CBE recently awarded for his contribution to the UK aerospace industry. We have not replaced Marcus on the Board for now and have chosen instead to strengthen the Executive Committee with the appointment of Kevin Cummings, CEO GKN Aerospace, Peter Oberparleiter, CEO GKN Powder Metallurgy, and Philip Swash, CEO GKN Land Systems. They will regularly attend Board meetings to ensure that the Board continues to have a good feel for what is happening in each division. The Board has real diversity of experience and technical expertise, and the Board dynamic continues to be excellent with all Directors making a valuable contribution. Our people Meeting a wide range of customer expectations is never easy, but GKN s culture is to persevere and through the commitment of our people we have delivered a good set of results. They have again demonstrated GKN s resilience and ability to grow above the market. I would like to take this opportunity to thank them for all that they have done. I have written in the past about a pressing need for a global talent pool that is well stocked with young people with the necessary scientific and mathematical skills. That remains the case and I am glad to report that around the world GKN continues to engage in hundreds of local initiatives designed to encourage young people to choose engineering as a possible future career. Looking forward As we enter 2015, political and economic uncertainty will continue to affect GKN. But we are a long term business with the right strategy. I am therefore confident that the Group will continue to grow and generate sustainable returns for our shareholders during 2015 and beyond. Mike Turner CBE Chairman GKN plc Annual Report and Accounts

10 STRATEGIC REPORT Our strategic framework We aim to create long term and sustainable shareholder value in the form of steadily growing earnings and dividends through the delivery of growth in sales, rising profitability and increasing return on invested capital. We have excellent positions in long term global growth markets and build strong relationships with international original equipment manufacturers (OEMs) and prime contractors. To create value we have five strategic objectives. Creating sustainable value See pages for more information on our business model 08 GKN plc Annual Report and Accounts 2014

11 Strategic Report Governance Financial Statements Other Information Our five strategic objectives Our financial goals 1 LEADING IN OUR CHOSEN MARKETS We aim to succeed in the long term by being the leader in our chosen markets. We are selective in our focus and work in partnership with our customers to deliver the most innovative and high quality products and systems. Our financial goals are based on a balanced approach between sales growth, margin and return on invested capital (ROIC). 2 LEVERAGING A STRONG GLOBAL PRESENCE GKN is an international business with a global footprint through which we serve our customer base. By further developing our geographic spread we will continue our expansion into growing markets and build longlasting and mutually beneficial customer relationships that increase our market share. GROWTH ABOVE MARKET 3 DIFFERENTIATING OURSELVES THROUGH TECHNOLOGY 4 DRIVING OPERATIONAL EXCELLENCE GKN delivers innovative technologies that help our customers stay ahead in their markets and enable us to maintain our competitive edge, ensuring we remain in higher value markets. We work with our customers to develop new technologies, driven by global trends such as fuel efficiency, the low-carbon agenda, electrification, urbanisation and population growth. We have a strong culture of operational excellence and, through continuous improvement processes, we focus on delivering exceptional quality and customer service. At the same time, we aim to be an employer of choice with a high-performance culture, motivated people and outstanding leaders, always ensuring that safety is paramount in all our locations. TRADING MARGIN 8-10% DELIVERING STRONG FINANCIAL RETURNS INCREASING CASH FLOW, EPS AND DIVIDENDS ROIC 20% 5 SUSTAINING ABOVE MARKET GROWTH We believe that growth, at a manageable rate, is essential to the creation of shareholder value. Market leadership, global presence, innovative technology and operational excellence combine to help deliver growth above our markets. See pages for more information on our key performance indicators GKN plc Annual Report and Accounts

12 STRATEGIC REPORT Our business model Our business model supports our strategy to create long term and sustainable value for shareholders. It highlights how we combine our advanced engineering value chain in global markets with our strong core competencies and clear values. Our business model Strong core competencies GKN s extensive industry know-how, engineering capability and strong customer relationships are central to our value chain and ensure we are well positioned to sustain above market growth and deliver strong financial returns. Industry know-how Understanding our markets and working closely with our customers, academic institutions and government agencies to identify future technology requirements gives us the expertise to deliver marketleading solutions and provides continued opportunities for sustainable growth. Engineering capability We are committed to developing and maintaining a diverse range of engineering talent across the Group and continually investing in technology to enable the efficient design and delivery of high quality, innovative solutions. Strong customer relationships We work in partnership with our customers, wherever they are in the world, to deliver customer-valued innovation and exceptional service. Listening to feedback and constantly striving to improve our products and processes helps us build and maintain these strong relationships. See pages 8 9 for more information on our strategic framework 10 GKN plc Annual Report and Accounts 2014

13 Strategic Report Governance Financial Statements Other Information DESIGNING NEW PRODUCTS AND SOLUTIONS Investment in technology, together with an understanding of market trends and customer needs, helps GKN create innovative high quality products that are efficient, sustainable and cost effective for our customers, and that deliver benefits to end consumers. DELIVERING HIGH QUALITY PRODUCTS We deliver high quality products to the right place at the right time all over the world. These products meet specific consumer needs, which help us to build strong customer relationships. CLEAR VALUES By our people As a business In our world P WINNING NEW BUSINESS Our strong engineering capability, global footprint and innovative solutions enable us to win business by offering value to our customers. STRONG CORE COMPETENCIES Industry know-how Engineering capability Strong customer relationships P.10 DELIVERING STRONG FINANCIAL RETURNS GLOBAL MARKETS Aerospace Automotive Land systems P APPLYING LEAN MANUFACTURING We focus on continuous improvement and reducing waste in our production processes around the world, as well as providing a safe working environment and minimising our impact on our environment. SOURCING MATERIALS AND PRODUCTS Our well-developed supply chain provides GKN with a reliable source of key raw materials and components, and is supported by processes that assist the decision to make in-house or buy externally. GKN plc Annual Report and Accounts

14 STRATEGIC REPORT Our business model / Global markets The world population is expected to reach over nine billion by 2050, an increase of more than two billion from today s level, with growth mainly in urban areas. GLOBAL MARKETS Aerospace Automotive Land systems Global markets Population growth drives change across our markets: increased demand for flights and larger aircraft, changes in the types of car people drive and the number of cars on the roads, a requirement for increased farming efficiency to help double global agricultural production, as well as infrastructure development in cities. All of this influences our product development and offers significant growth opportunities. There is also the continual drive to improve the fuel efficiency of aircraft, cars and other vehicles, while at the same time increasing manufacturing efficiency and product safety. Demand for fuel-efficient solutions remains high due to concerns over CO2 emissions and air quality. Advanced electric and hybrid alternatives are replacing traditional mechanical processes and GKN has specific expertise in electric and hybrid vehicle technology and electrically-driven machinery which help our customers meet this challenge. Manufacturers are increasingly opting for lightweight designs and materials. Composite aerostructures and engine components are already relatively common on new platforms, while in the automotive industry, components are being designed to reduce weight and size. Development work is underway in both sectors to increase the opportunities for lightweight materials. GKN has significant know-how in lightweight materials and increasingly in advanced production technologies such as Design for Powder Metallurgy and additive manufacturing that offer the opportunity to optimise product design. 9.6bn Global population by 2050 (a) See pages 24, 28 and 36 for more information on our markets 12 GKN plc Annual Report and Accounts 2014

15 Strategic Report Governance Financial Statements Other Information Our markets Aerospace Key market drivers Continued growth in air passenger traffic. Development of lightweight materials that improve aircraft efficiency. Worldwide defence budgets. Environmental impact reduction programmes. Airbus and Boeing deliveries in 2014: 1,352 Airbus and Boeing commercial backlog: 12,175 Automotive Key market drivers Increased affluence in developing markets. Demand for more fuel-efficient vehicles and lower tailpipe emissions. Demand for personal mobility in emerging markets. Customer preference for quality and safety. Move by OEMs towards vehicle platforms that support larger build volumes. Recent trends The development of new generation aircraft and aero engines that are quieter and more fuel-efficient. Commercial aircraft sales backlog at the principal OEMs is at an historically high level. Production rates for many commercial single aisle and the new generation of twin aisle aircraft are rising in response to increased demand. Global competition among aircraft manufacturers and supply chain continues to emerge. Focus on robustness of supply chain from OEMs and willingness to insource if necessary. Cutbacks in military expenditure in the US. Recent trends Global light vehicle production increased by 3% in 2014 to 87.4 million vehicles, whilst sales of light vehicles rose to 86.3 million vehicles. China and North America saw the largest production growth in 2014, while Japan s output for the year was better than expected following sales tax changes. Production in Europe increased 3% due to some recovery in the Western European market, which was partially offset by declines in Russia and the rest of Eastern Europe. Production in India and Brazil was affected by economic problems resulting in low domestic demand, and output fell in South Korea and Southeast Asia. Light vehicle production in 2014: 87.4m Expected growth in global vehicle production : 16.2% Outlook Growth in the commercial aerospace market is expected to continue but this will be offset in the short term by a further decline in the military sector. World aircraft production is expected to grow at 2-3% per annum over the next five years*. Airbus and Boeing forecast a global demand of between 31,000 and 38,000 large commercial aircraft over the next 20 years. * Source: GKN Aerospace forecast. Outlook External forecasts indicate that global vehicle production in 2015 will increase 2% to 89.5 million vehicles. The fastest growth is expected in China (7%) and India is forecast to increase by 6%. North America will grow at a slower rate than 2014 and Europe is expected to remain flat. Source: IHS Automotive. Land systems Key market drivers Recent trends Demand for more efficient After peaking in 2013, global demand for agricultural equipment to agricultural equipment declined in improve yields and meet an The construction equipment market in China is increased demand for food as declining due to high stock levels and difficult populations grow. access to credit. Regulatory and economic Industrial markets saw growth in the wind energy pressures to increase energy and the material handling segments, while marine efficiency and reduce applications saw a small decline. CO2 emissions. The largest land systems OEMs are increasingly Infrastructure development and adopting a global approach to equipment design global demand for commodities. and component sourcing. Need for significantly increased safety, operational efficiency and reliability. Global demand for agricultural equipment in 2018: $216bn (b) Growth in world urban population by 2050: 2.5bn (c) Outlook Agricultural equipment markets are expected to decline further in Construction markets will show low growth in the US and Europe but are expected to decline further in China. The mining equipment market is expecting further pressure on commodity prices and demand constraint in Most industrial markets will remain flat with low growth in North America and China; wind energy markets will return to growth, especially offshore. Source: (a) UN World Population Prospects: The 2012 Revision. (b) Freedonia Group, World Agricultural Equipment Market, (c) UN World Urbanisation Prospects: The 2014 Revision. GKN plc Annual Report and Accounts

16 STRATEGIC REPORT Key performance indicators GKN uses the following indicators of performance to help measure progress in delivering our strategy. GROWTH ABOVE MARKET DELIVERING STRONG FINANCIAL RETURNS TRADING MARGIN 8-10% ROIC 20% Financial KPIs ,456m % % 2014 INCREASING CASH FLOW, EPS AND DIVIDENDS Sales growth Trading margins (b) Return on average invested capital (ROIC) (b) Free cash flow Earnings per share (EPS) (b) 7,456m 9.2% 17.7% 234m 29.0p 234m p ,594m % % m p ,904m % % m p ,112m % % m p ,429m % % m p Method of calculation Management sales (a) measured both in absolute terms and on an underlying basis (i.e. excluding the effects of currency translation, acquisitions and divestments) relative to the prior year. Target To achieve long term growth rates at both Group and divisional level (in absolute terms and on an underlying basis) in excess of the growth in our major automotive, aerospace and land systems markets performance Group management sales (a) declined by 2% on an absolute basis and grew by 4% on an organic basis. The corresponding figures for GKN Aerospace were a decrease of 1% and an increase of 3%; for GKN Driveline increases of 1% and 8% respectively; for GKN Powder Metallurgy a decrease of 2% and an increase of 5%; and for GKN Land Systems decreases of 14% and 10% respectively. Management trading profit (a) as a percentage of management sales (a). To achieve medium term trading margins of between 11% and 13% for GKN Aerospace, 8% and 10% for GKN Driveline, 9% and 11% for GKN Powder Metallurgy and 8% and 11% for GKN Land Systems, giving an overall Group trading margin of between 8% and 10%. The Group trading margin in 2014 of 9.2% reflects good performance in all four divisions relative to their markets. The divisional trading margins were: GKN Aerospace 12.4%; GKN Driveline 8.1%; GKN Powder Metallurgy 11.0%; and GKN Land Systems 5.7%. Ratio of management trading profit (a) to average total net assets including the appropriate share of joint ventures but excluding current and deferred tax, cash, borrowings, postemployment obligations and derivative financial instruments. To achieve ROIC at both Group and divisional level which exceeds the weighted average cost of capital of the Group (12% as a pre-tax threshold and between 9% and 10% on a post-tax basis). The Group target is to achieve ROIC of 20% or above (pre-tax). Group ROIC of 17.7% in 2014 reflects improved profitability partially offset by an increased asset base. Divisional ROIC performance was as follows: GKN Aerospace 17.7%; GKN Driveline 19.3%; GKN Powder Metallurgy 21.8%; and GKN Land Systems 11.4%. Cash flows from operating activities (excluding special pension payments and before working capital refinancing for Volvo Aero in 2012) after capital expenditure and including fixed asset disposal proceeds, receipts of government capital grants and refundable advances and noncontrolling interest dividends. To generate positive free cash flow sufficient to cover dividend payments and provide funding resources to support organic and acquisitive earnings growth, and reduce indebtedness. Free cash flow amounted to 234 million, following a continued focus on operating cash generation throughout 2014 which included an increase in capital expenditure and research and development investment, and repayment of a government refundable advance. Management earnings for the Group (as set out in note 3(a) to the financial statements) divided by the weighted average number of ordinary shares in issue (excluding treasury shares). To achieve absolute growth in EPS each year and in the longer term, recognising the nature and cyclicality of our major markets, to achieve average annual compound growth of at least 6%. Management EPS in 2014 was 29.0 pence compared with 28.7 pence in 2013, an increase of 1%. See pages for more information on our financial results (a) Management sales and management trading profit are defined on page 21. (b) 2012 restated for impact of IAS 19 (revised). 14 GKN plc Annual Report and Accounts 2014

17 Strategic Report Governance Financial Statements Other Information Non-financial KPIs Non-financial KPIs help measure the sustainability of our business and progress towards operational excellence. We strive to operate in a safe, efficient and ethical manner, and at the same time aim to be an employer of choice and make a positive impact on the environment and the communities in which we operate. More information can be found in the sustainability report on pages Dividend per share 8.4p p 6.0p 7.2p 8.4p 7.9p Amount declared as payable by way of dividend divided by the number of ordinary shares in issue (excluding treasury shares). To maintain a progressive dividend policy aligning dividends with the long term trend in management earnings and reflecting growth in earnings per share and free cash flow generation. Dividend per share increased in 2014 reflecting positive earnings and cash performance. The dividend for the year, at 8.4 pence, is covered 3.4 times by management earnings and 1.7 times by free cash flow. Health and safety performance Per 1,000 employees Method of calculation Accident frequency rate (AFR) measured as the number of lost time accidents per 1,000 employees and accident severity rate (ASR) measured as the number of days/shifts lost due to accidents and occupational ill health per 1,000 employees. Target Zero preventable accidents performance AFR reduced to 1.3 (2013: 1.6). However ASR saw a small increase to 46 (2013: 40), primarily due to specific occupational health issues of three employees in North America. More information can be found on page 54. Environmental performance Main impacts on the environment Method of calculation Energy consumption and associated CO2 emissions, waste generation, waste recycled and water 2014 [00] consumption measured on a divisional basis per unit of production and against sales in GKN Aerospace. 2013Target 3.2% Improved year-on-year performance across all KPIs, with a 15% improvement in energy efficiency from to % 2014 performance Environmental performance in 2014 was in line with expectations, with most divisions achieving improved results in energy consumption, CO2 emissions, waste and water consumption. Group energy efficiency decreased by 4% over 2013, primarily due to currency fluctuations depressing statutory sales, but improved by 16% since 2009, meeting our target of a 15% improvement over the five years. See page 58 for more information on our environmental performance. Governance Online compliance training Completion of mandated compliance training on anti-bribery and corruption, competition law and IT security. Method of calculation Measured as a percentage completion against a pre-defined target audience of employees. Target 100% training completion for all employees within the target audience performance 98% (7,284 employees) of the target audience have to date completed our online anti-bribery training (2013: 84%; 6,302 employees). 98% (1,575 employees) of the target audience have to date completed our online competition law training (2013: 98%; 1,594 employees). 85% (14,191 employees) of the target audience have to date completed our online IT security training (2013: 37%; 6,273 employees). Our people Management turnover Method of calculation Management turnover is a measure of success in retaining our leaders and achieving our goal of being an employer of choice. Voluntary turnover of management employees, which excludes compulsory redundancies, terminations and retirements, is calculated as a percentage of total subsidiary management level employees. Target Voluntary turnover of less than 5% of management employees performance In 2014, voluntary management turnover was 4.7% (2013: 6.1%), bringing us into our target range of less than 5%. GKN plc Annual Report and Accounts

18 STRATEGIC REPORT Chief Executive s review Moving forward NIGEL STEIN Chief Executive The Group continued its progress in 2014 helped by good growth in our automotive and aerospace businesses which more than offset the headwinds of adverse currency translation and difficult land systems markets. Although management sales declined to 7,456 million, this represented underlying, organic growth of 4%. Earnings per share increased by 1% and the Board has recommended an increase to the dividend of 0.5 pence. Our aim is to create long term and sustainable shareholder value through a balanced approach with three elements: growth, trading margin and return on invested capital. We look to grow sales ahead of our markets, have targeted our Group margin to run in the 8-10% range and have a goal for return on invested capital (ROIC) of around 20%. I am pleased that in 2014 we made progress against all three of these objectives. Our business Over the course of the year we have seen the benefit of our business model. We are a global engineering business serving the world s leading original equipment manufacturers in three large markets. But whichever the market, our approach and strategy are the same: using our knowledge of our customers and their needs, combined with our leading technology, excellent global footprint and broad operational excellence, to design, develop and deliver outstanding products. This requires a thorough understanding of market trends and a strong capability for product innovation. There are good examples of both throughout this report including the case studies featured on pages The table opposite summarises some strategic landmarks for the Group and in the business review (pages 22-37) we set out the most noteworthy divisional achievements. See pages for more information on our financial results 16 GKN plc Annual Report and Accounts 2014

19 Strategic Report Governance Financial Statements Other Information STRATEGIC PROGRESS Leading in our chosen markets Organic and add-on opportunities in all divisions. Sold interest in Emitec. Leveraging a strong global presence Further increased our presence in Mexico and Asia. Differentiating ourselves through technology Increased proportion of investment in advanced engineering. Driving operational excellence Focus on operational excellence continued. Used customer data to measure our performance Voice of the Customer. Focused on safety across our operations. SUSTAINING ABOVE MARKET GROWTH Leading in our chosen markets excellent positions in their markets helped all four divisions prove successful in winning new business during GKN Aerospace won business for both aerostructures and engine systems, with the risk and revenue sharing partnership to supply components for the Pratt & Whitney PurePower PW100 Geared TurbofanTM engine. GKN Driveline won significant sideshaft business with Ford, General Motors, Volkswagen, BMW, Renault Nissan, Mazda and Hyundai whilst successfully designing and launching several all-wheel drive products with Fiat, BMW and Jaguar Land Rover. For GKN Powder Metallurgy, new business wins in the year totalled 165 million, higher than last year s equivalent and including a good proportion of higher margin Design for Powder Metallurgy components. For GKN Land Systems, the tough markets limited options, but its business in the industrial market continued to do well, successfully exploiting its leadership in clutches and brakes. During the year we sold our stake in the emissions control business Emitec, a good business with sound prospects, but which did not give GKN a route to a leadership position in that market. Leveraging a strong global presence having manufacturing plants and design centres located around the world, close to our customers, is an important strategic advantage for GKN. We also use the regional presence of one division to help other divisions enter or expand in that market. Mexico and Asia in general saw the greatest activity in this respect. Over the course of 2014, Group capital investment in Mexico and Asia was 37 million and 56 million respectively. China continues to be an important market for GKN. Although the country s economic growth has eased in recent years, growth of around 7% remains very attractive. We have continued to build our GKN Driveline joint venture company whilst at the same time expanding the activities of GKN Land Systems and GKN Powder Metallurgy in the country. We are also seeking to establish GKN Aerospace in China but this remains a work in progress. Differentiating ourselves through technology our excellent technology helped win significant business this year. This was clearly demonstrated through GKN Driveline s critical role in the Fiat Chrysler small all-wheel drive platform, GKN Powder Metallurgy driving its margin through new Design for Powder Metallurgy component wins and GKN Land Systems winning new business with Claas on the back of superior technical offering. GKN Aerospace continued building its position as a technology leader and was pleased to be awarded leadership of a challenging 30 million future wing research programme, backed by the UK s Aerospace Technology Institute. They also delivered an innovative wing leading edge demonstrator to the Clean Sky programme, helping bring an ultra-high performance, natural laminar flow wing closer to reality. Increasing investment was made into advanced engineering projects looking to the longer term, including development work on additive manufacturing (also known as 3D printing), the electrification of vehicle powertrains, future wing technologies and energy storage. All look likely to drive significant market changes in the future. GKN plc Annual Report and Accounts

20 STRATEGIC REPORT Chief Executive s review The continued implementation of our strategy in 2014 delivered organic growth, improved margins and increased ROIC, together bringing increased financial returns to our shareholders. Operational excellence is fundamental to what we do and provides the opportunity to differentiate ourselves in our customers eyes. Employee safety is our number one priority and our performance is set out on page 54. In general 2014 saw a good reduction in the number of accidents. However, in February 2014 an employee at GKN Aerospace Engine Systems El Cajon plant in the US suffered a fatal injury whilst operating a forklift truck. I deeply regret this loss of life and we have provided support to the employee s family. Lessons have been learned from this and applied elsewhere in the Group. Across the Group, the GKN Lean manufacturing programme enables us to continue to drive continuous improvement in manufacturing performance and back-office processes. Listening to the Voice of the Customer in a direct way is vital to our success. During 2014 we have implemented improved processes to ensure all employees keep their eyes focused on our customers own ratings of us, understand any concerns and work speedily and determinedly to resolve them. Although customers views have always been important in GKN, I am confident the positive effect of this direct feedback will prove an advantage in building our business. Together the successful delivery of these four strategic objectives helped deliver the fifth strategic objective of sustaining above market growth. In 2014 overall Group sales showed an organic increase of 4%, better than average for our markets. Doing the right thing Underpinning these results is a strong set of GKN Values. We call this doing the right thing and the effects of this are set out in the sustainability report on pages At our 2014 internal International Leadership Conference, considerable time was spent discussing how GKN s most senior people should demonstrate our Group Values. Supporting this we have introduced new processes for clarifying to managers what is expected of them and getting their acknowledgment they understand this. In the months ahead we will be running a process of re-communicating the GKN Code to every employee wherever they are and no matter which of the 27 Groupwide languages they speak. Summary The continued implementation of our strategy in 2014 delivered organic growth, improved margins and increased ROIC, together bringing increased financial returns to our shareholders. This could not have been achieved without the expertise, focus and sheer hard work of the 51,400 committed GKN people around the world. In closing, I would like to thank everyone in the GKN team for their contribution this year. I would also like to thank my former colleagues Marcus Bryson CBE and Bill Seeger for their support and contribution as members of my Executive team and the Board. See pages for more information on doing the right thing 18 GKN plc Annual Report and Accounts 2014

21 Strategic Report Governance Financial Statements Other Information Lean manufacturing Delivering operational excellence Looking ahead Commercial aircraft production should continue to be strong whereas military markets are forecast to decline. GKN Aerospace s 2015 organic sales are expected to be broadly flat, reflecting these differing trends and the phasing of our programmes. However, a strong commercial order book supports attractive growth for GKN Aerospace over the medium term. In automotive, external forecasts predict growth in global light vehicle production of around 2% with increases in China and North America, and Europe flat. Against this background, GKN Driveline and GKN Powder Metallurgy are expected to continue to grow organically above the market. Softer global agricultural equipment markets are likely to more than offset the slight improvement in industrial markets. As a result, GKN Land Systems 2015 sales are expected to be lower than 2014 and an 8 million restructuring charge is planned to further reduce the fixed cost base. Although some markets remain challenging, 2015 is expected to be a year of further growth. Beyond 2015, we are well positioned to outperform in our large global markets. Nigel Stein Chief Executive Visit us at to see more case studies GKN DRIVELINE VIGO Operational excellence founded on Lean manufacturing is a focus for GKN sites across the world. This culture of continuous improvement enables GKN to deliver quality products and exceptional customer service, and GKN Driveline in Vigo, Northern Spain, is one example of a site that has seen significant operational improvements in recent years. The plant, which supplies sideshafts to European automotive manufacturers, has implemented a system to reduce waste and optimise productivity, created tools for the sharing of knowledge and ideas and provided Lean training for all employees. Maximising employee involvement, both in the office and on the shop floor, has been fundamental in engaging the teams and developing the change in culture. The site has been recognised by the KAIZEN Institute, a global organisation that specialises in the continuous improvement of people, processes and systems, winning one of its 2014 awards. GKN plc Annual Report and Accounts

22 STRATEGIC REPORT Business review / Group performance Financial progress The Group has made good progress on its financial targets during 2014 with growth in organic sales, an improved Group margin, and an increase in Group ROIC all of which support an increase of 6% in the total dividend. ADAM WALKER Group Finance Director Group performance Results Change (%) Headline Organic Sales () 7,456 7,594 (2) 4 Trading profit () Trading margin 9.2% 8.7% Return on average invested capital 17.7% 17.3% See pages for more information on the financial performance of our divisions 20 GKN plc Annual Report and Accounts 2014

23 Strategic Report Governance Financial Statements Other Information Management sales m Organic sales increased by 303 million (4%). The adverse effect of currency translation on management sales was 403 million (5%) and there was a 7 million benefit from acquisitions which was more than offset by a 45 million reduction due to disposals. Organic trading profit increased 66 million, due to the absence of restructuring costs (2013: 25 million), the strong performance of three of our divisions, lower profits from GKN Land Systems and 6 million net benefit from commercial settlements and provision releases. Adverse currency translation was 38 million and there was a 2 million reduction due to acquisitions and divestments. Group trading margin increased to 9.2% (2013: 8.7% or 9.0% excluding restructuring charges). Return on average invested capital (ROIC) increased to 17.7% (2013: 17.3%). Management sales GKN Aerospace 2,226m GKN Driveline 3,444m GKN Powder Metallurgy 916m GKN Land Systems 776m Other Businesses 94m 7,456m Management sales Management trading profit GKN Aerospace 277m GKN Driveline 280m GKN Powder Metallurgy 101m GKN Land Systems 44m GKN driveline region management profit GK G 687m * * Including corporate costs and Other Businesses. GKN driveline region metallurgy customer GKN driveline product GK Basis of reporting In this report, financial information, unless otherwise stated, is presented on a management basis, the definition of which is below. The Group uses management measures, which are non- GAAP measures, to assess operating performance on a consistent basis, as we believe this gives a fairer assessment of the underlying performance of the business. The use of management measures allows the Group to chart progress, make decisions and allocate resources based on the actions for which management is responsible or can influence, without volatility arising from significant one-time trading and portfolio change transactions or the mark to market valuation of currency hedges. Definitions Financial information, unless otherwise stated, is presented on a management basis which aggregates the sales and trading profit of subsidiaries (excluding certain subsidiary businesses sold and closed) with the Group s share of the sales and trading profit of joint ventures. References to trading margins are to trading profit expressed as a percentage of sales. Management profit or loss before tax is management trading profit less net subsidiary interest payable and receivable and the Group s share of net interest payable and receivable and taxation of joint ventures. These figures better reflect performance of continuing businesses. Where appropriate, reference is made to organic results which exclude the impact of acquisitions/divestments as well as currency translation on the results of overseas operations. Operating cash flow is cash generated from operations adjusted for capital expenditure, government capital grants, proceeds from disposal of fixed assets and government refundable advances. Free cash flow is operating cash flow including interest, tax, joint venture dividends, own shares purchased and amounts paid to non-controlling interests, but excluding dividends paid to GKN shareholders. Return on average invested capital (ROIC) is management trading profit as a percentage of average total net metallurgy customer landsystems metallurgy market 2 assets of continuing subsidiaries and joint ventures excluding current and deferred tax, net debt, post-employment obligations and derivative financial instruments. Exchange rates Exchange rates used for currencies most relevant to the Group s operations are: Average Year end Euro US dollar The approximate impact on 2014 trading profit of subsidiaries and landsystems joint ventures of a market 1% movement in the average rate would be euro 1 million, US dollar 4 million. landsystems region la GKN plc Annual Report and Accounts

24 STRATEGIC REPORT Business review / GKN Aerospace GKN Aerospace is a leading global tier one supplier of airframe and engine structures, components, assemblies and transparencies to a wide range of aircraft and engine prime contractors and other tier one suppliers. It operates in three main product areas: aerostructures, engine components and sub-systems, and special products. GKN Aerospace Products Integrated aerostructures, including wing/empennage and flight control surface assemblies and fuselage structures. Fixed and rotating propulsion products for aircraft engines, fan cases, engine components, exhaust systems and nacelles. Transparencies including specially coated cockpit and cabin windows. Niche products such as ice protection, fuel systems and flotation devices. Key strategic activities To support the achievement of the Group s five strategic objectives, GKN Aerospace is focusing on the following areas: Exploiting its strong positions on existing programmes for new aircraft platforms, and pursuing long term contracts on selective high-growth and long-running platforms. Deploying new technologies for future commercial and military aircraft, to improve fuel efficiency, reduce emissions and minimise the environmental impact of aviation. Expanding into adjacent markets with similar product technologies and manufacturing capabilities; and expanding our global footprint. See pages for more information on GKN Aerospace 22 GKN plc Annual Report and Accounts 2014

25 Strategic Report Governance Financial Statements Other Information 12,350 employees 7 countries 33 manufacturing locations GKN plc Annual Report and Accounts

26 STRATEGIC REPORT Business review / GKN Aerospace Management sales management profit GKN Aero customer GK GKN Aerospace sales by customer Airbus 21% GE 13% UTC 13% Boeing 12% Snecma 6% Rolls-Royce 4% Spirit 3% Honeywell 3% MTU 3% Other 22% Management sales management profit GKN Aero customer GKN Aero market Management sales GKN management driveline region profit GKN GKN driveline Aero customer product GKN GKN driveline Aero market customer GK GKN Aerospace sales by market KEVIN CUMMINGS Chief Executive GKN Aerospace Commercial 73% Military 27% The overall aerospace market remained positive in 2014 driven by a growing commercial aircraft market partly offset by a declining military market. The division s commercial sales were 73%, with military representing 27%. GKN driveline region GKN driveline product GKN driveline customer GKN Aero product Commercial aircraft production is still growing. Both Airbus and Boeing continue GKN to benefit driveline from higher region deliveries and a record order backlog, and both have announced plans to increase production levels for single aisle aircraft in the future. There is also more demand for strong global suppliers to support their expansion plans. GKN metallurgy driveline customer product GKN Aerospace sales by product GKN metallurgy driveline customer 2 Engine components and sub-systems 1,045m Aerostructures 1,042m Special products 139m metallurgy GKN Aero product product lands Military spending remains under pressure, largely driven by cutbacks throughout the US and Europe, with the ramp-up of new programmes being delayed and overseas military operations reduced. Divisional metallurgy performance customer against Group metallurgy strategy 2 metallurgy product landsystems customer STRATEGIC OBJECTIVE metallurgy customer Leading in our chosen markets PROGRESS landsystems metallurgy market 2 landsystems metallurgy product region landsystems customer A world leader in aerostructures and number two in the independent aero engine structures market. $3 billion new work packages won. Leveraging a strong global presence Invested in composite and metallic manufacturing in Mexico. Construction began of a new manufacturing site in Seattle, US, to support the Boeing 737 MAX assembly line. Differentiating ourselves through technology landsystems market Driving operational excellence landsystems market landsystems region landsystems region Fabricated robotically-welded case technology selected for the Pratt & Whitney PurePower PW1900 Geared Turbofan engine. Continued to develop strong positions in additive manufacture and future wing design. Improved customer scorecard results across the globe through Voice of the Customer initiative. Received a number of quality awards from customers, including Best performing supplier from Airbus. SUSTAINING ABOVE MARKET GROWTH See page 13 for more information on the aerospace market 24 GKN plc Annual Report and Accounts 2014