Altra Industrial Motion
Altra Industrial Motion Corp. (Form: 8-K/A, Received: 03/15/2017 14:56:43)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 8-K/A

(Amendment No. 1)

CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported)  December 30, 2016

ALTRA INDUSTRIAL MOTION CORP.
(Exact name of registrant as specified in its charter)

001-33209

(Commission File Number)

 

Delaware

(State or other jurisdiction of incorporation)

61-1478870

(IRS Employer Identification No.)

 

300 Granite Street, Suite 201, Braintree, Massachusetts

(Address of principal executive offices)

(781) 917-0600
(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

[  ]

  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

[  ]

  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

[  ]

  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

[  ]

  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 


 

Item 2.01. Completion of Acquisition or Disposition of Assets.

On January 5, 2017, Altra Industrial Motion Corp. (the “Company”) filed with the Securities and Exchange Commission a report on Form 8-K (the “Prior 8-K”) disclosing that the Company, through certain of its subsidiaries, completed its previously announced acquisition of the Stromag business (the “Stromag Business”) from GKN plc. on December 30, 2016 (the “Stromag Acquisition”). This amendment is being filed to amend and supplement the Prior 8-K to include the financial information required by Item 9.01 of Form 8-K.

Item 9.01 Financial Statements and Exhibits.

 

(a)

Financial Statements of Business Acquired     The audited combined financial statements of the Stromag Business for the fiscal years ended December 31, 2015 and 2014 are filed as Exhibit 99.1 to this report and incorporated by reference into this Item 9.01(a).

 

(b)

Interim Financial Statements of Business Acquired     The unaudited interim combined financial statements of the Stromag Business for the six months ended June 30, 2016 and 2015 are filed as Exhibit 99.2 to this report and incorporated by reference into this Item 9.01(b).

 

(c)

Pro Forma Condensed Combined Financial Information     The unaudited pro forma condensed combined financial information of the Company for the fiscal year ended December 31, 2016 is filed as Exhibit 99.3 to this report and incorporated by reference into this Item 9.01(c). The Pro Forma Condensed Combined Financial Information is a presentation of historical results with accounting adjustments necessary to reflect the estimated pro forma effect of the Company’s acquisition of the Stromag Business on the result of operations of the Company and is presented for information purposes only. The Pro Forma Condensed Combined Financial Information does not reflect the effects of any anticipated changes to be made by the Company to the operations of the combined companies, including synergies and cost savings and does not include any one time charges expected to result from the Stromag Acquisition. The Pro Forma Condensed Combined Financial Information should not be construed to be indicative of the Company’s future results of operations.

Number No.            Description                                                                                                                                                                      

23.1

 

Consent of PricewaterhouseCoopers LLP, Independent Accountants

 

 

 

99.1

 

Audited combined financial statements of the Stromag Business for the years ended December 31, 2015 and 2014.

 

 

 

99.2

 

Unaudited Interim combined financial statements of the Stromag Business for the six months ended June 30, 2016 and 2015.

 

99.3

 

Unaudited pro forma condensed combined financial information of Altra Industrial Motion Corp.

 

 


 


 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

ALTRA INDUSTRIAL MOTION CORP.

 

 


Date: March 15, 2017

By:    

/s/ Glenn E. Deegan                                                        

 

 

Name: Glenn E. Deegan

 

 

Title: Vice President, Legal and Human Resources, General Counsel and Secretary.

 

 

 

 


 


 

EXHIBIT INDEX

 

Number No.            Description                                                                                                                                                                      

23.1

 

Consent of PricewaterhouseCoopers LLP, Independent Accountants

 

 

 

99.1

 

Audited combined financial statements of the Stromag Business for the years ended December 31, 2015 and 2014.

 

 

 

99.2

 

Unaudited interim combined financial statements of the Stromag Business for the six months ended June 30, 2016 and 2015.

 

99.3

 

Unaudited pro forma condensed combined financial information of Altra Industrial Motion Corp.

 

 

 

 

 

 

 

Exhibit 23.1

 

 

CONSENT OF INDEPENDENT ACCOUNTANTS

 

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-213976) and Form S-8 (No. 333-195791) of Altra Industrial Motion Corp. of our report dated January 17, 2017 relating to the financial statements of the Stromag Business, which appears in this Current Report on Form 8‑K/A of Altra Industrial Motion Corp.

 

/s/ PricewaterhouseCoopers LLP

Birmingham, United Kingdom

March 15, 2017

 

 

Exhibit 99.1

The Stromag Business

Combined Financial Statements

For the Years Ended 31 December 2015 and 31 December 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 1 of 29


 

Combined Income Statement

For the years ended 31 December 2015 and 31 December 2014

 

Notes

2015

2014

 

 

€000

€000

 

 

 

 

Sales

2

131,388

133,034

 

 

 

 

Operating profit

3

6,233

7,460

 

 

 

 

Interest payable

 

(1,517)

(1,134)

Interest receivable

 

403

285

Other net financing charges

 

(275)

(403)

Net financing costs

4

(1,389)

(1,252)

 

 

 

 

Profit before taxation

 

4,844

6,208

 

 

 

 

Taxation

5

(1,854)

(2,957)

Profit after taxation for the year

 

2,990

3,251

 

Combined Statement of Comprehensive Income

For the years ended 31 December 2015 and 31 December 2014

 

Notes

2015

2014

 

 

€000

€000

Profit after taxation for the year

 

2,990

3,251

Other comprehensive income

 

 

 

Items that may be reclassified to profit or loss

 

 

 

Currency variations- arising in year

 

1,475

1,383

Taxation

5

(15)

(40)

 

 

1,460

1,343

Items that will not be reclassified to profit or loss

 

 

 

Remeasurement of defined benefit plans

19

312

(1,542)

Taxation

5

(53)

587

 

 

259

(955)

Other comprehensive income for the year

 

1,719

388

 

 

 

 

Total comprehensive income for the year

 

4,709

3,639

 

Page 2 of 29


 

Combined Statement of Changes in Invested Capital

For the years ended 31 December 2015 and 31 December 2014

 

 

Total

 

 

invested

 

 

capital

 

Notes

€000

At 1 January 2015

 

136,151

Profit for the year

 

2,990

Other comprehensive income

 

1,719

Total comprehensive income

 

4,709

Dividends paid to the owners of the Stromag Business

6

(3,289)

Other transactions with owners of the Stromag Business

6

(4,715)

At 31 December 2015

 

132,856

At 1 January 2014

 

141,387

Profit for the year

 

3,251

Other comprehensive income

 

388

Total comprehensive income

 

3,639

Dividends paid to the owners of the Stromag Business

6

(6,976)

Other transactions with owners of the Stromag Business

6

(1,899)

At 31 December 2014

 

136,151

 

Page 3 of 29


 

Combined Balance Sheet

At 31 December 2015 and 31 December 2014

 

Notes

2015

2014

2013

 

 

€000

€000

€000

Assets

 

 

 

 

Non-current assets

 

 

 

 

Goodwill

8

86,973

86,890

86,785

Other intangible assets

8

61,507

68,339

75,297

Property, plant and equipment

9

22,060

23,216

24,919

Other receivables

10

9,884

11,712

11,710

Deferred tax assets

5

1,518

530

107

 

 

181,942

190,687

198,818

Current assets

 

 

 

 

Inventories

11

23,178

23,411

23,738

Trade and other receivables

12

23,884

22,817

18,526

Cash and cash equivalents

14

1,455

1,458

723

Other financial assets

14

2,784

2,706

2,965

 

 

51,301

50,392

45,952

Total assets

 

233,243

241,079

244,770

 

 

 

 

 

Liabilities

 

 

 

 

Current liabilities

 

 

 

 

Borrowings

14

(403)

(433)

(345)

Other financial liabilities

14

(30,272)

(29,545)

(26,193)

Trade and other payables

13

(21,440)

(21,206)

(20,385)

Current tax liabilities

 

(505)

(1,483)

(547)

Provisions

16

(1,525)

(3,812)

(5,290)

 

 

(54,145)

(56,479)

(52,760)

Non-current liabilities

 

 

 

 

Deferred tax liabilities

5

(20,835)

(22,194)

(24,044)

Trade and other payables

13

(161)

Provisions

16

(11,891)

(11,177)

(12,427)

Post-employment obligations

19

(13,355)

(15,078)

(14,152)

 

 

(46,242)

(48,449)

(50,623)

Total liabilities

 

(100,387)

(104,928)

(103,383)

 

 

 

 

 

Net assets

 

132,856

136,151

141,387

 

 

 

 

 

Total invested capital

 

132,856

136,151

141,387

 

The financial statements on pages 2 to 27 were approved by the Board of Directors of GKN Industries Limited and authorised for issue on 17 January 2017. They were signed on its behalf by:

/s/ Adam Walker

Adam Walker, Director

Page 4 of 29


 

Combined Cash Flow Statement

For the years ended 31 December 2015 and 31 December 2014

 

Notes

2015

2014

 

 

€000

€000

Cash flows from operating activities

 

 

 

Cash generated from operations

18

15,045

12,573

Interest received

 

332

227

Interest paid

 

(1,235)

(993)

Tax paid

 

(7,342)

(3,237)

 

 

6,800

8,570

Cash flows from investing activities

 

 

 

Purchase of property, plant and equipment

 

(3,129)

(2,576)

Purchase of intangible assets

 

(227)

(128)

Proceeds from sale and realisation of fixed assets

 

577

183

 

 

(2,779)

(2,521)

Cash flows from financing activities

 

 

 

Proceeds from borrowing facilities

 

649

3,610

Dividends paid to the owners of the Stromag Business

6

(3,289)

(6,976)

 

 

(2,640)

(3,366)

Movement in cash and cash equivalents

 

1,381

2,683

Cash and cash equivalents at 1 January

 

1,025

378

Currency variations

 

(1,354)

(2,036)

Cash and cash equivalents at 31 December

18

1,052

1,025

 

Page 5 of 29


 

Notes to the Combined Financial Statements

For the years ended 31 December 2015 and 31 December 2014

1

Accounting policies and presentation

The Stromag Business’ significant accounting policies are summarised below.

Background to the transaction

On 20 October 2016, Altra Industrial Motion Corp (“Altra”), entered into an agreement with GKN Industries Limited (“GKN”) to acquire the Stromag Business of GKN (the “Stromag Business”).

Stromag is an engineer of industrial power management components with core products including hydraulic clutches, electro-magnetic brakes and flexible couplings serving end markets including agricultural equipment, construction and mining machinery, renewable energy and the metal processing industry.

The accompanying historical financial information reflects the assets, liabilities, revenues and expenses directly attributed to the Stromag Business (“Stromag Business Historical Financial Information” or “Stromag Business HFI”).

Basis of preparation

The Stromag Business has not comprised a separate legal entity or group of entities for the years ended 31 December 2015 and 2014. The Stromag Business HFI is therefore prepared on a basis that combines the results, assets and liabilities of the Stromag Business by applying the principles underlying the consolidation procedures of IFRS 10 ‘Consolidated Financial Statements’ (IFRS 10) for each of the years ended 31 December 2015 and 2014 and as at these dates. On such basis, the Stromag Business HFI sets out the combined balance sheet as at 31 December 2015 and 2014 and the results of operations and cash flows for the two years then ended.

The Stromag Business HFI has been prepared in accordance with this basis of preparation which the Directors believe is appropriate for the intended use of these financial statements, which is to provide historical financial information to Altra to assist them in satisfying their reporting responsibilities. This basis of preparation describes how the Stromag Business HFI has been prepared in accordance with International Financial Reporting Standards as issued by the IASB and the IFRS Interpretation Committee interpretations (together “IFRS”). The principal accounting policies that have been applied to the Stromag Business HFI are set out below. These policies have been consistently applied to all years presented unless otherwise stated.

The Stromag Business HFI is presented in thousands of Euros (‘€’) and is prepared on an historical cost basis.

The following summarises the accounting and other principles applied in preparing the Stromag Business HFI:

The Stromag Business HFI was prepared using the Stromag Business’ historical records and includes all sales, costs, assets and liabilities directly attributable to the Stromag Business. Costs directly associated with the Stromag Business, for example, the costs of engineering and manufacturing, are separately identifiable and have been included directly within the Stromag Business HFI.

In addition, there are a number of other indirect central costs which have been allocated into the Stromag Business HFI to reflect the fact that the Stromag Business operated as part of the wider GKN Group. These costs primarily relate to the sales force, general marketing and merchandising, certain engineering and general corporate expenses related to finance, information technology, human resources and communications. These expenses have been allocated to the Stromag Business on the basis of direct usage when identifiable, with the remainder allocated on the basis of an allocation key determined using the value of sales less raw material costs of each sub division of the GKN Land Systems Division.

All such costs and expenses have been deemed to have been settled by the Stromag Business to GKN in the period in which the costs were incurred. Invested capital in the Stromag Business as shown in the Combined Balance Sheet includes cash pooling arrangements with GKN as well as certain other intercompany receivables/payables with GKN without formal repayment terms. Formal loan arrangements with GKN Group are presented as other financial assets and other financial liabilities.

Page 6 of 29


 

1

Accounting policies and presentation (continued)

Basis of preparation (continued)

The Stromag Business HFI has been prepared on a carve-out basis and the results do not necessarily reflect what the results of operations, financial position, or cash flows would have been had the Stromag Business been a separate entity or the future results of the Stromag Business as it will exist upon completion of the transaction as this would be dependent on multiple factors including organisation structure and strategic decisions made in various areas, including IT and infrastructure. The Directors believe that assumptions underlying the combined financial statements, including the assumptions regarding allocating corporate expenditure from the parent are reasonable.

GKN uses a centralised approach to cash management and financing its operations. Where cash is included in a legal entity transferring to Altra, that cash is also included in the Stromag Business HFI. Other cash transactions between GKN and the Stromag Business are accounted for through invested capital. Accordingly, none of the cash, cash equivalents, debt or related interest expense at the corporate level has been assigned to the Stromag Business in the Stromag Business HFI.

The income taxes charged to the Combined Income Statement have been prepared on a separate return basis as if the Stromag Business was a stand-alone entity. Historically, it was included in tax filings with other group entities. It does not maintain taxes payable to/from GKN, and it is deemed to settle the annual current tax balances immediately with the legal taxpaying entities. These settlements are reflected as changes in invested capital, unless included in a legal entity transferring to Altra.

These statements have been prepared using all standards and interpretations required for financial periods beginning 1 January 2015. No standards or interpretations have been adopted before the required implementation date.

Standards, revisions and amendments to standards and interpretations

The Stromag Business adopted all applicable amendments to standards with an effective date in 2015 with no material impact on its results, assets and liabilities. All other accounting policies have been applied consistently.

Basis of combination

Subsidiaries are all entities over which the Stromag Business has control. The Stromag Business controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are included from the date on which control is transferred to the Stromag Business. They are deconsolidated from the date that control ceases.

Inter-company transactions, balances and unrealised gains/losses on transactions between companies in the Stromag Business are eliminated.

Foreign currencies

Subsidiaries account in the currency of their primary economic environment of operation, determined having regard to the currency which mainly influences sales and input costs. Transactions are translated at exchange rates approximating to the rate ruling on the date of the transaction except in the case of material transactions when actual spot rate may be used where it more accurately reflects the underlying substance of the transaction. Assets and liabilities denominated in foreign currencies are translated at the exchange rates ruling at the balance sheet date. Such transactional exchange differences are taken into account in determining profit before tax.

The Stromag Business’ presentational currency is the Euro. On combination, results and cash flows of foreign subsidiaries are translated into Euros at average exchange rates except in the case of material transactions when the actual spot rate is used where it more accurately reflects the underlying substance of the transaction. Assets and liabilities are translated at the exchange rates ruling at the balance sheet date. Such translational exchange differences are taken to invested capital.

Profits and losses on the realisation of foreign currency net investments include the accumulated net exchange differences that have arisen on the retranslation of the foreign currency net investments since 5 September 2011, when GKN bought the Stromag Business, up to the date of realisation.

Page 7 of 29


 

1

Accounting policies and presentation (continued)

Revenue recognition

Sales

Revenue from the sale of goods is measured at the fair value of the consideration receivable which generally equates to the invoiced amount, excluding sales taxes and net of allowances for returns, early settlement discounts and rebates. The Stromag Business has one principal revenue stream:

Sales of product

This revenue stream accounts for the overwhelming majority of the Stromag Business sales to original equipment manufacturers and the aftermarket industry. Products sold include clutches, brakes and flexible couplings.

Invoices for goods are raised when the risks and rewards of ownership have passed which, dependent upon contractual terms, may be at the point of despatch or acceptance by the customer.

Other income

Interest income is recognised using the effective interest rate method.

Sales and other income is recognised in the income statement when it can be reliably measured and its collectability is reasonably assured.

Property, plant and equipment

Property, plant and equipment is stated at cost less accumulated depreciation and impairment charges.

Cost

Cost comprises the purchase price plus costs directly incurred in bringing the asset into use and borrowing costs on qualifying assets, defined as an asset or programme where the period of capitalisation is more than 12 months and the capital value is more than €1,500,000.

Where assets are in the course of construction at the balance sheet date they are classified as capital work in progress. Transfers are made to other asset categories when they are available for use.

Depreciation

Depreciation is not provided on freehold land or capital work in progress. In the case of all other categories of property, plant and equipment, depreciation is provided on a straight line basis over the course of the financial year from the date the asset is available for use.

Depreciation is applied to specific classes of asset so as to reduce them to their residual values over their estimated useful lives, which are reviewed annually.

 

 

The range of depreciation lives are:

 

 

 

 

Years

 

Freehold buildings

Up to 50

 

General plant, machinery, fixtures and fittings

6 to 15

 

Computers

3 to 5

 

Commercial vehicles and cars

4 to 5

 

Property, plant and equipment is reviewed at least annually for indications of impairment. Where an impairment charge arises in the ordinary course of business it is recorded in trading profit.

Page 8 of 29


 

1

Accounting policies and presentation (continued)

Financial assets and liabilities

Financial liabilities are recorded in arrangements where payments, or similar transfers of financial resources, are unavoidable or guaranteed.

Borrowings are measured initially at fair value which usually equates to proceeds received and includes transaction costs. Borrowings are subsequently measured at amortised cost.

Cash and cash equivalents comprise cash on hand and demand deposits, and overdrafts together with highly liquid investments of less than 90 days maturity. Unless an enforceable right of set-off exists and there is an intention to net settle, the components of cash and cash equivalents are reflected on a gross basis in the balance sheet.

Other financial assets and liabilities, including short term receivables and payables, are initially recognised at fair value and subsequently measured at amortised cost less any impairment provision unless the impact of the time value of money is considered to be material.

Goodwill

Goodwill consists of the excess of the fair value of the consideration over the fair value of the identifiable intangible and tangible assets net of the fair value of the liabilities including contingencies of businesses acquired at the date of acquisition. Acquisition related expenses are charged to the income statement as incurred. Goodwill in respect of business combinations of subsidiaries is recognised as an intangible asset.

Goodwill is not amortised but tested at least annually for impairment. Goodwill is carried at cost less any recognised impairment losses that arise from the annual assessment of its carrying value. To the extent that the carrying value exceeds recoverable amount, determined as the higher of estimated discounted future net cash flows or recoverable amount on a fair value less cost of disposal basis, goodwill is written down to the recoverable amount and an impairment charge is recognised in the income statement

Other intangible assets

Other intangible assets are stated at cost less accumulated amortisation and impairment charges.

Development costs

Where development expenditure results in a new or substantially improved product or process and it is probable that this expenditure will be recovered, it is capitalised. Cost comprises development expenditure and borrowing costs on qualifying assets or fair value on initial recognition when as a result of a business combination.

Amortisation is charged from the date the asset is available for use, on a straight line basis over the asset’s life up to a maximum of 7 years.

Capitalised development costs are subject to annual impairment reviews with any resulting impairments charged to the income statement.

Research expenditure and development expenditure not qualifying for capitalisation is written off as incurred.

Computer software

Where computer software is not integral to an item of property, plant or equipment its costs are capitalised and categorised as intangible assets. Cost comprises the purchase price plus costs directly incurred in bringing the asset into use. Amortisation is provided on a straight line basis over its useful economic life which is in the range of 3-5 years.

Page 9 of 29


 

1

Accounting pol icies and presentation (continued)

Other intangible assets (continued)

Assets acquired on business combinations - non-operating intangible assets

Non-operating intangible assets are intangible assets that are acquired as a result of a business combination, which arise from contractual or other legal rights and are not transferable or separable. On initial recognition they are measured at fair value. Amortisation is charged on a straight line basis to the income statement over their expected useful lives which are:

 

 

 

 

 

Years

 

Marketing related assets

-

brands and trademarks

20-50

 

 

-

agreements not to compete

Life of agreement

 

Customer related assets

-

order backlog

Length of backlog

 

 

-

other customer contracts and relationships

2-25

 

Technology based assets

 

 

5-25

 

Inventories

Inventories are valued at the lower of cost and estimated net realisable value with due allowance being made for obsolete or slow-moving items. Cost is determined on a first in, first out or weighted average cost basis. Cost includes raw materials, direct labour, other direct costs and the relevant proportion of works overheads assuming normal levels of activity. Net realisable value is the estimated selling price less estimated selling costs and costs to complete.

Taxation

Current tax and deferred tax are recognised in the income statement unless they relate to items recognised directly in other comprehensive income when the related tax is also recognised in other comprehensive income.

Full provision is made for deferred tax on all temporary differences resulting from the difference between the carrying value of an asset or liability in the combined financial statements and its tax base. The amount of deferred tax reflects the expected manner of realisation or settlement of the carrying amount of the assets and liabilities using tax rates enacted or substantively enacted at the balance sheet date.

Deferred tax assets are reviewed at each balance sheet date and are only recognised to the extent that it is probable that they will be recovered against future taxable profits.

No deferred tax is recognised on the unremitted profits of overseas branches and subsidiaries except to the extent that it is probable that such earnings will be remitted to the parent in the foreseeable future.

Pensions and post-employment benefits

The Stromag Business’ pension arrangements comprise defined benefit and membership of defined contribution schemes throughout the world. In certain companies, pension arrangements contain insurance policies, the premiums to which are based on the advice of independent actuaries. In other companies funds are retained within the business to provide for retirement obligations.

The Stromag Business accounts for all post-employment defined benefit schemes through recognition of the schemes’ surpluses or deficits on the balance sheet at the end of each year. Remeasurement of defined benefit plans is included in other comprehensive income. Current and past service costs, curtailments and settlements are recognised within operating profit. Interest charges on net defined benefit plans are recognised in other net financing charges.

For defined contribution arrangements the cost charged to the income statement represents the Stromag Business’ contributions to the relevant schemes in the year in which they fall due.

Page 10 of 29


 

1

Accounting policies and presentation (continued)

Provisions

Provisions for warranty exposures, environmental matters, employee obligations and legal claims are recognised when: the Stromag Business has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated. Provisions are not recognised for future operating losses.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. Provisions are only discounted where the effect is material.

Standards, revisions and amendments to standards and interpretations issued but not yet adopted

The Stromag Business does not intend to adopt any standard, revision or amendment before the required implementation date. At the date of authorisation of these financial statements, the following standards which have not been applied in these financial statements were in issue but not yet effective:

 

IFRS 9 Financial Instruments (effective from 1 January 2018);

 

IFRS 15 Revenue from contracts with customers (effective from 1 January 2018); and

 

IFRS 16 Leases (effective from 1 January 2019).

These standards and other revisions to standards and interpretations which have an implementation date in 2017 or thereafter are still being assessed.

Significant judgements, key assumptions and estimates

The Stromag Business’ significant accounting policies are set out above. The Stromag HFI includes cost allocations for certain functions provided by GKN, which require the use of estimates. These costs have been allocated on the basis of production type measures. These costs were affected by arrangements that existed in the GKN Group and are not necessarily representative of the position that will prevail in the future. The preparation of financial statements, in conformity with IFRS, requires the use of estimates, subjective judgement and assumptions that may affect the amounts of assets and liabilities at the balance sheet date and reported profit and earnings for the year. The Directors base these estimates, judgements and assumptions on a combination of past experience, professional expert advice and other evidence that is relevant to the particular circumstance.

Accounting policies where the Directors consider the more complex estimates, judgements and assumptions have to be made are those in respect of post-employment obligations (note 19), taxation (note 5), provisions (note 16) and impairment of non-current assets (note 8). Details of the principal judgements, assumptions and estimates made are set out in the related notes as identified.

2

Geographical analysis

The Stromag Business is not a listed entity and as a consequence IFRS 8 is not applicable. Accordingly limited segmental information is provided.

 

(a)

Sales

 

 

 

 

 

 

 

Germany

France

USA

Other

Total

 

 

€000

€000

€000

€000

€000

 

2015

75,607

24,527

15,164

16,090

131,388

 

 

 

 

 

 

 

 

2014

78,929

25,834

11,392

16,879

133,034

 

(b)

Operating profit

 

 

 

 

 

 

 

Germany

France

USA

Other

Total

 

 

€000

€000

€000

€000

€000

 

2015

 

 

 

 

 

 

Trading profit before depreciation, impairment and amortisation

6,811

2,621

3,087

4,493

17,012

 

Depreciation and impairment of property, plant and equipment

(2,295)

(805)

(427)

(241)

(3,768)

 

Amortisation of operating intangible assets

(168)

(15)

(183)

 

Amortisation of non-operating intangible assets

(6,828)

(6,828)

 

 

(2,480)

1,816

2,660

4,237

6,233

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

Trading profit before depreciation, impairment and amortisation

10,193

2,653

2,068

3,720

18,634

 

Depreciation and impairment of property, plant and equipment

(2,366)

(1,024)

(535)

(163)

(4,088)

 

Amortisation of operating intangible assets

(257)

(1)

(258)

 

Amortisation of non-operating intangible assets

(6,828)

(6,828)

 

 

742

1,629

1,533

3,556

7,460

Page 11 of 29


 

3

Operating profit

The analysis of the additional components of operating profit is shown below:

 

 

 

2015

2014

 

 

€000

€000

 

Sales

131,388

133,034

 

 

 

 

 

Operating costs

 

 

 

Change in stocks of finished goods and work in progress

542

37

 

Raw materials and consumables

(46,033)

(43,465)

 

Staff costs (note 7)

(46,386)

(48,943)

 

Reorganisation costs (i):

 

 

 

Redundancy and other employee related amounts

(1,342)

(659)

 

Recharges (iii)

(3,961)

(2,578)

 

Depreciation of property, plant and equipment

(3,768)

(3,870)

 

Impairment of property, plant and equipment

(218)

 

Amortisation of operating intangible assets

(183)

(258)

 

Amortisation of non-operating intangible assets arising on business combinations

(6,828)

(6,828)

 

Operating lease rentals payable:

 

 

 

Plant and equipment

(893)

(878)

 

Property

(764)

(538)

 

Impairment of trade receivables

(249)

(254)

 

Net exchange differences on foreign currency transactions

84

217

 

Other costs

(15,374)

(17,339)

 

 

(125,155)

(125,574)

 

Operating profit

6,233

7,460

 

 

(i)

Reorganisation costs reflect actions to reduce costs, improve productivity and rationalise facilities in continuing operations. This cost is included in operating profit.

 

(ii)

Research and development expenditure was €4,928,000 (2014: €5,409,000), net of customer and government funding.

 

(iii)

Recharges represent management charges and allocations to the Stromag Business.

4

Net financing costs

 

 

 

2015

2014

 

 

€000

€000

(a)

Interest payable

 

 

 

Financial liabilities

(1,351)

(1,012)

 

Short term bank and other borrowings

(166)

(109)

 

Repayable within five years

(13)

 

 

(1,517)

(1,134)

 

Interest receivable

 

 

 

Financial assets

378

275

 

Short term investments, loans and deposits

25

10

 

 

403

285

 

Net interest payable and receivable

(1,114)

(849)

 

Interest payable and receivable on financial assets/liabilities includes amounts in respect of intercompany balances with GKN group companies.

 

 

 

2015

2014

 

 

€000

€000

(b)

Other net financing charges

 

 

 

Interest charge on net defined benefit plans

(271)

(396)

 

Unwind of discounts

(4)

(7)

 

 

(275)

(403)

 

Page 12 of 29


 

5

Taxation

(a)

Tax expense

 

 

 

2015

2014

 

Analysis of charge in year

€000

€000

 

Current tax (charge)/credit

 

 

 

Current year charge

(3,836)

(4,595)

 

Adjustments in respect of prior years

(414)

(82)

 

 

(4,250)

(4,677)

 

Deferred tax (charge)/credit

 

 

 

Origination and reversal of temporary differences

2,288

1,972

 

Adjustments in respect of prior years

108

(252)

 

 

2,396

1,720

 

Total tax charge for the year

(1,854)

(2,957)

 

Significant judgements and estimates

The Stromag Business operates in many jurisdictions and is subject to tax audits which can take several years to conclude. Therefore, the accrual for current tax includes provisions for uncertain tax positions which require estimates and the exercise of judgement in respect of the interpretation of tax laws and the likelihood of challenge to historic tax positions. 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 an impact on the Stromag Business’ 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 differences between the charge in the income statement 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.

 

 

Tax reconciliation

2015

2014

 

 

€000

%

€000

%

 

Profit before tax

4,844

 

6,208

 

 

 

 

 

 

 

 

Tax charge calculated at 20.25% (2014: 21.5%) standard UK corporate tax rate

(981)

(20)

(1,335)

(22)

 

Differences between UK and overseas corporate tax rates

(366)

(8)

(765)

(12)

 

Non-deductible and non-taxable items

527

11

(629)

(1 0)

 

Utilisation of previously unrecognised tax losses and other assets

21

156

2

 

Changes in tax rates

(24)

(5)

 

Other changes in deferred tax assets

(725)

(15)

(45)

(1)

 

Tax charge on ordinary activities

(1,548)

(32)

(2,623)

(43)

 

Adjustments in respect of prior years

(306)

(6)

(334)

(5)

 

Total tax charge for the year

(1,854)

(38)

(2,957)

(48)

(b)

Tax included in other comprehensive income

 

 

 

2015

2014

 

 

€000

€000

 

Deferred tax on post-employment obligations

(53)

587

 

Current tax on foreign currency gains and losses on intra-group funding

11

(11)

 

Deferred tax on foreign currency gains and losses on intra-group funding

(26)

(29)

 

 

(68)

547

 

Page 13 of 29


 

5

Taxation (continued)

(c)

Recognised deferred tax

The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by lAS 12) during the year are shown below:

 

 

 

Assets

 

Liabilities

 

 

 

Post-

 

 

 

 

 

 

 

employment

Tax

 

 

Fixed

 

 

 

obligations

losses

Other

 

assets

Total

 

 

€000

€000

€000

 

€000

€000

 

At 1 January 2015

1,655

30

500

 

(23,849)

(21,664)

 

Included in the income statement

(202)

(26)

(10)

 

2,634

2,396

 

Included in other comprehensive income

(53)

2

16

 

(44)

(79)

 

Currency variations

1

19

 

10

30

 

At 31 December 2015

1,401

6

525

 

(21,249)

(19,317)

 

At 1 January 2014

1,189

65

1,113

 

(26,304)

(23,937)

 

Included in the income statement

(124)

(40)

(615)

 

2,499

1,720

 

Included in other comprehensive income

587

15

 

(44)

558

 

Currency variations

3

5

(13)

 

(5)

 

At 31 December 2014

1,655

30

500

 

(23,849)

(21,664)

 

Deferred tax assets are recognised where management projections indicate the future availability of taxable profits to absorb the deductions.

‘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.

(d)

Unrecognised deferred tax assets

There are no unrecognised deferred tax assets in the Stromag Business.

No deferred tax is recognised on the unremitted earnings of overseas subsidiaries except where the distribution of such profits is planned. If these earnings were remitted in full, tax of €1,481,000 (2014: €1,453,000) would be payable.

 

6

Transactions with the owners of the Stromag Business

 

 

 

Recognised

 

 

2015

2014

 

 

€000

€000

 

Interim dividend paid

(3,289)

(6,976)

 

Other transactions with owners of the Stromag business

(4,715)

(1,899)

 

 

(8,004)

(8,875)

 

Dividends were paid from legal entities in the deal perimeter to other entities in the GKN group.

Other transactions with the owner of the Stromag Business primarily represent movements on cash pool arrangements administered by entities within the GKN group but outside of the deal perimeter.

7

Employees

 

 

 

2015

2014

 

Employee benefit expense

€000

€000

 

Wages and salaries

(38,452)

(40,598)

 

Social security costs

(7,980)

(8,037)

 

Post-employment costs

46

(308)

 

 

(46,386)

(48,943)

 

The Stromag Business has previously been part of the wider GKN group. Within GKN, key management were deemed to be GKN plc Board Directors and members of the GKN Group’s Executive Committee. Within GKN Land Systems, the division where the Stromag Business was managed, key management were deemed to be the Division’s Executive Management Team. Due to the nature of these carve-out combined financial statements, the costs of these management teams are not fully included in the income statement, but rather an allocation of their costs. There was no management team focussed solely on the Stromag Business and therefore it is not meaningful to show key management compensation.

Page 14 of 29


 

8

Goodwill and other intangible asse ts

(a)

Goodwill

 

 

 

2015

2014

2013

 

 

€000

€000

€000

 

Cost and net book value

 

 

 

 

At 1 January

86,890

86,785

86,820

 

Currency variations

83

105

(35)

 

At 31 December

86,973

86,890

86,785

 

Goodwill relates to the acquisition of the Stromag Business on 5 September 2011.

(b)

Other intangible assets

 

 

 

2015

 

 

 

 

Assets arising on business combinations

 

 

 

Development

Computer

Marketing

Customer

Technology

 

 

 

costs

software

related

related

based

Total

 

 

€000

€000

€ 000

€000

€000

€000

 

Cost

 

 

 

 

 

 

 

At 1 January 2015

448

1,046

5,758

58,890

26,133

92,275

 

Additions

227

227

 

Disposals

(69)

(69)

 

Currency variations

(6)

(6)

 

At 31 December 2015

448

1,198

5,758

58,890

26,133

92,427

 

Accumulated amortisation

 

 

 

 

 

 

 

At 1 January 2015

(448)

(722)

(679)

(9,162)

(12,925)

(23,936)

 

Charge for the year

(183)

(288)

(3,927)

(2,613)

(7,011)

 

Disposals

28

28

 

Currency variations

(1)

(1)

 

At 31 December 2015

(448)

(878)

(967)

(13,089)

(15,538)

(30,920)

 

Net book amount at 31 December 2015

320

4,791

45,801

10,595

61,507

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

Assets arising on business combinations

 

 

 

Development

Computer

Marketing

Customer

Technology

 

 

 

costs

software

related

related

based

Total

 

 

€000

€000

€000

€000

€000

€000

 

Cost

 

 

 

 

 

 

 

At 1 January 2014

448

982

5,758

58,890

26,133

92,211

 

Additions

128

128

 

Disposals

(64)

(64)

 

At 31 December 2014

448

1,046

5,758

58,890

26,133

92,275

 

Accumulated amortisation

 

 

 

 

 

 

 

At 1 January 2014

(448)

(528)

(391)

(5,235)

(10,312)

(16,914)

 

Charge for the year

(258)

(288)

(3,927)

(2,613)

(7,086)

 

Disposals

64

64

 

At 31 December 2014

(448)

(722)

(679)

(9,162)

(12,925)

(23,936)

 

Net book amount at 31 December 2014

324

5,079

49,728

13,208

68,339

 

The non-operating intangible assets arising on business combinations relate to the GKN acquisition of the Stromag Business on 5 September 2011. Amounts were established at fair value as required by IFRS 3 and have been amortised in accordance with the accounting policy set out in note 1.

Page 15 of 29


 

8

Goodwill and other intangible assets (continued)

(c)

Impairment testing

An impairment test is a comparison of the carrying value of the assets of a business or cash generating unit (CGU) to their recoverable amount. Where the recoverable amount is less than the carrying value, an impairment results. Goodwill relates to the acquisition of the Stromag Business in 2011 and has been tested for impairment annually.

All goodwill was tested for impairment.

Significant judgements, assumptions and estimates

The goodwill has been assessed for impairment using an estimation of fair value less costs of disposal based on a multiple of EBITDA and recent comparable market prices. Due to market conditions in the year and the short term nature of its order book, value in use was not considered to be a representative assessment for impairment testing. The relevant assets have been assessed against fair value less costs of disposal. The assessment used an assumed EBITDA taking into account past performance and operating cash flows of the business, and a market based multiple following a review of comparable companies within a peer group. Sensitivity analysis is provided below.

Key assumptions have been made by the Directors reflecting past experience and are consistent with relevant external sources of information.

Operating cash flows

The main assumptions within forecast operating cash flow include the achievement of future sales prices and volumes (including reference to specific customer relationships, product lines and the use of industry relevant external forecasts of global vehicle production, raw material input costs, the cost structure and the ability to realise benefits from annual productivity improvements, the impact of foreign currency rates upon selling price and cost relationships and the levels of maintaining capital expenditure required to support forecast production.

Long term growth rates

To forecast beyond the detailed cash flows into perpetuity, a long term average growth rate has been used. In each case, this is not greater than the published International Monetary Fund average growth rate in gross domestic product for the next five year period in the territory or territories. This results in a range of nominal growth rates:

Germany 2% (2014: 2%)

France 2% (2014: 2%)

USA 3% (2014: 3%)

Goodwill sensitivity analysis

The result of the Stromag Business’ impairment test is dependent on estimates and judgements made by the Directors, particularly in relation to the key assumptions described above. Sensitivity analysis to potential changes in key assumptions has therefore been reviewed.

At 31 December 2015, the date of the Stromag Business’ annual impairment test, the estimated recoverable amount of operations using fair value less costs of disposal exceeded their carrying value by €29,920,000.

The table below shows the assumptions used in the calculation of fair value less costs of disposal and the amount by which each assumption must change in isolation in order for the estimated recoverable amount to equal the carrying value.

 

 

Fair value less costs of disposal excess over carrying value

€29,920,000

 

 

 

 

Assumptions used in calculation of fair value less costs of disposal

 

 

EBITDA

€23,120,000

 

Multiple

8.5

 

Change required for the carrying value to exceed the recoverable amount

 

 

EBITDA

15%

 

Multiple

15%pts

 

Page 16 of 29


 

9

Property, plant and equipment

 

 

 

2015

 

 

 

 

Other

Capital

 

 

 

Land and

Plant and

tangible

work in

 

 

 

buildings

machinery

assets

progress

Total

 

 

€000

€000

€000

€000

€000

 

Cost

 

 

 

 

 

 

At 1 January 2015

13,091

15,006

8,265

247

36,609

 

Additions

104

851

559

1,293

2,807

 

Disposals

(240)

(739)

(256)

(1,235)

 

Transfers

381

213

147

(741)

 

Currency variations

58

(6)

51

5

108

 

At 31 December 2015

13,394

15,325

8,766

804

38,289

 

Accumulated depreciation and impairment

 

 

 

 

 

 

At 1 January 2015

(1,555)

(8,362)

(3,476)

(13,393)

 

Charge for the year

(482)

(2,189)

(1,097)

(3,768)

 

Disposals

8

707

252

967

 

Currency variations

33

(42)

(26)

(35)

 

At 31 December 2015

(1,996)

(9,886)

(4,347)

(16,229)

 

Net book amount at 31 December 2015

11,398

5,439

4,419

804

22,060

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

Other

Capital

 

 

 

Land and

Plant and

tangible

work in

 

 

 

buildings

machinery

assets

progress

Total

 

 

€000

€000

€000

€000

€000

 

Cost

 

 

 

 

 

 

At 1 January 2014

12,968

14,499

7,746

350

35,563

 

Additions

310

1,132

781

524

2,747

 

Disposals

(1,121)

(445)

(1,566)

 

Transfers

243

316

68

(627)

 

Currency variations

(430)

180

115

(135)

 

At 31 December 2014

13,091

15,006

8,265

247

36,609

 

Accumulated depreciation and impairment

 

 

 

 

 

 

At 1 January 2014

(1,135)

(6,888)

(2,621)

(10,644)

 

Charge for the year

(479)

(2,259)

(1,132)

(3,870)

 

Impairment charges

(109)

(109)

(218)

 

Disposals

988

428

1,416

 

Currency variations

59

(94)

(42)

(77)

 

At 31 December 2014

(1,555)

(8,362)

(3,476)

(13,393)

 

Net book amount at 31 December 2014

11,536

6,644

4,789

247

23,216

 

Included within other tangible assets at net book amount are fixtures, fittings and computers €4,388,000 (2014: €3,211,000) and commercial vehicles and cars €31,000 (2014: €76,000).

 

Page 17 of 29


 

10

Other receivables

 

 

 

2015

2014

2013

 

 

€000

€000

€000

 

Indemnity receivable

9,875

11,616

11,616

 

Other receivables

9

96

94

 

 

9,884

11,712

11,710

 

The indemnity receivable relates to environmental and employee obligations that were taken on when GKN acquired the Stromag Business on 5 September 2011. The seller at that time contractually committed to compensate GKN in the event of settlements and these indemnities are transferring within the transaction perimeter.

 

11

Inventories

 

 

 

2015

2014

2013

 

 

€000

€000

€000

 

Raw materials

9,463

10,238

10,602

 

Work in progress

7,654

7,337

7,530

 

Finished goods

6,061

5,836

5,606

 

 

23,178

23,411

23,738

 

12

Trade and other receivables

 

 

 

2015

2014

2013

 

 

€000

€000

€000

 

Trade receivables

21,610

20,111

17,794

 

Other receivables

1,517

905

 

Prepayments

169

294

36

 

Indirect taxes recoverable

588

1,507

696

 

 

23,884

22,817

18,526

 

Provisions for doubtful debts against trade receivables

 

 

 

 

At 1 January

(587)

(782)

(871)

 

Charge for the year

 

 

 

 

Additions

(249)

(254)

(90)

 

Unused amounts reversed

267

33

121

 

Amounts used

104

404

31

 

Currency variations

(1)

12

27

 

At 31 December

(466)

(587)

(782)

 

Trade receivables subject to provisions for doubtful debts

470

590

823

 

Ageing analysis of trade receivables past due but not impaired

 

 

 

 

Up to 30 days overdue

1,969

2,481

1,850

 

31 - 60 days overdue

569

633

518

 

61 - 90 days overdue

269

313

183

 

More than 90 days overdue

791

326

467

 

There is no provision against other receivable categories.

 

13

Trade and other payables

 

 

 

2015

2014

2013

 

 

Current

Non- current

Current

Current

 

 

€000

€000

€000

€000

 

Amounts owed to suppliers and customers

(12,703)

(12,294)

(11,118)

 

Accrued interest

(299)

(133)

(49)

 

Payroll taxes, indirect taxes and audit fees

(2,221)

(2,442)

(2,251)

 

Amounts due to employees and employee benefit plans

(4,683)

(148)

(5,225)

(5,142)

 

Customer advances and deferred income

(1,534)

(13)

(1,112)

(1,825)

 

 

(21,440)

(161)

(21,206)

(20,385)

 

Page 18 of 29


 

14

Net debt

 

(a)

Analysis of net debt

 

 

 

 

 

2015

2014

2013

 

 

€000

€000

€000

 

Bank overdrafts

(403)

(433)

(345)

 

Other financial liabilities

(30,272)

(29,545)

(26,193)

 

Borrowings

(30,675)

(29,978)

(26,538)

 

Cash and cash equivalents

1,455

1,458

723

 

Other financial assets

2,784

2,706

2,965

 

Net debt

(26,436)

(25,814)

(22,850)

 

 

(i)

All borrowings are at variable interest rates.

 

(ii)

Other financial assets and liabilities represent amounts owed to GKN group companies, outside the Stromag Business, and are of a financing nature under loan arrangements which are repayable on demand and have variable interest rates.

 

(iii)

Unsecured bank overdrafts, bank balances and cash, other financial liabilities and other financial assets all of which are transferring to the purchaser under the terms of the transaction approximate to book value due to their short maturities and variable interest rates.

15

Financial risk management

The Stromag Business’ activities give rise to a number of financial risks: market risk, credit risk and liquidity risk. Market risk includes foreign currency risk and cash flow interest rate risk.

Risk management policies have been set by the GKN Executive Team and are implemented by a Treasury Department within the GKN Group that receives regular reports from all the operating companies to enable prompt identification of financial risks so that appropriate actions may be taken. The GKN Treasury Department has a policy and procedures manual that sets out specific guidelines to manage foreign currency risks, interest rate risk, financial credit risk and liquidity risk and the use of financial instruments to manage these.

 

(a)

Foreign currency risk

The Stromag Business has transactional currency exposures arising from sales or purchases by operating subsidiaries in currencies other than the subsidiaries’ functional currency. These exposures are forecast on a monthly basis by operating companies and are reported to the central GKN Treasury Department. Under the Stromag Business’ foreign currency policy, such exposures are hedged on a reducing percentage basis over a number of forecast time horizons using forward foreign currency contracts. There were no significant outstanding derivatives at each balance sheet date.

Due to the short time frames between order and delivery derivatives generally mature in the month of initiation.

The Stromag Business’ reporting currency for its combined financial statements is the euro. Changes in exchange rates will affect the translation of results and net assets of operations outside of Europe, where the euro is used. The Stromag Business’ largest exposure is the US dollar where a 1% movement in the average rate impacts trading profit by €25,000.

Analysis of net debt by currency:

 

 

 

2015

2014

2013

 

 

 

Cash and

 

 

Cash and

 

 

Cash and

 

 

 

 

other financial

 

 

other financial

 

 

other financial

 

 

 

Borrowings

assets

Total

Borrowings

assets

Total

Borrowings

assets

Total

 

 

€000

€000

€000

€000

€000

€000

 

 

 

 

Euro

(29,826)

3,830

(25,996)

(28,994)

4,100

(24,894)

(25,699)

3,623

(22,076)

 

Sterling

394

394

30

30

55

55

 

Others

(849)

15

(834)

(984)

34

(950)

(839)

10

(829)

 

 

(30,675)

4,239

(26,436)

(29,978)

4,164

(25,814)

(26,538)

3,688

(22,850)

 

Page 19 of 29


 

15

Financial risk management (continued)

 

(b)

Interest rate risk

The Stromag Business is exposed to cash flow interest rate risk on variable rate net borrowings/funds. The Stromag Business’ policy is to optimise the interest cost in reported earnings and reduce volatility in the debt related element of the Stromag Business’ cost of capital and this is monitored through cash management and the mix of fixed/variable interest rates.

 

( c)

Credit risk

The Stromag Business is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments. In terms of substance, and consistent with the related balance sheet presentation, the Stromag Business considers it has two types of credit risk; operational and financial. Operational credit risk relates to non-performance by customers in respect of trade receivables and by suppliers in respect of other receivables. Financial credit risk relates to non-performance by banks and similar institutions in respect of cash and deposits, facilities and financial contracts.

Operational

As suppliers to original equipment manufacturers the Stromag Business may have sizeable amounts outstanding with a single customer at any one time. The credit profiles of such original equipment manufacturers are available from credit rating agencies. The failure of any such customer to honour its debts could materially impact the Stromag Business’ results. However, there are many advantages in these relationships.

Credit risk and customer relationships are managed at a number of levels within the Stromag Business. At a business unit level documented credit control reviews are required to be held at least every month. The scope of these reviews includes amounts overdue and credit limits. At a Stromag Business level debtor ratios, overdue accounts and overall performance are reviewed regularly. Provisions for doubtful debts are determined at these levels based upon the customer’s ability to pay and other factors in the Stromag Business’ relationship with the customer.

At 31 December the largest 5 trade receivables as a proportion of total trade receivables analysed by major segment is as follows:

 

 

 

2015

2014

 

 

%

%

 

Germany

27

27

 

France

31

24

 

The amount of trade receivables outstanding at the year end does not represent the maximum exposure to operational credit risk due to the normal patterns of supply and payment over the course of a year. Based on management information collected as at month ends the maximum level of trade receivables at any one point during the year was €20,993,000 (2014: €18,419,000).

Financial

Credit risk is mitigated by the GKN Group’s policy of only selecting counterparties with a strong investment grade long term credit rating, normally at least A- or equivalent, and assigning financial limits to individual counterparties.

 

(d)

Capital risk management

The GKN Group defines capital as total equity. The GKN Group’s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain a capital structure which optimises the cost of capital. In order to maintain or adjust the capital structure, the GKN Group may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares.

Page 20 of 29


 

15

Financial risk management (continued)

 

(e)

Liquidity risk

The Stromag Business is exposed to liquidity risk as part of its normal financing and trading cycle at times when peak borrowings are required. The Stromag Business’ policies are to ensure that sufficient liquidity is available to meet obligations when they fall due and to maintain sufficient flexibility in order to fund investment objectives. Liquidity needs are assessed through short and long term forecasts. Committed bank facilities are available through the GKN group to enable objectives to be met.

All borrowings have a maturity of within one year.

There is no significant difference in the contractual undiscounted value of other financial assets and liabilities from the amounts stated in the balance sheet and balance sheet notes.

 

(f)

Categories of financial assets and financial liabilities

 

 

 

Loans and

Amortised

 

 

 

receivables

cost

Total

 

 

€000

€000

€000

 

2015

 

 

 

 

Other receivables

9,884

9,884

 

Trade and other receivables

23,127

23,127

 

Cash and cash equivalents

1,455

1,455

 

Other financial assets

2,784

2,784

 

Borrowings

(30,675)

(30,675)

 

Trade and other payables

(13,002)

(13,002)

 

 

37,250

(43,677)

(6,427)

 

2014

 

 

 

 

Other receivables

11,712

11,712

 

Trade and other receivables

21,016

21,016

 

Cash and cash equivalents

1,458

1,458

 

Other financial assets

2,706

2,706

 

Borrowings

(29,978)

(29,978)

 

Trade and other payables

(12,427)

(12,427)

 

 

36,892

(42,405)

(5,513)

 

2013

 

 

 

 

Other receivables

11,710

11,710

 

Trade and other receivables

17,794

17,794

 

Cash and cash equivalents

723

723

 

Other financial assets

2,965

2,965

 

Borrowings

(26,538)

(26,538)

 

Trade and other payables

(11,167)

(11,167)

 

 

33,192

(37,705)

(4,513)

 

IFRS13

There are no financial instruments that are measured subsequent to initial recognition at fair value.

The fair values of financial assets and financial liabilities have been determined with reference to available market information at the balance sheet date, using the methodologies described in their relevant notes:

 

Unsecured bank overdrafts, bank balances and cash and other financial assets, see note 14;

 

Fair value less costs of disposal for impairment testing of one CGU, see note 8;

 

Fair values of trade receivables and payables and cash and cash equivalents are assumed to approximate to cost due to the short-term maturity of the instruments and as the impact of discounting is not significant.

All other financial assets and liabilities together with calculations for fair value less costs of disposal were categorised as Level2.

 

Page 21 of 29


 

16

Provisions

 

 

 

 

Claims and

Employee

 

 

 

 

Warranty

litigation

obligations

Other

Total

 

 

€000

€000

€000

€000

€000

 

At 1 January 2015

(4,022)

(1,413)

(9,300)

(254)

(14,989)

 

Charge for the year

 

(353)

(148)

(501)

 

Amounts used

1,987

105

2,092

 

Currency variations

(17)

(1)

(18)

 

At 31 December 2015

(2,052)

(1,308)

(9,653)

(403)

(13,416)

 

Due within one year

(1,038)

(84)

(403)

(1,525)

 

Due in more than one year

(1,014)

(1,308)

(9,569)

(11,891)

 

 

(2,052)

(1,308)

(9,653)

(403)

(13,416)

 

 

 

 

 

 

 

 

 

 

Claims and

Employee

 

 

 

 

Warranty

litigation

obligations

Other

Total

 

 

€000

€000

€000

€000

€000

 

At 1 January 2014

(5,573)

(2,549)

(9,309)

(286)

(17,717)

 

Charge for the year

(60)

(60)

 

Amounts released

622

1,136

1,758

 

Amounts used

1,002

32

1,034

 

Currency variations

(13)

9

(4)

 

At 31 December 2014

(4,022)

(1,413)

(9,300)

(254)

(14,989)

 

Due within one year

(3,811)

(1)

(3,812)

 

Due in more than one year

(211)

(1,412)

(9,300)

(254)

(11,177)

 

 

(4,022)

(1,413)

(9,300)

(254)

(14,989)

 

Significant judgements and estimates

Whilst estimating provisions requires judgement, the range of reasonably possible outcomes is narrow. After consideration of sensitivity analysis, amounts stated represent the Directors’ best estimate of the likely outcome.

Warranty

Provisions set aside for warranty exposures either relate to amounts provided systematically based on historical experience under contractual warranty obligations attaching to the supply of goods or specific provisions created in respect of individual customer issues undergoing commercial resolution and negotiation. In the event of a claim, settlement will be negotiated with the customer based on supply of replacement products and compensation for the customer’s associated costs. Amounts set aside represent the Directors’ best estimate of the likely settlement and the timing of any resolution with the relevant customer. Utilisation of the provision due in more than one year is estimated as €350,000 in 2017 and €664,000 from 2018.

Claims and litigation

Legal provisions amounting to nil (2014: €4,000) relate to estimates of amounts required to settle or remove litigation actions that have arisen in the normal course of business. Further details of legal matters are not provided to avoid the potential of seriously prejudicing the Stromag Business’ stance in law. Amounts are reversed only when the matter is formally settled or when a material change in the litigation action occurs where legal advice confirms lower amounts need to be retained to cover the exposure.

As a consequence of primarily legacy activities a small number of sites in the Stromag Business are subject to environmental remediation actions, which in all cases are either agreed formally with relevant local and national authorities and agencies or represent the Directors’ view of the likely outcome having taken appropriate expert advice and following consultation with appropriate authorities and agencies. Amounts of €1,308,000 (2014: €1,409,000) are provided and there is a corresponding indemnity asset recorded in note 10.

Utilisation of the claims and litigation provision due in more than one year is estimated as nil in 2017 and €1,308,000 from 2018.

Employee obligations

Long service non- pension and other employee related obligations arising primarily in the Stromag Business’ continental European subsidiaries amount to €9,653,000 (2014: €9,300,000). This balance includes an obligation related to asbestos with a corresponding indemnity asset recorded in note 10. Utilisation of the provision due in more than one year is estimated as €24,000 in 2017 and €9,545,000 from 2018.

Other

Other provisions relate to customer and supplier exposures.

17

Invested capital

Invested capital on GKN’s purchase of the Stromag Business, on 5 September 2011, was €161,395.

Page 22 of 29


 

18

Cash flow reconciliations

 

 

2015

2014

 

Cash generated from operations

€000

€000

 

Operating profit

6,233

7,460

 

Adjustments for:

 

 

 

Depreciation, impairment and amortisation of fixed assets

 

 

 

Depreciation

3,768

3,870

 

Impairment

218

 

Amortisation

183

258

 

Amortisation of non-operating intangible assets arising on business combinations

6,828

6,828

 

Net profits on sale and realisation of fixed assets

(268)

(33)

 

Movement in post-employment obligations

(1,682)

(1,012)

 

Change in recharges payable

(353)

(1,279)

 

Change in inventories

463

845

 

Change in trade and other receivables

1,144

(2,932)

 

Change in trade and other payables and provisions

(1,271)

(1,650)

 

 

15,045

12,573

 

 

 

 

 

Movement in net debt

 

 

 

Movement in cash and cash equivalents

1,381

2,683

 

Net movement in other borrowings and deposits

(649)

(3,610)

 

Currency variations

(1,354)

(2,037)

 

Movement in year

(622)

(2,964)

 

Net debt at beginning of year

(25,814)

(22,850)

 

Net debt at end of year

(26,436)

(25,814)

 

 

 

 

 

Reconciliation of cash and cash equivalents

 

 

 

Cash and cash equivalents per balance sheet

1,455

1,458

 

Bank overdrafts included within “current liabilities - borrowings”

(403)

(433)

 

Cash and cash equivalents per cashflow

1,052

1,025

 

Page 23 of 29


 

19

Post-employment obligations

 

 

 

2015

2014

2013

 

Post-employment obligations as at the year end comprise:

€000

€000

€000

 

Pensions

(13,355)

(15,078)

(14,152)

 

The Stromag Business pension arrangements comprise defined benefit plans and membership of defined contribution schemes. The defined benefit pension plans in Germany and France are transferring to Altra as part of the Transaction and are therefore included in the Combined Balance Sheet of the Stromag Business. In other territories, such as the UK, employees of the Stromag Business are members of certain other GKN defined benefit pension plans. These plans are not transferring to Altra as part of the Transaction. Due to the nature of information available to the Stromag Business it is not possible to account for such plans as defined benefit. These multi-employer arrangements are accounted for as defined contribution.

The Stromag Business’ post-employment plans are substantially unfunded, with pension payments made from company funds as they fall due, rather than from scheme assets.

The Stromag Business’ 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 Europe, pensions in payment are generally updated in line with inflation. The European schemes are closed to new entrants.

Independent actuarial valuations of all major defined benefit scheme assets and liabilities were carried out at 31 December 2015. 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- significant judgements, assumptions and estimates

The most significant scheme is in Germany and so assumptions and sensitivity are shown for this scheme only.

Key assumptions:

 

 

 

Germany

 

 

%

 

2015

 

 

Rate of increase in pensionable salaries

2.50

 

Rate of increase in payment and deferred pensions

1.75

 

Discount rate

2.40

 

Inflation assumption

1.75

 

2014

 

 

Rate of increase in pensionable salaries

2.50

 

Rate of increase in payment and deferred pensions

1.75

 

Discount rate

1.90

 

Inflation assumption

1.75

 

The discount rate was calculated with reference to Aon Hewitt’s German discount rate yield curve consistent with prior year.

The mortality assumptions used in Germany were the RT2005-G tables. These assumptions give the following expectations: a male aged 65 lives for a further 18.6 years and a female aged 65 lives for a further 22.8 years whilst a male aged 45 is expected to live a further 21.5 years from age 65 and a female aged 45 is expected to live a further 25.5 years from age 65. These assumptions are based on the prescribed tables, rather than GKN experience.

 

Page 24 of 29


 

19

Post-employment obligations (continued)

(a)

Defined benefit schemes- significant judgements, assumptions and estimates (continued)

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 2015 is set out below:

 

 

 

Germany

 

 

Liabilities

 

 

€000

 

Discount rate +1%

921

 

Discount rate -1%

(1,083)

 

Rate of inflation +1%

(936)

 

Rate of inflation -1%

824

 

Life expectancy +1 year

(676)

 

Life expectancy -1 year

589

 

The above sensitivity analyses are based on isolated changes in each assumption, whilst 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. Any asset 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.

(b)

Defined benefit schemes - reporting

The amounts included in operating profit are:

 

 

 

Total

 

 

€000

 

2015

 

 

Current service cost

(32)

 

Past service credit- net

218

 

 

186

 

2014

 

 

Current service cost

(211)

 

The amounts recognised in the balance sheet are:

 

 

 

2015

 

 

 

Germany

France

Total

2014

 

 

€000

€000

€000

€000

 

Present value of unfunded obligations

(11,969)

(1,386)

(13,355)

(15,078)

 

Present value of funded obligations

(910)

(910)

(1,411)

 

Fair value of plan assets

910

910

1,411

 

Net obligations recognised in the balance sheet

(11,969)

(1,386)

(13,355)

(15,078)

 

The contribution expected to be paid by the Stromag Business during 2016 is £1,139,000.

Cumulative remeasurement of defined benefit plan differences recognised in equity are as follows:

 

 

 

2015

2014

 

 

€000

€000

 

At 1 January

 

 

 

Remeasurement of defined benefit plans

312

(1,542)

 

At 31 December

 

 

 

Page 25 of 29


 

19

Post-employment obligations (continued)

(b)

Defined benefit schemes – reporting (continued)

Movement in schemes’ obligations (funded and unfunded) during the year

 

 

 

Germany

France

Total

 

 

€000

€000

€000

 

At 1 January 2015

(14,422)

(2,067)

(16,489)

 

Current service cost

(32)

(32)

 

Past service credit

218

218

 

Interest

(263)

(35)

(298)

 

Remeasurement of defined benefit plans

166

145

311

 

Benefits and administrative expenses paid

1,672

353

2,025

 

At 31 December 2015

(12,879)

(1,386)

(14,265)

 

At 1 January 2014

(13,240)

(2,277)

(15,517)

 

Current service cost

(25)

(186)

(211)

 

Interest

(441)

(441)

 

Remeasurement of defined benefit plans

(1,841)

298

(1,543)

 

Benefits and administrative expenses paid

1,125

98

1,223

 

At 31 December 2014

(14,422)

(2,067)

(16,489)

 

Movement in schemes’ assets during the year

 

 

 

Germany

France

Total

 

 

€000

€000

€000

 

At 1 January 2015

1,411

1,411

 

Interest

27

27

 

Remeasurement of defined benefit plans

1

1

 

Benefits paid

(529)

(529)

 

At 31 December 2015

910

910

 

At 1 January 2014

1,365

1,365

 

Interest

45

45

 

Remeasurement of defined benefit plans

1

1

 

At 31 December 2014

1,411

1,411

 

Remeasurement gains and losses in relation to schemes’ obligations in the significant Germany scheme are as follows

 

 

 

Germany

 

 

€000

 

2015

 

 

Experience gains and losses

(353)

 

Changes in financial assumptions

519

 

 

166

 

2014

 

 

Experience gains and losses

(206)

 

Changes in financial assumptions

(1,635)

 

 

(1,841)

 

The fair values of the assets in the schemes were:

 

 

 

Germany

 

 

€000

 

At 31 December 2015

 

 

Other assets

910

 

 

910

 

At 31 December 2014

 

 

Other assets

1,411

 

 

1,411

 

Page 26 of 29


 

19

Post-employment obligations (continued)

(c)

Defined benefit scheme- risk factors

Through its post-employment pension plans, the Stromag Business is exposed to a number of risks, the most significant of which are detailed below. The Stromag Business’ focus is on managing the cash demands which the pension plans place on the Stromag Business, rather than balance sheet volatility in its own right.

Inflation risk : As some 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.

Member longevity : As the Stromag Business’ 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

As Germany is the only significant scheme demographic factors are provided solely for this plan.

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 Germany are as follows:

 

 

 

2015

2014

 

German

8

8

 

Defined benefit obligations are classified into those representing “active” members of a scheme or plan (i.e. those who are currently employed by the Stromag Business), “deferred” members (i.e. those who have accrued benefit entitlements, but who are no longer employed by the Stromag Business and are not yet drawing a pension) and “pensioner” members (ie. 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 Germany are given below:

 

 

 

Active

Deferred

Pensioner

 

 

 

 

Value

 

 

Value

 

 

Value

 

 

Age

Number

(€000)

Age

Number

(€000)

Age

Number

(€000)

 

Germany

58

60

(1,151)

61

21

(1,111)

77

319

(10,617)

 

(e)

Defined contribution schemes

The Stromag Business operates a number of defined contribution schemes. The charge to the income statement in the year was €141,000 (2014: €45,000).

20

Contingent assets and liabilities

In the case of certain businesses, performance bonds and customer finance obligations have been entered into in the normal course of business, however, the risk of an obligation arising is considered remote. Indemnity assets are included in note 10.

21

Operating lease commitments -minimum lease payments

The minimum lease payments which the Stromag Business is committed to make at 31 December are:

 

 

 

2015

2014

2013

 

 

 

Vehicles,

 

Vehicles,

 

Vehicles,

 

 

 

plant and

 

plant and

 

plant and

 

 

Property

equipment

Property

equipment

Property

equipment

 

 

€000

€000

€000

€000

€000

€000