Risks and uncertainties.

GKN has an extensive risk management framework designed to identify and assess the likelihood and consequences of risk and to manage the actions necessary to mitigate their impact. A detailed description of this framework is given on page 50. Set out below are the principal risks and uncertainties which could have a material impact on the Group and the corresponding mitigating actions that are in place. Additional risks not currently known or which are currently regarded as immaterial could also adversely affect future performance.

Market risks.

Risk   Nature of risk and potential impact   Mitigation

Operating in global markets

 

GKN operates globally and as such our results could be impacted by changes in macroeconomic conditions, consumer demand and preferences. An adverse impact could result from volatility in automotive demand and changing consumer preferences; rescheduling or cancellation of orders for civil aircraft and changes in amount or timing of defence spending; and volatility in agricultural, construction, mining and industrial markets.

 
  • Diverse business portfolio serving different markets, with lead indicators in those markets kept under review
  • Effective management of variable and fixed cost base, investment spending and working capital

Economic and political instability

 

Given the global footprint of the Group, our operations could be impacted adversely by global and regional changes in the economic, political and regulatory environments including availability of affordable credit.

 
  • Regular monitoring of market environment, including political, economic and regulatory developments
  • Flexible systems, including daily cash management, to mitigate GKN’s risk should a country withdraw from the eurozone
  • Group-wide governance framework supported by a strong control environment

Customer concentration

 

Significant customer concentration exists in the automotive and aerospace industries. The insolvency of, damage to relations, or significant worsening of commercial terms with a major customer could result in the loss of future business opportunities, asset write-offs and restructuring actions.

 
  • GKN is not dependent on contractual or other arrangements with any individual customer. No customer represented more than 10% of Group sales at 31 December 2011
  • Active management of customer relations and credit exposure
  • Strong commercial and engineering focus at customer level together with effective programme management

Highly competitive markets

 

GKN operates in highly competitive markets with customer decisions based typically on price, quality, technology and service. Customer vertical integration (including OEMs taking production in-house), the entry of new competitors or consolidation of existing competitors could restrict our ability to deliver the Group’s strategic objectives.

 
  • Continual review of competition and market trends
  • Maintaining GKN’s competitive position through new product technology
  • Investment in engineering and lean manufacturing capabilities, whilst also maintaining strong customer relationships

Technology advancements

 

GKN may lose customers to competitors offering new technologies if we are unable to adapt to market developments such as changes in legislative, regulatory or industry requirements, competitive technologies or consumer preferences. This may result from failure to
launch new products, new product applications or derivations of existing products to meet customers’ needs.

 
  • Regular assessment of market and technology trends and drivers
  • Divisional technology plans aligned to emerging and future trends
  • Focused investment in research and development
  • Effective programme delivery over the long term incorporating changes in technology

Operational risks.

Risk   Nature of risk and potential impact   Mitigation

Supply chain disruption

 

Supply chain disruption caused by lack of availability of equipment, components, services and raw materials that meet specifications could impact GKN’s sales to and relationships with customers and result in additional unrecoverable costs.

 
  • Effective supply chain management to ensure appropriate inventory levels are maintained in times of production volatility
  • Ongoing assessment of supplier technology and dependency
  • Dual sourcing where appropriate to reduce dependence on single supplier
  • Monitoring of financial viability of key suppliers

Volatile input costs

 

Sudden increases in the cost of raw materials, labour and energy could adversely affect the Group’s earnings if we are unable to pass increases on to customers.

 
  • Contracts that ensure the ability to pass on charges to customers where possible
  • Securing long-term contracts with stable pricing for key inputs
  • Maintaining good labour relations
  • Forward purchasing of energy requirements where appropriate

Product quality issues

 

Product quality issues could lead to potential liabilities for defects in products, warranty claims or product recalls and as a result adversely affect GKN’s financial performance and damage our reputation.

 
  • High levels of quality assurance are embedded in robust manufacturing systems

Inadequate safety in the workplace

 

A lack of robust safety processes and procedures could result in accidents involving employees and others on GKN sites and potentially causing adverse financial impact and damage to GKN’s reputation.

 
  • Consistent Groupwide application of health and safety programmes
  • Development of health and safety audits to ensure adherence to Group policies and procedures
  • A focus on process and behavioural safety through a number of Groupwide activities including machinery risk assessment, thinkSafe! and RADAR

People

 

A lack of technical capability and management depth could result in an inability to execute the strategic plan and deliver improving financial performance.

 
  • Annual performance appraisal and development process
  • Competitive reward packages together with focused training and development programmes
  • A culture that motivates individuals to perform to the best of their abilities

Acquisitions and their integration

 

A lack of suitable acquisition targets aligned with the planned growth strategy, a failure to integrate acquired businesses successfully, or an inability to capture value from them could impact operations and prevent successful delivery of GKN’s strategic objectives.

 
  • Thorough reviews to ensure strategic alignment of acquisitions
  • Extensive pre-acquisition due diligence which confirms the transaction value
  • Careful management of integration plans
  • Post acquisition reviews

Financial risks.

Risk   Nature of risk and potential impact   Mitigation

Pension deficit volatility

 

Pension deficit levels are affected by changes in asset values, discount rates, inflation and mortality assumptions. Accounting valuations of pension obligations can cause volatility in financial results. Additional Company pension contributions may have an impact on investment in businesses.

 
  • Active management of pension scheme assets and long-term view of liability assumptions including the level of benefits
  • Alternative funding and risk mitigation actions are implemented where appropriate

Exchange rate volatility

 

Currency risks include: transactional (subsidiary sales or purchases in currencies other than their functional currency) and translational (exchange rate movements in investments in overseas operations). The Group’s financial statements may fluctuate as a result of movements in exchange rates.

 
  • Hedging of transaction exposures through forward foreign exchange contracts
  • Borrowings in local currency including access to overseas debt capital markets

Complexity of global tax regimes

 

Given GKN’s global footprint and against a background of complex tax laws on a global basis, it is possible that actual tax liabilities could differ from accruals which are based on management judgements.

 
  • Ongoing monitoring of tax developments in major jurisdictions
  • Group-wide tax compliance programme supplemented by appropriate documentation

The Group insures against the impact of a range of unpredictable losses associated with both our business assets and liabilities. GKN’s risk financing strategy is based on a significant level of capped self-insured retention at the Group level (within GKN’s own captive insurance company, Ipsley Insurance Ltd, which does not insure the risks of any other entity) and a much lower retention at subsidiary level through deductibles. Catastrophe insurance is then purchased in the commercial market over and above these levels of retention. Ipsley’s current participation in GKN’s principal insurance programme is £10 million per incident capped at £20 million in any one year. Due to the nature of the risk, the Group’s aviation products liability insurance is placed solely in the commercial market.