GKN plc Annual Report and Accounts 2011
GKN
2011 performance
Annual Report and Accounts 2011
Financial highlights
(12 months ended 31 December 2011)
n
Group sales up £683 million (13%) to £6.1 billion.
n
Excluding net £19 million charge for temporary plant closure at Hoeganaes, Gallatin, USA:
n
Trading profit of £487 million, up £76 million – an increase of 18%.
n
Group trading margin of 8.0%, up from 7.6%; increased targets set for three divisions.
n
Profit before tax of £417 million, an increase of 15%. Reported profit before tax, £351 million.
n
Return on average invested capital (excluding 2011 acquisitions) of 18.3%, reflecting
higher profitability.
MARKET LEADERSHIP
G RO W T H
O P E R AT I O N A L E XC E L L E N CE
S U S TA I N A B I L I TY
ENGINEERING
n
Earnings per share up 9% to 22.6 pence per share.
n
Final dividend of 4.0 pence per share, giving a total for 2011 of 6.0 pence per share,
a 20% increase.
n
Net debt of £538 million, reflecting £444 million expenditure on new acquisitions.
for the future
Statutory basis
Sales
Profit before tax
Earnings per share
£5,746m
£351m
18.0p
2010: £5,084m
2010: £345m
2010: 19.6p
Management basis*
Sales
Profit before tax
Earnings per share
£6,112m
£417m
22.6p
2010: £5,429m
2010: £363m
2010: 20.7p
www.gkn.com
* See page 24 for details of measurement and reporting of performance on a management basis.
GKN plc Annual Report and Accounts 2011
GKN
2011 performance
Annual Report and Accounts 2011
Financial highlights
(12 months ended 31 December 2011)
n
Group sales up £683 million (13%) to £6.1 billion.
n
Excluding net £19 million charge for temporary plant closure at Hoeganaes, Gallatin, USA:
n
Trading profit of £487 million, up £76 million – an increase of 18%.
n
Group trading margin of 8.0%, up from 7.6%; increased targets set for three divisions.
n
Profit before tax of £417 million, an increase of 15%. Reported profit before tax, £351 million.
n
Return on average invested capital (excluding 2011 acquisitions) of 18.3%, reflecting
higher profitability.
MARKET LEADERSHIP
G RO W T H
O P E R AT I O N A L E XC E L L E N CE
S U S TA I N A B I L I TY
ENGINEERING
n
Earnings per share up 9% to 22.6 pence per share.
n
Final dividend of 4.0 pence per share, giving a total for 2011 of 6.0 pence per share,
a 20% increase.
n
Net debt of £538 million, reflecting £444 million expenditure on new acquisitions.
for the future
Statutory basis
Sales
Profit before tax
Earnings per share
£5,746m
£351m
18.0p
2010: £5,084m
2010: £345m
2010: 19.6p
Management basis*
Sales
Profit before tax
Earnings per share
£6,112m
£417m
22.6p
2010: £5,429m
2010: £363m
2010: 20.7p
www.gkn.com
* See page 24 for details of measurement and reporting of performance on a management basis.
.
01
.
GKN at a glance
02
.
GKN plc
Annual Report
and Accounts 2011
Contact details
GKN Driveline
GKN Powder Metallurgy
GKN Aerospace
GKN Land Systems
GKN Driveline is the world’s leading supplier of automotive
driveline systems and solutions. As a global business serving
the leading vehicle manufacturers, GKN Driveline develops,
builds and supplies an extensive range of automotive
driveline products and systems – for use in the smallest
ultra low-cost car to the most sophisticated premium
vehicle demanding the most complex driving dynamics.
GKN Powder Metallurgy is the world’s largest manufacturer
of sintered components. It comprises Hoeganaes and GKN
Sinter Metals. Hoeganaes produces the metal powder that
GKN Sinter Metals uses to manufacture precision automotive
components for engines, transmissions and body and
chassis applications. It also produces a range of components
for industrial and consumer applications.
GKN Aerospace is a world leading global first tier supplier
of airframe and engine structures, components, assemblies
and transparencies to a wide range of aircraft and engine
prime contractors and other first tier suppliers. It operates
in three main product areas: aerostructures, engine
components/sub-systems and special products.
GKN Land Systems is a leading supplier of technology
differentiated power management solutions and services.
It designs, manufactures and supplies products and
services for the agricultural, construction, mining and
industrial machinery markets. In addition, it provides
global aftermarket distribution and through-life support.
Products
Products
Products
Products
n
n
n
n
Constant velocity jointed systems including CV joints
and sideshafts.
All-wheel drive (AWD) systems including propshafts,
couplings and final drive units.
Trans-axle solutions including open, limited slip
and locking differentials and electronic torque
vectoring products.
eDrive systems including electric rear axles and
electric transmissions.
n
n
n
n
n
Sintered components for engines and gearboxes,
as well as bodies and chassis.
Sintered bearings and filters.
Metal injection moulded components.
Soft magnetic components for use in electric motors.
Sintered components for numerous industrial
applications.
n
n
n
n
Integrated aerostructures, including wing and flight
control surface sub-assemblies and fuselage structures
and surfaces.
Fixed and rotating propulsion products for aircraft engines;
fan cases, blades, exhaust systems and nacelles.
Transparencies including specially coated cockpit and
cabin windows.
Niche products such as ice protection, fuel systems
and flotation devices.
n
n
n
n
n
Electro-mechanical power management devices such
as electro-magnetic brakes, engineered flexible
couplings, clutches, driveshafts and gear technology.
Sensors, actuators and controls.
Single and multi-piece steel and aluminium wheels.
Structures and chassis systems.
Aftermarket parts and remanufacturing for
passenger cars, commercial trucks, agricultural
and construction vehicles.
Strategy
Strategy
Strategy
Strategy
Our strategy is to develop our market-leading presence,
superior technology and global manufacturing footprint to:
n provide innovative driveline systems and solutions,
supporting developing market trends for more fuelefficient vehicles; and
n increase our business in high-growth regions serving
the needs of strategic customers.
Our strategy is to exploit powder metal technology, working
closely with our customers to develop ‘design for powder
metal’ applications to:
n meet the rapidly developing requirements for highefficiency engines, advanced transmission applications
and evolving emissions standards; and
n expand the business in high-growth markets,
supporting customers globally.
Our strategy is to focus investment in core market technology
development and application, to:
n exploit our strong positions on existing programmes for
new aircraft and pursue long-term contracts on selective
high-growth and long-running platforms;
n develop new technologies for future commercial and
defence aircraft, improve fuel efficiency, reduce emissions
and minimise the environmental impact of aviation; and
n expand into adjacent markets with similar product
technologies and manufacturing capabilities.
Our strategy is to build a global leader in industrial
power management solutions on a platform of integrated
powertrain systems and services, including:
n developing capability in electro-mechanical components;
n expanding the business for existing products into
new markets; and
n improving customer performance by offering safe,
efficient and reliable power management, together
with increased electrification and use of lightweight
structures.
Number of employees: 21,100
Number of employees: 6,400
Number of employees: 8,500
Number of employees: 5,900
Locations: Operational in 51 locations across 23 countries.
Locations: Operational in 30 locations across 14 countries.
Locations: Operational in 27 locations across five countries.
Locations: Operational in 40 locations across 17 countries.
SALES BY CUSTOMER
6%
Mitsubishi
SALES BY CUSTOMER
5%
BMW
2% Tata Group
16% Volkswagen Group
7%
Toyota
13%
Renault
Nissan Group
8%
Ford
23%
Other
2% Hilite
2% Volkswagen Group
2% Linamar
3%
Fiat/Chrysler
2%
Bosch
8% Ford
6%
General Motors
5% ZF Group
2%
Honeywell
2% Bombardier
3% Spirit
3% Rolls-Royce
5% General Electric
SALES BY CUSTOMER
31%
EADS
5% Lockheed
Martin
17%
Other
11%
Fiat/Chrysler
9%
General Motors
SALES BY CUSTOMER
70%
Other
13%
United Technologies
1% Daimler
Group
2% Volkswagen Group
2% JCB
2% Ford Group
3% Agco
4% Claas
4% Caterpillar
GKN plc
Registrar
PO Box 55
Ipsley House
Ipsley Church Lane
Redditch
Worcestershire B98 0TL
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Tel +44 (0)1527 517715
Fax +44(0)1527 517700
Tel 0871 384 2962*
(+44 121 415 7039 from outside UK)
London Office
50 Pall Mall
London SW1Y 5JH
Tel +44 (0)20 7930 2424
Fax +44 (0)20 7930 3255
enquiries@gkn.com
www.gkn.com
Registered in England No. 4191106
*
Calls to this number cost 8p per minute from a BT landline; other providers’
costs may vary. Lines are open 8.30 am to 5.30 pm, Monday to Friday.
This annual report and accounts has been prepared for the members
of GKN plc and should not be relied upon by any other party or for
any other purpose. It contains forward looking statements which are
made in good faith based on the information available at the time
of its approval. It is believed that the expectations reflected in these
statements are reasonable but they may be affected by a number
of risks and uncertainties that are inherent in any forward looking
statement which could cause actual results to differ materially from
those currently anticipated. Nothing in this document should be
regarded as a profits forecast.
Fulmar Colour is FSC certified, PEFC certified and ISO 14001 certified
showing that it is committed to all round excellence and improving
environmental performance is an important part of this strategy. Fulmar
Colour aim to reduce at source the effect their operations have on the
environment, and are committed to continual improvement, prevention
of pollution and compliance with any legislation or industry standards.
Fulmar Colour is a CarbonNeutral® Printing Company
6% Tata Group
61%
Other
19%
Boeing
www.equiniti.com
www.shareview.co.uk
Cautionary statement
8% John Deere
7% Case New Holland
Fax 0871 384 2100
(+44 1903 698403 from outside UK)
This annual report is available on our website.
The paper used in this report is produced using FSC® mix pulp which is
fully recyclable, biodegradable, pH Neutral, heavy metal absence and
acid-free. It is manufactured within a mill which complies with the
international environmental ISO 14001 standard.
Designed and produced by MAGEE
www.magee.co.uk
Printed by Fulmar Colour
131
ISO 14001 REGISTERED
DNV Certification BV
013
.
01
.
GKN at a glance
02
.
GKN plc
Annual Report
and Accounts 2011
Contact details
GKN Driveline
GKN Powder Metallurgy
GKN Aerospace
GKN Land Systems
GKN Driveline is the world’s leading supplier of automotive
driveline systems and solutions. As a global business serving
the leading vehicle manufacturers, GKN Driveline develops,
builds and supplies an extensive range of automotive
driveline products and systems – for use in the smallest
ultra low-cost car to the most sophisticated premium
vehicle demanding the most complex driving dynamics.
GKN Powder Metallurgy is the world’s largest manufacturer
of sintered components. It comprises Hoeganaes and GKN
Sinter Metals. Hoeganaes produces the metal powder that
GKN Sinter Metals uses to manufacture precision automotive
components for engines, transmissions and body and
chassis applications. It also produces a range of components
for industrial and consumer applications.
GKN Aerospace is a world leading global first tier supplier
of airframe and engine structures, components, assemblies
and transparencies to a wide range of aircraft and engine
prime contractors and other first tier suppliers. It operates
in three main product areas: aerostructures, engine
components/sub-systems and special products.
GKN Land Systems is a leading supplier of technology
differentiated power management solutions and services.
It designs, manufactures and supplies products and
services for the agricultural, construction, mining and
industrial machinery markets. In addition, it provides
global aftermarket distribution and through-life support.
Products
Products
Products
Products
n
n
n
n
Constant velocity jointed systems including CV joints
and sideshafts.
All-wheel drive (AWD) systems including propshafts,
couplings and final drive units.
Trans-axle solutions including open, limited slip
and locking differentials and electronic torque
vectoring products.
eDrive systems including electric rear axles and
electric transmissions.
n
n
n
n
n
Sintered components for engines and gearboxes,
as well as bodies and chassis.
Sintered bearings and filters.
Metal injection moulded components.
Soft magnetic components for use in electric motors.
Sintered components for numerous industrial
applications.
n
n
n
n
Integrated aerostructures, including wing and flight
control surface sub-assemblies and fuselage structures
and surfaces.
Fixed and rotating propulsion products for aircraft engines;
fan cases, blades, exhaust systems and nacelles.
Transparencies including specially coated cockpit and
cabin windows.
Niche products such as ice protection, fuel systems
and flotation devices.
n
n
n
n
n
Electro-mechanical power management devices such
as electro-magnetic brakes, engineered flexible
couplings, clutches, driveshafts and gear technology.
Sensors, actuators and controls.
Single and multi-piece steel and aluminium wheels.
Structures and chassis systems.
Aftermarket parts and remanufacturing for
passenger cars, commercial trucks, agricultural
and construction vehicles.
Strategy
Strategy
Strategy
Strategy
Our strategy is to develop our market-leading presence,
superior technology and global manufacturing footprint to:
n provide innovative driveline systems and solutions,
supporting developing market trends for more fuelefficient vehicles; and
n increase our business in high-growth regions serving
the needs of strategic customers.
Our strategy is to exploit powder metal technology, working
closely with our customers to develop ‘design for powder
metal’ applications to:
n meet the rapidly developing requirements for highefficiency engines, advanced transmission applications
and evolving emissions standards; and
n expand the business in high-growth markets,
supporting customers globally.
Our strategy is to focus investment in core market technology
development and application, to:
n exploit our strong positions on existing programmes for
new aircraft and pursue long-term contracts on selective
high-growth and long-running platforms;
n develop new technologies for future commercial and
defence aircraft, improve fuel efficiency, reduce emissions
and minimise the environmental impact of aviation; and
n expand into adjacent markets with similar product
technologies and manufacturing capabilities.
Our strategy is to build a global leader in industrial
power management solutions on a platform of integrated
powertrain systems and services, including:
n developing capability in electro-mechanical components;
n expanding the business for existing products into
new markets; and
n improving customer performance by offering safe,
efficient and reliable power management, together
with increased electrification and use of lightweight
structures.
Number of employees: 21,100
Number of employees: 6,400
Number of employees: 8,500
Number of employees: 5,900
Locations: Operational in 51 locations across 23 countries.
Locations: Operational in 30 locations across 14 countries.
Locations: Operational in 27 locations across five countries.
Locations: Operational in 40 locations across 17 countries.
SALES BY CUSTOMER
6%
Mitsubishi
SALES BY CUSTOMER
5%
BMW
2% Tata Group
16% Volkswagen Group
7%
Toyota
13%
Renault
Nissan Group
8%
Ford
23%
Other
2% Hilite
2% Volkswagen Group
2% Linamar
3%
Fiat/Chrysler
2%
Bosch
8% Ford
6%
General Motors
5% ZF Group
2%
Honeywell
2% Bombardier
3% Spirit
3% Rolls-Royce
5% General Electric
SALES BY CUSTOMER
31%
EADS
5% Lockheed
Martin
17%
Other
11%
Fiat/Chrysler
9%
General Motors
SALES BY CUSTOMER
70%
Other
13%
United Technologies
1% Daimler
Group
2% Volkswagen Group
2% JCB
2% Ford Group
3% Agco
4% Claas
4% Caterpillar
GKN plc
Registrar
PO Box 55
Ipsley House
Ipsley Church Lane
Redditch
Worcestershire B98 0TL
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Tel +44 (0)1527 517715
Fax +44(0)1527 517700
Tel 0871 384 2962*
(+44 121 415 7039 from outside UK)
London Office
50 Pall Mall
London SW1Y 5JH
Tel +44 (0)20 7930 2424
Fax +44 (0)20 7930 3255
enquiries@gkn.com
www.gkn.com
Registered in England No. 4191106
*
Calls to this number cost 8p per minute from a BT landline; other providers’
costs may vary. Lines are open 8.30 am to 5.30 pm, Monday to Friday.
This annual report and accounts has been prepared for the members
of GKN plc and should not be relied upon by any other party or for
any other purpose. It contains forward looking statements which are
made in good faith based on the information available at the time
of its approval. It is believed that the expectations reflected in these
statements are reasonable but they may be affected by a number
of risks and uncertainties that are inherent in any forward looking
statement which could cause actual results to differ materially from
those currently anticipated. Nothing in this document should be
regarded as a profits forecast.
Fulmar Colour is FSC certified, PEFC certified and ISO 14001 certified
showing that it is committed to all round excellence and improving
environmental performance is an important part of this strategy. Fulmar
Colour aim to reduce at source the effect their operations have on the
environment, and are committed to continual improvement, prevention
of pollution and compliance with any legislation or industry standards.
Fulmar Colour is a CarbonNeutral® Printing Company
6% Tata Group
61%
Other
19%
Boeing
www.equiniti.com
www.shareview.co.uk
Cautionary statement
8% John Deere
7% Case New Holland
Fax 0871 384 2100
(+44 1903 698403 from outside UK)
This annual report is available on our website.
The paper used in this report is produced using FSC® mix pulp which is
fully recyclable, biodegradable, pH Neutral, heavy metal absence and
acid-free. It is manufactured within a mill which complies with the
international environmental ISO 14001 standard.
Designed and produced by MAGEE
www.magee.co.uk
Printed by Fulmar Colour
131
ISO 14001 REGISTERED
DNV Certification BV
013
.
This is GKN
03
GKN plc
Annual Report
and Accounts 2011
1 Directors’ report – business review
2 Directors’ report – governance
.
44
46
53
54
56
69
72
The Board
Corporate governance
Nominations Committee report
Audit Committee report
Remuneration report
Other statutory information
Statement of Directors’ responsibilities
3 Financial statements
.
73
74
121
122
125
Governance
22
24
36
38
Independent auditors’ report (Group)
Group financial statements
Independent auditors’ report (Company)
Company financial statements
Group financial record
4 Other information
.
126
128
130
131
Key subsidiaries and joint ventures
Shareholder information
Subject index
Contact details
Key
IFC – Inside Front Cover
Other information
GKN operates four divisions:
GKN Driveline, GKN Powder
Metallurgy, GKN Aerospace and
GKN Land Systems. Approximately
44,000 people work in GKN
companies and joint ventures in
more than 35 countries. We harness
our considerable technology and
manufacturing resources to supply
the highest quality systems,
structures, components and services.
2011 performance
GKN at a glance
This is GKN
Chairman’s statement
Chief Executive’s review
Business model
GKN strategy
Key performance indicators
Strategy in action
– Market leadership
– Growth
– Operational excellence
– Sustainability
Our markets
Review of performance
Risks and uncertainties
Sustainability report
Financial statements
IFC
01
03
04
06
08
10
12
14
GKN is a global engineering group –
our technologies and products are
at the heart of vehicles and aircraft
produced by the world’s leading
manufacturers.
Business review
.
04
.
Chairman’s statement
“
GKN performed very well in
2011, delivering a strong set
of results, despite continuing
macroeconomic uncertainties.”
Roy Brown
Chairman
Delivering strong results
It is particularly pleasing to report, in my final statement as Chairman, that GKN performed
very well in 2011, delivering a strong set of results despite continuing macroeconomic
uncertainties. Management profit before tax was £417 million and earnings per share
increased to 22.6p. We made good progress against our financial KPIs, and net debt,
excluding the acquisition costs of Stromag Holding and Getrag Driveline Products, continued
to reduce. These two acquisitions, in GKN Land Systems and GKN Driveline respectively,
strongly underpin our strategy of providing long-term sustainable growth.
In light of our performance and our confidence in the future prospects of the Company,
the Board is recommending to shareholders a final dividend of 4.0p, which will bring the
dividend for the year to 6.0p. This is in line with our progressive dividend policy designed
to align dividends with the long-term trend in earnings.
Safety
The safety of our people has always been and will continue to be of paramount importance.
The Board deeply regrets the fatalities that occurred at our Hoeganaes plant in Gallatin,
USA, in the first half of the year. To ensure that the lessons learnt at Gallatin are reflected in
our operating procedures and health and safety processes worldwide, we have put in place
a number of corrective actions and improvements described elsewhere in this annual report,
to strengthen yet further our safety focus and ensure the safety and wellbeing of all our
employees Group wide.
Governance
We are committed to maintaining high standards of corporate governance in what is a
constantly changing regulatory and governance environment. We set out in the corporate
governance statement on pages 46 to 52 our governance procedures and disciplines and
report on our compliance with the UK Governance Code throughout the year. The statement
also describes our response to Lord Davies’ report on Boardroom Diversity.
I am satisfied that the Board continues to operate effectively, as confirmed in this year’s
Board evaluation review, details of which are given in the corporate governance statement.
.
05
GKN plc
Annual Report
and Accounts 2011
People
A great company like GKN is built by the tens of thousands of committed individuals who
make up its workforce. These are the people who go that extra mile every day to deliver
superior products and services for our customers and value for all our shareholders.
I would like to take this opportunity to thank them all for their efforts in 2011.
Board changes
There is of course one specific individual to whom I would like to address thanks.
Sir Kevin Smith retired as Chief Executive at the end of 2011 after nine years in that role
and over 12 years with the Company. His leadership of the Group was outstanding, bringing
together what some commentators suggested was the “rump” of the business following the
demerger of our industrial services businesses in 2001 and developing it into a world class
engineering company focused on the automotive, aerospace and land systems markets.
Kevin helped lay the strongest of foundations for our growth strategy which we are on course
to deliver. We thank him for his tremendous contribution to the Group and wish him well for
the future.
GKN is very fortunate to have a very capable successor to Kevin in Nigel Stein. Nigel has
been with GKN since 1994 and, having served in a number of roles including Group Finance
Director and Chief Executive Automotive, he brings extensive skill and experience to the role.
In May 2011 we were pleased to welcome to the Board Tufan Erginbilgic who was appointed
a non-executive Director. Tufan is Chief Operating Officer for the Refining and Marketing
division of BP plc and his experience of the global energy industry brings a relevant and
distinctive perspective to the Board.
My term of office as Chairman of the Company comes to an end at the close of the Annual
General Meeting in May after an association with GKN of 16 years, eight of those as
Chairman. It has been a great privilege to be involved in the Group’s progression over that
period. In November last year we announced that Mike Turner will take over as Chairman
when I retire. Mike has been a non-executive Director since September 2009 and was
appointed Senior Independent Director in May 2010. His wealth of experience in the
engineering sector and his wide boardroom experience make Mike an excellent choice.
I wish him every success in the role.
Outlook
As I look back on my 16 years’ involvement with GKN, the Company that has developed over
this period is much more focused on its core engineering technology, underpinned by key
capabilities that are deployed consistently across its operations worldwide. GKN has
weathered many storms in its long history and, always mindful of the challenges of the
current uncertain macroeconomic conditions, I am confident that GKN will continue to
prosper for the benefit of all its stakeholders.
Roy Brown
Chairman
06
.
Chief Executive’s review
“
GKN made good progress in
2011, achieving above-market
growth and with further
development of our marketleading businesses including
two important acquisitions.”
Nigel Stein
Chief Executive
Building on a successful platform
I am delighted and honoured to have succeeded Sir Kevin Smith as Chief Executive. GKN is a great
company with an excellent team of committed people; I am confident that together we can build on
the platform he has developed and continue the Group’s success.
In 2011 we posted strong growth and delivered a good financial performance. All four of our divisions
reported at or near record profits. We made good progress on the strategic front with two important
acquisitions and we delivered continuous improvement in our operations – strong order wins, acrossthe-board quality improvements and continued development of new technology products.
However, that positive progress was overshadowed by the very tragic events in our Hoeganaes Gallatin
plant in Tennessee, USA, where, in two separate and unrelated accidents, five colleagues lost their lives.
These events have left a deep scar on the whole Group and a permanent and sad loss to the families of
five of our colleagues and friends. Following the explosion in May 2011 the Gallatin site was immediately
shut down and a comprehensive safety review of the entire facility undertaken. It was only brought back
into operation when we were absolutely sure that all activities were safe.
GKN has previously had a very strong safety record and the health and safety of our employees remains
our number one priority. We are applying the lessons learned from Gallatin across the Group to ensure
that similar accidents will not happen again. We report on this more fully on pages 41 to 43.
Our markets and divisional performance
The recovery in global automotive production continued throughout 2011, although natural disasters
in Japan and Thailand temporarily restricted output. Global automotive production increased 3% to
76.9 million units. GKN’s global footprint, together with our excellent exposure to the high-performing
European premium brands, enabled us to take full advantage of the market with underlying sales
in GKN Driveline and GKN Powder Metallurgy increasing by 10% and 13% and underlying profits
increasing by 12% and 36% respectively.
In GKN Aerospace, production increases on civil aircraft, such as the Airbus A320 and A330, and the
continuing ramp-up in the production schedules of new platforms, such as the A380 and Boeing 787,
more than balanced the decline in older military programmes such as the F-22 fighter aircraft and
C-17 transporter. Therefore, underlying sales in this year increased 4% with underlying profits up 4%.
Although defence budgets continue to be under pressure, some 70% of US military contracts are
long-term or multi-year agreements. In addition, GKN’s position in the civil market gives us confidence
of good growth ahead.
GKN Land Systems continued to benefit from the growth of global heavy construction, mining and
agricultural equipment markets and this led to a 21% underlying increase in sales and an 84%
increase in underlying profit.
Group performance
GKN made good progress in 2011, achieving above-market growth and with further development of our
market-leading businesses including new plant openings and two important acquisitions – Getrag
Driveline Products in GKN Driveline, and Stromag Holding in GKN Land Systems.
Overall Group sales were up 13% to £6.1 billion and trading profit increased 18% to £487 million
before a £19 million one-off charge relating to the temporary plant closure at Gallatin, USA.
Cash flow has again been strong and net debt ended the year at £538 million, £57 million lower
than 2010, before the £444 million cash cost of new acquisitions.
Building the future
Despite the recession and on-going macroeconomic uncertainties, we have continued to invest in
our businesses, winning new orders, launching new products and expanding our global footprint.
In GKN Driveline, the sideshaft expansion programme is on track, with the first phase of our latest
Chinese plant in Changchun having opened in June and the next phase already underway. When
completed, this will create a capacity for two million sideshafts. In India, a precision forging facility
in Oragadam near Chennai has opened and a new sideshaft plant in Pune is also under construction.
We continue to see strong growth in products for use in four-wheel and all-wheel drive (4WD/AWD)
vehicles. AWD is the fastest growing segment in automotive driveline and the acquisition of Getrag
Driveline Products, which provides strong operating positions in Europe and North America, makes
GKN Driveline the global leader in AWD systems and components.
GKN Driveline is also building another market-leading position in the emerging eDrive component
and systems market. We have hybrid axle, and electric and hybrid transmissions in production
launch for customers in Japan, Europe and North America, together with 20 on-going development
and technology programmes across a broad range of customers in Asia and Europe.
GKN Powder Metallurgy continues to benefit from increasing trends in industrial and automotive
markets to improve fuel efficiency and reduce emissions, which drive demand for components such
as variable valve timing in engines, high-performance gear sets in automatic transmissions and
differential gears.
GKN Aerospace has continued to secure extensions to existing programmes and to win additional
work packages on new ones, winning around US$3.5 billion of new business during the year.
Despite pressure on US defence budgets, major multi-year contracts were secured on a number
of US programmes both for US use and also for sales to other countries.
Good progress on new programmes was made with the first A350 wing spars being delivered to Airbus
in an extremely tight timescale. The Filton facility, UK, won new work packages with Bombardier and
Dassault and our US business expanded its workscope with Boeing on the 787 and 747-8.
In GKN Land Systems, the acquisition of Stromag broadened our industrial power management
applications into areas such as renewable energy and cranes, and provides GKN with excellent
technology and products that can be exploited in other markets.
All these activities provide a strong platform for growth that will enable us to deliver sustainable
shareholder value. This requires a balanced approach: a balance between growth, which GKN
is demonstrating, between margin on sales, where we have moved into our target range, and
between return on invested capital. In business, there is always tension between these three;
we will be looking to steer our businesses on balanced paths to maximise Group earnings per
share, dividends and long-term shareholder value.
In closing, I want to pay tribute to GKN’s employees for their commitment and their enterprise in
building an exceptional platform for GKN to continue to develop and grow. I would also like to add my
appreciation to that of the Chairman in thanking Kevin for his contribution over the past nine years as
Chief Executive.
Outlook
Overall, the Group’s broad exposure to global markets, strong customer positions and a healthy
order book means that it should make further progress in 2012, with the added benefit of a full
year contribution from the recent acquisitions.
Nigel Stein
Chief Executive
.
07
GKN plc
Annual Report
and Accounts 2011
Business model
How we
create
value
deSiGninG new PrOductS
and SOlutiOnS
Investment in technology,
along with an understanding
of market trends and customer
needs, results in innovative,
high-quality products that are
efficient, sustainable and cost
effective for our customers.
Market leadership comes from our ability to
innovate and provide technological solutions
for our customers, together with exceptional
levels of service, helping to build long-lasting
customer relationships.
And finally, at the heart of everything we do is
a drive for Sustainability that is characterised
by efficient and ethical operations from wellsupported, motivated and dynamic people.
>
>
Operational excellence is a result of a focus
on Lean manufacturing, the commitment of
our employees and the culture of continuous
improvement that is embedded in our people
around the world.
>
deliverinG hiGh-quality
PrOductS
As a result, we deliver highquality products to the
right place, at the right time,
strengthening customer
relationships and creating
strong financial returns.
>
Growth across the Group is derived from our
global footprint, constant pursuit of new business
opportunities and through expansion into new
technologies and markets.
OUR VALUES
Our business model is driven by,
and supports the achievement of,
our strategy to create long-term
value for our shareholders and
enables us to achieve our strategic
objectives (see page 10).
>
08
.
winninG new BuSineSS
>
>
09
GKN plc
Annual Report
and Accounts 2011
>
>
OU
T
EM STAN
PLO DI
YE NG
ES
IOR GY
R
PE OLO
U
S HN
C
TE
.
The combination of innovative
solutions, GKN’s manufacturing
footprint and engineering
capability, enables us to win
new business by offering
solutions for our customers.
>
Business review
>
SOurcinG raw MaterialS
Long-term shareholder
value is provided in the
form of steadily growing
earnings and dividends.
GLOBAL
FOOTPRINT
SharehOlder return
Sustainably-sourced raw
materials from long-standing
suppliers, together with
capital investment and
supplier management
expertise, are crucial
to the GKN supply chain.
>
>
S
OU
INU ENT
NT EM
CO PROV
IM
>
C
RE ORP
S
P
ON ORA
S
I B TE
I
L
I
TY
aPPlyinG lean
ManufacturinG
A safe working environment,
and continuous improvements
in our production processes,
with minimised use of resources
and environmental impact, are a
key focus in our facilities around
the world.
>
>
10
.
GKN strategy
STRATEGIC
objectives
GKN is committed to creating long-term shareholder value in
the form of steadily growing earnings and dividends through
the delivery of sustained growth in sales, profitability and
cash generation.
Market leadership
n
n
n
Achieve a leading market share in our chosen markets.
Develop superior technology and quality in all our businesses.
Deliver exceptional customer service.
Growth
n
n
n
Achieve above average market growth in our chosen markets.
Leverage and extend our global footprint to increase market share.
Accelerate growth through value-enhancing strategic acquisitions.
Operational excellence
n
n
n
Develop a world-class, efficient enterprise using Lean manufacturing techniques.
Be an employer of choice with a high-performance culture, motivated people and
outstanding leaders.
Achieve preferred status with our strategic customers and suppliers.
Sustainability
n
n
n
Develop products and processes to help reduce emissions.
Achieve a world-leading health and safety record.
Have a positive impact on the environment and communities in which we operate.
On the following pages
Find out more about the
progress made in each of
these areas in the case studies
on pages 14 to 21.
.
11
KPIs
Risk management
Key capabilities
(See pages 12 and 13 for more information.)
(See pages 36 and 37 for more information.)
(See pages 38 to 43 for more information.)
GKN monitors performance
against strategy through key
performance indicators (KPIs),
both financial and non-financial.
Progress against these KPIs is
reported regularly to the Board
and senior management. In
addition, certain KPIs are linked
to executive remuneration.
GKN has an extensive risk
management framework
designed to identify, assess
and mitigate significant
business risks which, if not
mitigated, could impact
delivery of the strategic plan.
Underpinning the delivery of
the GKN strategy are key Groupwide capabilities: superior
technology; recruiting, retaining
and developing outstanding
employees; leveraging a
global footprint; a culture
of continuous improvement;
and a commitment to
corporate responsibility.
Financial KPIs most explicitly
measure profitable growth.
However, operational excellence
and market leadership support
the delivery of customer
satisfaction, and consequently,
ensure GKN is well positioned to
provide growth for shareholders.
Non-financial KPIs indicate
progress in creating a sustainable
business model, in terms of
employee engagement and health
and safety performance, as well
as GKN’s environmental impact.
Risk management processes
operate throughout the
Group at plant, divisional and
corporate levels and regular
reports are made to the GKN
Board and its Committees.
These are at the heart of the
GKN business model, together
with our Values which bind
the Group together and
guide relationships with
all stakeholders.
Business review
GKN plc
Annual Report
and Accounts 2011
12
.
Key performance indicators
Financial KPIs
Sales growth(a)(b)
Earnings per share (EPS)(b)
£6,112m
2011
2010
2009
2007
2009
£4,454m
2008
22.6p
2011
2010
£5,429m
20.7p
5.7p
16.0p
2008
£4,617m
£4,100m
2007
23.5p
Method of calculation
Method of calculation
Management sales(c) 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.
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).
target
target
To achieve growth rates at both a 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.
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%.
2011 performance
Management EPS in 2011 was 22.6p compared with 20.7p in
2010, an increase of 9%.
2011 performance
Group management sales(c) grew by 13% on an absolute basis
and 10% on an underlying basis. The corresponding figures
for GKN Driveline were increases of 15% and 10% respectively,
for GKN Powder Metallurgy 11% and 13% respectively, for
GKN Aerospace 2% and 4% respectively, and for GKN Land
Systems 27% and 21% respectively.
Trading margins(a)
Free cash flow
2011
7.7%
2011
2010
7.6%
2010
2009
2008
2007
3.5%
£147m
£188m
2009
4.8%
2008
7.5%
£136m
£59m
2007
£68m
Method of calculation
Method of calculation
Management trading profit(c) as a percentage of management
sales(c).
Cash flows from operating activities (excluding special pension
contributions) after capital expenditure and including fixed asset
disposal proceeds, receipts of government capital grants and
refundable advances and non-controlling dividends.
target
To achieve medium-term trading margins of between 8% and
10% for GKN Driveline, 9% and 11% for GKN Powder Metallurgy,
11% and 13% for GKN Aerospace and 8% and 11% for GKN Land
Systems, giving an overall Group trading margin of between 8%
and 10%.
target
To generate positive free cash flow sufficient to cover dividend
payments and provide funding resources to support organic and
acquisitive earnings growth.
2011 performance
2011 performance
The Group trading margin in 2011 of 7.7% reflects good
performance in all four divisions.
Free cash flow amounted to £147 million, following a
continued focus on operating cash generation throughout
2011 offset by an increase in capital expenditure and the first
distribution of £23 million from the Pension partnership to
the UK Pension scheme.
Excluding the effect of acquisitions, the divisional trading
margins were: GKN Driveline – 7.1%, GKN Powder Metallurgy –
8.5%, GKN Aerospace – 11.2% and GKN Land Systems – 8.0%.
.
13
GKN plc
Annual Report
and Accounts 2011
2009
2010
17.0%
5.0p
2009 0p
6.2%
2008
6.0p
2011
18.3%
2011
2010
Dividend per share(b)
9.1%
2007
2008
3.0p
2007
15.1%
9.1p
Method of calculation
Method of calculation
Ratio of management trading profit(c) to average total net assets
including the appropriate share of joint ventures but excluding
current and deferred tax, cash, borrowings, post-employment
obligations and derivative financial instruments.
Amount declared as payable by way of dividend divided by the
number of ordinary shares in issue (excluding treasury shares).
target
To achieve ROIC at both a Group and divisional level which
exceeds the weighted 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).
2011 performance
Group ROIC increased to 18.3%* in 2011 as a result of significantly
improved profitability against a relatively stable asset base.
Divisional ROIC performance is as follows: GKN Driveline – 17.0%,
GKN Powder Metallurgy – 16.7%, GKN Aerospace – 22.7% and
GKN Land Systems – 29.5%.
target
A progressive dividend policy aligning dividends with the
long-term trend in management earnings whilst achieving a
sustainable management earnings-to-dividend cover ratio
of around 2.5 times.
2011 performance
2011 saw progress in the dividend payment, reflecting strong
earnings and cash performance. The dividend for the year, at
6.0p, is covered 3.8 times by management earnings.
* excluding 2011 acquisitions
(a)
(b)
(c)
2009 was previously restated following the decision to exit the Axles business of the former OffHighway segment.
As restated in 2007-2008 for the bonus issue inherent in the July 2009 rights issue.
Management sales and management trading profit are defined on page 24.
Non-financial KPIs
Health and safety
performance
Environmental
performance
Method of calculation
Method of calculation
Accident frequency rate (AFR) measured
as the number of lost time accidents
per 1,000 permanent employees and
accident severity rate (ASR) measured
as the number of days/shifts lost due to
accidents and occupational ill health
per 1,000 permanent employees.
Energy consumption and associated
CO2 emissions, waste generation,
waste recycled and water consumption
measured on a divisional basis per
unit of production and against sales
in GKN Aerospace.
target
Zero preventable accidents.
Improved year-on-year performance
across all KPIs.
2011 performance
2011 performance
AFR and ASR both showed a slight
reduction in 2011, to 2.4 (2010: 2.7) and 63
(2010: 68) respectively. However, there
were two accidents leading to five fatalities
in the Hoeganaes plant in Gallatin, USA.
More detail can be found on pages 41-43.
Performance in 2011 across all
environmental KPIs, with the exception
of recycled waste which saw a slight
reduction, has improved. See pages
40-41 for further information.
target
Employee turnover
Employee turnover is a measure of
our success in retaining our people
and achieving our goal of being an
employer of choice. Voluntary turnover
is calculated as a percentage of total
permanent employees.
In 2011, voluntary turnover, which
excludes compulsory redundancies or
terminations, was 3.97% (2010: 4.02%).
Business review
Return on average invested capital (ROIC)(a)
14
.
Strategy in action
Market
leadership
Creating a new global leader in all-wheel drive
GKN Driveline has established its position as global leader in the
engineering, manufacture and vehicle integration of all-wheel drive
(AWD) systems, through its acquisition of Getrag’s Driveline Products
business in September 2011.
With operations in the US and Europe, Getrag Driveline Products has
a product, manufacturing and customer footprint complementary to GKN’s
existing AWD product business, which is predominantly based in Asia.
Production of AWD vehicles is forecast to grow faster than overall global
vehicle production, reflecting increasing demand globally for crossover
vehicles and compact Sport Utility Vehicles (SUVs). Following the
acquisition, and against this positive market outlook, GKN Driveline
now offers its customers throughout the world a unique capability
in the development of entire AWD systems.
.
Leading the way in composite technology
15
GKN plc
Annual Report
and Accounts 2011
At its plant in Filton, UK, GKN Aerospace manufactures advanced carbon fibre
composite wing spars for the new Airbus A350 XWB, using state-of-the-art carbon
fibre fabrication techniques. During 2011, it delivered the first trailing edge assembly
to Airbus.
GKN is investing heavily in next generation automation technology and the Filton site
is a global centre of excellence for advanced wing assembly. This ensures its ability to
fulfil customers’ orders and help them reach weight and emissions targets through
the use of advanced carbon materials.
Business review
GKN Aerospace’s technology-led products use the latest developments in
materials processing and advanced metallic and composite manufacturing
capabilities. With advances in composites for the engine environment and its
world-leading expertise in wing structures, GKN Aerospace is at the forefront
of aerospace composite technology.
16
.
Strategy in action
Continued
Establishing strong positions in rapidly growing markets
GKN Driveline is increasingly well positioned to take advantage of the
rapid growth in the Chinese and Indian automotive markets.
During 2011, GKN opened its twelfth production facility in China, a new 52,000
square metre sideshaft plant in Changchun, northern China. Together with a phase
two expansion, due to be completed in 2012, this will provide a capacity of one
million vehicle sets a year from 2013. China is already the largest car market in the
world and, to keep pace with customer demand, GKN Driveline’s production
capacity in China is set to grow by more than 50% in the next four years.
Rapid growth also continues in India, where a new manufacturing facility for CVJ
Systems and Trans-axle solutions is under construction. When fully operational in
August 2012, it will have an annual production capacity of more than 600,000 CVJ
Systems. GKN Driveline’s business in India has grown at an annual rate of more than
15% over the past five years and India is expected to remain a high-growth market.
.
17
GKN plc
Annual Report
and Accounts 2011
Extending expertise to offer new products
While the acquisition of Getrag Driveline Products (see
page 14) helped secure global leadership in the fastgrowing all-wheel drive (AWD) segment, the Stromag
acquisition supports GKN Land Systems’ strategy to build a
global leader in industrial power management capabilities,
extending expertise in electro-mechanical components.
Stromag is a market-leading engineer in industrial power
management, with a strong technology base and a focus
on providing tailored solutions for its customers. GKN Land
Systems’ existing business combined with Stromag provide
a strong platform to accelerate growth in existing markets,
such as agriculture and construction, together with access
to a number of attractive new industrial segments including
renewable energy. Geographic expansion, initially in
North America, and then into Asia, will provide further
opportunities for the business.
Growth
Business review
Two acquisitions during 2011 provide platforms for growth
in both new and existing markets.
18
.
Strategy in action
Continued
Applying Lean processes in all we do
A culture of continuous improvement is at the heart of everything
we do at GKN. By constantly looking to improve our people,
processes and products, we deliver value to our customers.
A Lean Enterprise model is applied in GKN businesses and
production processes worldwide. This approach splits operations
into value streams, the end-to-end process of delivering a product
or service to the customer. The core aim of the Lean improvement
process is to minimise waste across an entire value stream.
GKN brings together many continuous improvement tools and
techniques to change ways of working, serving customer needs
more efficiently. The case study below is an example of the
improvements Lean techniques have made at one of GKN’s sites.
All GKN sites have a continuous improvement plan, aligned
to business objectives, which focuses employees consistently
on positive development. We aim to engage every employee
in every location across GKN, building a culture which constantly
challenges the norm and identifies opportunities to perform better.
Changing culture to improve efficiency
GKN Aerospace’s facility in Garden Grove, California, USA, manufactures
military transparencies, commercial and business jet cockpits and
passenger cabin windows. Using Lean techniques, it has undergone
a complete transformation.
Through the deployment of continuous improvement (CI) and enhanced
organisational leadership, levels of quality, productivity and efficiency have
all substantially increased.
To achieve this, business goals were aligned with the Lean Enterprise model
to establish a CI plan. In an on-going programme, management participate in
training and events at the site with Employee Involvement (EI) being a primary
focus. All employees are trained in the fundamentals of Lean and take part in
daily EI meetings based around sharing information and monitoring key
performance metrics.
The site has embraced the CI culture and has a very motivated workforce,
resulting in lower absenteeism and higher employee retention. Since 2008,
productivity has increased 29%, the business has gone from loss-making to
profit, inventory levels are down 25% and scrap levels have been reduced by
$2 million annually. Garden Grove has positioned itself as a centre of excellence
for transparency design, development and manufacture.
19
GKN plc
Annual Report
and Accounts 2011
Business review
Operational
excellence
.
20
.
Strategy in action
Continued
Operating low-emission production processes
GKN Powder Metallurgy operates the world’s most energy efficient
metal-forming process. Sintering helps conserve natural resources
by using recycled scrap metal to produce metal powder. This powder
is then pressured and heated to form sintered components in a
product’s final shape.
Powder Metallurgy creates significantly less waste than competing
processes such as casting, forging and machining. A low-emission
manufacturing process and the avoidance of wasteful secondary
operations further reduce its environmental impact.
Components made through a sintering process are also lighter and their
use in the automotive industry means that vehicles with powder metal parts
require less energy and produce less carbon dioxide, thereby increasing
efficiency and reducing demand on finite resources.
Driving electrification of transport
Electric power is increasingly seen as a solution to developing sustainable,
environmentally efficient transport. This focus is leading to progressive
electrification of the drivetrain in cars. A key part of GKN Driveline’s strategy
is to support vehicle manufacturers as they search for fuel savings and
reduced CO2 emissions through hybrid and electric drive vehicles.
GKN Driveline has formed a joint venture with EVO Electric Ltd, a UK pioneer in
advanced electric drive solutions, enabling GKN Driveline to offer advanced
axial flux motors and generators adding to its existing eDrive Systems portfolio.
The business is working on more than 20 electric/hybrid programmes with
automotive manufacturers.
The investment in EVO strategically enhanced GKN Driveline’s capability in
eDrive as it continues to innovate in the application of alternative power sources
and sustainable energy in systems that deliver outstanding performance.
.
21
Business review
GKN plc
Annual Report
and Accounts 2011
Sustainability
22
.
Our markets
automotive
In the automotive market, GKN Driveline sells to manufacturers of
passenger cars and light vehicles and around 75% of GKN Powder
Metallurgy sales are also to the automotive market.
Key market drivers
GKN’s four divisions operate
in the global automotive,
aerospace and land systems
markets (including agricultural,
construction and mining).
n
Macroeconomic trends, such as consumer prosperity
and confidence.
n
Fuel efficiency and emissions:
n
Demand for smaller vehicles.
n
Electric/hybrid applications.
n
Progressive electrification of the drivetrain.
n
Demand for personal mobility in emerging markets.
n
Lower weight and a focus on new materials.
n
Customer preference for quality and safety.
Trends
GKN aims to achieve a leading
position in these markets and
deliver above market growth.
n
Overall, global production volumes increased 3% in 2011 to 76.9 million
vehicles (2010: 74.4 million) whilst sales of cars and light vehicles
increased by 4%, to 75.1 million vehicles.(1)
n
All major geographic markets, except Japan due to the earthquake
and tsunami in March 2011, experienced production growth relative
to 2010, with the strongest growth in North America and India.
n
Demand for larger (premium) vehicles and light commercial
vehicles increased strongly. The demand for smaller vehicles,
particularly in Europe, was lower as the prior year’s scrappage and
tax incentive schemes had the effect of pulling forward demand.
n
Overall vehicle production in Europe benefited from a strong
improvement in exports while in North America the economic
recovery following the recession supported vehicle sales.
Outlook
n
External forecasts indicate that global production in 2012 will
increase by approximately 5% to 80.7 million vehicles.(1)
n
This projected growth is the result of a return to normal production
in Asia after the natural disasters in Japan and Thailand as supplies
of components improve, together with continued recovery from the
global recession.
n
Major markets that are expected to show the fastest growth include
Japan (18%), North America (10%), China (8%) and India (6%).(1)
n
Europe is forecast to contract by 8% in the wake of the current
economic climate.(1)
(1)
IHS Automotive.
lIGHT vEHIClE PRODuCTION
GlOBal lIGHT vEHIClE PRODuCTION
million units
million units
25
120
20
100
80
15
60
10
40
5
20
0
0
Europe
North
America
2010
Brazil, India
and China
00
02
04
06
CAGR
Total
2011
Source: IHS Automotive
Source: IHS Automotive
08
10
12
14
16
2000-2011 actual
2012-2016 forecast
23
GKN plc
Annual Report
and Accounts 2011
aerospace
land Systems
GKN Aerospace is a global first tier supplier to manufacturers of aircraft,
aircraft engines and equipment. The division has a balanced position
in civil (58%) and defence (42%) aerospace markets.
GKN Land Systems serves the agricultural, construction, mining, and
industrial machinery markets, offering integrated powertrain solutions,
wheels, structures and aftermarket distribution and services.
Key market drivers
Key market drivers
n
Backlog of aircraft orders for key customers.
n
Population growth and consumer prosperity.
n
Introduction and production rate of new aerospace programmes.
n
n
Levels of passenger air traffic.
Urbanisation leading to infrastructure development and increased
mass transit.
n
US defence budget.
n
Raw material demand.
n
Crude oil/jet fuel prices.
n
Regulatory drive to cut emissions and increase energy efficiency.
n
Drive to improve aircraft and engine efficiency.
n
Need for significant increased operational efficiency and reliability.
n
Environmental impact reduction programmes.
Trends
Trends
n
Recovery in European and US agricultural sectors continues.
Estimated average growth of 15% in the EU agricultural machinery
market in 2011, with a market volume of €24 billion(1); and prospects
for 2012 continue to be positive.
n
The overall aerospace market in 2011 was positive, driven
by recovery of civil aircraft production and a generally stable
defence sector.
n
n
A recovery in passenger and cargo volumes led both Airbus and
Boeing to announce increases in production levels of both single
aisle and wide bodied aircraft.
n
Infrastructure investment driving growth in the construction sector.
n
Continued increasing global demand for energy.
n
In the civil aerospace market, Airbus and Boeing reported that they
delivered a record 1,011 aircraft in 2011 and took on new orders
totalling 2,529 aircraft. Both companies continue to benefit from
their extensive order backlog that has grown to over 8,200 aircraft.
n
US defence spending showed slight growth in 2011 with the
President’s 2012 to 2016 Budget Request expected to remain
relatively flat for 2012-2013.
Outlook
n
The agricultural output required will double by 2050(2) to feed the
world population which is expected by then to reach nine billion,
from seven billion today. The need for increased farming efficiency
will drive ever greater mechanisation.
n
By 2050, more than 70% of the world’s population is expected to
live in cities(2) requiring massive urbanisation; the migration from
rural areas creates need for roads, power grids, water containment
and distribution systems.
n
Significant growth in agricultural and construction sectors is
expected in Brazil, Russia, India and China.
n
Growth in global construction is expected to outpace world GDP
over the next ten years. Growth in Asia and the cyclical rebound in
the US will fuel global construction growth from $7.2 trillion today to
$12 trillion by 2020(3).
(1)
VDMA Market Perspectives 2012.
FAO, How to Feed the World 2050 Deere & Company, January 2012.
Oxford Economics, Global Construction 2012.
Outlook
n
n
Passenger air traffic rose around 6% in 2011 and is projected to
continue to grow at a similar pace throughout 2012. Longer term
worldwide passenger market demand is projected to grow at around
5% with worldwide cargo traffic market growth at around 6%.
Boeing and Airbus forecast that between 28,000 and 32,000 new
single-aisle and wide-bodied aircraft will be required globally over
the next 20 years, with around 40% to support fleet replacement
and approximately 60% to support market growth.
(2)
(3)
CIvIl aIRCRaFT MaRKET 2011-2017
MIlITaRy aIRCRaFT MaRKET 2011-2017
by aircraft type US$ billion
by aircraft type US$ billion
125
50
WORlD POPulaTION
GlOBal CONSTRuCTION, FaRM
MaCHINERy aND HEavy TRuCKS
billion
US$ billion
250
7
45
100
40
200
6
35
75
30
5
150
25
50
20
25
10
4
100
3
15
50
2
5
0
0
2011 2012 2013 2014 2015 2016
Regional aircraft
Business jets
Commercial jetliners
2017
2011 actual
2012-2017 forecast
Source: Teal
1
0
2011 2012 2013 2014 2015 2016 2017
Trainers/light attack
Military transports
Rotorcraft
Fighters
2011 actual
2012-2017 forecast
Source: Teal
2010
2011
2010 actual
2011-2015 estimated
Source: Datamonitor
2012
2013
2014
2015
2010 2015 2020 2025 2030 2035 2040 2045 2050
Urban
Rural
Source: UN World Urbanisation Prospects: The 2009 Revision
Business review
.
24
.
Review of performance
In this section
Group performance
page
Divisional performance
page
Other financial information
page
25
25
32
A strong financial performance with at or near
record profits in all four divisions
Measurement and reporting of performance
In this review, financial information, Group and divisional, 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 underlying 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 assets of continuing subsidiaries and
joint ventures deducting 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
Euro
US dollar
Year End
2011
2010
2011
2010
1.15
1.60
1.16
1.55
1.20
1.55
1.17
1.57
The approximate impact on 2011 trading profit of subsidiaries and joint ventures of a 1%
movement in the average rate would be euro – £1 million, US dollar – £2 million.
.
25
GKN plc
Annual Report
and Accounts 2011
Group performance
Sales (£m)
Trading profit* (£m)
Trading margin*
ROIC
2010
acqns
Total
155
3
6,112
487
8.0%
5,957
484
8.1%
18.3%
5,429
411
7.6%
17.0%
Change
Headline
£
%
Underlying
£
683
76
13
18
563
77
%
10
19
(*) excludes the net £19 million impact from Gallatin
MaNaGEMENT SalES
£885m
GKN Land Systems
£2,795m
GKN Driveline
£1,481m
GKN Aerospace
£845m
GKN Powder Metallurgy
£106m
Other businesses
MaNaGEMENT TRaDING PROFIT
Management sales increased 13% in the year ended 31 December 2011 to £6,112 million
(2010: £5,429 million). The effect of currency translation was £15 million adverse and there
was a £164 million benefit from acquisitions which was partly offset by the £29 million
reduction due to disposals. Excluding these items, the underlying increase was £563 million
(10%). Within this figure, GKN Driveline was £252 million higher, GKN Powder Metallurgy
increased by £97 million, GKN Aerospace was £52 million higher, while GKN Land Systems
was up £148 million.
Management trading profit increased £76 million to £487 million (2010: £411 million),
excluding the £19 million net impact from the temporary closure of Hoeganaes’ Gallatin
facility in the US (£34 million cost, as previously announced, which was partially offset
by £15 million of insurance recovery). The effect of currency translational was £3 million
adverse and there was a £2 million net benefit from acquisitions. Excluding these items,
the underlying increase was £77 million. Within this figure, GKN Driveline was £21 million
higher, GKN Powder Metallurgy increased by £19 million, GKN Aerospace was up by
£6 million and GKN Land Systems increased by £31 million. Excluding the Gallatin impact,
Group trading margin increased to 8.0% (2010: 7.6%), against a target range of 8-10%.
Return on average invested capital (ROIC) increased to 18.3% excluding 2011 acquisitions,
compared with the Group target of 20% or better.
£67m
GKN Land Systems
divisional performance
£195m
GKN Driveline
£166m
GKN Aerospace
£3m
Other businesses
automotive
As shown in the table below, all major markets, except Japan due to the earthquake and
tsunami in March 2011, experienced increased production relative to 2010. The strongest
rates of production growth were in North America and India.
Car and light vehicle production
(millions of units)
£72m
GKN Powder Metallurgy
Total (including corporate costs and impact
of Gallatin plant closure) £468m
2011
2010
Growth
(%)
Europe
North America
Brazil
Japan
China
India
Others
20.3
13.1
3.2
7.9
17.2
3.6
11.6
19.1
11.9
3.2
9.1
16.8
3.3
11.0
6
10
0
-13
2
9
5
Total – global
76.9
74.4
3
Source: IHS Automotive
Further information on trends in, and the outlook for, major automotive markets is given on
page 22.
Business review
2011
GKN
pre acqns
26
.
Review of performance
Continued
GKN Driveline
GKN DRIvElINE SalES By REGION OF ORIGIN
£84m
£128m
India
Other
£243m
China
£240m
South
America
£1,092m
Europe
GKN Driveline is the world’s leading supplier of automotive driveline systems and solutions.
As a global business serving the leading vehicle manufacturers, it develops, builds and
supplies an extensive range of automotive driveline products and systems – for use in the
smallest ultra low-cost car to the most sophisticated premium vehicle demanding the most
complex driving dynamics.
The key financial results for the year are as follows:
2011
2010
Getrag
GKN
Driveline Driveline
£435m
Japan
Sales (£m)
Trading profit* (£m)
Trading margin
ROIC
£573m
North America
2,678
191
7.1%
17.0%
117
4
Total
2,795
195
7.0%
Change
Headline
£
2,433
169
6.9%
16.0%
362
26
%
15
15
Underlying
£
252
21
%
10
12
(*) Getrag Driveline Products trading profit includes acquisition-related charges of £3 million.
GKN DRIvElINE SalES By PRODuCT GROuP
£11m
eDrive
£144m Systems
Transaxle Systems
GKN Driveline’s sales increased 15% to £2,795 million (2010: £2,433 million). The favourable
impact of currency translation was £20 million, the acquisition of Getrag Driveline Products
on 30 September 2011 added £117 million, which was partly offset by £27 million lower sales
resulting from the sale of GKN Driveline’s 49% share of the Japanese driveshaft sales and
distribution joint venture GKN JTEKT Ltd (GTK) in March 2011. Underlying sales increased by
£252 million (10%), including Constant Velocity Jointed (CVJ) Systems which grew 7% and
non-CVJ sales which increased by 22%, compared with global vehicle production which
increased 3%.
£60m
Other
£639m
AWD
Systems
£1,941m
CVJ
Systems
This market outperformance was broad based across North America, Europe, China and
Japan, reflecting recent market share gains, the Group’s stronger position in premium
vehicles, demand for which continued to be strong, and GKN Driveline’s broadening
product mix, particularly with AWD systems and trans-axle solutions. In Japan, the market
outperformance reflected GKN Driveline’s exposure to companies less affected by the
earthquake and the priority given to reinstating production capability for exported vehicles.
In North America, lower production from Japanese companies experiencing component
shortages was more than offset by GKN Driveline’s market share gains through a broader
product offering, new programme wins and stronger sales to domestic producers.
Trading profit increased to £195 million (2010: £169 million). The impact of translational
currency was £1 million positive, and acquisitions (after costs and inventory fair value
adjustment of £3 million) added £4 million with underlying trading profit up by £21 million,
including around £15 million negative impact from the Japanese earthquake and tsunami,
compounded by the floods in Thailand. These affected production in Japan and overseas as
component supply chains were disrupted. Outside Japan, it was most pronounced for GKN
Driveline in North America where many of the Japanese car manufacturers cut production
rates significantly in the second quarter. Engineering costs increased to support new
programmes and future growth, and some temporary costs were incurred to raise capacity
in some regions to keep pace with significant increases in demand. GKN Driveline’s trading
margin was 7.1% (2010: 6.9%) excluding Getrag Driveline Products. GKN Driveline’s mediumterm target margin range remains at 8-10%.
Capital expenditure on tangible fixed assets was £113 million (2010: £73 million), 1.0 times
(2010: 0.7 times) depreciation.
Return on average invested capital, excluding the Getrag Driveline Products acquisition,
was 17.0% (2010: 16.0%), reflecting the increase in profitability.
During the year, GKN Driveline opened a new CVJ systems plant in Changchun, northern
China, a precision forge at Oragadam, near Chennai, southern India, expanded production
at WuHan, China and construction began on a new CVJ systems facility in Pune, India.
.
27
Overall, GKN Driveline won £500 million annualised new and replacement business with
the CVJ Systems business winning a healthy 65% of the contracts for which it bid. GKN
Driveline AWD Systems launched a power transfer unit (PTU) in China, saw good growth in
propshaft production in Europe and benefited from strong sales in North America, including
the Jeep Grand Cherokee. It also won significant new business with unique all-wheel drive
disconnect technology with vehicle manufacturers in the US, Europe and China.
In June, GKN Driveline invested £4 million in EVO Electric Ltd, a UK pioneer in axial flux
motors, and formed a joint venture, GKN EVO eDrive Systems Limited, to manufacture and
sell axial flux electric motors and drive systems for use in hybrid and all-electric vehicles.
GKN Driveline is already a pioneer in the development and supply of eTransmissions and
eAxles for hybrid and electric vehicles. This venture will enable GKN Driveline to offer
advanced axial flux motors and generators for niche applications, adding to its existing
eDrive systems portfolio and enhancing its capability in full driveline systems. Recent new
business wins in eDrive include:
n
major launch of eAxle for PSA Hybrid 4;
n
new European customer for 1-speed eTransmissions and demonstration vehicle contract
for an Asian vehicle manufacturer; and
n
development orders for 2-speed transmissions from European and North American
vehicle manufacturers.
On 30 September 2011, GKN Driveline completed the acquisition of Getrag Driveline
Products, a tier one supplier of geared driveline products, namely power transfer units and
rear drive units for AWD vehicles, along with final drive units for high-performance rear wheel
drive vehicles.
Getrag Driveline Products, with operations in the United States and Europe, has been
integrated into GKN Driveline. Getrag Driveline Products has a product, manufacturing and
customer footprint that is complementary to GKN Driveline’s own geared product business,
which is predominantly based in Asia. Combined, the businesses are now the leading global
supplier of AWD driveline products with an excellent customer base and product portfolio.
AWD and trans-axle solutions now represent 28% of GKN Driveline sales with significant
further growth opportunities.
As part of the Getrag transaction, GKN Driveline also acquired an exclusive licence,
principally for Europe and the Americas, to Getrag’s electric drivetrain technology for use
in electric and certain hybrid vehicles, making GKN a leading player in eDrive solutions and
very well placed for growth in the medium and long term.
Business review
GKN plc
Annual Report
and Accounts 2011
28
.
Review of performance
Continued
GKN Powder Metallurgy
GKN POWDER METalluRGy SalES*
£60m
GKN Sinter Metals
– Rest of World
£141m
Hoeganaes
GKN Powder Metallurgy is the world’s largest manufacturer of sintered components.
It comprises GKN Sinter Metals and Hoeganaes. Hoeganaes produces the metal powder
that GKN Sinter Metals uses to manufacture precision automotive components for engines,
transmissions and body and chassis applications. It also produces a range of components
for industrial and consumer applications.
Information on trends in, and the outlook for, major automotive markets is given on page 22.
The key financial results for the year are as follows:
£324m
GKN
Sinter Metals
– Europe
Change
£320m
GKN Sinter Metals
– Americas
Sales (£m)
Trading profit (£m)
Trading margin
ROIC
2011
2010
845
72
8.5%
16.7%
759
54
7.1%
13.2%
Headline
£
86
18
%
Underlying
£
11
33
97
19
%
13
36
*GKN Sinter Metals sales by region of origin
GKN POWDER METalluRGy SalES By PRODuCT TyPE
£141m
Hoeganaes
– metal powder
GKN Powder Metallurgy sales were £845 million (2010: £759 million), an increase of 11%.
The negative impact of currency translation was £11 million. Sales increased in all regions
as automotive markets recovered, recent new business wins entered production and market
share gains were made. Underlying sales for GKN Sinter Metals increased by 17% in North
America and 11% in Europe. Strong growth was also achieved in India, Brazil and China.
Overall, Hoeganaes’ total tons shipped were 1% lower than in 2010 due to the temporary
closure of the Gallatin plant. Underlying sales were 7% higher, principally due to an increase
in the commodity metals surcharge passed on to customers as raw material prices increased.
£85m
Sintered
components
– industrial
£619m
Sintered
components
– automotive
Overall, GKN Powder Metallurgy reported a trading profit of £72 million (2010: £54 million),
excluding £19 million of net costs associated with the temporary plant closure at the
Gallatin, USA, facility which are reported outside the divisional trading performance.
The divisional trading margin was 8.5% (2010: 7.1%). GKN Powder Metallurgy’s mediumterm target margin range has now been increased to 9-11% (from 8-10%).
Capital expenditure on tangible fixed assets was £44 million (2010: £27 million). The ratio
of capital expenditure to depreciation was 1.4 times (2010: 0.9 times). Return on average
invested capital was 16.7% (2010: 13.2%), reflecting the improvement in profitability.
Increasing trends in industrial and automotive markets to improve fuel efficiency and reduce
emissions, such as variable valve timing in engines, high performance gear sets in automatic
transmissions and differential gears, are continuing to drive the demand for products
made by powder metallurgy. During the year, more than £100 million (annualised sales)
of new programme business was awarded and 48 technical days were hosted for existing
and new customers, in order to promote powder metallurgy products and applications.
New contracts include:
n
one-way clutch system for a Mazda transmission in Asia with unique geometries which
are only possible using powder metallurgy technology; and
n
variable valve timing stator – one piece combination sprocket for VW engine.
.
29
GKN plc
Annual Report
and Accounts 2011
GKN aerospace
GKN aEROSPaCE SalES By PRODuCT
£411m
Engine components
and sub-systems
£119m
Special products
£951m
Aerostructures
The overall aerospace market remained positive in 2011, driven by a recovering civil aircraft
market and a generally stable defence sector. The division has increased its position in civil
aerospace to 58% of sales, with defence representing 42%.
2011 saw the introduction into service of the Boeing 787, on which GKN Aerospace has
sales of approximately $2.6 million per aircraft, and the announcement of the 737 MAX
and A320neo single aisle aircraft upgrades. Airbus is ramping up production of the A380
(GKN sales of $8.0 million per aircraft), but announced that the first flight of the A350 would
slip to 2013 (GKN sales of $2.5 million per aircraft). Airbus and Boeing estimate that between
28,000 and 32,000 new single aisle and wide bodied aircraft will be delivered by 2030.
GKN aEROSPaCE SalES By MaRKET
42%
Military
58%
Civil
Worldwide defence spending remains under pressure, largely driven by cutbacks throughout
Europe and likely reductions in the US defence budget. It is expected that the US 2013
defence budget submittal will be in line with 2012 spending levels. GKN’s position on key
multi-year programmes such as the UH-60 Blackhawk Helicopter, F/A-18 Super Hornet,
F-15 Eagle and C-130J Super Hercules provide a strong production base for the business
despite projected defence budget pressures.
Further information on trends in, and the outlook for, aerospace markets is given on page 23.
The key financial results for the year are as follows:
Change
2011
Sales (£m)
Trading profit (£m)
Trading margin
ROIC
2010
1,481
1,451
166
162
11.2% 11.2%
22.7% 23.3%
Headline
£
30
4
%
2
2
Underlying
£
%
52
6
4
4
GKN Aerospace sales of £1,481 million were £30 million higher than the prior year (2010:
£1,451 million). The impact from currency on translation of sales was £24 million negative,
from prior year acquisitions was £4 million positive, representing sales from GKN Aerospace
Services Structures Corp. of which the Group gained management control in April 2010, and
from disposals was £2 million negative, representing sales from the Engineering Services
division which was sold in November 2011. The underlying increase in sales of £52 million
represented a 4% increase. This increase reflects lower F-22 sales as the programme
continued its run down and lower production rates on the C-17 Globemaster, being more
than offset by higher civil sales, particularly for the A320, A330 and A380 and also the
early stages of the Boeing 787.
Trading profit increased by £4 million to £166 million (2010: £162 million). The impact
from currency on translation of results was £3 million adverse and the net impact from
acquisitions and divestments was £1 million positive. The trading margin was 11.2% (2010:
11.2%). GKN Aerospace’s medium term target margin range has now been increased to
11-13% (from 10-12%).
Business review
GKN Aerospace is a world leading global first tier supplier of airframe and engine structures,
components, assemblies and transparencies to a wide range of aircraft and engine prime
contractors and other first tier suppliers. It operates in three main product areas:
aerostructures, engine components/sub-systems and special products.
30
.
Review of performance
Continued
Capital expenditure on tangible assets in 2011 amounted to £59 million (2010: £51 million)
which represents 1.7 times depreciation (2010: 1.3 times), or 0.9 times depreciation
excluding the Airbus A350 programme. Expenditure on intangible assets, mainly initial
non-recurring programme costs, was £35 million (2010: £26 million). £57 million of the
capital expenditure and non-recurring programme costs, including £6 million of capitalised
borrowing costs, relate to the A350 wing assembly and trailing edge programme. A total
of £128 million had been invested on this programme by 31 December 2011, excluding
£11 million of capitalised borrowing costs. Spending, which has now reached its peak,
is likely to reduce to around £33 million in 2012.
Customer advances in the GKN Aerospace businesses, which are shown in trade and other
payables in the balance sheet, amounted to £63 million (2010: £70 million).
Return on average invested capital was 22.7% (2010: 23.3%) reflecting the increased
investment in new programmes, particularly the A350.
Important milestones include:
n
GKN Aerospace, with industry partners Airbus, AgustaWestland, Rolls-Royce, Umeco
and Vestas celebrated the opening of the UK National Composites Centre near Filton,
UK. GKN Aerospace has been driving forward the use of composites in aviation and
is expanding the application of new automated manufacturing techniques that will
enable faster and more consistent manufacture of complex composite structures. These
techniques will be critical if the industry is to meet rising demand for new aircraft and for
aircraft that offer improved performance, lower emissions and reduced maintenance.
n
GKN Aerospace signed a memorandum of understanding with Commercial Aerospace
of China (COMAC) to form a joint venture for composite structures manufacture of the
horizontal tailplane for the C919 aircraft, positioning GKN Aerospace in the infancy of
the civil aircraft industry in China.
n
In November, it was announced that a new 14,000 square metre aerospace facility
in Orangeburg, South Carolina, USA would be opened in 2012. The facility will house
assembly operations for the recently-awarded contract for the state-of-the-art allcomposite fuselage for the HondaJet (GKN sales of $0.5 million per aircraft).
n
Also in November, GKN Aerospace delivered the first section of the A350 XWB fixed
trailing edge (FTE) assembly comprising the composite port side wing spar with
integrated trailing edge ribs, to Airbus UK. The A350 XWB programme is the latest
step in a journey that has seen GKN Aerospace become a major supplier of critical
wing assemblies for both the A380 and for the A400M.
n
GKN Aerospace was awarded around $3.5 billion of contract extensions, new programme
wins and work scope expansions during the year, including:
n
n
new multi-year contracts for: UH-60 Blackhawk (five years); F/A-18 Super Hornet
(four years), F-15 Eagle (seven years); C-130J Super Hercules (five years);
C-17 Transporter (three years);
n
around $200 million of new business won at Filton, including Bombardier C-Series
ailerons and life of programme contract for Dassault mid-sized business jet wing
structure and moveable surfaces;
n
new $600 million long-term agreement with Pratt & Whitney to supply the forward
fan case for the Joint Strike Fighter F135 engine; and
n
HondaJet composite fuselage assembly.
In January 2012, the Composite Technology and Applications Limited joint venture with
Rolls-Royce opened a pre-production facility on the Isle of Wight, UK for the production
of composite fan blades for aircraft engines.
.
31
GKN plc
Annual Report
and Accounts 2011
GKN land Systems
GKN laND SySTEMS SalES By MaRKET
GKN Land Systems is a leading supplier of technology differentiated power management
solutions and services. It designs, manufactures and supplies products and services for the
agricultural, construction, mining and industrial machinery markets. In addition, it provides
global aftermarket distribution and through-life support.
£110m
Construction
& Mining
£206m
Industrial
Business review
Information on trends in, and the outlook for, land systems markets is given on page 23.
£338m
Agriculture
Sales in GKN Land Systems were strongly ahead of the prior year and reflected a solid
performance against a continued broad market recovery. All regions and sectors enjoyed
good growth, especially agriculture and heavy construction equipment in Europe and
North America.
The key financial results for the year are as follows:
2011
£231m
Automotive
GKN land
Systems
GKN laND SySTEMS SalES By BuSINESS
£313m
Power
Management
Devices
£242m
Aftermarkets
& Services
Sales (£m)
Trading profit* (£m)
Trading margin
ROIC
847
68
8.0%
29.5%
2010
Stromag
38
(1)
Total
885
67
7.6%
Change
Headline
£
699
37
5.3%
15.8%
186
30
%
27
81
Underlying
£
148
31
%
21
84
(*) Stromag trading profit includes acquisition related charges of £5 million.
Against this background, sales in the period were £885 million, 27% higher than the prior year
(2010: £699 million). There was no net impact from currency translation and excluding the £38
million of sales in Stromag, the acquisition that completed in September, the underlying increase
in sales was £148 million (21%) with all product areas and regions seeing an improvement.
£330m
Wheels
& Structures
GKN Land Systems reported trading profit of £67 million (2010: £37 million). Underlying trading
profit increased by £31 million, with Stromag reducing profit by £1 million, due to acquisition costs
and inventory fair value adjustment of £5 million. The trading margin excluding Stromag was 8.0%
compared with 5.3% in 2010, reflecting the strong increase in profitability of the division. GKN
Land System’s medium-term target margin range has now been increased to 8-11% (from 7-10%).
Capital expenditure on tangible fixed assets was £18 million (2010: £7 million), 1.3 times (2010:
0.5 times) depreciation.
Return on average invested capital, excluding the Stromag acquisition, increased to 29.5% (2010:
15.8%), reflecting the strong increase in profitability driven by operational process improvements.
Good progress was made in winning new business. Specific areas of success included:
n
double universal joints for Dana and CNH;
n
custom clutch solution for John Deere; and
n
first application of auxiliary pump and high-speed shafts in oil exploration.
In addition to achieving strong organic growth and new business wins, on 5 September 2011,
GKN Land Systems completed the £170 million acquisition of Stromag.
Stromag is a market leading engineer of industrial power management components. Its core
products include hydraulic clutches, electro-magnetic brakes and flexible couplings serving endmarkets including renewable energy, agricultural equipment, construction and mining machinery
and the metal processing industry. The acquisition is an important step in the implementation
of the GKN Land Systems’ strategy to build a global leader in industrial power management,
extending its capability in electro-mechanical power management components and systems.
In combination with the existing business, it provides a strong platform to accelerate growth in
existing markets, together with access to a number of new customers and industrial segments,
including renewable energy.
Other businesses
GKN’s other businesses comprise Cylinder Liners, which is mainly a 59% owned venture in
China, manufacturing engine liners for the truck market in the US, Europe and China and a
50% share in Emitec, which manufactures metallic substrates for catalytic converters in
Germany, the US, China and India.
32
.
Review of performance
Continued
Sales in the year were £106 million (2010: £87 million). Trading profit was £3 million (2010: £3 million)
reflecting an improvement in the underlying business offset by the heavy investment by NoNOx, a
division of Emitec, into selective catalytic reduction systems, particularly for the truck market.
hoeganaes’ Gallatin plant, uSa
As reported with the first half results in August 2011, the Hoeganaes Gallatin plant in the US was
temporarily closed on 27 May 2011, following an explosion which resulted in fatalities. Production was
gradually brought back during the third quarter. In total, £34 million of incremental shipping, purchasing
and plant closure and remedial works costs were recorded. £15 million has subsequently been
recovered from external insurance claims. Further details are given in note 2 to the financial statements.
corporate costs
Corporate costs, which comprise the costs of stewardship of the Group and operating charges and
credits associated with the Group’s legacy businesses, were £16 million (2010: £14 million).
Other financial information
Restructuring and impairment charges
There were no Group restructuring and impairment charges during the year (2010: £39 million).
Change in value of derivative and other financial instruments
The Group enters into foreign exchange contracts to hedge much of its transactional exposure.
At 31 December 2011, the net fair value of such instruments was a liability of £84 million (2010:
£54 million liability). Where hedge accounting has not been applied, the change in fair value
resulted in a charge of £29 million (2010: £3 million charge). There was a £3 million charge arising
from the change in the fair value of embedded derivatives in the year (2010: £3 million credit) and
a net gain of £2 million attributable to the currency impact on Group funding balances (2010:
£12 million net gain). There was a £1 million loss on the change in the fair value of GKN Powder
Metallurgy commodity contracts (2010: nil).
amortisation of non-operating intangible assets arising on business combinations
The charge for the amortisation of non-operating intangible assets (for example, customer contracts,
order backlogs and intellectual property rights) arising on business combinations was £22 million
(2010: £19 million). The increase relates to the impact of the acquisitions of Getrag Driveline
Products and Stromag.
Gains and losses on changes in Group structure
During the year the Group sold its 49% share in a joint venture company, GKN JTEKT Limited
realising a profit of £4 million and its Aerospace Engineering Services business realising a further
profit of £4 million. In 2010, the loss of £4 million principally related to the sale and closure of the
Axles business.
Post-tax earnings of joint ventures
In management figures, the sales and trading profits of joint ventures are included pro-rata in the
individual divisions to which they relate, although shown separately post-tax in the accounts. The
Group’s share of post-tax earnings of joint ventures in the year was £38 million (2010: £35 million).
Post-tax earnings on a management basis were £40 million (2010: £36 million), with trading profit
of £49 million (2010: £44 million). The Group’s share of the tax charge amounted to £8 million
(2010: £7 million) with an interest charge of £1 million (2010: £1 million). Underlying trading profit
increased £7 million due to strong performance in our Chinese joint ventures, which increased by
£6 million, and improvements in Emitec, which increased by £2 million.
Net financing costs
Net financing costs totalled £61 million (2010: £75 million) and include the non-cash charge on
post-employment benefits of £17 million (2010: £31 million) and unwind of discounts of £2 million
(2010: £4 million). Interest payable was £47 million (2010: £46 million), whilst interest receivable
was £5 million (2010: £6 million) resulting in net interest payable of £42 million (2010: £40 million).
Capitalised interest costs attributable to the Group’s A350 investment were £6 million (2010: £4 million)
and interest charged on UK Government refundable advances was £2 million (2010: £2 million).
The non-cash charge on post-employment benefits arises as the expected return on scheme assets
of £153 million (2010: £145 million) was more than offset by interest on post-employment obligations
of £170 million (2010: £176 million). Details of the assumptions used in calculating post-employment
costs and income are provided in note 14 to the financial statements.
.
33
GKN plc
Annual Report
and Accounts 2011
MaNaGEMENT PROFIT BEFORE Tax
OF CONTINuING OPERaTIONS
£m
Profit before tax
The management profit before tax was £417 million (2010: £363 million), including the net
£19 million impact from the temporary closure of the Hoeganaes Gallatin plant, described
on page 32. The profit before tax on a statutory basis was £351 million (2010: £345 million).
500
417
400
363
Taxation
The book tax rate on management profits of subsidiaries was 16% (2010: 11%), arising as a
£60 million tax charge on management profits of subsidiaries of £377 million.
255
200
The Group’s theoretical weighted average tax rate, which assumes that book profits/losses are
taxed at the statutory tax rates in the countries in which they arise, is 31% (2010: 32%). The book
tax rate is significantly lower, largely because of the recognition of substantial deferred tax
assets (mainly in the US, UK and Japan) due to increased confidence in the Group’s ability both
to access and realise future taxable profits that absorb brought forward tax deductions, partially
offset by an increase in the Group’s provision for uncertain tax positions.
170
87
100
0
2007
2008
2009
2010
2011
MaNaGEMENT EaRNINGS PER SHaRE
pence
25.0
23.5
One of GKN’s core strategic tax objectives is to access brought forward tax deductions in order to
sustain a ‘cash tax’ charge on management profits at or below 20%. ‘Cash tax’ provides a proxy
for the cash cost of taxation of management profits. The cash tax charge was 13% (2010: 13%).
In the near term, the ‘cash tax’ rate is expected to continue at or below 20% due to further
utilisation of brought forward tax deductions.
The tax rate on statutory profits of subsidiaries was 14% (2010: 6%) arising as a £45 million tax
charge on statutory profits of £313 million.
22.6
20.7
Non-controlling interests
The profit attributable to non-controlling interests was £27 million (2010: £20 million) including
a £21 million (2010: £15 million) impact from the pension partnership arrangement (see note 14
for further details).
20.0
16
15.0
Earnings per share
Management earnings per share was 22.6 pence (2010: 20.7 pence). On a statutory basis,
earnings per share was 18.0 pence (2010: 19.6 pence). Average shares outstanding in 2011
were 1,553.1 million (see note 3 for further details).
10.0
5.7
5.0
Dividend
0.0
2007
2008
2009
2010
2011
As restated in 2007-2008 for the bonus
issue inherent in the July 2009 rights issue.
Cash flow
OPERaTING CaSH FlOW
£m
245
250
227
198
200
150
128
50
0
2008
Operating cash flow, which is defined as cash generated from operations of £500 million
(2010: £420 million) adjusted for capital expenditure (net of proceeds from capital grants) of
£281 million (2010: £190 million), proceeds from the disposal/realisation of fixed assets of
£8 million (2010: £5 million) and UK Government refundable advances of nil (2010: £10 million),
was an inflow of £227 million (2010: £245 million).
Within operating cash flow there was an outflow of working capital and provisions of £89 million
(2010: £59 million outflow). Average working capital as a percentage of sales increased from
6.8% in 2010 to 7.5% in 2011.
131
100
2007
In view of the improving trading performance and taking into account the Group’s future
prospects, the Board has decided to recommend a final dividend of 4.0 pence per share (2010:
3.5 pence). The total dividend for the year will, therefore, be 6.0 pence (2010: 5.0 pence),
representing a management earnings cover ratio of 3.8 times (2010: 4.1 times). The intention is
to have a progressive dividend policy based on a management earnings cover ratio of around
2.5 times. The final dividend is payable on 21 May 2012 to shareholders on the register at 27 April
2012. Shareholders may choose to use the Dividend Reinvestment Plan (DRIP) to reinvest the
final dividend. The closing date for receipt of new DRIP mandates is 27 April 2012.
2009
2010
2011
Capital expenditure (net of proceeds from capital grants) on both tangible and intangible assets
totalled £281 million (2010: £190 million), including £54 million (2010: £39 million) on the A350
programme. Of this, £235 million (2010: £159 million) was on tangible fixed assets and was 1.2
times (2010: 0.8 times) the depreciation charge. Expenditure on intangible assets, mainly initial
non-recurring costs on GKN Aerospace programmes, totalled £46 million (2010: £31 million).
The Group invested £103 million in the year (2010: £92 million) on research and development
activities not qualifying for capitalisation.
Free cash flow
Free cash flow, which is operating cash flow including joint venture dividends and after interest,
tax, amounts paid to non-controlling interests and own shares purchased but before dividends
paid to GKN shareholders, was an inflow of £147 million (2010: £188 million), after £31 million
Business review
300
34
.
Review of performance
Continued
(2010: £55 million) of expenditure on the Group’s restructuring programmes and £19 million in
relation to the temporary plant closure at Gallatin. The year-on-year change reflects an improvement
in profitability more than offset by increased capital expenditure and a working capital outflow. Net
interest paid totalled £43 million (2010: £46 million) and tax paid in the year was £38 million (2010:
£33 million).
Net borrowings
NET BORROWINGS
£m
At the end of the year, the Group had net borrowings of £538 million (2010: £151 million), the
increase reflecting the £444 million acquisitions of Getrag Driveline Products and Stromag.
The Group’s share of net funds in joint ventures was £2 million (2010: £17 million).
(800)
(708)
Pensions and post-employment obligations
(600)
(538)
(506)
(400)
(300)
(200)
(151)
GKN operates a number of defined benefit and defined contribution pension schemes together with
historic retiree medical arrangements across the Group. The net amount included within trading profit
of £33 million (2010: £26 million) includes the current service cost of £38 million (2010: £35 million)
partly offset by credits arising from initiatives taken to reduce the Group’s post-employment liabilities.
Other net financing charges of £17 million (2010: £31 million) have reduced partly due to the full year
impact of the pension partnership arrangement and partly as a result of lower interest on liabilities due
to the 30 basis point reduction in the discount rate between 31 December 2010 and 31 December 2009.
Net amount included
within Trading Profit
Current service cost
0
2007
2008
2009
2010
2011
UK pensions
Overseas pension
Retiree medical
and life insurance
uK PENSION aCCOuNTING DEFICIT
£m
Other net
financing charges
2011
£m
2010
£m
2011
£m
2010
£m
2011
£m
(24)
(13)
(22)
(12)
(21)
(12)
(20)
(6)
5
(19)
(7)
(21)
(1)
(1)
–
–
(3)
(3)
(38)
(35)
(33)
(26)
(17)
(31)
2010
£m
600
499
UK pensions
500
The UK defined benefit scheme is a funded plan with all future benefits accrued on a career average
basis. A hybrid pension plan providing benefits from an element of both defined benefit and defined
contribution arrangements is open to new members. Members currently in employment with the
Company represent approximately 18% of total liabilities of £2,650 million (2010: £2,435 million).
400
272
300
259
The charge relating to the UK defined benefit scheme reflected in trading profit included a settlement
credit of £2 million, net of expenses, relating to an enhanced transfer value exercise for deferred
members of the UK scheme.
200
100
0
71
3
2007
2008
2009
2010
2011
The accounting deficit at 31 December 2011 of £259 million was £188 million higher than the deficit
at the end of 2010. December 2011 asset values were above those of end December 2010 but the
valuations of liabilities at 31 December 2011 were £215 million higher. This increase largely reflected
the 70 basis point reduction in discount rate to 4.7% (£274 million) partially offset by the £109 million
positive impact from a 35 basis point reduction in the assumption for long-term inflation to 3%.
Overseas pensions
Overseas pension obligations arise mainly in the US, Germany and Japan.
GROuP POST-EMPlOyMENT OBlIGaTIONS
– aCCOuNTING BaSIS
£m
Trading profit benefited from the one-time curtailment/past service credit in Japan of £1 million.
The deficit increased by £71 million to £539 million, £54 million of which was as a result of discount
rate reductions in the US and Europe by 100 and 10 basis points, respectively.
996
1,000
900
868
834
800
Retiree medical and life insurance
GKN operates retiree medical and life insurance arrangements in North America and has a scheme,
closed to new members, in the UK.
700
600
600
The obligation in respect of all schemes at the end of the year was £70 million compared with
£61 million at the end of 2010. The 100 basis point reduction in the US discount rate accounted
for £7 million of the £9 million increase.
500
400
331
300
Summary
200
At 31 December 2011, the total deficit on post-employment obligations of the Group totalled
£868 million (2010: £600 million), comprising the deficit on funded obligations of £465 million
(2010: £193 million) and unfunded obligations of £403 million (2010: £407 million).
100
0
2007
2008
2009
2010
2011
.
35
GKN plc
Annual Report
and Accounts 2011
Net assets
Net assets of £1,624 million were £63 million lower than the December 2010 year end figure of
£1,687 million. The decrease includes actuarial losses on post-employment obligations net of
tax of £223 million, adverse currency movements net of tax of £32 million and dividends paid
to equity shareholders of £85 million offset by retained profit of £306 million.
The following section describes the way in which the Group manages and controls its treasury
function and ensures it is financed in an appropriate and cost-effective manner.
Treasury management
All treasury activities are co-ordinated through a central function (Group Treasury), the purpose of
which is to manage the financial risks of the Group and to secure short and long-term funding at
the minimum cost to the Group. It operates within a framework of clearly defined Board-approved
policies and procedures, including permissible funding and hedging instruments, exposure limits
and a system of authorities for the approval and execution of transactions. It operates on a cost
centre basis and is not permitted to make use of financial instruments or other derivatives other
than to hedge identified exposures of the Group. Speculative use of such instruments or derivatives
is not permitted. Group Treasury prepares reports at least annually to the Board, and on a monthly
basis to the Finance Director and other senior executives of the Group. In addition, liquidity, interest
rate, currency and other financial risk exposures are monitored weekly. The overall indebtedness of
the Group is reported on a weekly basis to the Chief Executive and the Finance Director. The Group
Treasury function is subject to an annual internal and external review of controls.
Funding and liquidity
At 31 December 2011, UK committed bank facilities were £755 million. Within this, there are
committed revolving credit facilities of £675 million that include £445 million of new five year
facilities put in place in the second half of the year. The balance of UK committed facilities of
£80 million is an eight-year amortising facility from the European Investment Bank (EIB). At
31 December 2011, drawings against the revolving credit facilities were £33 million and the Group
drew down in full its £80 million facility from the EIB. The EIB loan is repayable in five £16 million
instalments from 2015 and bears a fixed interest rate of 4.1%. Capital market borrowings were
£526 million at 31 December 2011 and include unsecured issues of £176 million 7% bonds maturing
in May 2012 and £350 million 6.75% bonds maturing in October 2019. The weighted average
maturity profile of the Group’s committed borrowing facilities was 4.7 years. This leaves the Group
well placed in the short term to manage sudden changes in liquidity in the financial markets.
All of the Group’s committed credit facilities have a financial covenant requiring EBITDA of
subsidiaries to be at least 3.5 times net financing costs. In addition, the new five-year revolving
credit facilities put in place in 2011 contains a financial covenant requiring net debt to be no
greater than 3 times EBITDA of subsidiaries. The covenants are tested every six months using
the previous 12 months results. For the 12 months to 31 December 2011 EBITDA was 12.9 times
greater than net interest, whilst net debt was 0.9 times EBITDA.
Financial resources and going concern
At 31 December 2011, the Group had net borrowings of £538 million. In addition, it had available,
but undrawn, committed UK borrowing facilities totalling £642 million. The next maturities of the
Group’s committed UK borrowing facilities are £176 million unsecured bond in May 2012 and
£160 million revolving bank credit facilities in July 2013.
The Directors have assessed the future funding requirements of the Group and the Company
and compared them to the level of committed available borrowing facilities. The assessment
included a review of both divisional and Group financial forecasts, financial instruments and
hedging arrangements for the 19 months from the balance sheet date. Major assumptions
have been compared to external reference points such as global light vehicle volumes, build
schedules from aircraft assemblers and market forecasts from major manufacturers of
agricultural and construction machinery.
The forecasts show that the Group will have a sufficient level of headroom in the foreseeable
future and an assessment of the likelihood of breaching covenants in this period is considered
to be remote.
Having undertaken this work, the Directors are of the opinion that the Group has adequate
committed resources to fund its operations for the foreseeable future and so determine that
it is appropriate for the financial statements to be prepared on a going concern basis.
Business review
Financing
36
.
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.
n
Given the global footprint of the Group, our operations
Economic and
political instability could be impacted adversely by global and regional
changes in the economic, political and regulatory
environments including availability of affordable credit.
n
n
n
n
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.
Highly competitive GKN operates in highly competitive markets with customer
decisions based typically on price, quality, technology and
markets
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.
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.
n
n
n
n
n
n
n
n
n
n
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
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
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
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
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
.
37
GKN plc
Annual Report
and Accounts 2011
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.
n
n
n
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.
n
n
n
n
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.
Inadequate safety A lack of robust safety processes and procedures could
result in accidents involving employees and others on
in the workplace
GKN sites and potentially causing adverse financial impact
and damage to GKN’s reputation.
n
High levels of quality assurance are embedded in robust
manufacturing systems
n
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
n
n
People
A lack of technical capability and management depth
could result in an inability to execute the strategic plan
and deliver improving financial performance.
n
n
n
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.
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
n
n
n
n
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
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
n
values, discount rates, inflation and mortality assumptions.
Accounting valuations of pension obligations can cause
n
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
n
n
Given GKN’s global footprint and against a background
Complexity of
global tax regimes of complex tax laws on a global basis, it is possible that
n
actual tax liabilities could differ from accruals which are
based on management judgements.
n
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.
Business review
n
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
38
.
Sustainability report
Creating long-term sustainable value
At the heart of everything GKN does is a drive for sustainability that is characterised by
efficient and ethical operations from teams of well-supported, motivated and dynamic
people. Central to the GKN business model (pages 8-9) are key capabilities that underpin
sustainability and enable the delivery of strategic objectives and creation of long-term
value for our shareholders. These capabilities are summarised as: our Values, superior
technology, outstanding employees, global footprint, continuous improvement and
corporate responsibility.
Our values
The GKN Code together with the associated policies directs the behaviours expected of all
GKN people. The GKN Code is encapsulated into 12 promises, six from GKN to its employees
and six from employees to GKN:
Promises from GKn to employees
Promises from employees to GKn
We will support you through investment
and training so we can build a high
performance business by delivering
superb customer service.
I share GKN’s commitment to build a
high performing business with a strong
customer focus. I show that commitment
through my work.
We will help you develop your full
potential and we will not tolerate
any discrimination.
I always respect the rights of other
team members.
We will care for you by providing a safe
working environment.
I do not put other team members at risk
of injury and will counsel anyone I see
working unsafely.
We will do what we can to minimise our
impact on the environment.
I believe in honest and proper conduct
at all times.
We are all part of a wider society and
we will contribute positively to the
communities of which we are part.
I know I am free to report behaviour which
is wrong and I will do so.
If you have a problem we will listen
in confidence.
I will help protect the environment and
support local communities.
.
39
GKN plc
Annual Report
and Accounts 2011
Additionally, new legislation provides an opportunity to reinforce key principles that
underpin the GKN Values. Following the introduction into the UK in 2011 of the Bribery Act
2010, a Group-wide training programme was launched explaining the implications of the Act
for employees; it also includes a reprise of existing Competition and Anti-Trust legislation.
Superior technology
For over 250 years GKN has developed and deployed new technologies: from the first steelmaking processes to the modern day use of advanced composites in aircraft, and from the
introduction of the first front-wheel-drive vehicle systems 50 years ago to the development
of electric drive systems for modern cars today.
Evidence of the importance of technology to GKN and examples of its application are shown
throughout this report and on our website at www.gkn.com/technologyandinnovation. The
GKN technology plan addresses the complete product lifecycle: from customer requirement
to product development and then implementation to safe disposal. The plan is driven by
global trends including the low-carbon agenda, electrification, urbanisation, shortages of
key resources, population growth and changes in food consumption.
Each business unit deploys technology to help customers meet these challenges and the
Group Technology Strategy Board, chaired by the Group’s Principal Engineer, drives the
development and deployment of the technology plan. It also facilitates collaboration
on technology developments across the Group’s businesses, sharing best practice and
exploiting synergies where appropriate. The Technology Strategy Board has a key role in
further developing external relationships and partnerships, including access to external
sources of funding.
GKN also works with other companies to develop technological advances in key sectors.
Composite technologies offer environmental and competitive advantages and, in November
2011, GKN Aerospace joined industry partners Airbus, AgustaWestland, Rolls-Royce,
Umeco and Vestas in the official opening of the UK’s National Composites Centre (NCC).
The 8,500 square metre NCC facility is situated close to three of GKN Aerospace’s major
composite manufacturing operations in the UK, serving the global aerospace sector – at
Filton and Western Approach in Bristol, and Cowes on the Isle of Wight.
Outstanding employees
EMPlOyEES By REGION
as at 31 December 2011
9,800
Rest of World
GKN has approximately 44,000 employees, in subsidiaries and joint ventures, and
success in delivering shareholder value means the Group must strive to be an employer
of choice, promoting a high performance culture with motivated, well-trained employees
and outstanding leaders.
5,800
UK
15,100
Europe
excluding UK
13,300
Americas
GKN seeks to recruit talented individuals with the skills and passion to become leaders of
the future. In 2011, GKN recruited over 100 graduates worldwide, providing opportunities to
develop professional technical and leadership career paths. GKN is also expanding its
recruitment of apprentices and currently has some 825 around the world.
GKN is committed to supporting all its employees through investment and development.
In 2011 the GKN Academy, an online training resource, was fully deployed through the
internet enabling all employees worldwide to access this from their workplace or home.
It provides over 360 courses in eight languages to employees and their families.
Total 44,000
Including subsidiaries and joint ventures
Good leadership is at the heart of engaging employees. Development programmes address
key stages of advancement, for newly promoted supervisors, through plant leadership roles
and into executive, Group-wide roles. Leadership development frameworks chart employees’
progress through managerial and technical careers, with focused assessment and training
to provide the right support to achieve success.
Employee engagement is an important element in delivering positive business outcomes.
Each employee’s role is related to the Group strategy, and their job purpose and its business
context is explained. A variety of communication channels, with an emphasis on face-to-face
communication, are used to help employees contribute their ideas and understand the
context for decision-making in GKN.
Business review
Regular employee dialogue ensures that the Values fully inform how we work and, during
2011, a global programme of workshops helped reinforce the promises and the expected
behaviours implicit in them all. Over 6,000 people have completed this programme at more
than 25 sites and it is continuing throughout 2012. The Values are promoted through posters,
the Group intranet and recognition schemes across the Group.
40
.
Sustainability report
Continued
EMPlOyEES By BuSINESS
as at 31 December 2011
8,500
GKN Aerospace
5,900
GKN Land
Systems
21,100
GKN Driveline
A Group-wide employee opinion survey (EOS) was conducted in 2011 which identified
progress in manager communication and the level of understanding of business objectives
and direction. Actions are being implemented in areas where improvement opportunities
were identified, including creating a greater understanding and demonstration of GKN’s
Values and providing better career discussions. Monthly surveys, using a subset of the
questions from the EOS, of some 3,000 employees globally provide an on-going indicator
of communication and engagement across the Group. These surveys identify areas for
improvement in employee communications and engagement and facilitate local actions
to address these.
In 2011, GKN won the Confederation of British Industry (CBI) prize for International Employee
Engagement and the People Grand Prix award, recognising both GKN’s employee engagement
strategy and the progress towards achieving Group goals through employee engagement.
2,100
Other
businesses
6,400
GKN Powder
Metallurgy
Global footprint
Total 44,000
Including subsidiaries and joint ventures
To serve its international customer base and exploit growing markets requires a truly
global business. GKN has factories, service centres and offices in 37 countries across
five continents.
This global footprint provides the ability to build and sustain close relationships with
customers. It helps to optimise GKN’s position in supply chains and in developing new
technologies in partnership with customers wherever they are globally. Manufacturing in
close proximity to customers also means products have to be transported shorter distances,
helping the Group reduce its impact on the environment.
In China, GKN Driveline and its joint venture partner, SDS, opened a factory at Changchun in
June 2011. Changchun is the largest automotive industrial city in China. In November 2011,
GKN Driveline opened a new £6.6 million precision forge at Oragadam near Chennai, India,
and work commenced on a new 8,000 square metre GKN Driveline facility in Pune, India.
More information on these new plants is given in the case study on page 16.
ENERGy CONSuMPTION PER uNIT OF PRODuCTION
kWh/tonne
Expansion was also seen in more established markets, for example GKN Aerospace in the
USA announced its intention to build a new 14,000 square metre aerospace components
assembly facility in South Carolina. The new facility will perform assembly operations for
the recently-awarded production contract for the HondaJet.
continuous improvement
3,000
A culture of continuous improvement is at the heart of GKN. All GKN sites have a continuous
improvement plan, aligned to business objectives. This engages employees to focus
consistently on positive development, building a culture which constantly questions the
norm and identifies opportunities to excel further and deliver greater value for the Company,
customers and shareholders.
2,500
2,000
1,500
1,000
500
0
Driveline
Powder Aerospace*
Metallurgy
Land
Systems
2009
2010
2011
* Aerospace measured against £1,000 sales.
A Lean Enterprise model provides the basis for continuous improvement across all
operations and is key to creating efficiency for customers and reducing GKN’s environmental
footprint. Lean is central to sustainability as it helps cut waste, reduce energy use, minimise
raw material use and streamline all processes. A Lean Enterprise model is applied to
business and production processes worldwide (see case studies page 18).
Continuous improvement is also an important mechanism in supporting improvements in
health, safety and environmental performance which the following section addresses.
.
41
GKN plc
Annual Report
and Accounts 2011
CO2 EMISSIONS PER uNIT OF PRODuCTION
kg/tonne
corporate responsibility
1,200
GKN’s main impacts on the environment are energy (and associated CO2 emissions), waste
generation and recycling, and water consumption. The Group is committed to continuous
improvement in all these areas of environmental performance and continues to take actions
to address each of them.
800
600
400
200
0
Driveline
Powder Aerospace*
Metallurgy
Land
Systems
2009
2010
2011
81% of manufacturing locations are either certified to ISO14001 or are in the process of
obtaining certification. As noted above, Lean Enterprise is applied to energy efficiency
and waste reduction programmes, both in offices and at our manufacturing locations.
All sites continue to develop energy efficiency targets, and actions are incorporated into
their Continuous Improvement plans, ensuring regular reviews and appropriate actions.
The Group objective is to improve energy efficiency by 15% over the period 2009 to 2014.
Every division is on track to meet this: since 2009, GKN Driveline has improved energy
efficiency by 13%, GKN Powder Metallurgy by 12%, GKN Aerospace by 7% and GKN Land
Systems by 18%.
WaSTE GENERaTION PER uNIT OF PRODuCTION
kg/tonne
350
All four divisions improved energy efficiency in 2011 with in excess of a 4% improvement
over the prior year; in GKN Land Systems the improvement exceeded 16%.
Actions to reduce the generation of waste adhere to a hierarchy of first, and the best alternative,
of not producing waste, second of reusing materials, and finally, if neither of these is possible,
to recycle rather than simply dispose of the material.
300
250
200
150
100
50
0
Driveline
Powder Aerospace*
Metallurgy
Land
Systems
Demonstrating the first of these, eliminating waste, GKN Powder Metallurgy at Menomonee
Falls, Wisconsin, USA, won the GKN Group Environmental Excellence Award in 2011 for
the elimination of anhydrous ammonia by replacing the previous system with newer
technologies, thus removing any risk of environmental impact.
During the year 88% of overall Group waste was recycled.
2009
2010
2011
Overall Group water consumption reduced in 2011, with GKN Land Systems achieving a
26% reduction.
Much work remains to be done to improve GKN’s environmental footprint and a combination
of learning and best practice sharing will be used to support this.
RECyClED WaSTE
% of total waste
Compliance with all applicable rules and regulations remains a core objective. Unfortunately
in 2011 five notices of non-compliance were received and penalties were paid of US$2,600.
100
80
Health and Safety
60
GKN is committed to continuous improvement in health and safety performance, with a goal
of zero preventable accidents. The tragedies at the Hoeganaes site in Gallatin, Tennessee,
USA, in 2011 have broken a previously strong safety record. As a result of these incidents
GKN has significantly improved health and safety processes worldwide.
40
20
0
Driveline
Aerospace
Powder
Metallurgy
Land
Systems
2009
2010
2011
WaTER CONSuMPTION PER uNIT OF PRODuCTION
m3/tonne
8
7
6
5
4
3
2
1
0
The Hoeganaes site in Gallatin experienced two significant events that led to the deaths
of five GKN employees. The health and safety of GKN employees is the number one priority
for GKN and the Company deeply regrets the loss of lives. It is taking every measure to ensure
Gallatin operates to world class standards and that the lessons learned from these accidents
are applied throughout the Group. The accidents and actions are described below:
n
On 31 January 2011, a flash fire caused by an electric arc seriously injured two GKN
people who subsequently lost their lives.
n
On 27 May 2011, a fire fuelled by a hydrogen leak occurred near a furnace in the north
annealing building taking the lives of three GKN people.
The plant has historically had a very strong safety record and, as with all industrial plants
of this kind, is continually monitored by external agencies to confirm compliance with all
applicable regulations.
These accidents have had a profound and permanent affect on everyone at GKN and most
particularly the families and friends of the colleagues who lost their lives. Support continues
to be provided to the families and employees at the facility.
Automotive
Powder Aerospace*
Metallurgy
Land
Systems
2009
2010
2011
* Aerospace measured against £1,000/sales.
Following the incident in May 2011, all production ceased at the plant and two expert external
firms were engaged to lead a comprehensive safety review of the entire facility. This review
involved all Gallatin employees as well as health and safety experts from across the Group.
Business review
1,000
Environment
42
.
Sustainability report
Continued
The aim of the review was to ensure that the root causes of the incidents were fully
understood and all necessary corrective actions implemented. In addition, it was tasked
with making recommendations that would take the Gallatin facility far beyond regulatory
compliance to world class standards of operations and safety.
Over a period of three months, the recommendations from the review were implemented to
ensure that similar accidents will not happen again. This primarily involved: the upgrade of
electrical systems; the replacement of key components in the gas and air supply system in
the affected building; the implementation of significantly upgraded gas management and
hydrogen detection systems; the development of an industry-leading powder metal dust
management system; upgrade to furnaces to improve operations and safety; and full and
comprehensive retraining of all employees and contractors.
The work was carried out in full consultation with Tennessee Occupational Safety and Health
Administration and the Gallatin Fire Department. The plant went through a phased restart
during August 2011, but only after the actions from the review were verified as complete.
Hoeganaes continues to cooperate fully with the US Chemical Safety Board specifically with
regard to the recommendations made in its final report.
The lessons learned from the tragic events in Gallatin are now being spread across the whole
Group to improve safety performance. The key actions are set out below:
n
Specifically within the Gallatin plant and the broader Hoeganaes business, operational
procedures have been fully reviewed, updated, tested and implemented, with the
involvement of employees to embed new ways of working. Appropriate hazard and
risk management education has been deployed, including a focus on dust reduction,
containment and mitigation.
n
Internal processes Groupwide are being expanded to include a more formal audit regime,
centrally resourced, and directed against broad-based and wide-ranging audit criteria.
Learning from the 2011 incidents is being incorporated into the audit regime and
GKN continues to engage internationally recognised consultants to assess sites and
recommend actions as appropriate. Throughout 2012, there will be additional site
reviews, peer group company audits and dedicated internal specialist safety audits.
n
thinkSAFE!, a comprehensive online and face-to-face communication programme is being
deployed across the Group during 2012. Currently implemented in GKN Driveline, it has
proven highly successful in reducing accidents and improving employee behaviour towards
safety, as well as engaging employees to help create a safe working environment.
Global procedures and ways of working are continually reviewed and improved based
on best practice, including the robust deployment of RADAR (Risk Awareness, Detection,
Action and Review). This is a GKN-developed behavioural awareness and improvement
tool, which assists employees in recognising hazards and risks in their work area and
empowers them to take action to eliminate or mitigate those hazards or risks detected.
A risk assessment programme has also been developed for machinery, including auxiliary
and support equipment. The continued use and spread of RADAR and machinery risk
assessment, supported by improved processes and procedures, will be regularly audited
and will reinforce the foundations already in place to drive continuous improvement.
Employee communication about health and safety occurs regularly, including safety
briefings, hazard awareness training and incident investigation. A variety of audio, visual
and animation techniques are being used to engage employees, delivering clear and
consistent messages.
The management of health and safety, including compliance with laws and regulations
in GKN, is based on the international health and safety system standard – OHSAS 18001.
78% of locations have achieved certification to OHSAS 18001 and the remaining sites are
working towards this.
.
43
GKN plc
Annual Report
and Accounts 2011
aCCIDENT FREquENCy RaTE
Number of lost time accidents per 1,000 permanent employees
4.0
Accident frequency rate (AFR) and Accident severity rate (ASR) are the key health and
safety performance indicators for the Group and our performance for 2011 is shown in the
adjacent charts.
3.4
3.0
2.7
2.5
2.5
2.4
2.1
2.0
1.5
Each division sets annual targets based on health and safety improvement and accident rate
reduction. These targets are set at portfolio, division and plant level taking into account local
conditions, priorities and objectives. All actions are aligned with the Group objective of zero
preventable accidents.
1.0
0.5
0.0
2007
2008
2009
2010
2011
aCCIDENT SEvERITy RaTE
Number of days/shifts lost due to accidents and
occupational ill health per 1,000 permanent employees
100
The Group has seen overall improvement in these safety metrics over the last ten years.
Whilst there was an increase in AFR in 2010, performance against both metrics has improved
in 2011.
99
80
75
71
68
63
60
40
20
0
2007
2008
2009
2010
2011
During 2011 there were six health and safety enforcement actions against GKN companies
in the US and UK, two of which resulted in fines issued by relevant authorities amounting
to $16,000. This amount does not include fines that may be incurred as a result of the
Gallatin incidents, which are yet to be finalised.
Communities
GKN has a proud history of working with the communities in which it operates. To encourage
this, individuals and groups of employees are recognised for the contribution they make
through the annual GKN Hearts of Gold Awards.
One of the highlights of the 2011 awards was an on-going project at the GKN Driveline facility
in Porto Alegre, Brazil, integrating people with learning difficulties and disabilities into its
workforce. Partnerships with local specialists support the different challenges that are
involved in this.
In 2011 two projects, funded by the GKN Millennium Trust, were completed. The first, a project
based in rural Pabal, India, is a partnership between GKN and Vigyan Ashram and involved a
new education facility to develop engineering skills in local children so that they can take
back to their communities skills such as welding, maintenance, electrical installation and
much more. The 602 square metre building was completed in 2011 and officially opened
at a ceremony in which Sir Kevin Smith presented the first set of students with certificates
of achievement after completion of their foundation modules.
The second project is a new teaching and innovation facility which opened at the GKN
Aerospace Filton facility in the UK. Leveraging the Group’s position within the UK National
Composites Network, it provides training to students to help them design new products and
understand the environmental impact of production processes. The facility welcomed its first
students in 2011; since then 102 students have attended for two days of activities.
GKN seeks to react positively when unexpected events strike the communities in which
we work. In April 2011, tornados devastated large parts of North Carolina, USA, close to
GKN facilities. 14 GKN employees’ families were directly affected including fatalities, loss of
homes and structural damage to houses. The GKN Driveline community helped clear debris,
repair and rebuild homes and provide funds to support affected families.
In another event near to GKN’s operations, the massive earthquake and tsunami that struck
north eastern Japan in March 2011 had a devastating effect, claiming thousands of lives and
destroying communities. In the aftermath of this devastation, and after seeking advice from
colleagues in Japan on the most appropriate way to provide support, GKN made a donation
of US $250,000 to the Japanese Red Cross to help alleviate the suffering.
These activities are just a few of the numerous connections with communities; visit
www.gkn.com/corporateresponsibility for further examples of the work undertaken by
GKN employees.
Business review
3.5
Health and safety performance is measured on a regular basis and reports are made monthly
to the Executive Committee. A half and full year report is made to the GKN Board.
44
.
The Board
roy Brown (65)
Chairman
nigel Stein (56)
Chief Executive
n
ne
Appointed a non-executive Director in
1996 and became Chairman in May 2004.
He will retire from the Board following the
Annual General Meeting on 3 May 2012.
Appointed to the Board in August 2001.
Experience
Former executive Director of Unilever plc
and Unilever NV from 1992 to 2001 with
responsibility for the group’s activities
in Europe, Africa and the Middle East.
He is a former non-executive Director of
Brambles plc, Brambles Ltd (Australia),
British United Provident Association Ltd
(BUPA), the Franchise Board of Lloyd’s of
London and HMV Group plc. Chartered
Engineer, Fellow of the Institution of
Mechanical Engineers and Fellow of the
Institution of Engineering and Technology.
External Appointments
Non-executive Director of Santander UK plc
and Alliance & Leicester plc.
Experience
Joined GKN in 1994 and has held a range
of commercial, general management
and finance roles, including Finance
Director and Chief Executive Automotive.
He became Chief Executive on 1 January
2012. Prior to GKN, he gained experience
in the commercial vehicle and
manufacturing sector and held senior
financial positions with Laird Group plc
and Hestair Duple Ltd. Former nonexecutive Director of Wolseley plc.
Member of the Institute of Chartered
Accountants of Scotland.
External Appointments
Marcus Bryson (57)
Chief Executive Aerospace
and Land Systems
e
Appointed to the Board in June 2007.
Experience
Joined GKN with the acquisition of the
Westland Group in 1994. He has extensive
experience of the aerospace industry
having held a number of finance and
commercial roles with Westland and
senior positions in GKN’s Aerospace
division. Joined the Executive Committee
as Chief Executive Aerospace in January
2006 and assumed responsibility for
Land Systems on 1 October 2011.
External Appointments
Vice-President Aerospace of
ADS Group Ltd.
President of The Society of Motor
Manufacturers and Traders Ltd and
Member of the Automotive Council.
william Seeger (60)
Finance Director
John Sheldrick (62)
Independent non-executive Director
Michael turner, cBe (63)
Senior Independent Director
e
arn
arn
Appointed to the Board in
September 2007.
Appointed to the Board in
December 2004.
Experience
Experience
Appointed to the Board in September
2009 and became Senior Independent
Director in May 2010. He will succeed
Roy Brown as Chairman on 3 May 2012.
Joined GKN in 2003 as Senior VicePresident and Chief Financial Officer of
GKN Aerospace. In June 2007 he became
a member of the Executive Committee as
President and Chief Executive Propulsion
Systems and Special Products. Appointed
Finance Director in September 2007.
Prior to GKN, he held a number of senior
finance positions at TRW Inc spanning
over 20 years, latterly as Vice-President
Financial Planning and Analysis.
Former Group Finance Director of
Johnson Matthey plc from 1995 to 2009.
Prior to joining Johnson Matthey in 1990
he was Group Treasurer of The BOC Group
plc. He is also a former non-executive
Director of API Group plc. Fellow of the
Association of Corporate Treasurers
and Fellow of the Chartered Institute
of Management Accountants.
Experience
Has extensive experience of the
aerospace industry having worked for
BAE Systems plc for over 40 years, and
as Chief Executive from 2002 to 2008.
Former President of the Aerospace
& Defence Industries Association
of Europe. Fellow of the Royal
Aeronautical Society.
External Appointments
Non-executive Director of Fenner plc
and Low & Bonar plc.
External Appointments
Chairman of Babcock International
Group plc and non-executive Director of
Lazard Ltd. Member of the Government’s
Apprenticeship Ambassadors Network.
.
45
GKN plc
Annual Report
and Accounts 2011
richard Parry-Jones, cBe (60)
Independent non-executive Director
arn
arn
Appointed to the Board in June 2010.
Appointed to the Board in March 2008.
Experience
Experience
Currently Chief Operating Officer for
CDC Group plc, the UK Government’s
development finance institution. She
joined CDC in early 2009 from Unilever,
where for eight years she was Senior
Vice-President Finance and Information,
Home and Personal Care, originally in
Asia and later for the group as a whole.
Her early career was spent at KPMG,
latterly as a partner. Former nonexecutive Director of Havelock
Europa plc.
Has extensive experience of the automotive
industry having previously worked for the
Ford Motor Company for 38 years, latterly
as Group Vice-President Global Product
Development and Group Chief Technical
Officer. Fellow of the Royal Academy of
Engineering, the Institution of Mechanical
Engineers and the Royal Society of
Statistical Science. Former Chairman of the
Welsh Assembly Government Ministerial
Advisory Group.
External Appointments
External Appointments
Chair of the Sustainability Committee of
the Institute of Chartered Accountants
in England & Wales and an Association
Member of BUPA.
Non-executive Director of Cosworth Group
Holdings Ltd. Visiting Professor within the
Department of Aeronautical and Automotive
Engineering at Loughborough University.
Joint Chairman of the Automotive Council.
andrew reynolds Smith (45)
Chief Executive Automotive
and Powder Metallurgy
e
Appointed to the Board in June 2007.
Experience
Joined GKN in 2002 and has held a number of
senior positions across the Group’s Driveline,
Powder Metallurgy and OffHighway businesses.
Joined the Executive Committee in January
2006 and became Chief Executive Automotive
and Powder Metallurgy on 1 October 2011. Prior
to GKN, he held various general management
and functional positions at Ingersoll Rand,
Siebe plc (now Invensys plc) and Delphi
Automotive Systems. Former Chairman of
the CBI Manufacturing Council and former
member of the Ministerial Advisory Group
for Manufacturing.
External Appointments
Member of the Government’s Green
Economy Council.
tufan erginbilgic (52)
Independent non-executive Director
Judith felton
Company Secretary
arn
e
Appointed to the Board in May 2011.
Joined GKN in 1980 and became Deputy
Company Secretary in 1995 before being
appointed Company Secretary in 2009.
Fellow of the Institute of Chartered
Secretaries and Administrators.
Experience
Currently Chief Operating Officer for
the Refining and Marketing division of
BP plc with specific responsibility for
the global lubricants, aviation and LPG
businesses as well as all refining and
fuels operations outside the US. He
joined BP in 1997 and has held a number
of senior marketing and operational
roles, including Chief of Staff to the
Group Chief Executive. His early career
was spent at Mobil Oil.
External Appointments
Non-executive Director and Trustee
of Young Enterprise UK.
a
r
n
e
Member of Audit Committee
Member of Remuneration Committee
Member of Nominations Committee
Member of Executive Committee
Governance
Shonaid Jemmett-Page (51)
Independent non-executive Director
46
.
Corporate governance
In this section
Leadership
Effectiveness
Accountability
Relations with shareholders
Compliance statement
47
page 49
page 50
page 51
page 52
page
Introduction
The regulatory and governance environment continued to evolve during 2011: the Bribery
Act came into force in July 2011; issues such as risk appetite, diversity, succession planning,
board evaluation and remuneration were brought to the fore through a number of
consultations and reports; and amendments to the UK Corporate Governance Code were
announced. GKN continues to be active in contributing to the governance debate and we
have taken the necessary actions to ensure that our governance framework remains robust.
Board changes
As reported in my Chairman’s statement on page 5, we have strengthened the nonexecutive Director representation on the Board through the appointment of Tufan
Erginbilgic. Furthermore, our succession planning delivered very capable internal
successors for the roles of both Chief Executive and Chairman; Nigel Stein and Mike Turner
bring extensive skill and experience to their respective positions and the continuity they
provide will doubtless be of great benefit to the Group.
Remuneration
During the year, the Remuneration Committee undertook a thorough review of the policy
and structure of remuneration for our executive Directors and a number of changes to the
remuneration framework are proposed as a result. These are designed to improve the
alignment of the remuneration framework with the interests of shareholders and our
strategic objectives, in particular the delivery of long term sustainable earnings growth.
Further information can be found in the remuneration report.
Diversity
In February 2011, Lord Davies published a report containing recommendations to address
the balance of women on boards, including recommendations for listed companies to
announce their goals in this regard. The report fostered much debate around gender
diversity, culminating in the amendment of the UK Corporate Governance Code.
Achieving gender diversity is more difficult in certain sectors and, as an engineering
business, the demographic profile of the current talent pool presents significant challenges.
Notwithstanding this, we will work towards extending the female composition of our Board
as vacancies arise and suitable candidates are identified, with an aspiration of 25% female
membership by 2015.
Our prime responsibility, however, is the strength of the Board and our overriding aim in any
new appointments must always be to select the best candidate.
Our governance framework is outlined in the following statement and is one which I believe
will continue to contribute to the future success of GKN and its shareholders.
Roy Brown
Chairman
27 February 2012
.
47
GKN plc
Annual Report
and Accounts 2011
Leadership
GKN’s governance framework is designed to facilitate a combination of effective, entrepreneurial and prudent management required both to
safeguard shareholders’ interests and to sustain the success of GKN over the longer term.
The Board recognises that to achieve good governance requires considerable and continuing effort. Governance is therefore an integral part of the
way in which the Board and its Committees operate.
The governance framework extends across the Group to ensure that all relevant laws and regulations are complied with wherever GKN operates and
that an appropriate internal control environment exists. In pursuit of GKN’s Values, Directors and employees are expected to act with integrity at all
times, combining high standards of business performance with equivalent standards of corporate governance and risk management.
Directors also have a statutory duty to take into account the long term consequences of their decisions, the interests of employees, relationships
with suppliers, customers and others, the impact of the Group’s operations on local communities and the environment, and the need to maintain
a reputation for high standards of business conduct.
The role of the Board
The GKN Board is collectively responsible for the long term success of the Group. Key aspects of the Board’s role include setting the Group’s
strategic aims, ensuring that the necessary capabilities to deliver the strategy are in place, reviewing operational performance and ensuring that an
appropriate and effective framework of control and risk management exists. A full description of the role of the Board, which includes a number of
specific responsibilities reserved for its decision, is available on our website at www.gkn.com.
Board agendas are set by the Chairman in consultation with the Chief Executive and with the assistance of the Company Secretary, who maintains a
12 month rolling programme of items for discussion by the Board to ensure that all matters reserved to the Board and other key issues are considered
at the appropriate time. Agendas are closely aligned to the key aspects of the Board’s role; below are examples of areas of the Board’s focus in 2011.
Strategy
■
■
■
Approved strategic plans and
the Group’s annual budget,
with appropriate consideration
of the risks inherent in them
Approved the strategic
acquisitions of Getrag Driveline
Products and Stromag Holding
Considered further de-risking
opportunities in respect of the
Group’s pension arrangements
Capabilities
■
Succession planning for the
Board and senior executives
■
Reviewed divisional
technology plans that
support the delivery of
the business’ strategy
■
Received a detailed update on
the application of continuous
improvement across the Group
Performance
■
Considered reports following
the fatalities at Gallatin and
agreed corrective actions to
strengthen further the Group’s
safety focus
■
Reviewed divisional strategic
and operational performance
■
Considered Group financial
performance, with continued
focus on cash generation and
working capital
Control
■
Assessed, with the support
of the Audit Committee, the
effectiveness of internal
control and audit processes
■
Considered post acquisition
reviews in respect of
Rockford Powertrain
and Teleflex Aerospace
Manufacturing Group
■
Assessed the effectiveness
of the Board
The Board meets formally at least eight times a year. At least one meeting is combined with a Board visit to the Group’s business locations; in
2011 the Board toured a number of Aerospace and Automotive facilities located in North Carolina and Alabama in the US (including a Getrag
driveline facility which was acquired during the year). On a separate occasion the Board also visited the Group’s Aerospace facility at Filton in the UK.
A number of informal meetings are also held during the year which help to strengthen relations between Directors. There are sufficient opportunities
for the Chairman to meet with the non-executive Directors, without the executive Directors being present, should this be deemed appropriate.
Board Committees
The Board has appointed a number of Committees which play an important governance role through the detailed work they carry out to fulfil
the responsibilities delegated to them. Their terms of reference are available on our website. All Board Committees are supported by the
Company Secretariat.
Governance
Roy Brown has been Chairman since 2004; he is responsible for leading the Board and for its effectiveness. Following the retirement of Sir Kevin
Smith, Nigel Stein was appointed Chief Executive with effect from 1 January 2012. As Chief Executive, he leads the business and, with the support of
the Executive Committee, is responsible for the execution of the Group’s strategy and the day-to-day running of the Group.
48
.
Corporate governance
Continued
Corporate Governance Committees
Audit Committee
(chaired by John Sheldrick)
monitors the integrity of financial reporting and audit processes and reviews the effectiveness of the Group’s
systems of internal control and risk management. A report on its activities in 2011 is given on pages 54 and 55.
Remuneration Committee
determines and makes recommendations on the Group’s remuneration policy and framework to recruit, retain
(chaired by Richard Parry-Jones) and reward executive Directors and senior executives. The remuneration report is set out on pages 56 to 68.
Nominations Committee
(chaired by Roy Brown)
recommends Board and Board Committee appointments and reviews succession planning against the leadership
needs of the Group. A report on its activities during the year is set out on page 53.
All independent non-executive Directors are members of these Committees. This gives them detailed insight into matters critical to the success of the
Group and helps to inform Board discussions. The Chairman and the Chief Executive are also members of the Nominations Committee.
Briefing papers are prepared and circulated to Committee members in advance of each meeting and, in respect of the Audit Committee, made
available to other Directors. In order that the Board remains fully appraised of their work, the Committee Chairmen report formally on Committee
activities at the subsequent Board meeting.
These Committees can obtain external professional advice at the cost of the Company if deemed necessary.
Operational Governance
Executive Committee
(chaired by Nigel Stein)
is responsible for executing strategy by leading, overseeing and directing the activities of the Group.
Its work is supported by a number of sub-committees:
Lean Enterprise Sub-Committee is responsible for driving operational best practice globally through the application of Lean business processes.
Group Technology
Strategy Board
is responsible for development of the Group’s technology plan, driving the development of appropriate
technologies across the Group and the strengthening of external relationships including access to sources
of funding.
Governance and
Risk Sub-Committee
has responsibility for developing strategy for and providing oversight and direction on all matters relating to
governance and compliance, risk management and corporate social responsibility.
In November 2011, the Chief Executive’s Council was established to help shape the Group’s strategy and operations. Chaired by the Chief Executive,
the Council’s membership comprises 25 senior executives from divisional leadership teams involved in the day-to-day running of the businesses.
Board and Committee attendance
The attendance of Directors at relevant meetings of the Board and of the Audit, Remuneration and Nominations Committees held during 2011 was
as follows:
Board
(9 meetings)
Audit
Committee
(5 meetings)
Remuneration
Committee
(8 meetings)
Nominations
Committee
(5 meetings)
Chairman
Roy Brown
9
–
–
5
Executive Directors
Sir Kevin Smith
Marcus Bryson
Andrew Reynolds Smith
William Seeger
Nigel Stein(a)
9
9
9
9
8
–
–
–
–
–
–
–
–
–
–
5
–
–
–
–
Non-executive Directors
Tufan Erginbilgic(b)
Shonaid Jemmett-Page
Richard Parry-Jones(c)
John Sheldrick
Michael Turner
4/6*
9
8
9
9
2/2*
5
4
5
5
3/5*
8
8
8
8
1/2*
5
4
5
5
Director
*
Actual attendance/maximum number of meetings Director could attend based on date of appointment.
(a) Nigel Stein was unable to attend the Board meeting in February due to a prior business commitment with a major customer.
(b) Tufan Erginbilgic was unable to attend the Nominations Committee meeting in June and the Board and Remuneration Committee meetings in June and September due to prior
business commitments.
(c) Richard Parry-Jones was unable to attend the Board, Audit and Nominations Committee meetings in February due to personal commitments.
.
49
Effectiveness
Development
Board composition
Directors are continually updated on the Group’s businesses, the
markets in which they operate and changes to the competitive and
regulatory environment through briefings to the Board and meetings
with senior executives. Board visits to Group business locations enable
the Directors to meet with local management and employees and to
update and maintain their knowledge and familiarity with the Group’s
operations. Non-executive Directors are also encouraged to visit
Group operations throughout their tenure to increase their exposure
to the business.
The Board currently comprises four executive and six non-executive
Directors, including the Chairman. Biographical details of all Directors
are given on pages 44 and 45. The Board considers that all of the nonexecutive Directors, excluding the Chairman, are independent and is not
aware of any relationship or circumstance likely to affect the judgement
of any Director.
Changes to Board composition in 2011 are set out below:
■
On 3 February the Board renewed the terms of appointment for
Richard Parry-Jones for a further three year period.
■
Tufan Erginbilgic was appointed a non-executive Director on 9 May
for an initial term of three years, bringing with him considerable
experience of the global energy industry.
■
From 1 October, responsibility for the Group’s Automotive business
was assumed by Andrew Reynolds Smith, with Marcus Bryson
undertaking responsibility for GKN Land Systems.
■
Sir Kevin Smith retired from the Board on 31 December and was
succeeded as Chief Executive by Nigel Stein from 1 January 2012.
At the AGM on 3 May 2012, and in accordance with the Company’s
articles of association, shareholders will be asked to elect Tufan
Erginbilgic to the Board. All other Directors, with the exception of Roy
Brown who retires at the conclusion of the AGM, will seek re-election in
accordance with the provisions of the UK Corporate Governance Code.
Descriptions of the role of the Chairman, Chief Executive, Senior
Independent Director and Company Secretary are available on our
website. The non-executive Directors provide constructive challenge
and bring independence to the Board and its decision making process.
Recommendations for appointments to the Board are made by the
Nominations Committee. The Committee follows Board approved
procedures (available on our website) which provide a framework for
the different types of Board appointments on which the Committee
may be expected to make recommendations. Appointments are made
on merit, and against objective criteria with due regard to diversity
(including skills, experience and gender). Non-executive appointees
are also required to demonstrate that they have sufficient time to
devote to the role.
These procedures were used by the Nominations Committee in
recommending to the Board the appointment of Nigel Stein as Chief
Executive, Michael Turner as Chairman and Tufan Erginbilgic as a nonexecutive Director. The Committee engaged the services of an external
search consultant in relation to these appointments; further information
is set out in the Nominations Committee report on page 53.
Training and development needs are discussed with each Director
by the Chairman as part of the individual performance review process.
The suitability of external courses is kept under review by the Company
Secretary such that any needs identified either through the review
process or on an ad hoc basis can be addressed; for example, Nigel
Stein attended a Harvard Business School workshop for new chief
executives, Directors attended external training courses on a number
of matters including remuneration, industry regulation, climate
change and risk, executive Directors completed the Group’s Strategic
Leadership Development Programme and all Directors received
in-house briefings on the implications of the Bribery Act and related
changes to the Group’s policies and procedures.
Information and support
The Chairman is responsible for ensuring that Directors receive
accurate, timely and clear information. The provision of information to
the Board, particularly in relation to risk, was reviewed during the year
as part of the performance evaluation exercise referred to below.
To ensure that adequate time is available for Board discussion and to
enable informed decision making, briefing papers are prepared and
circulated to Directors one week prior to scheduled Board meetings. All
Directors have direct access to the advice and services of the Company
Secretary who is tasked with ensuring that the Board is fully briefed
on legislative, regulatory and corporate governance developments.
In addition, Directors may, in the furtherance of their duties, take
independent professional advice at the Company’s expense.
The Company Secretary also supports the Committee Chairmen by
ensuring that agendas are appropriate and address all matters for
which the Committee has specific responsibility.
On joining the Board, a Director receives a comprehensive induction
pack which includes background information about GKN and its
Directors, and details of Board meeting procedures, Directors’ duties
and responsibilities, procedures for dealing in GKN shares and a
number of other governance-related issues. This is supplemented by a
briefing with the Company Secretary who is charged with facilitating the
induction of new Directors both into the Group and as to their roles and
responsibilities as Directors. The Director meets with the Chief Executive
and with relevant senior executives to be briefed on the general Group
strategy and each individual business portfolio. Plant visits and external
training, particularly on matters relating to the role of a Director and the
role and responsibilities of Board Committees, are arranged as
appropriate. This induction process was applied following the
appointment of Tufan Erginbilgic during the year.
Governance
GKN plc
Annual Report
and Accounts 2011
50
.
Corporate governance
Continued
Performance evaluation
Accountability
An external performance evaluation was undertaken in late 2010 and
the results were presented to the Board in January 2011. The facilitator
(Sheena Crane) did not provide any other services to the Group.
A number of recommendations were agreed and implemented,
including the following:
Financial and business reporting
■
a written Chief Executive’s report on Group performance, progress
on significant strategic activity and other issues of note to be
circulated in advance of and considered at each Board meeting;
■
an annual ‘deep dive’ review by the Board of succession planning
to, and development for, senior levels below Board;
■
detailed reviews of strategic capabilities including continuous
improvement and technology; and
■
the rescheduling of Committee meetings to the day prior to Board
meetings and more time allocated to the Board strategic review
meeting in order to allow for increased debate.
The evaluation process for 2011 involved in-depth one-to-one interviews
conducted by the Company Secretary with each Director to gather
feedback on the following areas believed to be critical to informing
and assisting the effectiveness of the Board and its Committees:
■
strategy and process;
■
risk and risk management systems;
■
monitoring financial and non-financial performance;
■
succession planning;
■
deep dive topics and capability reviews;
■
overall Board and Committee working/efficiency; and
■
key themes for discussion focus in 2012.
The results of the evaluation exercise were presented at a Board
meeting in January 2012. The output is under consideration by the
Board; any agreed changes will be implemented as soon as practicable.
The individual performance of the Directors was also evaluated, against
a number of assessment areas, through one-to-one interviews with the
Chairman. No actions were considered necessary as a result of these
evaluations and the Chairman confirms that each Director continues
to make a valuable contribution to the Board and, where relevant,
its Committees and devotes sufficient time to the role.
When reporting externally the Board aims to present a balanced and
understandable assessment of the Group’s position and prospects.
Such assessment is provided in the business review sections of this
annual report. The responsibilities of the Directors in respect of the
preparation of the annual report are set out on page 72 and the
auditors’ report on page 73 includes a statement by PwC about their
reporting responsibilities. As set out on page 35, the Directors are
of the opinion that GKN's business is a going concern.
Risk management and internal control
The Board attaches considerable importance to, and acknowledges
its responsibility for, the Group’s systems of internal control and risk
management and receives regular reports on such matters. The Board’s
policy is to have systems in place which optimise the Group’s ability to
manage risk in an effective and appropriate manner.
The Board has delegated to the Executive Committee responsibility
for identifying, evaluating and monitoring the risks facing the Group
and for deciding how these are to be managed. In addition to formal
reviews of risk management by the Executive Committee, members are
expected to report to the Committee as necessary the occurrence of
any material control issues, serious accidents or events that have had
a major commercial impact, or any significant new risks which have
been identified. Such matters are reported to the next Board meeting
and/or Audit Committee meeting as appropriate. As part of its remit,
the Governance and Risk Sub-Committee develops strategy for
and provides oversight and direction on all matters relating to
risk management.
GKN’s enterprise risk management programme facilitates a common,
Group-wide approach to the assessment of risks and the way in
which these are monitored, managed and controlled. Risk profiling
is undertaken at plant, region/business stream, divisional and
corporate levels using a software tool which provides a consistent
set of risk definitions and a common approach to probability and
impact. A broad spectrum of risks is considered, including those
relating to strategy, operational performance, financial (including credit
risk, risk financing and fraud), product engineering and technology,
business reputation, human resources, health and safety, and the
environment. Consolidated ‘risk maps’ are reviewed by divisional
management, the Executive Committee, the Audit Committee and
the Board.
A summary of those risks which could have a material impact on the
Group is given on pages 36 and 37.
.
51
GKN plc
Annual Report
and Accounts 2011
Relations with shareholders
The Board maintains a dialogue with shareholders directed towards
ensuring a mutual understanding of objectives.
the formulation and deployment of Group accounting policies and
procedures, supported by regular bulletins from the central and
divisional finance teams on the application of accounting standards
and reporting protocols;
Major shareholders
■
Group and divisional policies governing the maintenance of
accounting records, transaction reporting and key financial
control procedures;
■
a proprietary internal control monitoring system, GKN Reporting and
Integrity Procedures (GRiP), to assess compliance with key financial
controls on monthly, quarterly and annual cycles;
■
monthly operational review meetings which include, as necessary,
reviews of internal financial reporting issues and financial control
monitoring; and
The Chairman and Senior Independent Director, with support from
the Company Secretary, meet with institutional shareholders and
investor representatives to discuss matters relating to governance and
strategy. Any issues raised are fed back to the Board by the Chairman.
The Senior Independent Director is also available to discuss issues with
shareholders where concerns cannot be addressed through normal
channels of communication.
■
■
ongoing training and development of financial reporting personnel.
Each year all Group businesses are required formally to review
their business risks and to report on whether there has been any
material breakdown in their internal controls. This formal review
is supplemented by an interim review conducted at the half year.
Companies also have to confirm annually whether they have complied
with statutory and regulatory obligations as well as with the policies
which support the GKN Code.
The Group’s systems and procedures are designed to identify, manage
and, where practicable, reduce and mitigate the effects of the risk
of failure to achieve business objectives. They are not designed to
eliminate such risk, recognising that any system can only provide
reasonable and not absolute assurance against material misstatement
or loss.
The review process
The Audit Committee is responsible for reviewing the ongoing control
processes, and the actions undertaken by the Committee to discharge
this responsibility are described in the Audit Committee’s report on
pages 54 and 55.
The Board receives an annual report from the Audit Committee
concerning the operation of the systems of internal control and risk
management. This report is considered by the Board in forming its own
view on the effectiveness of the systems.
The Board has reviewed the effectiveness of the Group’s systems of
internal control and risk management during the period covered by
this annual report. It confirms that the processes described above,
which accord with the guidance on internal control (the revised
Turnbull Guidance), have been in place throughout that period and
up to the date of approval of the annual report. The Board also confirms
that no significant failings or weaknesses were identified in relation
to the review.
Communication with major institutional shareholders is undertaken
as part of GKN’s investor relations programme, in which non-executive
Directors are encouraged to participate.
The Chairman and Senior Independent Director are joined by the
Remuneration Committee Chairman where discussion includes
matters relating to executive remuneration. In late 2011/early 2012,
the Remuneration Committee Chairman consulted with major
shareholders on proposed changes to the remuneration framework
for executive Directors.
The Chief Executive, Finance Director and Head of Investor Relations
meet regularly with major shareholders to discuss strategy, financial
and operating performance. Feedback is sought by the Company’s
brokers after meetings and presentations to ensure that the Group’s
strategy and performance is being communicated effectively and to
develop further an understanding of shareholder views. This feedback
is included in a twice-yearly report to the Board which also provides an
update on investor relations activity, highlights changes in holdings
of substantial shareholders and reports on share price movements. In
addition, external brokers’ reports on GKN are circulated to all Directors.
GKN hosted a Capital Markets Day for institutional investors in April
2011, which included a visit to the Aerospace A350 facility in Bristol
and divisional presentations on growth opportunities and technology
innovations. A recording of the presentations and slide material shown
is available on our website.
Communications with shareholders
Written responses are given to letters or email received from
shareholders and all shareholders receive, or can access electronically,
copies of the annual and half year reports. The investor relations
section of our website was enhanced during 2011 and provides further
detail about the Group, including share price information, webcasts and
presentations of annual and half year results, other presentations made
to the investment community, and copies of financial reports.
Annual General Meeting
Information regarding the 2012 AGM is given on page 69. Shareholders
who attend the AGM are invited to ask questions during the meeting
and to meet with Directors after the formal proceedings have ended.
Resolutions for consideration at the 2012 AGM will be voted on by
way of a poll rather than by show of hands. This is a more transparent
method of voting as it allows the votes of all shareholders to be
counted, including those cast by proxy. The results of the poll vote
will be announced to the London Stock Exchange and published
on our website after the meeting.
Governance
The Group also has in place systems and procedures for exercising
control and managing risk in respect of financial reporting and the
preparation of consolidated accounts. These include:
52
.
Corporate governance
Continued
Compliance statement
This corporate governance statement, together with the Nominations
Committee report on page 53, the Audit Committee report on pages
54 and 55 and the remuneration report on pages 56 to 68, provide a
description of how the main principles of the UK Corporate Governance
Code (the Code) have been applied within GKN during 2011. The Code
is published by the Financial Reporting Council and is available on its
website at www.frc.org.uk.
Throughout the financial year ended 31 December 2011, GKN was in
compliance with the relevant provisions set out in the Code with the
exception of provision B.1.2 which requires that at least half the Board,
excluding the Chairman, should comprise independent non-executive
Directors. As stated in the 2010 annual report, a recruitment process
was started in late 2010 to identify a replacement non-executive
Director following the retirement of Helmut Mamsch on 31 October
2010. From this date and until the appointment of Tufan Erginbilgic
on 9 May 2011, the Board comprised five executive Directors and four
independent non-executive Directors (excluding the Chairman). Since
this date, the Company has been in compliance with provision B.1.2 and
currently comprises four executive Directors and five independent nonexecutive Directors (excluding the Chairman). The Board is content that
the independent judgement of the non-executive Directors was not
adversely impacted during the period of non-compliance.
This statement complies with sub-sections 2.1, 2.2(1), 2.3(1), 2.5, 2.7
and 2.10 of Rule 7 of the Disclosure Rules and Transparency Rules of the
Financial Services Authority. The information required to be disclosed
by sub-section 2.6 of Rule 7 is shown on pages 69 to 71.
.
53
GKN plc
Annual Report
and Accounts 2011
Nominations Committee report
Composition
Activities
The Nominations Committee comprises the following Directors:
The Committee met on five occasions in 2011. Members’ attendance at
these meetings is set out in the table on page 48.
Roy Brown
Tufan Erginbilgic
Shonaid Jemmett-Page
Richard Parry-Jones
John Sheldrick
Nigel Stein
Michael Turner
Nominations Committee position
Chairman
Member (from 9 May 2011)
Member
Member
Member
Member (from 1 January 2012)
Member
Sir Kevin Smith was a member of the Committee until his retirement
from the Board on 31 December 2011.
In accordance with the provisions of the UK Corporate Governance Code,
the majority of members are independent non-executive Directors.
The secretary to the Committee is Judith Felton, Company Secretary.
Role
The role of the Nominations Committee is to lead the process for
identifying, and making recommendations to the Board on, candidates
for appointment as Directors of the Company and as Company
Secretary, giving full consideration to succession planning and the
leadership needs of the Group. It also makes recommendations to
the Board on the composition of the Nominations Committee and
the composition and chairmanship of the Audit and Remuneration
Committees. It keeps under review the structure, size and composition
of the Board, including the balance of skills, knowledge, experience,
ethnicity and gender and the independence of the non-executive
Directors, and makes recommendations to the Board with regard to
any changes. The Nominations Committee follows Board-approved
procedures in making its recommendations.
Written terms of reference that outline the Committee’s authority and
responsibility are available on our website at www.gkn.com. The terms
were considered as part of the Board’s performance evaluation review
as described on page 50.
The Committee’s main focus in the year was on the succession process
for both the Chief Executive and the Chairman roles.
In identifying a new Chief Executive to take over from Sir Kevin Smith on
his retirement at the end of the year, the Committee’s focus was to find an
individual with proven leadership capabilities in a multinational business
who could lead the development of the Group’s strategy in particular
driving future growth, both organic and through acquisition. An extensive
process was conducted involving consideration of both internal and
external candidates, following which the Committee recommended
Nigel Stein to the Board as successor to the Chief Executive.
The process for the selection of a Chairman, to succeed Roy Brown
on his retirement in May 2012, was conducted by a Selection Panel
comprising those non-executive Directors who did not wish to apply
for the role, and with support from Roy Brown, Sir Kevin Smith as Chief
Executive and Nigel Stein as Chief Executive Designate. Following a
thorough process during which the Panel considered both internal and
external candidates, Michael Turner was recommended to the Board as
GKN’s next Chairman.
Both these appointments were unanimously approved by the Board.
The Committee also recommended, and the Board approved, changes
in the executive Director responsibilities (of Marcus Bryson and Andrew
Reynolds Smith) as a consequence of Nigel Stein’s appointment as
Chief Executive. In addition, following a successful search process
by the Committee, the Board approved its recommendation to appoint
Tufan Erginbilgic to strengthen the non-executive membership of the
Board following the retirement of Helmut Mamsch in late 2010.
Performance evaluation
Details of the Board and Committee evaluation process which took
place during the year can be found on page 50.
On behalf of the Committee
Advice provided to the Committee
From time to time the Committee appoints external search consultants
to provide support in recruiting and selecting individuals for potential
appointment to the Board. During 2011, MWM Consulting and Zygos
Partnership were engaged by the Committee. Neither of these firms
provides any other services to the Group.
Roy Brown
Chairman of the Nominations Committee
27 February 2012
Governance
Name
54
.
Audit Committee report
Composition
Activities
The Audit Committee comprises the following independent nonexecutive Directors:
The Committee met on five occasions in 2011 timed to coincide with the
financial and reporting cycles of the Company. Members’ attendance at
these meetings is set out in the table on page 48.
Name
John Sheldrick
Tufan Erginbilgic
Shonaid Jemmett-Page
Richard Parry-Jones
Michael Turner
Audit Committee position
Chairman
Member (from 9 May 2011)
Member
Member
Member
The secretary to the Committee is Judith Felton, Company Secretary.
The Committee’s members have, in the Board’s view, recent and
relevant financial experience as required by the UK Corporate
Governance Code. In particular, John Sheldrick, the Committee
Chairman, was Group Finance Director of Johnson Matthey plc from
1995 until his retirement in September 2009 and has chaired GKN’s
Audit Committee since 2004; and Shonaid Jemmett-Page has held
a number of senior finance roles in Unilever, is a former partner at
KPMG and is currently Chief Operating Officer at CDC Group plc.
Role
The primary role of the Audit Committee, which reports its findings to
the Board, is to ensure the integrity of the financial reporting and audit
processes and the maintenance of sound internal control and risk
management systems. The Committee is responsible for monitoring
and reviewing:
■
the integrity of the Group’s financial statements and the significant
reporting judgements contained in them;
■
the appropriateness of the Group’s relationship with the external
auditors, including auditor independence, fees and provision of
non-audit services;
■
the effectiveness of the external audit process, making
recommendations to the Board on the appointment of the
external auditors;
■
the activities and effectiveness of the internal audit function
(Corporate Audit);
■
the effectiveness of the Group’s internal control and risk
management systems; and
■
the Group’s policies and practices concerning business conduct
and ethics, including whistleblowing.
Written terms of reference that outline the Committee’s authority and
responsibility are available on our website at www.gkn.com. The terms
were considered as part of the Board’s performance evaluation review
as described on page 50.
Advice provided to the Committee
In the performance of its duties, the Committee has independent
access to the services of Corporate Audit and to the external auditors,
and may obtain outside professional advice as necessary. During 2011
no member of the Committee, nor the Committee collectively, sought
such outside professional advice beyond that which was provided
directly to the Committee by the external auditors. Both the Head of
Corporate Audit and the external auditors have direct access to the
Chairman of the Committee outside formal Committee meetings.
The Group Chairman, Chief Executive, Finance Director, Head of
Corporate Audit, the engagement partner of PricewaterhouseCoopers
LLP (PwC) and other members of senior management attended
meetings by invitation. The Head of Corporate Audit and PwC had
the opportunity to discuss matters with the Committee without any
executive management being present at two and three meetings
respectively. In addition, the members of the Committee met separately
at the start of each meeting to discuss matters in the absence of any
persons attending by invitation.
Financial reporting
During the year the Audit Committee reviewed a wide range of financial
reporting and related matters in respect of the Company’s half year
and annual results statements and its annual report prior to their
consideration by the Board. In particular, the Committee reviewed the
significant accounting judgements made in respect of restructuring
charges, tax and warranty provisioning, non-recurring costs on
Aerospace contracts, assumptions in respect of post-employment
obligations, and charges arising from the temporary closure of the
Group’s plant in Gallatin, US. Key points of disclosure and presentation
to ensure the adequacy, clarity and completeness of the financial
statements were also considered. Reports highlighting key accounting
matters and significant judgements were also received from PwC in
respect of each set of financial statements; these were discussed in
Committee with the auditors. Analysis to support the going concern
judgement given on page 35 was also reviewed.
Following consideration of the matters presented to it and discussion
with both management and PwC, the Committee was satisfied that the
significant judgements made were justified and that the financial
reporting disclosures were appropriate and meaningful.
External auditors
Independence
The Audit Committee is responsible for the development,
implementation and monitoring of the Company’s policies on
external audit. The policies, designed to maintain the objectivity and
independence of the external auditors, regulate the appointment of
former employees of the external audit firm to positions in the Group
and set out the approach to be taken when using the external auditors
for non-audit work. During the year, on the recommendation of the
Audit Committee, the Board approved changes to the policy on the
provision of non-audit services by auditors in order to improve clarity
and reflect current practice and developing regulatory guidance. In
particular, changes were made to exclude a number of services in line
with the Auditing Practices Board’s Ethical Standards and Financial
Reporting Council Guidance on Audit Committees, both published in
December 2010.
As a general principle the external auditors are excluded from
consultancy work and cannot be engaged by GKN for other non-audit
work unless there are compelling reasons to do so. Any proposal to
use the external auditors for non-audit work must be submitted to the
Finance Director, via the Group Financial Controller, for approval prior
to appointment. The Finance Director will, depending on the nature of
the service, seek the prior authorisation of the Chairman of the Audit
Committee. During the year, an electronic approval system for non-audit
services was implemented, allowing improved tracking and visibility of
non-audit fees. The non-audit fees incurred during 2011 are set out in
.
55
GKN plc
Annual Report
and Accounts 2011
The Committee receives annual confirmation from PwC as to their
independence and objectivity within the context of applicable
regulatory requirements and professional standards, as well as
management confirmation of compliance with the Group’s policies on
the employment of former employees of the external auditors and the
use of the external auditors for non-audit work. The objectivity and
independence of PwC is also considered as part of Corporate Audit’s
annual review of the effectiveness of both the external auditors and
the audit process.
Effectiveness and reappointment
Following the rotation of the audit partner after the completion of
the 2010 audit in line with best practice guidelines, the Committee
undertook a thorough review of the performance of the external auditors
and the effectiveness of the external audit process which included:
The Committee reviewed regular reports on control issues of Group
level significance, including details of any remedial action being taken;
these reports included updates on the status of the Group’s proprietary
internal financial control monitoring system (GKN Reporting and
Integrity Procedures). It considered reports from Corporate Audit and
PwC on the Group’s systems of internal control and reported to the
Board on the results of its review. The Committee also examined reports
detailing the Group’s actual or potential material litigation, monitored
compliance with the Group’s policy for the appointment of agents
and consultants (which is available on our website), and reviewed
the Directors’ and Company Secretary’s expenses.
Further information on the Group’s systems of internal control and
risk management is given on pages 50 and 51.
Whistleblowing
To support the Group’s Employee Disclosure Procedures Policy (which
is available on our website), GKN operates a Group-wide international
whistleblowing hotline. Run by an external and independent third party,
the hotline facilitates arrangements whereby employees can make
(on an anonymous basis if preferred) confidential disclosures about
suspected impropriety and wrongdoing. Any matters so reported are
investigated and escalated to the Audit Committee as appropriate.
Statistics on the volume and general nature of all disclosures made
are reported to the Committee on an annual basis.
■
a tender proposal by the new audit partner for future GKN audits
which covered such matters as qualification, expertise, resourcing,
independence, objectivity and value for money and which was
subject to rigorous scrutiny by the Committee;
■
completion of a comprehensive questionnaire by Directors and
senior management across the Group on the effectiveness of the
auditors and the audit process;
Performance evaluation
■
a comparative analysis of GKN’s audit and non-audit fees against
those of the constituents of the FTSE 100 and FTSE 250 Indices;
On behalf of the Committee
■
consideration of the findings of an independent benchmarking
survey into the four major audit firms; and
■
a review of externally published documents on the four major audit
firms (including PwC) issued by regulatory bodies.
Following the review, and taking account of the tenure of PwC as
auditors, the Committee concluded that it was appropriate to
recommend to the Board PwC’s reappointment as the Company’s
auditors. There are no contractual obligations restricting the
Committee’s choice of external auditors.
Details of the fees paid to PwC in 2011 can be found in note 4(a) to the
financial statements.
Internal control
In 2011 the Committee reviewed the results of the audits undertaken
by Corporate Audit and considered the adequacy of management’s
response to the matters raised, including the implementation of any
recommendations made. The Committee considered and approved
the 2012 Corporate Audit programme, including the proposed audit
approach (particularly in respect of post-acquisition reviews and antibribery compliance checks), coverage and allocation of resources.
The effectiveness of Corporate Audit was formally reviewed, taking
into account the views of Directors and senior management on matters
such as independence, proficiency, resourcing, and audit strategy,
planning and methodology.
Details of the Board and Committee evaluation process which took
place during the year can be found on page 50.
John Sheldrick
Chairman of the Audit Committee
27 February 2012
Governance
note 4(a) to the financial statements and include half year review work,
tax compliance and advice (whereby PwC can draw upon significant
historic knowledge gained through the audit process), technical
accounting advice and other verification and attestation procedures.
All such activities remain within the policy approved by the Board.
56
.
In this section
Remuneration report
The Remuneration Committee
page
Executive Directors
page
Chairman and non-executive Directors
page
Shareholding requirement
page
Directors’ remuneration 2011
page
Future policy
page
57
57
61
62
63
67
The remuneration report for 2011 sets out the remuneration
policy for Directors and how it has been applied, including
disclosures on directors’ remuneration required by law.
During the year, the Committee carried out a comprehensive review of the policy and
structure of remuneration for executive Directors and as a result we are proposing to
make a number of changes to the executive Director remuneration framework beginning
with the 2012 financial year.
These changes, some of which are subject to shareholder approval, are summarised
at the end of this report and described in the 2012 AGM circular. The proposed changes
aim to improve the alignment of the remuneration framework with the interests of
shareholders and our strategic objectives, in particular the delivery of long term
sustainable earnings growth. Key features are:
■
although the structure of the reward is changing, the overall quantum will remain
broadly unchanged;
■
an element of the short term variable remuneration scheme (up to 10% of basic
salary for the 2012 financial year) will be assessed against strategic measures to
align better our reward structure with key strategic priorities. In addition, deferred
amounts of bonus earned will be subject to clawback in the event of a material
individual or corporate failure; and
■
subject to shareholder approval, we will make awards under a new incentive plan,
the Sustainable Earnings Plan (SEP), which will replace awards under the current
Long Term Incentive Plan and Executive Share Option Scheme. Under the SEP, the
time horizon of awards is being extended to five years to reflect better the longer
term nature of our business. The key principle behind the SEP is to encourage and
reward earnings performance which is sustained over the long term, in line with our
growth strategy and our stated objective of creating long term shareholder value.
Throughout 2011, the Committee continued to apply the current remuneration policy
prudently with a strong alignment to the interests of shareholders. Details are given in
the following pages.
On behalf of the Board
Richard Parry-Jones
Chairman of the Remuneration Committee
27 February 2012
.
57
GKN plc
Annual Report
and Accounts 2011
Composition
The Committee comprises the following independent non-executive
Directors:
Name
Remuneration Committee position
Richard Parry-Jones
Tufan Erginbilgic
Shonaid Jemmett-Page
John Sheldrick
Michael Turner
Chairman
Member (from 9 May 2011)
Member
Member
Member
The secretary to the Committee is Judith Felton, Company Secretary.
During the year and by invitation of the Committee, Roy Brown,
Chairman, has attended meetings together with the following members
of the senior management team: Sir Kevin Smith, Chief Executive; Nigel
Stein, Chief Executive Designate; and Douglas McIldowie, Group Human
Resources Director. No person was present during discussions relating
to their own individual remuneration. In addition, representatives from
New Bridge Street (NBS) and Deloitte LLP (Deloitte), the Committee’s
independent advisers, attended meetings as necessary.
Role
The principal role of the Remuneration Committee is to determine
and make recommendations to the Board on the Group’s policy for
the remuneration of the executive Directors of GKN plc. Within the
framework of the agreed policy, which is reviewed annually by the
Committee and the Board, the Committee has responsibility for:
■
determining the detailed terms of service of the executive Directors
and the Company Secretary, including basic salary, incentives and
benefits, and the terms upon which their service may be terminated;
■
determining the fees of the Chairman; and
■
recommending to the Chief Executive and monitoring the level and
structure of remuneration of the most senior executives immediately
below Board level.
The Committee’s authority and responsibilities are set out in written
terms of reference which are available on our website at www.gkn.com.
The terms of reference were reviewed during 2011 to ensure they
continue to reflect accurately the Committee’s remit.
Advice provided to the Committee
During 2011, the Committee received independent advice from NBS
on remuneration and incentive arrangements for executive Directors
and senior executives below Board level. Following a tender exercise,
the Committee appointed Deloitte to provide advice and input to
the Committee’s review of remuneration strategy. The nature and
quantum of other services provided by NBS and Deloitte was taken
into account in confirming their appointment to ensure that no conflict
of interest would arise in relation to the services they provide to the
Remuneration Committee.
Aon Hewitt (the parent company of NBS) provided advice to the
Company in relation to a UK pension de-risking project in 2011. It also
provides ongoing administration services relating to US employee
healthcare benefits and ongoing actuarial services relating to German
retirement benefits. Deloitte provides ongoing tax support to GKN
employees on international assignment, advice on other taxation
matters including transfer pricing and, in 2011, assistance with an
internal audit assignment.
The Committee also receives advice from the Company Secretary on
governance matters; input from the Chief Executive on the remuneration
of other executive Directors and of the Company Secretary; and input
from the Chief Executive and Group Human Resources Director on the
remuneration of senior executives immediately below Board level.
Activities
The Committee met on eight occasions in 2011; members’ attendance
at meetings is set out in the table on page 48.
The key matters that were considered by the Committee during the year
were as follows:
■
awards under the Group’s long term incentive arrangements for 2011
and the outturn of awards made in 2009 to senior executives below
Board level;
■
payments under the short term variable remuneration scheme for
2010 and proposals for 2011 awards;
■
salary review proposals for executive Directors, the Company
Secretary and senior executives immediately below Board level;
■
external advisers’ review of trends in remuneration practices,
benchmarking and governance;
■
UK Government consultative documents relating to executive
Directors’ remuneration;
■
a review of the Directors' remuneration and severance policies;
■
approval of the 2010 remuneration report; and
■
a detailed review of remuneration strategy for executive Directors
and senior executives.
Executive Directors
The Company’s remuneration strategy is aligned with its business
strategy, summarised on page 10, and is currently delivered through
the policy set out below. Changes to the policy, which will apply from
the 2012 financial year, are summarised at the end of this report.
The short term variable remuneration scheme supports the operational
performance of the business by measuring against key business
fundamentals of profit, margin, operating cash flow and net debt,
all of which underpin the Group’s strategic objectives; the long term
incentives reward executives for the Company’s performance measured
by growth in earnings and total shareholder return relative to companies
in the FTSE 350 Index; in setting performance targets under both short
and long term incentives, the Committee ensures through regular
monitoring that, whilst stretching, the targets are both realistic and
achievable without taking inappropriate business risks; and in
determining salary levels, the Committee ensures that there is
a strong link between pay and performance.
Remuneration policy
GKN’s remuneration policy for executive Directors is designed to attract,
retain and motivate executives of the high calibre required to ensure
that the Group is managed successfully to the benefit of shareholders.
To achieve this, a competitive package of incentives and rewards linked
to performance is provided.
In setting remuneration levels, the Committee takes into consideration the
remuneration practices found in other multinational companies based in
the UK and also ensures that the remuneration arrangements for executive
Directors are compatible with those for executives throughout the Group.
It also considers the most recent pay awards in the Group generally when
reviewing the basic salaries of the executive Directors.
Governance
The Remuneration Committee
58
.
Remuneration report
Continued
Summary of key elements of executive Directors' remuneration for 2011
Element of remuneration
Purpose
Basic salary
■
■
■
Provide the basis for a
market competitive package
to recruit and retain talent.
Recognise skills, experience
and responsibility.
Reward individual
performance.
Policy
■
To maintain salaries
within a competitive
market range of the
relevant employment
markets.
Basis of delivery
■
■
Short term variable
remuneration
■
■
Drive and reward the
achievement of short term
financial targets and the
delivery of key objectives
relevant to GKN’s long term
strategic objectives.
Deferred proportion
of award, delivered
in shares, provides a
retention element.
■
■
■
Annual awards based
on annual performance
against key financial
objectives.
Targets, whilst
stretching, do not
encourage inappropriate
business risks to
be taken.
Percentage of payment
deferred and awarded
in shares.
■
■
■
■
■
Longer term incentives
■
■
Drive and reward the
achievement of longer term
objectives aligned closely
to shareholders’ interests.
Retain key executives
over a longer term
measurement period.
■
■
Annual awards over a
three year measurement
period under the LTIP
and the ESOS.
Targets, whilst
stretching, do
not encourage
inappropriate business
risks to be taken.
■
■
■
■
Retirement and other benefits
■
■
Help recruit and retain.
Ensure adequate income
in retirement.
■
To provide market
competitive
arrangements.
■
■
For changes to future policy see pages 67 and 68.
Reviewed annually by the Committee
with any increase usually effective from
1 July. In its review, the Committee
considers external benchmark data
and takes into account individual
performance, Group profitability,
prevailing market conditions and recent
pay awards in the Group generally.
Performance of executive Directors is
reviewed to ensure that payment of
salaries in accordance with the stated
policy is entirely justified.
Stretching targets are set each year
reflecting business priorities which
underpin Group strategy and align with
financial key performance indicators.
Maximum payment opportunity is 110%
of basic salary.
Payments are determined by the
Committee after year end, based
on performance against targets.
Amount awarded above 65% of basic
salary is paid in deferred shares to be
held for two years.
Structure of plan is reviewed annually.
The LTIP is based on EPS growth
and the ESOS is based on relative
TSR performance.
Combined maximum potential annual
share award under both plans is 250%
of basic salary.
The Remuneration Committee must also
be satisfied that the underlying financial
performance of the Group justifies the
vesting of shares.
A personal shareholding requirement
must be satisfied before shares can
vest (see page 62).
Retirement benefits are provided by
means of an allowance which can be
delivered in cash or as payment to a
defined contribution retirement plan. In
circumstances where there are historical
contractual commitments, benefits in
part are provided through membership
of the GKN Group Pension Scheme.
Salary is supplemented with normal
benefits available to senior managers
including car allowance and healthcare
arrangements.
.
59
GKN plc
Annual Report
and Accounts 2011
The Committee believes that these proportions represent an
appropriate balance between certainty of income and incentive-based
remuneration linked to the achievement of GKN’s operational and
strategic objectives.
Basic salary
Salaries of executive Directors are reviewed annually by the Committee
taking into account individual performance, Group profitability,
prevailing market conditions, recent pay awards in the Group
generally and external benchmark data on remuneration.
In line with the Group’s budgeted average salary increase for all
management staff, the executive Directors received an annual salary
increase of 3% with effect from 1 July 2011. Marcus Bryson and Andrew
Reynolds Smith each received further increases of 4% with effect from
1 October 2011 reflecting the increased responsibilities assumed by
them on that date. On his appointment as Chief Executive on 1 January
2012, Nigel Stein’s salary was increased from £515,000 to £725,000. These
increases were designed to bring the salary of each executive Director to
a level which is in a competitive market range for their respective roles.
With effect from 1 January 2012 the basic annual salaries payable to
executive Directors are:
Director
Nigel Stein
Marcus Bryson
Andrew Reynolds Smith
William Seeger
Salary
£
725,000
450,000
450,000
422,300
The average basic salary of the nine executives in the most senior
executive grade below Board level whose remuneration is monitored
by the Remuneration Committee was £264,400 as at 31 December 2011
(all non-sterling amounts have been translated into sterling at the year
end exchange rate for this purpose).
Performance-related short term variable remuneration scheme (STVRS)
For the 2011 financial year, stretching targets related to a combination of
Group and, where appropriate, individual portfolio profit, margin and
cash flow performance and Group net debt were applied. Achievement
of on target performance would result in payments of approximately
55% of an executive Director’s salary and bonuses were capped at 110%
of salary.
Details of the targets applied and payments made in respect of the 2011
STVRS are set out in the second table on page 63.
STVRS payments in excess of 65% of base salary made to executive
Directors and some 80 senior executives below Board level are
compulsorily deferred and invested in GKN shares under the Group’s
Deferred Bonus Plan. Shares will normally be released after a two year
deferral period during which time any dividends earned are accrued
and an equivalent cash amount paid on release of the shares. Release
of such shares is not subject to any further performance conditions;
however in certain circumstances, such as resignation during the
deferral period, the shares may lapse.
Details of the amounts invested in respect of the STVRS payments for
the 2010 and 2011 financial years are set out in footnote (a) to the first
table on page 63.
The Remuneration Committee has discretion to alter targets to reflect
changed circumstances such as material changes in accounting
standards or changes in the structure of the Group. Payments to
executive Directors are based upon a percentage of basic salary
received during the year and do not form part of pensionable earnings.
Long term incentive arrangements
The long term incentive arrangements currently comprise the GKN Long
Term Incentive Plan which targets Earnings per Share (EPS) growth
and the GKN Executive Share Option Scheme which is based on Total
Shareholder Return (TSR).
The combined maximum potential annual award under the GKN Long
Term Incentive Plan and the GKN Executive Share Option Scheme is
250% of basic salary.
Under both plans the number of shares that vest depends on the
Group’s performance against the relevant targets during the three years
commencing on 1 January in the year of award and on satisfaction of a
personal shareholding requirement (see page 62). In addition, before
any shares become eligible for release or exercise, the Remuneration
Committee must be satisfied that this is justified by the underlying
financial performance of the Group over the measurement period. There
is no provision for the retesting of awards. The maximum number of
shares that could vest upon satisfaction of the relevant performance
condition in respect of each executive Director is set out in the tables
on pages 64 and 65.
Neither the GKN Long Term Incentive Plan nor the GKN Executive Share
Option Scheme contains provisions for the automatic release of awards
in respect of which the measurement period has not ended on a change
of control of GKN plc.
GKN Long Term Incentive Plan (LTIP)
Each executive Director may be awarded annually a right to receive
GKN shares up to a maximum value of 150% of basic salary. The
Remuneration Committee decides the level of awards in each year.
The number of shares awarded is calculated by reference to the average
of the daily closing prices of a GKN share during the preceding year.
Vesting levels for awards made in 2011 under the rules of the LTIP are
as follows:
Compound annual EPS(a) growth
12% or more
6%
Less than 6%
Between 6% and 12%
Vesting level
100%
30%
0
Straight line basis
(a) Normalised for tax, and excluding exceptional items, other net financing charges
and volatile IFRS charges or credits (see note 10 to the financial statements).
Following vesting, awards are not released to the Director for at least
one further year other than in the specific circumstances set out in the
rules of the LTIP. Dividends are treated as having accrued from the
beginning of the third year of the measurement period on any shares
that vest and the equivalent cash amount paid to the Director on release
of such shares.
The table on the following page sets out, in respect of each LTIP award
made within the last five years, the percentage which has vested and
the percentage of each outstanding award that would have vested had
the measurement period ended on 31 December 2011:
Governance
On the basis of the expected value of long term incentives and
achievement of on target performance for the purposes of the short
term variable remuneration scheme, the total annual remuneration
(excluding pension benefits) of each executive Director under the
Group’s remuneration policy is weighted between performance-related
and non performance-related elements, valued as at the time of award
of long term incentives, at around 60% and 40% respectively.
60
.
Remuneration report
Continued
LTIP
ESOS
Year of award
Performance condition
2007
2008
2009
2010
2011
TSR
No award
EPS
EPS
EPS
Percentage vested on maturity
or indicative vesting percentage
based on performance as at
31 December 2011
0 (ended on 31 December 2009)
N/A
100% (ended on 31 December 2011)
100% (performance after 24 months)
100% (performance after 12 months)
2009 awards:
performance targets were set by the Remuneration Committee
and took into account the impact of the severe recessionary
conditions on the Group’s earnings and market expectations of
earnings performance. They were aligned to the strategic plan
at the time of award and aimed to incentivise earnings recovery
following the recession;
■
■
EPS of 12.4p in 2011 was required for minimum vesting (30%)
and 15.5p for maximum vesting (100%).
2010 awards:
performance targets were set by the Remuneration Committee and
took into account the unusually low base 2009 earnings due to
recessionary conditions. They were aligned to the strategic plan at
the time of award and market expectations of GKN’s performance;
■
■
EPS of 15.3p in 2012 is required for minimum vesting (30%) and
18.0p for maximum vesting (100%).
GKN Executive Share Option Scheme (ESOS)
Each executive Director may be awarded annually an option to acquire a
number of GKN shares. The Remuneration Committee decides the level of
awards in each year. Annual award levels are not specifically capped under
the ESOS, but when combined with awards under the LTIP (which are
capped at 150% of basic salary) they cannot exceed 250% of basic salary.
Options granted under the ESOS are normally exercisable between the
third and tenth anniversary of the date of grant. The exercise price is fixed
at the market price of a GKN share at the time of grant.
Performance is measured by comparing the TSR from GKN shares
with the TSR from shares of companies in a comparator group
comprising the constituents of the FTSE 350 Index at the start of a
three year measurement period commencing on 1 January in the year
of award. The FTSE 350 Index was chosen as the comparator group
as it is a broadly based index containing more manufacturing and
engineering companies than the FTSE 100 Index.
Vesting levels under the rules of the ESOS are as follows:
TSR ranking in comparator group
Upper quartile
Median level
Below median level
Between median and upper quartile
Vesting level
100%
35%
0
Straight line basis
The TSR data and ranking information is obtained from NBS to ensure
that the comparative performance is independently verified.
The following table sets out, in respect of each ESOS award made
within the last five years, the percentage which has vested and the
percentage of each outstanding award that would have vested had
the measurement period ended on 31 December 2011:
Year of award
Performance condition
2007
2008
2009
2010
2011
TSR
No award
TSR
TSR
TSR
Percentage vested on maturity
or indicative vesting percentage
based on performance as at
31 December 2011
0 (ended on 31 December 2009)
N/A
100% (ended on 31 December 2011)
100% (performance after 24 months)
52% (performance after 12 months)
Retirement benefits
Retirement benefits take the form of a supplementary allowance,
expressed as a percentage of basic salary, which may be delivered
by means of either a cash payment or as a payment to a defined
contribution retirement plan. In certain cases, based on historical
contractual commitments, retirement benefits in part are delivered
by membership of the executive section of the GKN Group Pension
Scheme, which is a defined benefit scheme. The retirement provisions
are made in order to assist each executive Director towards securing
overall retirement benefits comparable in value with those available
under the pension scheme had it not been for the operation of the
earnings cap introduced by the Finance Act 1989 (some members have
specific individual pensionable earnings caps).
Details of the supplementary allowances paid to executive Directors in
the year are set out in the first table on page 63.
GKN’s defined benefit pension scheme provides executive Directors
with a pension of up to two-thirds of basic annual salary (up to their
pensionable earnings cap), from 1 September 2007 calculated on a
career average basis, on retirement at age 60 after 20 or more years’
service and proportionately less for shorter service or for retirement
before pension age. An employee contribution of 8.6% of salary up to
their pensionable earnings cap is required under the scheme. Details of
defined benefit provisions for executive Directors are set out in the first
table on page 66.
Following changes in the taxation of pensions introduced by the UK
Government from April 2006, for those Directors previously affected by
the limit on annual pensionable earnings, a notional limit has been
maintained beyond April 2006 so that, overall, the existing pension
and salary supplement arrangements are broadly unchanged (for some
members a specific individual pensionable earnings cap has been
introduced). No compensation is offered for any additional tax suffered
by the individual in the event that the value of their pension exceeds
the Lifetime Allowance. Further changes in the taxation of pensions
from 2011 have resulted in a change in policy which enables executive
Directors voluntarily to reduce their pensionable earnings cap so that
the value of their annual accrued pension does not exceed the Annual
Allowance of £50,000.
Executive Directors with non-UK service agreements typically receive
pension retirement benefits consistent with local practice. In particular,
in accordance with standard practice in the US, GKN makes a total annual
contribution equivalent to 11% of William Seeger’s basic salary and
any STVRS payment made in the relevant year to his qualified and
non-qualified defined contribution pension arrangement. The amount
contributed by GKN, as noted above, forms part of the overall pension
allowance payable to Mr Seeger of 40% of salary.
Benefits in kind
Benefits in kind comprise principally car and healthcare benefits.
The level of benefits provided to executive Directors and other senior
management is consistent with that provided by other major companies.
.
61
GKN plc
Annual Report
and Accounts 2011
Due to the complicated interaction between the UK and the US tax
regimes, tax and social security equalisation is applied to William
Seeger’s remuneration. Additional taxes which arise in excess of the
monthly contribution deducted from Mr Seeger’s salary are settled by
the Company in order to ensure that he is not disadvantaged by his
global tax position.
Executive Board changes
Nigel Stein was appointed Chief Executive Designate on 1 October 2011
and became Chief Executive on 1 January 2012. Mr Stein’s annual salary
with effect from the beginning of 2012 is £725,000. His other contract
terms remained unchanged.
Sir Kevin Smith retired as Chief Executive and from the Board on
31 December 2011. Details of his remuneration in respect of the
2011 financial year are given on pages 63 to 65. He received no
compensation payment on his retirement.
Service agreements
External appointments
The Board’s current policy is that, unless local employment practice
requires otherwise, the notice period in executive Directors’ service
agreements is one year. With the exception of William Seeger, the
executive Directors’ service agreements have no fixed term. William
Seeger has a US service agreement (also terminable on one year’s
notice) which terminates in any event on 31 December 2016 (unless
extended by prior agreement with Mr Seeger).
The Board recognises the benefit which GKN can obtain if executive
Directors of GKN serve as non-executive directors of other companies.
Subject to review in each case, the Board’s general policy is that each
executive Director may accept one non-executive directorship with
another company (but not the chairmanship of a FTSE 100 company)
from which the Director may retain the fees.
There is no contractual provision for predetermined compensation payable
upon early termination of an executive Director’s service agreement, other
than in the event of early termination following a change of control of GKN
plc. In the event of such an early termination (other than on a change of
control) the Remuneration Committee would apply the principles of the
severance policy adopted by the Board. Under this policy, which may be
varied in individual cases, an immediate lump sum severance payment
will be made to the Director equivalent to one year’s basic salary plus
one year’s pension contributions. Consideration would be given to the
inclusion in the severance payment of additional elements relating to
short term variable remuneration and major benefits in kind. However,
such additional elements will not normally be included where the
severance is as a result of underperformance. Consideration would also
be given to making the severance payment in 12 equal instalments which
will only be paid to the extent that the Director has not been able to
mitigate his loss by the date of the relevant payment.
In the event of the service agreement coming to an end by mutual
consent, the Remuneration Committee will approve such termination
arrangements as are appropriate in the particular circumstances.
If, in breach of its terms, termination of a Director’s service agreement
occurs on less than due notice within 12 months following a change in
control of GKN plc, a predetermined amount is payable to the Director
equivalent to one year’s basic salary, pension contributions, benefits
in kind and loss of entitlements under performance-related short term
remuneration arrangements (30% of base salary). No right to such
a payment arises simply by virtue of a change in control.
An enhancement to the pension rights of an executive Director upon
early retirement will only be considered in exceptional cases and a full
costing would be provided to the Remuneration Committee at the time
of its deliberations. In any event, such enhancement would not be
considered unless objectives set for the Director had been met or it
was otherwise merited in the opinion of the Remuneration Committee.
It is also the Board’s policy that, at the time of consideration of a proposed
appointment of an executive Director, the Remuneration Committee
will take into account the likely cost of severance in determining the
appropriateness of the proposed terms of appointment. In accordance
with the relevant provisions of the Companies Act 2006, no payment will
be made to a Director for loss of office or employment with the Company in
excess of the Director’s contractual obligations without the prior approval
of shareholders in general meeting.
Nigel Stein was a non-executive director of Wolseley plc until 22 March
2011. He received fees of £15,450 for the period 1 January to 22 March
2011 which he retained.
Chairman and non-executive Directors
Remuneration policy
The remuneration policy for the Chairman and the other non-executive
Directors is to pay fees in line with those paid by other UK listed
companies of comparable size and complexity. Such fees may include
additional payments to the Senior Independent Director and to
the Chairmen of Board Committees to reflect the significant extra
responsibilities attached to these positions.
The fees of the non-executive Directors (other than the Chairman),
together with any additional fees payable to the Senior Independent
Director and the Chairmen of Board Committees, are determined by
the Board upon the recommendation of the Chairman and Chief
Executive and are set at a level that the Board believes will attract
individuals with the necessary experience and ability to make a
substantial contribution to the Group’s affairs. The fees received by
the Chairman are determined by the Remuneration Committee. No
Director participates in deliberations concerning his own fee. Current
annual fee levels, which remain unchanged since 2008, are as follows:
Base fee
Chairman
Non-executive Directors
Additional fees
Senior Independent Director
Audit Committee Chairman
Remuneration Committee Chairman
£
300,000
50,000
£
5,000
11,000
10,000
Neither the Chairman nor the other non-executive Directors participate
in the Group’s short term variable remuneration or long term incentive
arrangements or in its pension scheme, nor do they receive benefits
in kind.
Terms of appointment
The terms of service of the Chairman and other non-executive Directors
are contained in letters of appointment.
The current policy for non-executive Directors is to serve on the Board
for nine years with interim renewals after three and six years, subject to
mutual agreement and annual performance reviews. Appointments may
be terminated upon three months’ notice by either party and there are
no provisions for compensation in the event of termination.
Governance
These benefits do not form part of pensionable earnings. Details of the
benefits in kind provided to executive Directors in 2011 are set out in the
first table on page 63.
62
.
Remuneration report
Continued
Non-executive Board changes
Historical TSR performance
Roy Brown will retire as Chairman on 3 May 2012 at the conclusion
of the AGM and will be succeeded by Michael Turner. He will receive
no compensation payment on his retirement.
TOTAL ShAREhOLDER RETuRN – %
On becoming Chairman, Mr Turner will receive fees of £300,000 per
annum. His appointment as Chairman is for an initial period of three
years terminable at any time upon 12 months’ notice by either party.
2009-2011
2007-2009
Tufan Erginbilgic joined the Board as a non-executive Director on
9 May 2011.
2006-2008
Shareholding requirement
In order to reinforce the alignment of their interests with those of
shareholders generally, all Directors are subject to a shareholding
requirement. Details of Directors’ shareholdings are given in the
second table on page 66.
2005-2007
LTIP Comparator
Group Median TSR
GKN TSR
2004-2006
ESOS Comparator
Group Median TSR
Executive Directors
Non-executive Directors
It is the Board’s policy that non-executive Directors will normally be
expected to acquire a holding of GKN shares of a value equivalent to
30% of one year’s basic fee within three years of appointment.
Satisfaction of share-based incentive arrangements
Awards made under the ESOS and LTIP may be satisfied by the issue of
new shares, the transfer of shares held in treasury or by shares held in
an employee benefit trust (EBT). Awards made under the Deferred
Bonus Plan are satisfied by shares held in the EBT.
In accordance with the recommendations of the Association of British
Insurers, the number of new shares that may be issued to satisfy awards
granted under the LTIP and ESOS and any other employee share scheme
is restricted to 10% of the issued ordinary share capital of the Company
over any 10 year period. Further, the number of new shares that may
be issued to satisfy awards granted under the LTIP and ESOS and any
other executive scheme is restricted to 5% of the issued ordinary share
capital of the Company over any 10 year period. At 31 December 2011,
the Company had used 1.7% of the share capital available under the 5%
in 10 years limit and 1.9% of the share capital available under the 10%
in 10 years limit.
-60 -40 -20
0
20
40
60
80 100
(%)
Historic LTIP awards used different comparator groups and for both the
LTIP and ESOS the TSR calculation methodology required is different from
that required by Schedule 8 to the Large and Medium-sized Companies
and Groups (Accounts and Reports) Regulations 2008 (the Regulations).
The chart above illustrates GKN’s TSR compared to the median TSR of the
relevant comparator group under the LTIP and ESOS in respect of the five
most recently completed measurement periods (no measurement period
ended in December 2010 as no long term incentive awards were made in
2008). For awards made in 2009 onwards, there is no LTIP comparator
group as LTIP awards were based on EPS from that date.
For the measurement periods under the LTIP that ended on 31 December
2006, 2007, 2008 and 2009, the comparator group comprised tailored
peer groups of approximately 40 international automotive and aerospace
companies (including GKN). The ESOS comparator groups comprised the
FTSE 350 Index constituent companies on 1 January in the first year of the
relevant measurement period.
TOTAL ShAREhOLDER RETuRN
140
120
Value (£)
Executive Directors are required to establish and maintain an
investment in GKN shares equivalent to at least 100% of their basic
salary. Under the current policy, the receipt of any shares by a Director
from an award made under the LTIP and ESOS is conditional upon the
shareholding requirement being met on the third anniversary of the
grant of the award. For these purposes any vested but unexercised
rights under the LTIP will be counted as shares.
100
80
60
40
20
0
During the year, the EBT purchased 2,213,306 shares and at
31 December 2011 it held 2,219,116 shares (2010: 5,810). The shares
were purchased on the market by the EBT and will be used to satisfy
awards under the Group’s long term incentive arrangements. The EBT
has waived the right to receive dividends paid on these shares.
2006
2007
2008
GKN TSR
FTSE 350 Index TSR
2009
2010
2011
Source: New Bridge Street
The chart above is prepared in accordance with the Regulations. It
shows the Company’s TSR and that of the FTSE 350 Index, based on an
initial investment of £100, over the five-year period to the end of 2011.
The FTSE 350 Index was chosen for this chart as it is a broadly based
index which contains more manufacturing and engineering companies
than the FTSE 100 Index.
.
63
GKN plc
Annual Report
and Accounts 2011
Directors’ remuneration 2011
With the exception of the dates shown in the first table below and in the first two tables on page 64 and the section headed ‘Share interests’ on page
66, the information set out on pages 63 to 66 represents the auditable disclosures required by Schedule 8 to the Large and Medium-sized Companies
and Groups (Accounts and Reports) Regulations 2008 which have been audited by the Company’s auditors, PricewaterhouseCoopers LLP.
The remuneration of the executive Directors who served during the year was as follows:
Sir Kevin Smith
Marcus Bryson
Andrew Reynolds Smith
William Seeger(g)
Nigel Stein
Basic salary
£000
24.01.03
01.10.07
14.11.07
11.02.08
22.08.01
748
425
420
416
500
321(b)
280
144(b)
220
204
2,509
1,169
Other benefits
£000
Supplementary
pension
allowance(c)
Total 2011
£000
Car allowance
£000
Total 2010
£000(d)
14
15
12
12
12
20(e)
41(f )
5
16
4
299
144
123
166
169
1,402
905
704
830
889
1,493
684
767
825
930
65
86
901
4,730
4,699
(a) 2011 STVRS payments up to 65% of base salary were paid in cash and are included in the table above. An amount of £113,046 (2010: £115,593) will be deferred into shares
under the Deferred Bonus Plan for Marcus Bryson. No amounts will be deferred for 2011 and the full amounts will be paid as cash to Andrew Reynolds Smith (2010: £164,000);
William Seeger (2010: £154,629); Nigel Stein (2010: £187,625) and Sir Kevin Smith (2010: £285,426).
(b) The 2011 STVRS payments agreed by the Remuneration Committee take into account the one-off charge (£19 million) relating to the Hoeganaes plant closure at Gallatin
and, in addition, the Remuneration Committee exercised its discretion to reduce the 2011 STVRS payments made to Sir Kevin Smith, Chief Executive, and Andrew Reynolds Smith,
Chief Executive Powder Metallurgy.
(c) Supplementary pension allowances delivered to executive Directors by means of either a cash payment or as a payment to a defined contribution retirement plan to assist
them towards securing retirement benefits. The pension cost for William Seeger includes GKN’s contribution to Mr Seeger’s US qualified and non-qualified defined contribution
pension arrangement.
(d) Includes the supplementary pension allowances paid to executive Directors in 2010.
(e) Includes an amount of £13,208 in respect of holiday cancellation costs in order to take charge personally of the management of events at Hoeganaes, Gallatin following closure
of the plant in May 2011.
(f) Includes a one-off amount of £35,762 relating to a payment made by the Company in connection with a US tax liability for Marcus Bryson incurred during his employment with
GKN Aerospace in the US.
(g) Under the terms of his service agreement, Mr Seeger’s emoluments are paid semi-monthly in US$, converted at the exchange rate published in the UK Financial Times on the
first business day of the relevant month. Mr Seeger is a US National who relocated to the UK in 2008 in the role of Finance Director. Mr Seeger had full US Federal and State
hypothetical tax withholding through the US payroll in 2011. As a result of the complicated interaction of the UK and US tax regimes, a payment of £425,188 (2010: £387,996)
was made by GKN to the UK and US tax authorities on his behalf in order to avoid a period of double taxation. All subsequent tax refunds resulting from the tax paid by GKN
will be refunded to the Company in due course. The best estimate of the amount which is not expected to be refunded based on information available to date is £167,847
(2010: £166,684); these amounts are not included in the total remuneration shown above.
The 2011 performance-related payments made under the STVRS were triggered by the achievement of a number of Group and, where appropriate,
individual portfolio targets relating to profit, margin and cash flow performance and Group net debt. The maximum amount that an individual could
receive and the total payments to executive Directors under the 2011 STVRS (before the exercise of discretion referred to in note (b) above) were
as follows:
Element
Profit
Margin
Cash flow
Group net debt
Target %
Maximum %
Actual %
20
20
10
5
45
40
10
15
20.0 to 30.4
8.0 to 40.0
0.0 to 10.0
4.5
55
110
32.5 to 84.9
Governance
Executive Director
Date of service
agreement
Performance
related
(STVRS – cash)
£000(a)
64
.
Remuneration report
Continued
The remuneration of the non-executive Directors who served during the year was as follows:
2011
£000
2010
£000
2012 AGM
09.05.14
31.05.13
28.02.14
19.12.13
03.05.15
300
32
50
60
61
55
300
–
29
57
61
53
Date of leaving
the Board
Expiry of
current term
2011
£000
2010
£000
31.10.10
06.05.10
06.05.10
N/A
N/A
N/A
–
–
–
42
17
23
558
582
Date of current letter
of appointment
Non-executive Director
Roy Brown
Tufan Erginbilgic(b)
Shonaid Jemmett-Page
Richard Parry-Jones
John Sheldrick
Michael Turner
28.04.09
04.04.11
28.04.10
03.02.11
05.01.11
24.11.11
Expiry of
current term(a)
(a) In accordance with provisions of the UK Corporate Governance Code, all Directors offer themselves for annual re-election.
(b) Appointed 9 May 2011.
Former non-executive Directors
Helmut Mamsch
Sir Christopher Meyer
Sir Peter Williams
Directors’ aggregate emoluments for 2011 amounted to £5.6 million (2010: £6.4 million).
Long term incentive plans
Awards over GKN shares under the LTIP held by the executive Directors who served during the year, together with any movements, are shown below:
LTIP
Awards held
1 January 2011
Sir Kevin Smith
12.08.09
11.08.10
400,000
678,383
–
–
–
226,513(b)
1,078,383
–
226,513
851,870
Marcus Bryson
12.08.09
11.08.10
01.04.11
200,647
381,125
–
–
–
343,558
–
–
–
200,647
381,125
343,558
581,772
343,558
–
925,330
Andrew Reynolds Smith
12.08.09
11.08.10
01.04.11
214,024
381,125
–
–
–
343,558
–
–
–
214,024
381,125
343,558
595,149
343,558
–
938,707
214,024
372,050
–
–
–
335,378
–
–
–
214,024
372,050
335,378
586,074
335,378
–
921,452
260,841
453,720
–
–
–
408,997
–
–
–
260,841
453,720
408,997
714,561
408,997
–
1,123,558
William Seeger
Nigel Stein
12.08.09
11.08.10
01.04.11
12.08.09
11.08.10
01.04.11
Awards made
during year(a)
Awards lapsed
during year
Awards held
31 December 2011
Date of grant
400,000
451,870
(a) The GKN share price used to calculate the number of shares the subject of the award, under the rules of the LTIP, was 146.70p. The closing mid-market price of a GKN share
on the date of award was 204.70p. The measurement period relating to these awards ends on 31 December 2013 and the performance condition is described on page 59.
(b) Sir Kevin Smith retired on 31 December 2011. Under the rules of the LTIP, shares under his 2009 and 2010 awards are eligible for release at the end of the relevant measurement
periods subject to satisfaction of the performance criteria. The number of shares subject to his 2010 award has been reduced by 226,513 (shown as lapsed in the table above)
to reflect his period of service during the performance period.
(c) During 2011, no awards vested and no shares were released to Directors. The measurement period for the 2009 awards ended on 31 December 2011 with 100% of the performance
condition being met. The shares will normally be released on the fourth anniversary of the date of award subject to the Directors meeting the personal shareholding requirement.
Dividends are treated as having accrued from 1 January 2011 on the number of shares that are due to vest and a cash equivalent amount will be paid on release of the shares.
.
65
GKN plc
Annual Report
and Accounts 2011
ESOS
Options
exercised
during year
Shares
under option
31 December
2011
–
–
–
222,541(c)
–
–
–
–
147,196
790,481
1,154,509
443,948
–
222,541
–
2,536,134
–
–
–
168,353
–
–
–
–
–
–
–
–
22,638
579,124
334,323
168,353
936,085
168,353
–
–
1,104,438
33,957
87,095
617,732
356,612
–
–
–
–
–
168,353
–
–
–
–
–
–
–
–
–
–
33,957
87,095
617,732
356,612
168,353
1,095,396
168,353
–
–
1,263,749
617,732
356,612
–
–
–
164,345
–
–
–
–
–
–
617,732
356,612
164,345
974,344
164,345
–
–
1,138,689
129,878
359,834
752,861
434,621
–
–
–
–
–
200,420
–
–
–
–
–
–
–
–
–
–
129,878
359,834
752,861
434,621
200,420
1,677,194
200,420
–
–
1,877,614
Date of grant
Shares
under option
1 January
2011
Options
granted
during year
Sir Kevin Smith
15.03.02
19.03.03
12.08.09
07.05.10
147,196
790,481
1,154,509
666,489
–
–
–
–
2,758,675
Marcus Bryson
15.03.02
12.08.09
07.05.10
01.04.11
22,638
579,124
334,323
–
Andrew
Reynolds Smith
15.03.02
19.03.03
12.08.09
07.05.10
01.04.11
William Seeger
Nigel Stein
12.08.09
07.05.10
01.04.11
15.03.02
19.03.03
12.08.09
07.05.10
01.04.11
Options
lapsed
during year
Exercise
price(a)
Exercisable
from(b)
Exercisable
to(b)
207.87p
110.04p
110.08p
134.60p
15.03.05
19.03.06
12.08.12
07.05.13
14.03.12
30.06.12
11.02.13
06.11.13
207.87p
110.08p
134.60p
199.58p
15.03.05
12.08.12
07.05.13
01.04.14
14.03.12
11.08.19
06.05.20
31.03.21
207.87p
110.04p
110.08p
134.60p
199.58p
15.03.05
19.03.06
12.08.12
07.05.13
01.04.14
14.03.12
18.03.13
11.08.19
06.05.20
31.03.21
110.08p
134.60p
199.58p
12.08.12
07.05.13
01.04.14
11.08.19
06.05.20
31.03.21
207.87p
110.04p
110.08p
134.60p
199.58p
15.03.05
19.03.06
12.08.12
07.05.13
01.04.14
14.03.12
18.03.13
11.08.19
06.05.20
31.03.21
(a) Adjusted where appropriate to take account of the dilutive effect of the 2009 rights issue.
(b) Represents the earliest exercise date (assuming satisfaction of the relevant performance condition and personal shareholding requirement) and latest expiry date of
options held by the Director during the year. The performance condition is described on page 60.
(c) Sir Kevin Smith retired on 31 December 2011. The number of shares subject to his 2010 award has been reduced by 222,541 (shown as lapsed in the table above) to reflect his
period of service during the performance period.
(d) During 2011, no options were exercised by Directors.
(e) The closing mid-market price of a GKN share on 30 December 2011 (being the last trading day in 2011) was 183p and the price range during the year was 157p to 245p.
Deferred Bonus Plan
Share awards held by the executive Directors under the Deferred Bonus Plan at 31 December 2011 were as follows: Sir Kevin Smith – 143,013;
Marcus Bryson – 57,918; Andrew Reynolds Smith – 82,172; William Seeger – 77,477; Nigel Stein – 94,009.
These represent the amount of bonus earned for the 2010 financial year deferred into shares and were granted on 1 April 2011 after the announcement
of the 2010 annual results. The closing mid-market price of a GKN share on the date of award was 204.7p. Awards will be released on the second
anniversary of the date of grant. Sir Kevin Smith retired on 31 December 2011 and his shares will be released to him in accordance with the rules
of the plan.
Governance
Options over GKN shares under the ESOS held by the executive Directors who served during the year, together with any movements, are shown below:
66
.
Remuneration report
Continued
Retirement benefits
The table below sets out the defined benefit provision for those executive Directors whose retirement benefits are delivered in part through the
GKN Group Pension Scheme.
Accrued annual
pension at
31 December
2011(a)
£000
Marcus Bryson
Andrew Reynolds Smith
Nigel Stein
173
34
71
Accrued annual
pension at
31 December
2010(a)
£000
163
30
66
Transfer value
of accrued
annual pension
at 31 December
2011
£000
Transfer value
of accrued
annual pension
at 31 December
2010
£000
4,285
566
1,690
3,401
383
1,275
Change in
transfer value
in 2011(b)
£000
885
183
415
Transfer value at
31 December 2011
Increase in
of increase in
annual pension
annual pension
(c)
in 2011
in 2011(c)
£000
£000
46
44
55
2
3
3
(a) The accrued annual pension includes entitlements earned as an employee prior to becoming a Director as well as for qualifying services after becoming a Director.
(b) A transfer value represents the present value of accrued benefits. It does not represent an amount of money which the individual is entitled to receive. The change in transfer
value over the year reflects the additional pension earned and the effect of changes in stock market conditions during the year. In particular, a reduction in the discount rate
assumption and a strengthening of the mortality assumption have resulted in a significant increase in the transfer value, in addition to that arising from the additional benefit
accrued. The method and assumptions used to calculate transfer values from the GKN Group Pension Scheme were last reviewed and adopted by the Trustee in February 2011
in order to meet the requirements of new transfer value legislation which came into effect from that date.
(c) Increase over the year in accrued pension in excess of inflation to which the Director would have been entitled on leaving service.
Total amounts paid to executive Directors as supplementary cash allowances and/or as payments to defined contribution retirement plans are
included in the supplementary pension allowance column in the remuneration table on page 63. For Sir Kevin Smith and William Seeger, such
payments comprise their retirement benefits in full.
Share interests
The interests of the Directors, and of their connected persons, in GKN shares are set out below:
Shareholdings as at
Directors as at 31 December 2011
31 December
2011
1 January
2011
Executive Directors
Sir Kevin Smith
Marcus Bryson
Andrew Reynolds Smith
William Seeger
Nigel Stein
1,481,856
207,214
283,123
135,000
510,398
1,460,928
207,214
283,123
100,000
510,398
80,780
80,780
30,000
12,900
20,000
20,000
160,000
–
7,854
20,000
20,000
160,000
Chairman
Roy Brown
Non-executive Directors
Tufan Erginbilgic
Shonaid Jemmett-Page
Richard Parry-Jones
John Sheldrick
Michael Turner
There were no changes in the Directors’ interests in shares or options between 31 December 2011 and 27 February 2012.*
This report, approved by the Board, has been prepared in accordance with the requirements of the Companies Act 2006 (the Act), the Listing Rules of
the UK Listing Authority and Statutory Instrument 2008/410: The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations
2008. Furthermore, the Board has applied the principles of good governance relating to Directors’ remuneration contained within the UK Corporate
Governance Code. The Act requires the auditors to report to the Company’s shareholders on the audited information within this report and to state
whether, in their opinion, those parts of the report have been prepared in accordance with the Act. The auditors’ opinion is set out on page 121 and
those aspects of the report which have been subject to audit are clearly marked.
*
As at 29 February 2012, there were no changes in the interests of the Directors other than in respect of Sir Kevin Smith who exercised the
following awards in full: on 28 February 2012 – the 2003 ESOS award and 2011 DBP award; and on 29 February 2012 – the 2009 LTIP award.
.
67
GKN plc
Annual Report
and Accounts 2011
Future policy and remuneration arrangements
Following a comprehensive review by the Remuneration Committee during 2011 of the existing policy and remuneration arrangements for executive
Directors, a number of changes are being introduced with effect from the 2012 financial year. The changes, which are summarised below, aim to
improve the alignment of the remuneration framework with the interests of shareholders and with GKN’s strategic objectives, in particular the delivery
of sustainable earnings growth. (The introduction of the new long term incentive arrangements is subject to shareholders’ approval at the AGM in
May 2012.)
Overall remuneration package
GKN’s policy for executive Directors is to maintain total compensation within a competitive market range of the relevant employment market,
taking into account an individual’s experience, responsibility and performance, Group profitability, prevailing market conditions and pay awards
in the Group generally. Whilst the structure of the reward for executive Directors is changing, as described below, the overall quantum will
remain unchanged.
Basic salary
The intention is to maintain salary increases for executive Directors in line with the wider Group employee population, other than in the event of
changes in role and responsibilities.
Short term variable remuneration
For 2012, the strategic measures aim to drive improvements in health and safety performance and levels of stock turn. Achievement of these measures
will result in payments of 10% of salary; the Committee will consider increasing this proportion in future years.
A clawback provision is being introduced on all outstanding deferred share awards made under the Group’s Deferred Bonus Plan (DBP) in the event of
a material misstatement or gross misconduct.
Long term incentive arrangements
Subject to shareholders’ approval, the Sustainable Earnings Plan (SEP) is being introduced to replace the current long term incentive arrangements,
i.e. the LTIP which rewards for EPS growth and the ESOS which rewards for GKN’s TSR against the FTSE 350. TSR is no longer considered an appropriate
measure of performance due to the difficulties in identifying an appropriate comparator group to GKN with its unique mix of automotive and
aerospace businesses; the use of a broad based equity index can produce arbitrary outcomes. Recognising the fundamental alignment of EPS to
GKN’s stated growth strategy and the objective of creating long term shareholder value, the performance measure for the SEP is based on EPS growth.
Awards under the SEP will comprise two elements: a Core Award and a Sustainability Award. Both elements are linked and are granted on the same
date. The whole award (i.e. both the Core Award and the Sustainability Award) are subject to the achievement of stretching EPS growth targets over
the initial three year performance period.
EPS targets for the initial three year performance period will be the same as the present LTIP scheme (see page 59). However, in line with market
practice, the proportion of the award that will vest for threshold performance is being reduced to 25% of the award (currently the threshold vesting
under the LTIP and ESOS is 30% and 35% respectively). The Sustainability Award is then subject to a further condition that the highest EPS achieved
in this three year period is sustained in a further two year period.
In order to ensure that growth is based on ‘quality’ earnings, which are sustainable over the long term and which will lead to the creation of
shareholder value, vesting of awards will be subject to a financial underpin. This will involve consideration by the Remuneration Committee of the
Group’s return on capital including its performance relative to the prevailing ROIC target as published in the annual report (see page 13), shareholder
expectations, new investment performance, and GKN’s cost of capital. The key conclusions from this assessment and the basis for any adjustment to
the levels of vesting will be disclosed retrospectively in the remuneration report.
The time horizon of the long term incentive arrangements is being extended to five years to reflect better the long term nature of the Group’s business.
The award is subject to stretching EPS growth targets which, if achieved, will result in half of the Core Award being receivable after three years and
the remaining half of the Core Award receivable after five years. The Sustainability Award is only released at the end of five years if the highest EPS
attained (in the initial three year performance period) is sustained. (Further details of the SEP can be found in the 2012 AGM circular.)
Retirement benefits
Retirement benefits principally take the form of a supplementary allowance expressed as a percentage of basic salary, which may be delivered by
means of either a cash payment or as payment to a defined contribution retirement plan. Under current arrangements the relevant amount is 40%
of basic salary. For future executive Director appointments this will be reduced to 25% of basic salary.
Shareholding requirement
Whilst the value of the shareholding requirement will remain unchanged at 100% of salary for all executive Directors, the current, rather complex,
rules will be simplified such that until the requirement is met 50% of deferred shares under the DBP and 50% of shares that vest under the SEP must
be retained (net of tax in both cases).
Governance
An element of the Group’s short term variable remuneration scheme (STVRS) will in future be assessed against strategic measures linked to
measurable and quantitative targets which support the delivery of GKN’s long term strategic agenda. These will complement the existing financial
measures which make up the remainder of the ‘bonus’ opportunity and which align with the Group’s financial KPIs. The Committee has flexibility to
select appropriate strategic measures each year dependent on the specific business needs and strategic goals of the Group. Payment under this
element will be subject to the achievement of a threshold level of financial performance.
68
.
Remuneration report
Continued
The key elements of the new remuneration framework in respect of short and long term incentive arrangements, and how these have changed from
the current arrangements, are summarised in the following table.
Current framework
STVRS
Future framework
110% of salary maximum
Unchanged
110% of salary maximum
All financial measures (profit, margin,
cash flow and net debt)
Improved strategic
alignment
100% financial measures
10% strategic measure(s) (subject to
threshold financial performance)
The Committee intends to review the
proportion based on strategic measures
annually and intends to increase the
proportion in the future
Long term incentives
Amounts in excess of 65% of salary
deferred for two years
Unchanged
Amounts in excess of 65% of salary deferred
for two years
No clawback
Strengthened
Clawback introduced on the deferred
element for material misstatement or
gross misconduct
Two plans:
ESOS
■
LTIP
Simplified
Typical face value of awards (% salary):
■
ESOS: c. 80%
■
LTIP: c. 120%
(2011 awards)
Unchanged
■
One plan:
Sustainable Earnings Plan
■
Typical face value of awards (% salary):
■
Sustainable Earnings Plan: 174%
Expected value of awards: c. 90%
Expected value of awards: c. 90%
Maximum annual face value (% of salary):
Sustainable Earnings Plan: 200%
Maximum annual face value
(% of salary):
■
ESOS and LTIP: 250% (with
maximum LTIP award being
no more than 150%)
Reduced
Time horizon:
■
ESOS: Three years
■
LTIP: Three years with additional
one year holding period
Improved strategic
alignment
■
Performance measures:
ESOS: TSR vs FTSE 350
■
LTIP: EPS growth
Improved strategic
alignment
■
■
■
Time horizon:
Sustainable Earnings Plan: Initially
measured over three years; sustained
growth is then measured over a further
two year period
Performance measures:
Sustainable Earnings Plan: EPS growth
.
69
GKN plc
Annual Report
and Accounts 2011
Other statutory information
Annual General Meeting
Rights and obligations attaching to shares
The Annual General Meeting of the Company will be held at 2.00 pm on
Thursday, 3 May 2012 at the Cavendish Conference Centre, 22 Duchess
Mews, London W1G 9DT. The notice of meeting, which includes the
special business to be transacted at the meeting, is included within
the AGM circular. The circular also contains an explanation of all the
resolutions to be considered at the AGM.
Holders of ordinary shares are entitled to receive dividends when
declared, to receive the Company's annual report, to attend and speak
at general meetings of the Company, to appoint proxies and to exercise
voting rights.
The Directors recommend a final dividend of 4.0p per ordinary share in
respect of the year ended 31 December 2011, payable to shareholders on
the register at the close of business on 27 April 2012. This, together with
the interim dividend of 2.0p paid in September 2011, brings the total
dividend for the year to 6.0p.
Issued share capital
At 31 December 2011, the issued share capital of the Company consisted
of 1,590,529,859 ordinary shares of 10p (2010: 1,590,529,859 shares),
of which 37,388,984 shares (2.35%) were held in treasury (2010:
37,565,178 shares; 2.36%). A total of 176,194 ordinary shares were
issued during the year in connection with the exercise of options under
the Company’s share option schemes (2010: 636,687 shares), all of
which were transferred from treasury (2010: 634,401 shares).
GKN operates an Employee Benefit Trust (EBT) to satisfy the vesting and
exercise of awards of ordinary shares made under the Group’s sharebased incentive arrangements. As at 31 December 2011, the EBT held
2,219,116 shares (2010: 5,810 shares), being 0.14% of the Company’s
issued share capital (2010: 0.003%) including treasury shares.
The ordinary shares are listed on the London Stock Exchange. In
addition, GKN has a sponsored Level 1 American Depositary Receipt
(ADR) programme for which the Bank of New York Mellon acts as
Depositary. The ADRs trade in the US over-the-counter market where
each ADR represents one GKN ordinary share.
The trustee of the EBT does not exercise any voting rights in respect of
shares held by the EBT. Once the shares are transferred from the EBT to
share scheme participants, the participants are entitled to exercise the
voting rights attaching to those shares.
The EBT waived payment of the 2010 final dividend in May 2011 and the
interim dividend in September 2011.
Full details of the rights and obligations attaching to the Company’s
shares are contained in the articles of association.
Restrictions on the transfer of securities
Whilst the Board has the power under the articles of association to
refuse to register a transfer of shares, there are no restrictions on the
transfer of shares.
Under the Company’s articles, the Directors have power to suspend
voting rights and the right to receive dividends in respect of shares in
circumstances where the holder of those shares fails to comply with
a notice issued under section 793 of the Companies Act 2006.
The Company is not aware of any agreements between shareholders
that may result in restrictions on the transfer of securities or
voting rights.
Substantial shareholders
As at 31 December 2011*, the Company had been notified of the following holdings of voting rights in its shares under Rule 5 of the Disclosure Rules
and Transparency Rules of the Financial Services Authority:
Shareholder
Nature of interest
Standard Life Investments Ltd
Direct
Indirect
7.00%
4.99%
Total
11.99%
Direct
Indirect
Contracts for difference
0.15%
4.98%
0.02%
Ameriprise Financial Inc
% of voting rights
Total
5.15%
Capital Group International Inc
Indirect
4.95%
Legal & General Group plc
Direct
3.89%
* see footnote on page 71.
Governance
Dividend
On a show of hands at a meeting of GKN, every member present holding
ordinary shares has one vote. On a poll taken at a meeting, every
member present and entitled to vote has one vote in respect of each
ordinary share held by him. In the case of joint shareholders only the
vote of the senior joint holder who votes (and any proxy duly authorised
by him) may be counted. Shares held in treasury carry no voting rights.
70
.
Other statutory information
Continued
Directors
The Directors who served during the financial year were as follows:
Name
Position as at 31 December 2011
Service in the year ended 31 December 2011
Roy Brown
Sir Kevin Smith
Marcus Bryson
Tufan Erginbilgic
Shonaid Jemmett-Page
Richard Parry-Jones
Andrew Reynolds Smith
William Seeger
John Sheldrick
Nigel Stein
Michael Turner
Chairman
Chief Executive(a)
Chief Executive Aerospace and Land Systems
Independent non-executive Director
Independent non-executive Director
Independent non-executive Director
Chief Executive Automotive and Powder Metallurgy
Finance Director
Independent non-executive Director
Chief Executive Designate(b)
Senior Independent Director
Served throughout the year
Served throughout the year
Served throughout the year
Appointed 9 May 2011
Served throughout the year
Served throughout the year
Served throughout the year
Served throughout the year
Served throughout the year
Served throughout the year
Served throughout the year
(a) Retired on 31 December 2011.
(b) Appointed Chief Executive on 1 January 2012.
Membership of the Board and biographical details of the Directors in
office at the date of this report are shown on pages 44 and 45. Further
details relating to Board and Committee composition are disclosed in
the corporate governance statement on pages 46 to 52.
Following his appointment to the Board in May 2011 and in accordance
with the Company’s articles of association, Tufan Erginbilgic will retire
and offer himself for election at the 2012 AGM. With the exception of
Roy Brown, who retires at the conclusion of the AGM, all other Directors
will retire and offer themselves for re-election in accordance with the
UK Corporate Governance Code.
The articles of association provide that a Director may be appointed
by an ordinary resolution of shareholders or by the existing Directors,
either to fill a vacancy or as an additional Director. Further information
on GKN’s internal procedures for the appointment of Directors is given
in the corporate governance statement.
The remuneration report, which includes details of service agreements
and the Directors’ interests in GKN shares, is set out on pages 56 to 68.
Copies of the service contracts of the executive Directors and the
letters of appointment of the non-executive Directors are available for
inspection at the Company’s registered office during normal business
hours and will be available for inspection at the Company’s AGM.
A copy of the deed poll of indemnity is available for inspection at the
Company’s registered office during normal business hours and will be
available for inspection at the Company’s AGM.
The Company has also arranged appropriate insurance cover for any
legal action taken against its Directors and officers.
Conflicts of interest
Under the Companies Act 2006, Directors have a statutory duty to avoid
conflicts of interest with the Company. As permitted by the Act, the
Company’s articles of association enable Directors to authorise actual
and potential conflicts of interest.
Formal procedures for the notification and authorisation of such
conflicts are in place. These procedures enable non-conflicted Directors
to impose limits or conditions when giving or reviewing authorisation
and require the Board to review the register of Directors’ conflicts
annually and on an ad hoc basis when necessary. Any potential
conflicts of interest in relation to newly appointed Directors are
considered by the Board prior to appointment.
Articles of association
The Company’s articles of association can only be amended by special
resolution of the shareholders. GKN’s current articles are available on
our website at www.gkn.com.
Directors’ powers
The Board of Directors may exercise all the powers of the Company
subject to the provisions of relevant legislation, the Company’s articles
of association and any directions given by the Company in general
meeting. The powers of the Directors include those in relation to the
issue and buyback of shares.
At the 2011 AGM the Company was authorised to purchase up to
155,296,468 of its ordinary shares. No shares were purchased under
this authority in 2011. A special resolution to renew the authority will
be proposed at the 2012 AGM.
Directors’ indemnities
Pursuant to the articles of association, the Company has executed a
deed poll of indemnity for the benefit of the Directors of the Company
and persons who were Directors of the Company in respect of costs
of defending claims against them and third party liabilities. These
provisions remain in force. The indemnity provision in the Company’s
articles of association also extends to provide a limited indemnity in
respect of liabilities incurred as a director, secretary or officer of an
associated company of the Company.
Change of control
The Company’s subsidiary, GKN Holdings plc, has entered into
agreements with 14 banks for 21 bilateral banking facilities totalling
£675 million. Each agreement provides that, on a change of control
of GKN plc, the respective bank can give notice to GKN Holdings plc to
repay all outstanding amounts under the relevant facility.
All of the Company’s share schemes contain provisions relating to a
change of control. Outstanding options and awards normally vest and
become exercisable on a change of control subject to the satisfaction
of any performance conditions at that time.
The executive Directors’ service agreements provide for payment of a
predetermined amount equivalent to one year’s salary and benefits on
termination by the Company of a Director’s service agreement on less
than due notice within 12 months of a change of control of GKN plc.
Further information is given in the remuneration report on page 61.
.
71
GKN plc
Annual Report
and Accounts 2011
Payments to suppliers
Auditors & disclosure of information
It is Group policy to abide by the payment terms agreed with suppliers,
provided that the supplier has performed its obligations under the
contract. Given the nature and diversity of the Group’s international
purchasing arrangements and contracts, it is not Group policy to follow
any specific code or standard in relation to payment practice.
Resolutions to reappoint PricewaterhouseCoopers LLP as auditors
of the Company and to authorise the Directors to determine their
remuneration will be proposed at the 2012 AGM.
Donations
In 2011, charitable donations made by Group companies around the world
totalled £747,800, of which £34,340 was to UK registered charities.
In addition, the GKN Millennium Trust, a UK charitable trust established
in 1995, donated a total of £137,000 to the Engineering Development
Trust and Young Enterprise in 2011. During the year, the Trust also
provided funding totalling £108,000 for the winning projects of the
Group’s 2009 Evolve competition, designed to foster long term
sustainable links in local educational establishments.
The GKN Foundation, an independent US charitable body established in
1951, supported approximately 300 organisations in the US in 2011 with
contributions totalling almost US $700,000.
In accordance with the Group’s policy, no political donations were made
and no political expenditure was incurred during 2011.
The Group’s US Aerospace business has a Political Action Committee
(PAC) which is funded entirely by employees and their spouses. No
funds are provided to the PAC by GKN and any administrative services
provided to the PAC by the US Aerospace business are fully charged to
and paid for by the PAC, and the Company does not therefore consider
these to be political donations. Employee contributions are entirely
voluntary and no pressure is placed on employees to participate.
Under US law, an employee-funded PAC must bear the name of the
employing company.
This Directors’ report comprising the inside front cover and pages 1 to 72
has been approved by the Board and is signed on its behalf by
Judith Felton
Company Secretary
27 February 2012
As at 1 March 2012, Standard Life Investments Ltd’s holding in the
Company amounted to 11.05%, 6.81% of which was held directly and
4.24% of which was held indirectly. As at this date, the Company had
not been advised of any further changes or additions to the interests
notified under Rule 5 of the Disclosure Rules and Transparency Rules of
the Financial Services Authority as set out on page 69.
Governance
GKN plc, as a holding company, did not have any amounts owing to
trade creditors at 31 December 2011.
Each of the Directors who held office at the date of approval of this
Directors’ report confirms that, so far as he/she is aware, there is
no relevant audit information of which the Company’s auditors are
unaware. Each Director has taken all the steps that he/she ought to
have taken as a Director in order to make himself/herself aware of any
relevant audit information and to establish that the Company’s auditors
are aware of that information.
72
.
Statement of Directors’ responsibilities
The Directors are responsible for preparing the annual report, the
Directors’ remuneration report and the Group and Company financial
statements in accordance with applicable law and regulations.
Each of the Directors as at the date of the annual report, whose names
and functions are set out on pages 44 and 45, confirm that to the best of
their knowledge:
Company law requires the Directors to prepare Group and Company
financial statements for each financial year. Under that law, the
Directors are required to prepare the Group financial statements in
accordance with applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the European Union (EU) and have
elected to prepare the Company financial statements in accordance
with applicable law and United Kingdom (UK) Accounting Standards
(UK Generally Accepted Accounting Practice).
■
the Group financial statements, prepared in accordance with
IFRSs as adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and
the undertakings included in the consolidation taken as a whole;
and
■
the Directors’ report includes a fair review of the development and
performance of the business and the position of the Company and
the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties
that they face.
Under company law, the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and the Company and of their profit
or loss for that period. In preparing each of the Group and Company
financial statements the Directors are required to:
■
select appropriate accounting policies and apply them consistently;
■
make judgements and estimates that are reasonable and prudent;
■
for the Group financial statements, state whether they have been
prepared in accordance with IFRSs as adopted by the EU;
■
for the Company financial statements, state whether applicable
UK Accounting Standards have been followed, subject to any
material departures disclosed and explained in the Company
financial statements; and
■
prepare the financial statements on a going concern basis unless it
is inappropriate to presume that the Group and the Company will
continue in business.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Group’s and the Company’s
transactions, disclose with reasonable accuracy at any time the
financial position of the Group and the Company, and enable them to
ensure that the financial statements and the Directors’ remuneration
report comply with the Companies Act 2006 and as regards the Group
financial statements, Article 4 of the IAS Regulation. They are also
responsible for safeguarding the assets of the Company and the Group
and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company’s website.
Legislation in the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Approved by the Board of GKN plc and signed on its behalf by
Roy Brown
Chairman
27 February 2012
.
Independent auditors’ report to the members of GKN plc
We have audited the Group financial statements of GKN plc for the year
ended 31 December 2011 which comprise the Consolidated Income
Statement, the Consolidated Statement of Comprehensive Income, the
Consolidated Statement of Changes in Equity, the Consolidated Balance
Sheet, the Consolidated Cash Flow Statement and the related notes.
The financial reporting framework that has been applied in their
preparation is applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the European Union.
Respective responsibilities of directors and auditors
As explained more fully in the Statement of Directors’ responsibilities
set out on page 72, the Directors are responsible for the preparation
of the Group financial statements and for being satisfied that they
give a true and fair view. Our responsibility is to audit and express
an opinion on the Group financial statements in accordance with
applicable law and International Standards on Auditing (UK and
Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only
for the Company’s members as a body in accordance with Chapter 3 of
Part 16 of the Companies Act 2006 and for no other purpose. We do not,
in giving these opinions, accept or assume responsibility for any other
purpose or to any other person to whom this report is shown or into
whose hands it may come save where expressly agreed by our prior
consent in writing.
73
GKN plc
Annual Report
and Accounts 2011
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ report for the
financial year for which the Group financial statements are prepared
is consistent with the Group financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
■
certain disclosures of Directors’ remuneration specified by law
are not made; or
■
we have not received all the information and explanations we
require for our audit.
Under the Listing Rules we are required to review:
■
the Directors’ statement, set out on page 35, in relation to going
concern;
■
the part of the corporate governance statement relating to the
Company’s compliance with the nine provisions of the UK Corporate
Governance Code specified for our review; and
■
certain elements of the report to shareholders by the Board on
Directors’ remuneration.
Other matter
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to
the Group’s circumstances and have been consistently applied and
adequately disclosed; the reasonableness of significant accounting
estimates made by the Directors; and the overall presentation of
the financial statements. In addition, we read all the financial and
non-financial information in the annual report to identify material
inconsistencies with the audited financial statements. If we become
aware of any apparent material misstatements or inconsistencies
we consider the implications for our report.
Opinion on financial statements
In our opinion the Group financial statements:
■
give a true and fair view of the state of the Group’s affairs as at
31 December 2011 and of its profit and cash flows for the year
then ended;
■
have been properly prepared in accordance with IFRSs as adopted
by the European Union; and
■
have been prepared in accordance with the requirements of the
Companies Act 2006 and Article 4 of the lAS Regulation.
We have reported separately on the parent Company financial
statements of GKN plc for the year ended 31 December 2011 and on the
information in the Directors’ remuneration report that is described as
having been audited.
Ian Chambers
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Birmingham
27 February 2012
Notes
(a) The maintenance and integrity of the GKN plc website is the responsibility of the
Directors; the work carried out by the auditors does not involve consideration of
these matters and, accordingly, the auditors accept no responsibility for any changes
that may have occurred to the financial statements since they were initially
presented on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Financial statements
Scope of the audit of the financial statements
74
.
Consolidated Income Statement
For the year ended 31 December 2011
Sales
Notes
2011
£m
2010
£m
2
5,746
5,084
419
–
(31)
(22)
–
8
367
(39)
12
(19)
68
(4)
4
374
385
14
38
35
(47)
5
(19)
(46)
6
(35)
Trading profit
Restructuring and impairment charges
Change in value of derivative and other financial instruments
Amortisation of non-operating intangible assets arising on business combinations
UK Pension scheme curtailment
Gains and losses on changes in Group structure
Operating profit
Share of post-tax earnings of joint ventures
Interest payable
Interest receivable
Other net financing charges
Net financing costs
5
Profit before taxation
Taxation
6
Profit after taxation for the year
Profit attributable to other non-controlling interests
Profit attributable to the Pension partnership
Profit attributable to non-controlling interests
Profit attributable to equity shareholders
Earnings per share – p
Continuing operations – basic
Continuing operations – diluted
(61)
(75)
351
345
(45)
(20)
306
325
6
21
5
15
27
279
20
305
306
325
18.0
17.9
19.6
19.6
8
.
75
GKN plc
Annual Report
and Accounts 2011
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2011
Notes
2010
£m
306
325
4
(31)
(4)
42
(1)
14
4
3
(2)
9
–
(1)
–
1
–
21
26
14
6
(277)
–
56
(24)
–
58
(256)
85
Total comprehensive income for the year
50
410
Total comprehensive income for the year attributable to:
Equity shareholders
23
387
Other non-controlling interests
Pension partnership
6
21
8
15
Non-controlling interests
27
23
50
410
Financial statements
Profit after taxation for the year
Other comprehensive income
Currency variations
Subsidiaries
Arising in year
Reclassified in year
Joint ventures
Arising in year
Reclassified in year
Derivative financial instruments
Transactional hedging
Arising in year
Reclassified in year
Actuarial gains and losses on post-employment obligations
Subsidiaries
Joint ventures
Taxation
2011
£m
76
.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2011
Non-controlling
interests
Other reserves
Notes
At 1 January 2011
Profit for the year
Other comprehensive
income/(expense)
Share-based payments
Distribution from Pension
partnership to
UK Pension scheme
Purchase of own shares by
Employee Share Ownership
Plan Trust
Dividends paid to
equity shareholders
Dividends paid to
non-controlling interests
Capital
Share redemption
capital
reserve
£m
£m
Share
premium
account
£m
Retained
earnings
£m
Exchange
reserve
£m
388
–
159
–
298
–
9
–
788
279
11
–
–
–
–
–
–
(223)
6
26
–
–
–
–
–
–
9
hedging
reserve
£m
(196)
–
Other
reserves
£m
(133)
–
Share
holders’
equity
£m
Pension
partnership
£m
Other
£m
Total
equity
£m
1,313
279
346
21
28
6
1,687
306
–
–
–
–
(256)
6
(32)
–
(1)
–
–
–
–
–
–
–
–
(23)
–
(23)
–
(5)
–
–
–
(5)
–
–
(5)
–
–
(85)
–
–
–
(85)
–
–
(85)
–
–
–
–
–
–
–
At 31 December 2011
159
298
9
760
356
(197)
(133)
1,252
344
28
1,624
At 1 January 2010
Profit for the year
Other comprehensive
income/(expense)
Investment in Pension
partnership by
UK Pension scheme
Purchase of non-controlling
interests
Share-based payments
Transfers
Dividends paid to
equity shareholders
Dividends paid to
non-controlling interests
457
–
–
–
9
–
431
305
343
–
(197)
–
(95)
–
948
305
–
15
24
5
972
325
–
–
–
36
45
1
–
82
–
3
85
–
–
–
–
–
–
–
–
331
–
331
–
–
298
–
–
–
(2)
3
38
–
–
–
–
–
–
–
–
(38)
(2)
3
–
–
–
–
(3)
–
–
(5)
3
–
–
–
(23)
–
–
–
(23)
–
–
(23)
–
–
–
–
–
159
298
9
788
388
At 31 December 2010
26
11
9
–
–
(298)
–
–
–
(196)
–
(256)
6
–
(133)
–
–
1,313
346
(6)
(1)
28
(6)
(1)
1,687
Other reserves include accumulated reserves where distribution has been restricted due to legal or fiscal requirements and accumulated adjustments
in respect of piecemeal acquisitions.
.
77
GKN plc
Annual Report
and Accounts 2011
Consolidated Balance Sheet
Assets
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Investments in joint ventures
Other receivables and investments
Derivative financial instruments
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Current tax assets
Derivative financial instruments
Other financial assets
Cash and cash equivalents
Notes
2011
£m
2010
£m
12
12
13
14
15
21
6
534
424
1,812
147
37
21
224
350
200
1,651
143
23
19
171
3,199
2,557
749
962
16
5
–
156
637
762
10
13
4
438
1,888
1,864
5,087
4,421
(228)
(30)
(1,308)
(138)
(46)
(61)
(13)
(1,065)
(100)
(57)
(1,750)
(1,296)
(466)
(72)
(96)
(120)
(91)
(868)
(532)
(61)
(63)
(108)
(74)
(600)
16
17
6
21
19
19
Total assets
Liabilities
Current liabilities
Borrowings
Derivative financial instruments
Trade and other payables
Current tax liabilities
Provisions
Non-current liabilities
Borrowings
Derivative financial instruments
Deferred tax liabilities
Trade and other payables
Provisions
Post-employment obligations
19
21
18
6
22
19
21
6
18
22
26
(1,713)
(1,438)
(3,463)
(2,734)
1,624
1,687
159
298
9
760
26
159
298
9
788
59
Non-controlling interests
1,252
372
1,313
374
Total equity
1,624
1,687
Total liabilities
Net assets
Shareholders’ equity
Share capital
Capital redemption reserve
Share premium account
Retained earnings
Other reserves
23
The financial statements on pages 74 to 120 were approved by the Board of Directors and authorised for issue on 27 February 2012. They were signed
on its behalf by:
Nigel Stein, William Seeger – Directors
Financial statements
At 31 December 2011
78
.
Consolidated Cash Flow Statement
For the year ended 31 December 2011
Notes
Cash flows from operating activities
Cash generated from operations
Special contribution to the UK Pension scheme
Interest received
Interest paid
Tax paid
Dividends received from joint ventures
Cash flows from investing activities
Purchase of property, plant and equipment
Receipt of government capital grants
Purchase of intangible assets
Receipt of government refundable advances
Proceeds from sale and realisation of fixed assets
Acquisition of subsidiaries (net of cash acquired)
Acquisition of other investments
Purchase of non-controlling interests
Proceeds from sale of businesses (net of cash disposed)
Proceeds from sale of joint venture
Investments in joint ventures
Investment loans and capital contributions
Cash flows from financing activities
Investment in Pension partnership by UK Pension scheme
Distribution from Pension partnership to UK Pension scheme
Purchase of own shares by Employee Share Ownership Plan Trust
Proceeds from borrowing facilities
Bond buy back including buy back premium
Repayment of other borrowings
Finance lease payments
Amounts placed on deposit
Amounts returned from deposit
Dividends paid to shareholders
Dividends paid to non-controlling interests
25
26
14
15
4
4
14
26
26
23
9
Currency variations on cash and cash equivalents
Movement in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
25
2011
£m
2010
£m
500
–
5
(48)
(38)
35
420
(331)
7
(53)
(33)
23
454
33
(236)
1
(46)
–
8
(450)
(4)
–
5
8
(4)
–
(162)
3
(31)
10
5
(6)
–
(5)
5
1
(10)
(3)
(718)
(193)
–
(23)
(5)
115
–
(10)
–
–
4
(85)
(6)
331
–
–
38
(26)
(48)
(1)
(4)
20
(23)
(1)
(10)
286
(2)
7
(276)
421
133
288
145
421
.
79
Notes to the financial statements
GKN plc
Annual Report
and Accounts 2011
For the year ended 31 December 2011
Accounting policies and presentation
The Group’s significant accounting policies are summarised below.
Basis of preparation
The consolidated financial statements (the “statements”) have been prepared in accordance with International Financial Reporting Standards
(IFRS) as endorsed and adopted for use by the European Union. These statements have been prepared under the historical cost method except
where other measurement bases are required to be applied under IFRS as set out below.
These statements have been prepared using all standards and interpretations required for financial periods beginning 1 January 2011.
No standards or interpretations have been adopted before the required implementation date.
Standards, revisions and amendments to standards and interpretations
There were no changes in standards or interpretations outlined in the audited consolidated financial statements for the year ended 31 December
2010 reported as likely to impact the reporting of the Group’s results, assets and liabilities in 2011.
The Group adopted all applicable amendments to standards with an effective date in 2011 with no material impact on its results, assets
and liabilities.
Basis of consolidation
The statements incorporate the financial statements of the Company and its subsidiaries (together “the Group”) and the Group's share of the
results and equity of its joint ventures and associates.
Subsidiaries are entities over which, either directly or indirectly, the Company has control through the power to govern financial and operating
policies so as to obtain benefit from their activities. This power is accompanied by a shareholding of more than 50% of the voting rights.
The results of subsidiaries acquired or sold during the year are included in the Group’s results from the date of acquisition or up to the date
of disposal. All business combinations are accounted for by the purchase method. Assets, liabilities and contingent liabilities acquired in
a business combination are measured at fair value.
Intra-group balances, transactions, income and expenses are eliminated.
Other non-controlling interests represent the portion of shareholders’ earnings and equity attributable to third party shareholders.
Joint ventures
Joint ventures are entities in which the Group has a long term interest and exercises joint control with its partners over their financial
and operating policies. In all cases voting rights are 50% or lower. Investments in joint ventures are accounted for by the equity method.
The Group’s share of equity includes goodwill arising on acquisition.
The Group’s share of profits and losses resulting from transactions between the Group and joint ventures are eliminated.
Foreign currencies
Subsidiaries and joint ventures 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 where actual spot rate may be used if it more accurately reflects the underlying
substance of the transaction. Where practicable, transactions involving foreign currencies are protected by forward contracts. Assets and
liabilities in foreign currencies are translated at the exchange rates ruling at the balance sheet date.
Material foreign currency movements arising on the translation of intra-group balances treated as part of the net investment in a subsidiary are
recognised through equity. Movements on other intra-group balances are recognised through the income statement.
The Group’s presentational currency is sterling. On consolidation, results and cash flows of foreign subsidiaries and joint ventures are translated
to sterling at average exchange rates except in the case of material transactions where the actual spot rate is used if 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.
Profits and losses on the realisation of currency net investments include the accumulated net exchange differences that have arisen on the
retranslation of the currency net investments since 1 January 2004 up to the date of realisation.
Financial statements
1
80
.
Notes to the financial statements
Continued
1
Accounting policies and presentation (continued)
Presentation of the income statement
IFRS is not fully prescriptive as to the format of the income statement. Line items and subtotals have been presented on the face of the income
statement in addition to those required under IFRS.
Sales shown in the income statement are those of continuing subsidiaries.
Operating profit is profit before discontinued operations, taxation, finance costs and the share of post-tax profit of joint ventures accounted for
using the equity method. In order to achieve consistency and comparability between reporting periods, operating profit is analysed to show
separately the results of normal trading performance and individually significant charges and credits. Such items arise because of their size
or nature and, comprise:
■
charges relating to the Group wide restructuring programme announced in 2008;
■
the impact of the annual goodwill impairment review;
■
asset impairment and restructuring charges which arise from events which are significant to any reportable segment;
■
amortisation of the fair value of non-operating intangible assets arising on business combinations;
■
changes in the fair value of derivative financial instruments and material currency translation movements arising on intra-group funding;
■
profits or losses on businesses sold or closed which do not meet the definition of discontinued operations or which the Group views as
capital rather than revenue in nature;
■
profits or losses arising from business combinations including fair value adjustments to pre-combination shareholdings, changes in
estimates of deferred and contingent consideration made after the provisional fair value period and material expenses incurred on
a business combination; and
■
the 2010 UK Pension scheme curtailment.
The Group’s post-tax share of joint venture profits is shown as a separate component of profit before tax. Material restructuring and impairment
charges, amortisation of the fair value of non-operating intangible assets arising on business combinations and other net financing charges and
their related taxation are separately identified.
Net finance costs are analysed to show separately interest payable, interest receivable and other net financing charges. Other net financing
charges include the net of interest payable on post-employment obligations and the expected return on pension scheme assets and unwind of
discounts on fair value amounts established on business combinations.
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.
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, acceptance by the customer or, in Aerospace, certification by the customer. Revenue from royalties and the rendering of
services is not significant.
Many businesses in Automotive and Land Systems recognise an element of revenue via a surcharge or similar raw material cost recovery
mechanism. The surcharge invoiced or credited is generally based on prior period movement in raw material price indices applied to current
period deliveries. Other cost recoveries are recorded according to the customer agreement. In those instances where recovery of such increases
is guaranteed, irrespective of the level of future deliveries, revenue is recognised, or due allowance made, in the same period as the cost
movement takes place.
Other income
Interest income is recognised using the effective interest rate method. Dividend income is not significant.
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 borrowings costs on qualifying assets.
Where freehold and long leasehold properties were carried at valuation on 23 March 2000, these values have been retained as book values
and therefore deemed cost at the date of the IFRS transition.
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.
.
81
GKN plc
Annual Report
and Accounts 2011
Accounting policies and presentation (continued)
Property, plant and equipment (continued)
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 main rates of depreciation used are:
Years
Freehold buildings
Steel powder production plant
General plant, machinery, fixtures and fittings
Computers
Commercial vehicles and cars
Up to 50
18
6 to 15
3 to 5
4 to 5
Property, plant and equipment is reviewed at least annually for indications of impairment. Impairments are charged to the income statement.
Similarly, where property, plant and equipment has been impaired and subsequent reviews demonstrate the recoverable value is in excess of
the impaired value an impairment reversal is recorded. The amount of the reversal cannot exceed the theoretical net book amount at the date of
the reversal had the item not been impaired. Impairment reversals are credited to the income statement against the same line item to which the
impairment was previously charged.
Costs capitalised relating to leasehold properties are charged to the income statement in equal annual instalments over the period of the lease
or 50 years, whichever is the shorter.
Leased assets
Operating lease rentals are charged to the income statement as incurred over the lease term. Finance leased assets are not significant.
Borrowing costs
Borrowing costs are capitalised as cost on qualifying tangible and intangible fixed asset expenditure. A qualifying asset is an asset or programme
where the period of capitalisation is more than 12 months and the capital value is more than £10 million. For general borrowings the capitalisation
rate is the weighted average of the borrowing costs outstanding during the year. For specific funding and borrowings the amount capitalised is the
actual borrowing cost incurred less any investment income on the temporary investment of those borrowings.
Financial assets and liabilities
Financial liabilities are recorded in arrangements where payments, or similar transfers of financial resources, is unavoidable or guaranteed.
In respect of the Group’s Pension partnership arrangement payments are subject to discretion and can, if certain conditions are met, be avoided.
In this instance, the arrangement is classified as a non-controlling interest.
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. Other financial assets comprise investments with more than 90 days until 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.
The carrying value of other financial assets and liabilities, including short term receivables and payables, are stated at amortised cost less any
impairment provision unless the impact of the time value of money is considered to be material.
Derivative financial instruments
The Group does not trade in derivative financial instruments. Derivative financial instruments including forward foreign currency contracts are
used by the Group to manage its exposure to risk associated with the variability in cash flows in relation to both recognised assets or liabilities
or forecast transactions. All derivative financial instruments are measured at the balance sheet date at their fair value.
Where derivative financial instruments are not designated as or not determined to be effective hedges, any gain or loss on remeasurement is
taken to the income statement. Where derivative financial instruments are designated as and are effective as cash flow hedges, any gain or loss
on remeasurement is held in equity and recycled through the income statement when the designated item is transacted.
Gains or losses on derivative financial instruments no longer designated as effective hedges are taken directly to the income statement.
Derivatives embedded in non-derivative host contracts are recognised at their fair value when the nature, characteristics and risks of the
derivative are not closely related to the host contract. Gains and losses arising on the remeasurement of these embedded derivatives at each
balance sheet date are taken to the income statement.
Financial statements
1
82
.
Notes to the financial statements
Continued
1
Accounting policies and presentation (continued)
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 arising on the acquisition of a joint
venture is included in the carrying value of the investment.
Where negative goodwill arises, following reassessment of fair values, it is credited to the income statement in the year in which the acquisition
is made.
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 the recoverable amount, determined as the
higher of estimated discounted future net cash flows or recoverable amount on a fair value less cost to sell 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.
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.
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. Amortisation is charged from the
date the asset is available for use. In Aerospace, amortisation is charged over the asset’s life up to a maximum of fifteen years either on a straight
line basis or, where sufficient contractual terms exist, a unit of production method is applied. In Automotive, amortisation is charged on a straight
line basis over the asset’s life up to a maximum of seven years.
Capitalised development costs are subject to annual impairment reviews. Impairments are charged to the income statement.
Research expenditure and development expenditure not qualifying for capitalisation is written off as incurred.
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
Customer related assets
Technology based assets
– brands and trademarks
– agreements not to compete
– order backlog
– other customer relationships
20-50
Life of agreement
Length of backlog
2-25
5-10
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 consolidated 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.
Deferred tax is recognised on the unremitted profits of joint ventures. 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.
.
83
GKN plc
Annual Report
and Accounts 2011
Accounting policies and presentation (continued)
Pensions and post-employment benefits
The Group’s pension arrangements comprise various defined benefit and defined contribution schemes throughout the world. In the UK and in
certain overseas companies pension arrangements are made through externally funded defined benefit schemes, the contributions to which are
based on the advice of independent actuaries or in accordance with the rules of the schemes. In other overseas companies funds are retained
within the business to provide for retirement obligations.
The Group also operates a number of defined contribution and defined benefit arrangements which provide certain employees with defined
post-employment healthcare benefits.
The Group accounts for all post-employment defined benefit schemes through full recognition of the schemes’ surpluses or deficits on the
balance sheet at the end of each year. Actuarial gains and losses are included in other comprehensive income. Current and past service costs,
curtailments and settlements are recognised within operating profit. Returns on scheme assets and interest on obligations are recognised in
other net financing charges.
For defined contribution arrangements the cost charged to the income statement represents the Group’s contributions to the relevant schemes
in the year in which they fall due.
Government refundable advances
Government refundable advances are reported in Trade and other payables in the balance sheet. Refundable advances include amounts lent by
Government, accrued interest and directly attributable costs. Refundable advances are provided to the Group to part-finance expenditures on
specific development programmes. The advances are provided on a risk sharing basis, i.e. repayment levels are determined subject to the
success of the related programme. Interest is calculated using the effective interest rate method.
Share-based payments
Share options granted to employees and share-based arrangements put in place since 7 November 2002 are valued at the date of grant or award
using an appropriate option pricing model and are charged to operating profit over the performance or vesting period of the scheme. The annual
charge is modified to take account of shares forfeited by employees who leave during the performance or vesting period and, in the case of nonmarket related performance conditions, where it becomes unlikely the option will vest.
Standards, revisions and amendments to standards and interpretations issued but not yet adopted
The Group does not intend to adopt any standard, revision or amendment before the required implementation date. The impact of the adoption
of IFRS 9 ‘Financial Instruments’, IFRS 10 ‘Consolidated Financial Statements’ including amendments to IAS 27, IFRS 11 ‘Joint Arrangements’
including amendments to IAS 28 and IAS 19 ‘Employment Benefits’ (revised) are being assessed. With regard to the specific change in IAS 19
relating to restriction on the expected rate of return on scheme assets to the interest rate on post-employment obligations, the impact on
current year statutory profit would have been a reduction of £24 million.
All other revisions and amendments to standards and interpretations which have an implementation date in 2012 or 2013 are not expected to
have a material impact on the Group’s results, assets or liabilities.
Significant judgements, key assumptions and estimates
The Group’s significant accounting policies are set out above. 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.
The accounting policies where the Directors consider the more complex estimates, judgements and assumptions have to be made are those in
respect of acquired assets and liabilities – business combinations (note 24), post-employment obligations including the valuation of the Pension
partnership plan asset (note 26), derivative and other financial instruments (notes 4c and 21), taxation (note 6) and impairment of non-current
assets (note 12). The details of the principle estimates, judgements and assumptions made are set out in the related notes as identified.
Financial statements
1
84
.
Notes to the financial statements
Continued
2 Segmental analysis
The Group’s reportable segments have been determined based on reports reviewed by the Executive Committee led by the Chief Executive.
The operating activities of the Group are largely structured according to the markets served; automotive, aerospace and the land systems
markets. Automotive is managed according to product groups; driveline and powder metallurgy. Reportable segments derive their sales from
the manufacture of product. Revenue from services, inter segment trading and royalties is not significant.
(a) Sales
Automotive
2011
Subsidiaries
Joint ventures
Acquisitions
Subsidiaries
Driveline
£m
Powder
Metallurgy
£m
Aerospace
£m
Land
Systems
£m
2,432
246
845
–
1,481
–
805
42
2,678
845
1,481
847
5,851
117
–
–
38
155
Total
£m
106
Other businesses
Management sales
Less: Joint venture sales
6,112
(366)
Income statement – sales
5,746
2010
Subsidiaries
Joint ventures
Other businesses
2,180
253
759
–
1,451
–
664
35
2,433
759
1,451
699
5,342
87
Management sales
Businesses sold and closed – Axles
Less: Joint venture sales
5,429
10
(355)
Income statement – sales
5,084
.
85
GKN plc
Annual Report
and Accounts 2011
2 Segmental analysis (continued)
(b) Trading profit
Automotive
2011
Trading profit before depreciation, impairment and amortisation
Depreciation and impairment of property, plant and equipment
Amortisation of operating intangible assets
Trading profit – subsidiaries
Trading profit/(loss) – joint ventures
Acquisitions
Trading profit – subsidiaries
Acquisition related charges
Powder
Metallurgy
£m
Aerospace
£m
Land
Systems
£m
255
(107)
(3)
103
(31)
–
208
(34)
(5)
77
(13)
(1)
145
46
72
–
169
(3)
63
5
191
72
166
68
–
–
–
–
7
(3)
Total
£m
497
4
(5)
11
(8)
Other businesses
Gallatin temporary plant closure
Corporate and unallocated costs
3
3
(19)
(16)
Management trading profit
Less: Joint venture trading profit
468
(49)
Income statement – trading profit
419
2010
Trading profit before depreciation, impairment and amortisation
Depreciation and impairment of property, plant and equipment
Amortisation of operating intangible assets
Trading profit – subsidiaries
Trading profit/(loss) – joint ventures
238
(107)
(3)
84
(30)
–
209
(39)
(6)
49
(15)
(1)
128
41
54
–
164
(2)
33
4
169
54
162
37
422
Other businesses
Corporate and unallocated costs
3
(14)
Management trading profit
Less: Joint venture trading profit
411
(44)
Income statement – trading profit
367
No income statement items between trading profit and profit before tax are allocated to management trading profit, which is the Group’s
segmental measure of profit or loss.
There is a net credit in Corporate of £2 million (2010: £8 million; Driveline £6 million and Corporate £2 million) within trading profit in respect
of changes to retiree benefit arrangements.
Gallatin temporary plant closure
As a consequence of the Gallatin temporary plant closure, a Hoeganaes facility within Powder Metallurgy, following an incident on 27 May
2011, the Group has incurred a significant amount of incremental, one-off costs. The information presented in this note should be read in
conjunction with page 32.
The Group income statement for the year ended 31 December 2011 includes a net pre-tax charge of £19 million in relation to the Gallatin
temporary plant closure. The £19 million, which has been charged to trading profit, represents a gross cost of £34 million offset by recoveries
from the Group’s external insurer of £15 million. The £34 million covers the cost of responding to customer obligations, £20 million, including
premium freight and powder supply charges, rectification and corrections to the plant configuration, £8 million, fixed employment costs
that were unabsorbed in June and July as a result of no productive activity, £4 million, and professional fees and other costs amounting
to £2 million.
The net £19 million charge attracts taxation relief of £4 million.
The impact on cash flows from operating activities was a net outflow of £19 million.
Financial statements
Driveline
£m
86
.
Notes to the financial statements
Continued
2 Segmental analysis (continued)
(c) Goodwill, fixed assets and working capital – subsidiaries only
Automotive
Driveline
£m
Powder
Metallurgy
£m
Aerospace
£m
Land
Systems
£m
Total
£m
2011
Property, plant and equipment and operating
intangible assets
Working capital
982
77
313
100
479
56
142
73
1,916
306
Net operating assets
Goodwill and non-operating intangible assets
1,059
321
413
29
535
282
215
196
Net investment
1,380
442
817
411
2010
Property, plant and equipment and operating
intangible assets
Working capital
878
72
307
89
421
67
110
58
Net operating assets
Goodwill and non-operating intangible assets
950
81
396
29
488
296
168
54
1,031
425
784
222
Net investment
1,716
286
(d) Fixed asset additions, investments in joint ventures and other non-cash items
Automotive
2011
Fixed asset additions and
capitalised borrowing costs
– property, plant and equipment
– intangible assets
Investments in associate and
Joint ventures
Other non-cash items
– share-based payments
2010
Fixed asset additions and
capitalised borrowing costs
– property, plant and equipment
– intangible assets
Investments in Joint ventures
Other non-cash items
– share-based payments
Driveline
£m
Powder
Metallurgy
£m
Aerospace
£m
Land
Systems
£m
Other
Businesses
£m
Corporate
£m
Total
£m
136
9
44
–
58
39
18
1
1
–
–
–
257
49
118
–
–
11
22
–
151
2
1
1
–
–
2
6
88
4
107
26
–
–
60
26
–
8
1
12
1
–
24
–
–
–
183
31
143
1
–
1
–
–
1
3
.
87
GKN plc
Annual Report
and Accounts 2011
2 Segmental analysis (continued)
(e) Country analysis
2011
Management sales by origin
Goodwill, other intangible assets, property,
plant and equipment and investments
in associate and joint ventures
2010
Management sales by origin
Goodwill, other intangible assets, property,
plant and equipment and investments
in joint ventures
united
Kingdom
£m
uSA
£m
Germany
£m
Other
countries
£m
Total
non-uK
£m
Total
£m
930
1,720
1,017
2,445
5,182
6,112
411
908
498
1,104
2,510
2,921
819
1,571
858
2,181
4,610
5,429
355
695
354
940
1,989
2,344
(f) Other sales information
Subsidiary segmental sales gross of inter segment sales are; Driveline £2,491 million (2010: £2,234 million), Powder Metallurgy £851 million
(2010: £765 million), Aerospace £1,481 million (2010: £1,451 million) and Land Systems £805 million (2010: £665 million). Inter segment
transactions take place on an arms length basis using normal terms of business.
In 2011 and 2010, no customer accounted for 10% or more of subsidiary sales or management sales.
Management sales by product are: Driveline – CVJ systems 70% (2010: 77%), all-wheel drive systems 23% (2010: 18%), transaxle solutions 5%
(2010: 5%) and other goods 2% (2010: nil). Powder Metallurgy – sintered components 83% (2010: 82%) and metal powders 17% (2010: 18%).
Aerospace – aerostructures 64% (2010: 64%), engine components and sub-systems 28% (2010: 28%) and special products 8% (2010: 8%).
Land Systems – power management devices 36% (2010: 27%), wheels and structures 37% (2010: 36%) and aftermarket 27% (2010: 37%).
During the year, Driveline’s product groups were reassessed to better reflect the mix of business. Amounts shown above, together with 2010
comparatives reflect the current product groups.
Segmental analysis – property, plant and equipment and operating intangible assets
Segmental analysis – goodwill and non-operating intangible assets
Goodwill
Other businesses
Corporate assets
2011
£m
2010
£m
1,916
828
(534)
19
7
1,716
460
(350)
19
6
2,236
1,851
2011
£m
2010
£m
Segmental analysis – working capital
Other businesses
Corporate items
Accrued net financing costs
Restructuring provisions
Deferred and contingent consideration
Government refundable advances
306
11
(36)
(21)
(10)
(29)
(42)
286
6
(47)
(19)
(41)
(27)
(40)
Balance sheet – inventories, trade and other receivables, trade and other payables and provisions
179
118
Balance sheet – property, plant and equipment and other intangible assets
(h) Reconciliation of segmental working capital to the balance sheet
Financial statements
(g) Reconciliation of segmental property, plant and equipment and operating intangible fixed assets to the balance sheet
88
.
Notes to the financial statements
Continued
3 Adjusted performance measures
(a) Reconciliation of reported and management performance measures
2011
2010
As
reported
£m
Joint
ventures
£m
Exceptional
and nontrading items
£m
5,746
366
–
6,112
5,084
355
(10)
Trading profit
Restructuring and impairment
charges
Change in value of derivative and
other financial instruments
Amortisation of non-operating
intangible assets arising on
business combinations
UK Pension scheme curtailment
Gains and losses on changes in
Group structure
419
49
–
468
367
44
–
411
–
–
–
–
(39)
–
39
–
(31)
–
31
–
12
–
(12)
–
(22)
–
–
–
22
–
–
–
(19)
68
–
–
19
(68)
–
–
8
–
(8)
–
(4)
–
4
–
Operating profit
374
49
45
385
44
(18)
Share of post-tax earnings of
joint ventures
38
(49)
2
(9)
35
(44)
1
(8)
Interest payable
Interest receivable
Other net financing charges
(47)
5
(19)
–
–
–
–
–
19
(47)
5
–
(46)
6
(35)
–
–
–
–
–
35
(46)
6
–
Net financing costs
(61)
–
19
(42)
(75)
–
35
(40)
Profit before taxation
351
–
66
417
345
–
18
363
Taxation
(45)
–
(15)
(60)
(20)
–
(17)
(37)
–
51
357
325
–
1
326
(20)
–
15
Sales
Management
basis
£m
As
reported
£m
Joint
ventures
£m
468
Exceptional
and nontrading items
£m
Management
basis
£m
5,429
411
Profit from continuing operations
Profit attributable to
non-controlling interests
306
(27)
–
21
Earnings
279
–
72
351
305
–
16
321
Earnings per share – p
18.0
–
4.6
22.6
19.6
–
1.1
20.7
(6)
Impact of Gallatin temporary plant closure
Given the significance of the Gallatin incident and related net charge in 2011 (see note 2b), the table in 3b highlights the impact of the
temporary plant closure on trading profit and margin.
(5)
.
89
GKN plc
Annual Report
and Accounts 2011
3 Adjusted performance measures (continued)
(b) Summary by segment
2011
Sales
£m
Driveline
Powder Metallurgy
Aerospace
Land Systems
Other businesses (Cylinder Liners and Emitec)
Getrag (Driveline)
Stromag (Land Systems)
Corporate and unallocated costs
2010
Trading
profit
£m
Margin
Sales
£m
Trading
profit
£m
Margin
2,678
845
1,481
847
106
117
38
–
191
72
166
68
3
4
(1)
(16)
7.1%
8.5%
11.2%
8.0%
2,433
759
1,451
699
87
–
–
–
169
54
162
37
3
–
–
(14)
6.9%
7.1%
11.2%
5.3%
6,112
487
8.0%
5,429
411
7.6%
2011
£m
2010
£m
–
Gallatin temporary plant closure
6,112
(19)
468
7.7%
4 Operating profit
The analysis of the components of operating profit is shown below:
Sales by subsidiaries
Less: Businesses sold and closed – (2010: Axles)
Operating costs
Change in stocks of finished goods and work in progress
Raw materials and consumables
Staff costs (note 10)
Reorganisation costs (ii):
Redundancy and other employee related amounts
Impairment of plant and equipment
Depreciation of property, plant and equipment (iii)
Impairment of plant and equipment
Amortisation of intangible assets
Operating lease rentals payable:
Plant and equipment
Property
Impairment of trade receivables
Amortisation of government capital grants
Net exchange differences on foreign currency transactions
Acquisition related charges
Other costs
Trading profit
5,746
–
5,084
(10)
5,746
5,074
32
(2,636)
(1,457)
31
(2,157)
(1,346)
–
–
(191)
(1)
(10)
(4)
–
(191)
(2)
(10)
(14)
(29)
(8)
1
(1)
(8)
(1,005)
(13)
(32)
(7)
1
2
–
(979)
(5,327)
(4,707)
419
367
(i) EBITDA is subsidiary trading profit before depreciation, impairment and amortisation charges included in trading profit. EBITDA in 2011
was £621 million (2010: £570 million).
(ii) Reorganisation costs in 2010 reflect actions in the ordinary course of business to reduce costs, improve productivity and rationalise
facilities in continuing operations.
(iii) Including depreciation charged on assets held under finance leases of less than £1 million (2010: £1 million).
(iv) Research and development expenditure in subsidiaries was £103 million (2010: £92 million).
Financial statements
(a) Trading profit
90
.
Notes to the financial statements
Continued
4 Operating profit (continued)
(a) Trading profit (continued)
(v) Auditors’ remuneration
The analysis of auditors’ remuneration is as follows:
2011
£m
2010
£m
Fees payable to PricewaterhouseCoopers LLP for the Company’s annual financial statements
Fees payable to PricewaterhouseCoopers LLP and their associates for other services to the Group:
– Audit of the Company’s subsidiaries pursuant to legislation
(0.3)
(0.6)
(3.4)
(3.1)
Total audit fees
(3.7)
(3.7)
– Other services pursuant to legislation
– Tax services
– Corporate finance transaction services
– Other services
(0.1)
(0.7)
(0.2)
(0.1)
(0.1)
(0.6)
–
(0.1)
(1.1)
(0.8)
Total non-audit fees
Fees payable to PricewaterhouseCoopers LLP and their associates in respect of associated pension schemes:
– Audit
– Other services
Total fees payable to PricewaterhouseCoopers LLP and their associates
–
–
–
–
–
–
(4.8)
(4.5)
All fees payable to PricewaterhouseCoopers LLP, the Company’s auditors, include amounts in respect of expenses. All fees payable to
PricewaterhouseCoopers LLP have been charged to the income statement.
(b) Restructuring and impairment charges in 2010
The prior year restructuring actions comprised facility and operation closures, permanent headcount reductions achieved through
redundancy programmes and the structured use of short-time working arrangements, available through national or state legislation,
by European, Japanese and North American subsidiaries. There have been no further restructuring charges during 2011.
In the comparative year to 31 December 2010 the Group incurred charges of £12 million for redundancy and post-employment costs,
£2 million for short-term working costs, wholly wages and salaries and £25 million for other reorganisation costs. All of these costs were
incurred in subsidiaries.
The segmental allocation of restructuring costs in the comparative year to 31 December 2010 was: Driveline £29 million, Powder Metallurgy
£1 million, Aerospace £4 million and Land Systems £5 million.
Cash outflow in respect of previous restructuring plans was £31 million (2010: £55 million). Proceeds from sale of fixed assets, put out of use
as part of previous restructuring programmes, of £2 million were recognised in the year (2010: £2 million).
(c) Change in value of derivative and other financial instruments
2011
£m
Forward currency contracts (not hedge accounted)
Embedded derivatives
Commodity contracts (not hedge accounted)
Net gains and losses on intra-group funding
Arising in year
Reclassified in year
2010
£m
(29)
(3)
(1)
(3)
3
–
(33)
–
2
–
12
–
2
12
(31)
12
IAS 39 requires derivative financial instruments to be valued at the balance sheet date and any difference between that value and the intrinsic
value of the instrument to be reflected in the balance sheet as an asset or liability. Any subsequent change in value is reflected in the income
statement unless hedge accounting is achieved. Such movements do not affect cash flow or the economic substance of the underlying
transaction. In 2011 and 2010 the Group used transactional hedge accounting in a limited number of instances.
.
91
GKN plc
Annual Report
and Accounts 2011
4 Operating profit (continued)
(d) Amortisation of non-operating intangible assets arising on business combinations
2011
£m
Marketing related
Customer related
Technology based
2010
£m
–
(17)
(5)
–
(16)
(3)
(22)
(19)
(e) Gains and losses on changes in Group structure
2011
£m
Profits and losses on sale or closure of businesses
Business sold – GKN Aerospace Engineering Services
Business sold and closed – (2010: Axles)
Profit on sale of joint venture
Investment write up on acquisition of GKN Aerospace Services Structures Corp.
2010
£m
4
–
4
–
–
(5)
–
1
8
(4)
On 31 March 2011 the Group sold its 49% share in a joint venture company, GKN JTEKT Limited, for cash consideration of £8 million. A profit on
sale of £4 million was realised which includes £2 million of previous currency variations reclassified from other reserves.
On 30 November 2011 the Group sold its Engineering Services division of GKN Aerospace for net cash consideration of £5 million. A profit on
sale of £4 million was realised which represents previous currency variations reclassified from other reserves.
On 1 September 2010 the Group concluded the sale of its European agricultural axles operations with other operations closed during the year.
Sale proceeds were £5 million and a net loss of £5 million was realised representing trading losses of £2 million, tangible fixed asset
impairment of £1 million, other asset write downs of £3 million and reclassified currency variations from other reserves of £1 million.
5 Net financing costs
2011
£m
2010
£m
(10)
(14)
(26)
–
(2)
6
(1)
(7)
(15)
(24)
(1)
(2)
4
(1)
(47)
(46)
5
6
Short term bank and other borrowings
Loans repayable within five years
Loans repayable after five years
Bond buy back premium
Government refundable advances
Borrowing costs capitalised
Finance leases
Interest receivable
Short term investments, loans and deposits
Net interest payable and receivable
(42)
(40)
2011
£m
2010
£m
153
(170)
145
(176)
(17)
(2)
(31)
(4)
(19)
(35)
The capitalisation rate on specific funding was 5.6% (2010: 5.6%) and on general borrowings was 6.1% (2010: 6.8%).
(b) Other net financing charges
Expected return on scheme assets
Interest on post-employment obligations
Post-employment finance charges
Unwind of discounts
Financial statements
(a) Interest payable and fee expense
92
.
Notes to the financial statements
Continued
6 Taxation
(a) Tax expense
Analysis of charge in year
2011
£m
2010
£m
Current tax (charge)/credit
Current year charge
Utilisation of previously unrecognised tax losses and other assets
Net movement on provisions for uncertain tax positions
Adjustments in respect of prior years
(82)
10
(22)
1
(65)
20
(27)
(1)
(93)
(73)
(26)
7
58
–
9
(23)
(2)
72
(2)
8
48
53
(45)
(20)
2011
£m
2010
£m
(97)
37
(84)
47
(60)
(37)
4
11
11
6
15
17
(45)
(20)
Deferred tax (charge)/credit
Origination and reversal of temporary differences
Tax on change in value of derivative financial instruments
Other changes in unrecognised deferred tax assets
Changes in tax rates
Adjustments in respect of prior years
Total tax charge for the year
Analysed as:
Tax in respect of management profit
Current tax
Deferred tax
Tax in respect of items excluded from management profit
Current tax credit
Deferred tax credit
Total for tax charge for the year
Management tax rate
The tax charge arising on management profits of subsidiaries of £377 million (2010: £327 million) was £60 million (2010: £37 million charge)
giving an effective tax rate of 16% (2010: 11%). Details of the effective tax rate for the Group and the underlying events and transactions
affecting this are given on page 33.
The Group operates in many jurisdictions and is subject to tax audits which are often complex and can take several years to conclude.
Therefore, the accrual for current tax includes provisions for uncertain tax positions which require estimates for each matter and the exercise
of judgement in respect of the interpretation of tax laws and the likelihood of challenge to 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 a material impact on the Group’s tax rate and/or cash tax payments may arise. Tax payments comprise
payments on account and payments on the final resolution of open items and, as a result, there can be substantial differences between the
charge in the income statement and cash tax payments. With regard to deferred tax, judgement is required for the recognition of deferred tax
assets, which is based on expectations for future financial performance in particular legal entities or tax groups.
.
93
GKN plc
Annual Report
and Accounts 2011
6 Taxation (continued)
(a) Tax expense (continued)
2011
Tax reconciliation
£m
2010
%
£m
%
Profit before tax
Less share of post-tax earnings of joint ventures
351
(38)
345
(35)
Profit before tax excluding joint ventures
313
310
Tax charge calculated at 26.5% (2010: 28%) standard UK corporate tax rate
Differences between UK and overseas corporate tax rates
Non-deductible and non-taxable items
Utilisation of previously unrecognised tax losses and other assets
Other changes in unrecognised deferred tax assets
Changes in tax rates
(83)
(16)
(2)
10
58
–
(26)
(5)
(1)
3
19
–
(87)
8
(11)
20
72
(2)
(28)
3
(4)
7
23
(1)
Tax charge on ordinary activities
Net movement on provision for uncertain tax positions
Other adjustments in respect of prior years
(33)
(22)
10
(10)
(7)
3
–
(27)
7
–
(8)
2
Total tax charge for the year
(45)
(14)
(20)
(6)
(b) Tax included in comprehensive income
2011
£m
Deferred tax on post-employment obligations
Deferred tax on foreign currency gains and losses on intra-group funding
Current tax on post-employment obligations
Current tax on foreign currency gains and losses on intra-group funding
2010
£m
30
1
24
1
46
(3)
14
1
56
58
2011
£m
2010
£m
16
(138)
10
(100)
(122)
(90)
2011
£m
2010
£m
224
(96)
171
(63)
128
108
Assets
Liabilities
(d) Recognised deferred tax
Deferred tax assets
Deferred tax liabilities
There is a net £48 million deferred tax credit to the income statement in the year (2010: £53 million) and a further deferred tax credit of
£31 million has been recorded directly in other comprehensive income (2010: £46 million). Primarily these credits relate to the recognition
of previous unrecognised future tax deductions in the US, the UK and Japan, based on management projections which indicate the future
availability of taxable profits to absorb the deductions.
Financial statements
(c) Current tax
94
.
Notes to the financial statements
Continued
6 Taxation (continued)
(d) Recognised deferred tax (continued)
The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by IAS 12)
during the year are shown below:
Assets
At 1 January 2011
Included in the income statement
Included in other comprehensive income
Businesses acquired
Currency variations
At 31 December 2011
Liabilities
Total
Postemployment
obligations
£m
Tax losses
£m
111
–
30
–
1
120
23
–
–
4
47
12
–
(8)
–
(161)
11
–
(60)
4
(9)
2
1
–
–
108
48
31
(68)
9
142
147
51
(206)
(6)
128
Other
£m
Fixed assets
£m
Other
£m
At 1 January 2010
Other movements
Included in the income statement
Included in other comprehensive income
Businesses acquired
Currency variations
74
2
(11)
46
–
–
45
–
75
–
–
–
46
–
1
–
–
–
(145)
(2)
(12)
–
(3)
1
(6)
–
–
(3)
–
–
At 31 December 2010
111
120
47
(161)
(9)
£m
14
–
53
43
(3)
1
108
Deferred tax assets totalling £41 million (2010: £39 million) have been recognised in territories where tax losses have been incurred in the
year as future profitability is expected which will result in their realisation.
(e) unrecognised deferred tax assets
Certain deferred tax assets have not been recognised on the basis that the Group’s ability to utilise them is uncertain as shown below.
2011
2010
Tax value
£m
Gross
£m
Expiry
period
Tax value
£m
Gross
£m
Expiry
period
Tax losses – with expiry: national
Tax losses – with expiry: local
Tax losses – without expiry
142
20
120
401
487
463
2012-2031
2012-2031
215
41
109
619
480
399
2011-2030
2011-2030
Total tax losses
282
1,351
365
1,498
Post-employment obligations
Other temporary differences
70
41
298
161
66
38
245
136
Total other temporary differences
111
459
104
381
Unrecognised deferred tax assets
393
1,810
469
1,879
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 £13 million (2010: £25 million) would be payable.
(f) Changes in uK tax rate
A reduction in the mainstream rate of UK corporation tax to 26% took effect from April 2011 which gives rise to an effective UK tax rate of
26.5% for the year. Further reductions to 23% by 2014 are expected and at the balance sheet date a reduction to 25% had been substantively
enacted, so UK deferred tax is measured at 25%. Further reductions will cause a corresponding reduction in the value of UK deferred tax assets
but as substantial UK deferred tax assets are currently unrecognised, no material impact on the Group effective tax rate is expected.
(g) Franked investment income – litigation
Since 2003, the Group has been involved in litigation with HMRC in respect of various advance corporate tax payments made and corporate
tax paid on certain foreign dividends which, in its view, were levied by HMRC in breach of the Group’s EU community law rights. A Court of
Appeal hearing regarding payments on account took place in November 2011 and the initial judgment is favourable toward GKN retaining
existing payments on accounts received, although HMRC still has a right to appeal against this decision. The main case has been appealed
to the UK Supreme Court and to the European Court of Justice (for further guidance on breach of community law). The Judgements for either
Court are not expected until late Summer/early Autumn 2012. The continuing complexity of the case means that it is not possible to predict
the final outcome of the litigation with any reasonable degree of certainty and as a result, no contingent asset has been recognised.
.
95
GKN plc
Annual Report
and Accounts 2011
7 Discontinued operations
There were no discontinued operations in 2011 or 2010.
8 Earnings per share
2011
2010
Earnings
£m
Weighted
average
number of
shares
million
Basic eps
Dilutive securities
279
–
1,553.1
6.3
18.0
(0.1)
305
–
1,552.6
0.7
19.6
–
Diluted eps
279
1,559.4
17.9
305
1,553.3
19.6
Earnings per
share
pence
Earnings
£m
Weighted
average
number of
shares
million
Earnings per
share
pence
Management basis earnings per share, 22.6p (2010: 20.7p) are presented in note 3 and use the weighted average number of shares consistent
with basic earnings per share calculation.
9 Dividends
Paid or proposed
in respect of
2010 interim dividend paid
2010 final dividend paid
2011 interim dividend paid
2011 final dividend proposed
Recognised
2011
pence
2010
pence
2012
£m
2011
£m
2010
£m
–
–
2.0
4.0
1.5
3.5
–
–
–
–
–
62
–
54
31
–
23
–
–
–
6.0
5.0
62
85
23
10 Employees including Directors
Employee benefit expense
Wages and salaries
Social security costs
Post-employment costs
Share-based payments
2011
£m
2010
£m
(1,204)
(199)
(48)
(6)
(1,128)
(179)
(40)
(3)
(1,457)
(1,350)
Short-time working expense of nil (2010: £2 million) included in restructuring charges comprises wages and salaries nil (2010: £2 million).
Average monthly number of employees (including Executive Directors)
2011
Number
2010
Number
By business
Driveline
Powder Metallurgy
Aerospace
Land Systems
Other businesses
Businesses sold and closed – (2010: Axles)
Corporate
16,197
6,162
8,632
4,848
896
–
190
15,472
5,738
8,609
4,294
716
98
169
36,925
35,096
Total
Financial statements
The 2011 final year proposed dividend will be paid on 21 May 2012 to shareholders who are on the register of members at close of business on
27 April 2012.
96
.
Notes to the financial statements
Continued
10 Employees including Directors (continued)
Key management
The key management of the Group comprises GKN plc Board Directors and the members of the Group’s Executive Committee during the year and
their aggregate compensation is shown below. More detailed disclosure on Directors’ remuneration is set out in the Directors’ remuneration
report on pages 56 to 68.
Key management compensation
2011
£m
2010
£m
Salaries and short term employee benefits
Post-employment benefits
Share-based and medium term incentives and benefits
6.3
0.7
4.2
6.0
0.8
3.2
11.2
10.0
The amount outstanding at 31 December 2011 in respect of annual short term variable remuneration payable in cash was £1.9 million (2010:
£1.8 million). Key management participate in certain incentive arrangements where the key performance metric is management earnings per
share using the cash tax rate which is discussed on page 33 of the business review. Management eps using the cash tax rate is 23.2p (2010:
20.4p). A total of £106,700 in dividends was received by key management in 2011 (2010: £27,100).
11 Share-based payments
The Group has granted options over shares to employees for a number of years under different schemes. Where grants were made after
7 November 2002 they have been accounted for as required by IFRS 2 “Share-based payment”. Awards made before that date have not been
so accounted. All options have been valued at the date of grant by an independent third party using a Monte Carlo model which uses the same
principle as a binomial model.
Details of awards made in 2011 are set out below. Details of awards made since 7 November 2002 that impact the 2011 accounting charge are:
(a) Executive Share Option Schemes (ESOS)
Awards were made to Directors and certain senior employees in March 2003 under the 2001 scheme and in September 2004, April 2005,
April 2006, August 2009, May 2010 and April 2011 under the 2004 scheme. In April 2007 awards were made to Directors under the 2004
scheme. Under both schemes options were granted with a fixed exercise price equal to the market price at the date of grant and subject to
meeting performance conditions over a three year period. In the case of the 2001 scheme, the performance condition was based on earnings
per share (eps) growth whilst under the 2004 scheme the condition is based on Total Shareholder Return (TSR) compared with that of
comparator companies. Under the 2001 scheme only, where the performance condition is not satisfied in full after the first three years,
retesting is carried out each year up to six years from the date of grant. Inputs to the valuation model were: option price 110.08p to 380.3p,
volatility 29% to 38%, expected dividend yield 3.3% to 6.2%, risk-free interest rate 2.80% to 5.40% and expected terms of 6.0 years to
6.7 years.
(b) Long Term Incentive Plans (LTIP)
Awards were made to Directors and certain senior employees in March 2003 under the 2001 scheme and in September 2004, April 2006,
April 2007, August 2009, August 2010 and April 2011 under the 2004 scheme. In April 2005 awards were made to Directors under the 2004
scheme. Under the 2001 scheme and under the 2004 scheme up to and including the April 2007 award, options were granted subject to TSR
performance over a three year period compared with a comparator group. From the August 2009 award options were granted subject to eps
performance over a three year period. There is no retest facility under either scheme. Inputs to the valuation model for awards made prior to
2009 were: option price nil, volatility 23% to 39%, expected dividend yield 3.3% to 6.2%, risk-free interest rate 4.05% to 5.40% and a term of
3 years to 4 years 9.5 months.
In respect of the 2009, 2010 and 2011 awards, the inputs to the valuation model were: option price nil, volatility nil, expected dividend yield
4.5%, and a term of 4 years. These awards were only made to main Board Directors.
(c) Profit Growth Incentive Plan (PGIP)
Awards were made in August 2010 and April 2011 under the PGIP to certain senior employees (excluding Directors). Any benefit under the
PGIP will be deliverable dependent upon the extent to which profit growth targets are satisfied by the Group over a 3 year performance period.
The PGIP is a cash-based incentive plan, however, for certain very senior employees the benefit is deliverable in shares; the number of
shares will be released following the performance period if the minimum targeted profit growth is achieved. A maximum of twice the amount
of shares will be released on achievement of the maximum profit growth target, with one and a half times the number being released for
interim performance. No shares will be released and the awards will lapse if the minimum profit growth target is not achieved. Release is
also conditional upon the satisfaction of a personal shareholding requirement for certain very senior employees. Any awards deliverable
under the PGIP will be satisfied from GKN ordinary shares already in issue.
An award was made under the PGIP in April 2009; this award was a 2 year award that was entirely cash based and therefore not subject to the
IFRS 2 requirements. The benefit under this scheme was delivered in 2011 based on the extent to which profit growth targets were satisfied by
the Group over the 2 year performance period.
The expected volatility is based on historical volatility over a period commensurate with the term of the awards. The risk-free interest rate is
the rate obtainable from government securities over the expected life of the equity incentive.
.
97
GKN plc
Annual Report
and Accounts 2011
11 Share-based payments (continued)
(d) Deferred Bonus Plan (DBP)
Awards were made to Directors and certain senior employees in April 2011. Awards are in respect of above target performance under the short
term variable remuneration scheme which are compulsorily deferred into shares under the DBP. Awards are not subject to any performance
conditions and shares will be released after a two year vesting period.
Further details of the ESOS, LTIP, PGIP and DBP schemes are given in the Directors’ remuneration report on pages 56 to 68.
A reconciliation of option movements over the year to 31 December 2011 is shown below:
2011
Outstanding at 1 January
Granted
Forfeited
Exercised
2010
Number
000s
Weighted
average
exercise price
pence
Number
000s
Weighted
average
exercise price
pence
20,617
121.58
17,096
121.32
199.66
132.93
118.33
5,446
(1,289)
(636)
134.70
178.28
112.03
1,637
(868)
(176)
Outstanding at 31 December
21,210
127.17
20,617
121.58
Exercisable at 31 December
3,249
138.32
3,666
138.28
For options outstanding at 31 December the range of exercise prices and weighted average contractual life is shown in the following table:
2011
Range of exercise price
Number
of shares
000s
Contractual
weighted
average
remaining life
years
110p-145p
195p-220p
18,680
2,530
7.00
6.06
Number
of shares
000s
Contractual
weighted
average
remaining life
years
19,613
1,004
7.95
1.21
The weighted average share price during the year for options exercised over the year was 201.5p (2010: 146.60p). The total charge for the
year relating to share-based payment plans was £6 million (2010: £3 million) all of which related to equity-settled share-based payment
transactions. After deferred tax, the total charge was £6 million (2010: £3 million).
Liabilities in respect of share-based payments were not material at either 31 December 2011 or 31 December 2010. There were no vested rights
to cash or other assets at either 31 December 2011 or 31 December 2010.
Financial statements
2010
98
.
Notes to the financial statements
Continued
12 Goodwill and other intangible assets
Goodwill
2011
£m
2010
£m
Cost
At 1 January
Businesses acquired
Currency variations
527
188
–
507
4
16
At 31 December
715
527
Accumulated impairment
At 1 January
Currency variations
177
4
169
8
At 31 December
181
177
Net book amount at 31 December
534
350
The carrying value of goodwill at 31 December comprised:
Reportable segment
Business
Geographical location
2011
£m
2010
£m
Driveline
Driveline(i)
Driveline(i)
Hoeganaes
Aerostructures
Propulsion Systems
Propulsion Systems
Power Management Devices(ii)
Wheels and Structures
Americas
Europe
North America
North America
North America
North America
Europe
Italy
126
63
22
33
98
38
70
20
58
18
22
32
97
38
–
20
470
64
285
65
534
350
Powder Metallurgy
Aerospace
Land Systems
Other businesses not individually significant to the carrying value of goodwill
(i) Includes goodwill arising on the acquisition of Getrag Driveline Products (see note 24).
(ii) Represents goodwill arising on the acquisition of Stromag (see note 24).
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. During the year, all goodwill (including amounts arising on
businesses acquired in the year) was tested for impairment with no impairment charges resulting.
For the purposes of carrying out impairment tests, the Group’s total goodwill has been allocated to a number of CGUs and each of these CGUs has
been separately assessed and tested. The size of a CGU varies but is never larger than a primary or secondary reportable segment. In some cases,
a CGU is an individual subsidiary or operation.
The aggregation of assets for identifying CGUs has changed, in one case, during the year. In the prior year Driveline managed the Asia Pacific
region separately from Japan and accordingly these areas were separate CGUs. During 2011 there has been a change in the structure of Driveline
such that these two areas are now under common management. There has been no impact on reported results as a consequence of the change.
All of the recoverable amounts were measured based on value in use. Detailed forecasts for the next five years have been used which are based
on approved annual budgets and strategic projections representing the best estimate of future performance. In the case of an individual CGU
within the Group’s Aerospace (Engine Products) business, value in use at 31 December 2011 was measured using operating cash flow projections
covering the next ten years which incorporate the anticipated timing of volumes on current programmes. Management consider forecasting over
this period to more appropriately reflect the length of business cycle of that CGU’s programmes, in particular the growth of certain military
programmes.
Key assumptions
In determining the recoverable amount of all CGUs it is necessary to make a series of assumptions to estimate the present value of future cash
flows. In each case, these key assumptions have been made by management reflecting past experience and are consistent with relevant external
sources of information.
.
99
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Annual Report
and Accounts 2011
12 Goodwill and other intangible assets (continued)
Key assumptions (continued)
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 within Driveline
businesses and consideration of specific volumes on certain US military and civil programmes within Aerospace), raw material input costs, the
cost structure of each CGU 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 ongoing capital expenditure required to support forecast production.
Pre-tax risk adjusted discount rates
Pre-tax risk adjusted discount rates are derived from risk-free rates based upon long term government bonds in the territory, or territories, within
which each CGU operates. A relative risk adjustment (or “beta”) has been applied to risk-free rates to reflect the risk inherent in each CGU relative
to all other sectors on average, determined using an average of the betas of comparable listed companies.
The range of pre-tax risk adjusted discount rates set out below have been used for impairment testing. The range of rates reflects the mix of
geographical territories within CGUs within the reportable segments.
Driveline: North and South America 13%-24% (2010: 13%-24%), Europe 12%-14% (2010: 12%-13%) and Japan and Asia Pacific region countries
10%-17% (2010: 10%-17%).
Powder Metallurgy: Europe 12% (2010: 12%) and North America 13% (2010: 13%).
Aerospace: Europe 11% (2010: 11%) and North America 12% (2010: 12%).
Land Systems: Europe 12% (2010: 12%) and North America 13% (2010: 13%).
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
where the CGU is primarily based. This results in a range of nominal growth rates:
Driveline: North and South America 3%-8% (2010: 3%-6%), Europe 3%-7% (2010: 3%-8%) and Japan and Asia Pacific region countries 2%-8%
(2010: 1%-9%)
Powder Metallurgy: Europe 4% (2010: 3%) and North America 3% (2010: 3%)
Aerospace: Europe 3% (2010: 3%) and North America 3% (2010: 3%)
Goodwill sensitivity analysis
The results of the Group’s impairment tests are dependent upon estimates and judgements made by management, particularly in relation to the
key assumptions described above. Sensitivity analysis to likely and potential changes in key assumptions has therefore been reviewed.
At 31 December 2011, the date of the Group’s annual impairment test, the estimated recoverable amount of one individual CGU within the Group’s
Aerospace operations and one CGU within the Group’s Driveline operations exceeded their carrying value by £60 million and £107 million
respectively. The table below shows the discount rate, long term growth rate and forecast operating cash flow assumptions used in the calculation
of value in use and the amount by which each assumption must change in isolation in order for the estimated recoverable amount to equal the
carrying value.
Reportable segment
Driveline
Aerospace
Business
Americas
Propulsion
Systems
Value in use excess over carrying value
£107m
£60m
13%
3%
£1,082m
12%
3%
£525m
2.8%pts
4.8%pts
20%
2.9%pts
8.8%pts
28%
Assumptions used in calculation of value in use
Pre-tax adjusted discount rate
Long term growth rate
Total pre-discounted forecast operating cash flow
Change required for the carrying value to exceed the recoverable amount
Pre-tax adjusted discount rate
Long term growth rate
Total pre-discounted forecast operating cash flow
Other than as disclosed above, it is not considered that a reasonably possible change in any of the key assumptions would generate a different
impairment test outcome to the one included in this annual report.
Financial statements
Land Systems: Europe 2%-3% (2010: 3%) and North America 3% (2010: 3%)
100
.
Notes to the financial statements
Continued
12 Goodwill and other intangible assets (continued)
Other intangible assets
2011
Other Intangible Assets
Development
costs
£m
Computer
software
£m
2010
Assets
arising on
business
combinations
£m
Total
£m
Development
costs
£m
Cost
At 1 January
Businesses acquired
Additions
Capitalised borrowing costs
Disposals
Businesses sold
Currency variations
126
–
41
3
–
–
–
104
–
5
–
(9)
(8)
(1)
182
209
–
–
–
–
(1)
412
209
46
3
(9)
(8)
(2)
101
–
24
1
–
–
–
At 31 December
170
91
390
651
126
51
89
72
212
4
–
–
–
–
(1)
6
–
–
(9)
(8)
(1)
–
22
–
–
–
2
54
77
96
116
14
294
Accumulated amortisation
At 1 January
Charge for the year
Charged to trading profit
Non-operating intangible assets
Restructuring and impairment
Disposals
Businesses sold
Currency variations
At 31 December
Net book amount at 31 December
Computer
software
£m
Total
£m
170
9
–
–
–
–
3
370
9
30
1
(3)
–
5
104
182
412
48
83
52
183
3
–
–
–
–
–
7
–
1
(3)
–
1
–
19
–
–
–
1
227
51
89
72
212
424
75
15
110
200
10
22
–
(9)
(8)
–
99
–
6
–
(3)
–
2
Assets
arising on
business
combinations
£m
10
19
1
(3)
–
2
Other intangible assets include development costs of £54 million (2010: £28 million) which is in the course of development and £13 million
(2010: £14 million) with a remaining amortisation period of up to 8 years (2010: 9 years) in respect of two aerospace programmes and £52 million
(2010: £61 million) in respect of a customer relationship asset arising from one business combination with a remaining amortisation period of
6 years (2010: 7 years).
The net book amount of assets arising on business combinations includes marketing related assets of £10 million (2010: £4 million), customer
related assets of £200 million (2010: £93 million) and technology based assets of £84 million (2010: £13 million).
.
101
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Annual Report
and Accounts 2011
13 Property, plant and equipment
2011
2010
Capital
work in
progress
£m
Total
£m
Land and
buildings
£m
Other
tangible
assets
£m
Capital
work in
progress
£m
Total
£m
Cost
At 1 January
Businesses acquired
Additions
Capitalised borrowing costs
Disposals
Businesses sold
Transfers
Currency variations
693
43
17
1
(8)
–
–
(2)
3,678
74
159
2
(110)
(9)
46
(45)
91
8
78
–
–
–
(46)
(1)
4,462
125
254
3
(118)
(9)
–
(48)
660
1
20
1
(5)
–
–
16
3,564
1
97
2
(93)
(8)
58
57
82
1
63
–
–
–
(58)
3
4,306
3
180
3
(98)
(8)
–
76
At 31 December
744
3,795
130
4,669
693
3,678
91
4,462
208
2,603
–
2,811
185
2,485
–
2,670
Accumulated depreciation
and impairment
At 1 January
Charge for the year
Charged to trading profit
Depreciation
Impairments
Restructuring and impairment
Businesses sold and closed
Disposals
Businesses sold
Currency variations
16
–
–
–
(6)
–
3
175
1
–
–
(107)
(9)
(27)
–
–
–
–
–
–
–
191
1
–
–
(113)
(9)
(24)
17
1
–
–
(3)
–
8
174
1
(1)
1
(91)
(4)
38
–
–
–
–
–
–
–
191
2
(1)
1
(94)
(4)
46
At 31 December
221
2,636
–
2,857
208
2,603
–
2,811
Net book amount at 31 December
523
1,159
130
1,812
485
1,075
91
1,651
Included within other tangible assets at net book amount are general plant, machinery and steel powder production plant £1,137 million (2010:
£1,056 million), fixtures, fittings and computers £20 million (2010: £17 million) and commercial vehicles and cars £2 million (2010: £2 million).
The net book amount of assets under finance leases is land and buildings £2 million (2010: £2 million) and plant and equipment nil (2010: nil).
14 Investments in joint ventures
Group share of results
2011
£m
2010
£m
366
(317)
355
(311)
Trading profit
Net financing costs
49
(1)
44
(1)
Profit before taxation
Taxation
48
(8)
43
(7)
Share of post-tax earnings – before exceptional and non-trading items
Amortisation of non-operating intangible assets arising on business combinations
and other net financing charges, including tax of £1 million (2010: nil)
40
36
(2)
(1)
Share of post-tax earnings
38
35
Sales
Operating costs
Financial statements
Land and
buildings
£m
Other
tangible
assets
£m
102
.
Notes to the financial statements
Continued
14 Investments in joint ventures (continued)
Group share of net book amount
2011
2010
Group
share of
equity
£m
Provisions
for
impairment
£m
Net book
amount
£m
At 1 January
Share of post-tax earnings of joint ventures
Utilisation of provision
Actuarial gains on post-employment
obligations, including deferred tax
Dividends paid
Additions
Disposals
Currency variations
143
38
–
–
–
–
143
38
–
113
35
(1)
(1)
–
1
112
35
–
–
(35)
4
(6)
3
–
–
–
–
–
–
(35)
4
(6)
3
–
(23)
10
–
9
–
–
–
–
–
–
(23)
10
–
9
At 31 December
147
–
147
143
–
143
2011
£m
2010
£m
124
127
(79)
(25)
117
139
(87)
(26)
147
143
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Group
share of
equity
£m
Provisions
for
impairment
£m
Net book
amount
£m
The joint ventures have no significant contingent liabilities to which the Group is exposed and nor has the Group any significant contingent
liabilities in relation to its interest in the joint ventures. The share of capital commitments of the joint ventures are shown in note 29.
15 Other receivables and investments
Other investments
Indirect taxes and amounts recoverable under employee benefit plans
Other receivables
2011
£m
2010
£m
4
23
10
–
20
3
37
23
On 22 June 2011, the Group acquired a 31% shareholding (25% on a fully diluted basis) in Evo Electric Limited for cash consideration of £4 million.
The investment has been designated as an associated undertaking.
Included in other receivables is a £9 million indemnity asset (see note 24).
16 Inventories
Raw materials
Work in progress
Finished goods
2011
£m
2010
£m
355
242
152
305
208
124
749
637
Inventories of £70 million (2010: £65 million) are carried at net realisable value. The amount of any write down of inventory recognised as an
expense in the year was £1 million (2010: £4 million).
.
103
GKN plc
Annual Report
and Accounts 2011
17 Trade and other receivables
Trade receivables
Amounts owed by joint ventures
Other receivables
Prepayments
Indirect taxes recoverable
Provisions for doubtful debts against trade receivables
At 1 January
Charge for the year
Additions
Unused amounts reversed
Amounts used
Currency variations
2011
£m
2010
£m
840
19
46
21
36
664
17
36
17
28
962
762
(10)
(8)
(8)
1
5
–
(7)
2
3
–
(12)
(10)
Trade receivables subject to provisions for doubtful debts
13
11
Ageing analysis of trade receivables and amounts owed by joint ventures past due but not impaired
Up to 30 days overdue
31 – 60 days overdue
61 – 90 days overdue
More than 90 days overdue
43
9
4
7
36
7
2
5
At 31 December
18 Trade and other payables
2011
Amounts owed to suppliers and customers
Amounts owed to joint ventures
Accrued interest
Government refundable advances
Deferred and contingent consideration
Payroll taxes, indirect taxes and audit fees
Amounts due to employees and employee benefit plans
Government grants
Customer advances and deferred income
Non-current
£m
Current
£m
Non-current
£m
(975)
(2)
(21)
–
(12)
(73)
(154)
(2)
(69)
(9)
–
–
(42)
(17)
(1)
(35)
(6)
(10)
(766)
–
(19)
–
(5)
(46)
(148)
(4)
(77)
(4)
–
–
(40)
(22)
(1)
(31)
(4)
(6)
(1,308)
(120)
(1,065)
(108)
Government refundable advances are forecast to fall due for repayment between 2014 and 2031. Non-current deferred and contingent
consideration falls due as follows: one-two years £5 million (2010: £5 million) and two-five years £12 million (2010: £17 million). Non-current
amounts owed to suppliers and customers fall due within two years.
Financial statements
Current
£m
2010
104
.
Notes to the financial statements
Continued
19 Net borrowings
(a) Analysis of net borrowings
Current
Notes
2011
Other borrowings
£350 million 6¾% 2019 unsecured bond
£176 million 7% 2012 unsecured bond
Other secured US$ denominated loan
Other long term borrowings
Finance lease obligations
Bank overdrafts
Other short term bank borrowings
i
i
iv
Borrowings
Within
one year
£m
Non-current
One to two
years
£m
Two to five
years
£m
More than
five years
£m
Total
Total
£m
£m
–
(176)
(2)
–
(1)
(11)
(38)
–
–
(3)
–
(1)
–
–
–
–
(1)
(65)
(1)
–
–
(347)
–
–
(48)
–
–
–
(347)
–
(4)
(113)
(2)
–
–
(347)
(176)
(6)
(113)
(3)
(11)
(38)
(228)
(4)
(67)
(395)
(466)
(694)
Bank balances and cash
Short term bank deposits
ii
150
6
–
–
–
–
–
–
–
–
150
6
Cash and cash equivalents
v
156
–
–
–
–
156
–
–
–
–
–
–
(72)
(4)
(67)
(395)
(466)
(538)
–
–
(1)
(6)
(1)
(17)
(36)
–
(176)
(2)
–
(1)
–
–
–
–
(5)
–
(1)
–
–
(347)
–
–
–
–
–
–
(347)
(176)
(7)
–
(2)
–
–
(347)
(176)
(8)
(6)
(3)
(17)
(36)
(61)
(179)
(6)
(347)
(532)
(593)
Other financial assets – bank deposits
Net borrowings
2010
Other borrowings
£350 million 6¾% 2019 unsecured bond
£176 million 7% 2012 unsecured bond
Other secured US$ denominated loan
Other long term borrowings
Finance lease obligations
Bank overdrafts
Other short term bank borrowings
i
i
iv
Borrowings
Bank balances and cash
Short term bank deposits
ii
158
280
–
–
–
–
–
–
–
–
158
280
Cash and cash equivalents
v
438
–
–
–
–
438
iii
4
–
–
–
–
4
Other financial assets – bank deposits
Net borrowings
381
(179)
(6)
(347)
(532)
(151)
Other borrowings include: unsecured £350 million (2010: £350 million) 6¾% bond maturing in 2019 less unamortised issue costs of £3 million
(2010: £3 million); unsecured £176 million (2010: £176 million) 7% bond maturing in 2012 less unamortised issue costs of nil (2010: nil); and
a secured term loan of £6 million (2010: £8 million) secured by way of a fixed and floating charge on certain Aerospace fixed assets.
Other long term borrowings include £80 million drawn under the Group’s European Investment Bank unsecured facility. The loan is due for
repayment in five equal annual instalments of £16 million, commencing in June 2015 and attracts a fixed interest rate of 4.1% per annum
payable annually in arrears. Also included is £33 million drawn from the Group’s new 2016 Revolving Credit Facility of £445 million. The term
of the facility is 5 years and attracts a variable interest rate.
Notes
(i) Denotes borrowings at fixed rates of interest until maturity. All other borrowings and cash and cash equivalents are at variable interest
rates unless otherwise stated.
(ii) The average interest rate on short term bank deposits was 0.7% (2010: 0.5%). Deposits at both 31 December 2011 and 31 December 2010
had a maturity date of less than one month.
(iii) The interest rate on bank deposits in 2010 was 2% and they matured on 27 May 2011.
(iv) Finance lease obligations gross of finance charges fall due as follows: £1 million within one year (2010: £1 million), £3 million in one to
five years (2010: £3 million) and nil in more than five years (2010: £1 million).
(v) £24 million (2010: £11 million) of the Group’s cash and cash equivalents are held by the Group’s captive insurance company to maintain
solvency requirements and as collateral for Letters of Credit issued to the Group’s principal external insurance providers. These funds
cannot be circulated within the Group on demand.
.
105
GKN plc
Annual Report
and Accounts 2011
19 Net borrowings (continued)
(b) Fair values
2011
2010
Book value
£m
Borrowings, other financial assets and cash and cash equivalents
Other borrowings
Finance lease obligations
Bank overdrafts and other short term bank borrowings
Bank balances and cash
Short term bank deposits and other bank deposits
Trade and other payables
Government refundable advances
Deferred and contingent consideration
Fair value
£m
Book value
£m
Fair value
£m
(642)
(3)
(49)
150
6
(659)
(3)
(49)
150
6
(537)
(3)
(53)
158
284
(564)
(3)
(53)
158
284
(538)
(555)
(151)
(178)
(42)
(29)
(39)
(29)
(40)
(27)
(40)
(27)
(71)
(68)
(67)
(67)
The following methods and assumptions were used in estimating fair values for financial instruments:
Unsecured bank overdrafts, other short term bank borrowings, bank balances and cash and short term bank deposits approximate to book value
due to their short maturities. For other amounts, the repayments which the Group is committed to make have been discounted at the relevant
interest rates applicable at 31 December 2011. Bonds included within other borrowings have been valued using quoted closing market values.
20 Financial risk management
The Group’s activities give rise to a number of financial risks: market risk, credit risk and liquidity risk. Market risk includes foreign currency risk,
cash flow and fair value interest rate risk and commodity price risk. The Group has in place risk management policies that seek to limit the effects
of financial risk on financial performance. Derivative financial instruments, mainly forward foreign currency contracts, are used to hedge risk
exposures that arise in the ordinary course of business.
(a) Foreign currency risk
The Group 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
Treasury Department. Under the Group’s foreign currency policy, such exposures are hedged on a reducing percentage basis over a number
of forecast time horizons using forward foreign currency contracts.
The Group’s reporting currency for its consolidated financial statements is sterling. Changes in exchange rates will affect the translation of
results and net assets of operations outside of the UK. The Group’s largest exposures are the euro and the US dollar where a 1% movement
in the average rate impacts trading profit of subsidiaries and joint ventures by £1 million and £2 million respectively.
Regarding financial instruments a 1% strengthening of sterling against the currency rates indicated below would have the following impact on
operating profit:
Trading profit:
Payables
and
receivables
£m
Euro
US dollar
0.4
(0.5)
Derivative
financial
instruments
£m
(1.5)
10.8
Intra-group
funding
£m
0.7
0.7
The derivative sensitivity analysis has been prepared by reperforming the calculations used to determine the balance sheet values adjusted
for the changes in the individual currency rates indicated with all other cross currency rates remaining constant. The sensitivity is a fair value
change relating to derivatives for which the underlying transaction has not occurred at 31 December. The Group intends to hold all such
derivatives to maturity. The analysis of other items has been prepared based on an analysis of a currency balance sheet.
Financial statements
Risk management policies have been set by the Board and are implemented by the central Treasury Department that receives regular reports from
all the operating companies to enable prompt identification of financial risks so that appropriate actions may be taken. The 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.
106
.
Notes to the financial statements
Continued
20 Financial risk management (continued)
(a) Foreign currency risk (continued)
Analysis of net borrowings by currency:
2011
Other
financial
assets
£m
(644)
(12)
–
(38)
29
16
34
77
–
–
–
–
(615)
4
34
39
(694)
156
–
(538)
Borrowings
£m
Sterling
US dollar
Euro
Others
2010
Cash and
cash
equivalents
£m
Total
£m
Cash and
cash
equivalents
£m
Other
financial
assets
£m
(524)
(30)
(1)
(38)
304
18
19
97
4
–
–
–
(216)
(12)
18
59
(593)
438
4
(151)
Borrowings
£m
Total
£m
(b) Interest rate risk
The Group is exposed to fair value interest rate risk on fixed rate borrowings and cash flow interest rate risk on variable rate net borrowings/
funds. The Group’s policy is to optimise interest cost in reported earnings and reduce volatility in the debt related element of the Group’s cost
of capital. This policy is achieved by maintaining a target range of fixed and floating rate debt for discrete annual periods, over a defined time
horizon. The Group’s normal policy is to require interest rates to be fixed for 30% to 70% of the level of underlying borrowings forecast to arise
over a 12 month horizon. This policy remains suspended following a Board decision in December 2004. At 31 December 2011 87% (2010: 88%)
of the Group’s gross borrowings were subject to fixed interest rates.
As at 31 December 2011 £6 million (2010: £284 million) was in bank deposits, all of which was on deposit with banks on the Isle of Man
(2010: £267 million in the UK).
(c) Credit risk
The Group 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 Group 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, including forward foreign currency contracts.
Operational
As tier-one suppliers to automotive, land systems and aerospace original equipment manufacturers the Group may have substantial 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 Group’s results. However, there are many
advantages in these relationships. In Land Systems there are a greater proportion of amounts receivable from small and medium sized
customers.
Credit risk and customer relationships are managed at a number of levels within the Group. At a subsidiary 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 divisional
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 Group’s 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:
Driveline
Powder Metallurgy
Aerospace
Land Systems
2011
%
2010
%
53
20
67
28
50
17
66
25
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 £940 million (2010: £761 million).
Financial
Credit risk is mitigated by the Group’s policy of only selecting counterparties with a strong investment graded long term credit rating, normally
at least AA- or equivalent, and assigning financial limits to individual counterparties.
The maximum exposure with a single bank for deposits is £6 million (2010: £56 million), whilst the maximum mark to market exposure for
forward foreign currency contracts at 31 December 2011 to a single bank was £1 million (2010: £1 million).
.
107
GKN plc
Annual Report
and Accounts 2011
20 Financial risk management (continued)
(d) Capital risk management
The Group defines capital as total equity. The Group’s objectives when managing capital are to safeguard the 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 Group may adjust the amount of dividends paid to shareholders,
return capital to shareholders, issue new shares or sell assets to reduce borrowings.
The Group monitors borrowings on the basis of the ratio of gross borrowings to EBITDA. The Group seeks to operate at a gross debt to EBITDA
of subsidiaries ratio of 3 times or less and the ratios at 31 December 2011 and 2010 were as follows:
Gross borrowings
EBITDA
Gross borrowings to EBITDA ratio
2011
£m
2010
£m
694
621
1.1 times
593
570
1.0 times
The Group’s two external banking covenants require an EBITDA of subsidiaries to net interest payable and receivable ratio of 3.5 times or more
and net debt to EBITDA of subsidiaries of 3 times or less measured at 30 June and 31 December. The ratios at 31 December 2011 and 2010 were
as follows:
2011
£m
621
(48)
12.9 times
EBITDA
Net interest payable and receivable (excluding borrowing costs capitalised)
EBITDA to net interest payable and receivable ratio
Net debt
EBITDA
Net debt to EBITDA ratio
2010
£m
570
(44)
13.0 times
2011
£m
2010
£m
538
621
0.9 times
151
570
0.3 times
The Group monitors these ratios on a rolling basis and they are part of the budgeting and forecasting processes.
(e) Liquidity risk
Financial statements
The Group is exposed to liquidity risk as part of its normal financing and trading cycle at times when peak borrowings are required.
Borrowings normally peak in May and September following dividend and bond coupon payments. The Group’s 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 and
acquisition objectives. Liquidity needs are assessed through short and long term forecasts. Committed bank facilities total £755 million
of which nil expire in 2012. There were £113 million of drawings on these facilities at 31 December 2011. Committed facilities are provided
through 15 banks.
Maturity analysis of borrowings, derivatives and other financial liabilities
Within
one year
£m
One to two
years
£m
Two to five
years
£m
More than
five years
£m
Total
£m
2011
Borrowings (note 19)
Contractual interest payments and finance lease charges
Government refundable advances
Deferred and contingent consideration
Derivative financial instruments liabilities – receipts
Derivative financial instruments liabilities – payments
(228)
(41)
–
(12)
333
(360)
(4)
(29)
–
(6)
223
(237)
(67)
(89)
(12)
(12)
314
(341)
(395)
(75)
(55)
–
262
(273)
(694)
(234)
(67)
(30)
1,132
(1,211)
2010
Borrowings (note 19)
Contractual interest payments and finance lease charges
Government refundable advances
Deferred and contingent consideration
Derivative financial instruments liabilities – receipts
Derivative financial instruments liabilities – payments
(61)
(37)
–
(6)
147
(160)
(179)
(29)
–
(6)
103
(114)
(6)
(72)
(7)
(18)
247
(271)
(347)
(92)
(60)
–
271
(285)
(593)
(230)
(67)
(30)
768
(830)
There is no significant difference in the contractual undiscounted value of other financial liabilities from the amounts stated in the balance
sheet and balance sheet notes.
108
.
Notes to the financial statements
Continued
20 Financial risk management (continued)
(f) Commodity price risk
The Group is exposed to changes in commodity prices, particularly of metals, which has a significant impact on input costs and the overall
financial results. The Group seeks to mitigate this exposure in a variety of ways including medium term price agreements, surcharges and
advance purchasing. In rare circumstances and only in respect of certain specified risks the Group uses derivative commodity hedging
instruments. The impact of such financial instruments in respect of the overall commodity price risk is not material.
(g) Categories of financial assets and financial liabilities
held for trading
Loans and
receivables
£m
2011
Other receivables and investments
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Borrowings
Trade and other payables
Provisions
2010
Other receivables and investments
Trade and other receivables
Derivative financial instruments
Other financial assets
Cash and cash equivalents
Borrowings
Trade and other payables
Provisions
Amortised
cost
£m
Financial
assets
£m
Derivatives
used for
hedging
£m
Financial
liabilities
£m
Total
£m
10
905
–
156
–
–
–
–
–
–
–
(694)
(1,078)
(50)
–
–
26
–
–
–
–
–
–
(102)
–
–
–
–
–
–
–
–
–
–
–
10
905
(76)
156
(694)
(1,078)
(50)
1,071
(1,822)
26
(102)
–
(827)
3
717
–
4
438
–
–
–
–
–
–
–
–
(593)
(848)
(31)
–
–
31
–
–
–
–
–
–
–
(74)
–
–
–
–
–
–
–
1
–
–
–
–
–
3
717
(42)
4
438
(593)
(848)
(31)
1,162
(1,472)
31
(74)
1
(352)
For the purposes of IFRS7, derivative financial instruments are categorised as a Level 2 fair value measurement. The discounted contingent
element of deferred and contingent consideration of £14 million (2010: £8 million) is categorised as a Level 3 fair value measurement,
see note 27.
21 Derivative financial instruments
2011
Assets
Forward currency contracts
Not hedge accounted
Hedge accounted
Commodity contracts
Not hedge accounted
Embedded derivatives
2010
Liabilities
Noncurrent
£m
Total
Noncurrent
£m
Current
£m
2
–
4
–
(61)
–
(29)
–
–
19
–
1
–
(11)
21
5
(72)
Assets
Liabilities
Noncurrent
£m
Current
£m
(84)
–
3
–
11
1
(56)
–
(13)
–
(55)
1
(1)
–
(1)
9
–
16
–
1
–
(5)
–
–
–
12
(30)
(76)
19
13
(61)
(13)
(42)
Current
£m
£m
Noncurrent
£m
Total
Current
£m
£m
Forward foreign currency contracts, commodity contracts and embedded derivatives are marked to market using market observable rates and
published prices. The amounts in respect of embedded derivatives represent commercial contracts denominated in US dollars between European
Aerospace subsidiaries and customers outside the USA.
.
109
GKN plc
Annual Report
and Accounts 2011
21 Derivative financial instruments (continued)
hedge accounting – cash flow hedges
The Group manages exposure to foreign currency fluctuations on forecast and outstanding purchase and sale transactions using forward foreign currency
contracts. The Group has adopted transactional foreign currency hedge accounting for a limited number of contracts. The net value of forward foreign
currency contracts subject to hedge accounting was less than £1 million (2010: £1 million). The cash flow and profit impact will occur in 2012 (2010:
2011 to 2012). A £1 million loss was recognised in equity during the year (2010: £1 million gain) in respect of contracts outstanding at 31 December 2011.
No accumulated gain or loss was recycled through trading profit in the year (2010: nil). Cash flow hedging was 100% effective during 2011 and 2010.
22 Provisions
Restructuring
£m
Warranty
£m
Legal and
environmental
£m
Other
£m
Total
£m
At 1 January 2011
Net charge for the year:
Additions
Unused amounts reversed
Unwind of discounts
Businesses acquired
Amounts used
Currency variations
(41)
(23)
(9)
(58)
(131)
–
–
–
–
31
–
(6)
6
–
(19)
7
–
(1)
2
–
(3)
1
1
(24)
8
(1)
(29)
21
–
(31)
16
(1)
(51)
60
1
At 31 December 2011
(10)
(35)
(9)
(83)
(137)
(5)
(5)
(18)
(17)
(4)
(5)
(19)
(64)
(46)
(91)
(10)
(35)
(9)
(83)
(137)
Due within one year
Due in more than one year
Restructuring
Restructuring provisions outstanding at 31 December 2011 relate primarily to the estimated future cash outflows in respect of reorganisation and
onerous contracts (predominantly leases) arising from Group strategic restructuring programmes, details of the charges in respect of which are
included in note 4b. Amounts are only set aside when irrevocable commitments exist at the balance sheet date and these invariably reflect actual
or constructive contractual arrangements which indicate the amount and most likely timing of flows. Utilisation of the provision due in more than
one year is expected as follows: £2 million in 2013 and £3 million from 2014.
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 management’s 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 £9 million in 2013 and £8 million from 2014.
Legal and environmental
Legal provisions amounting to £4 million (2010: £5 million) relate to management estimates of amounts required to settle or remove litigation
actions that have arisen in the normal course of business. Further details are not provided to avoid the potential of seriously prejudicing the
Group’s stance in law. Amounts unused and reversed only arise 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 Group are subject to environmental remediation actions, which in all
cases are either agreed formally with relevant local and national authorities and agencies or represent management’s view of the likely outcome
having taken appropriate expert advice and following consultation with appropriate authorities and agencies. Amounts used includes £1 million
of environmental remediation expenditure.
Utilisation of the provision due in more than one year is estimated as £2 million in 2013 and £3 million from 2014.
Other
Other provisions include claims provisions held within the Group’s captive insurance company £14 million (2010: £13 million), provisions held
in respect of onerous contracts and leases £22 million (2010: £2 million) and long service non-pension and other employee related obligations
arising primarily in the Group’s continental European subsidiaries £19 million (2010: £13 million). Claims provisions and charges are established
in accordance with external insurance and actuarial advice. Non-beneficial lease provisions arising on prior year business combinations were £28
million (2010: £30 million). The movement on this provision included utilisation of £2 million and discount unwind of £1 million. Utilisation of other
provisions due in more than one year is expected as follows: £8 million in 2013; £3 million in 2014; £7 million in 2015 and £46 million from 2016.
Vacant leasehold property provisions and non-beneficial contractual obligations included in Restructuring and Other provisions above amount to
£50 million (2010: £31 million).
Financial statements
Warranty
110
.
Notes to the financial statements
Continued
23 Share capital
Issued and Fully Paid
2011
£m
2010
£m
159
159
2011
Number
000s
2010
Number
000s
Ordinary shares of 10p each
At 1 January
Shares issued under share option schemes
1,590,530
–
1,590,528
2
At 31 December
1,590,530
1,590,530
Ordinary shares of 10p each
Deferred shares of 40p each
At 1 January
Cancellation(i)
–
–
At 31 December
–
–
At 31 December
1,590,530
1,590,530
743,904
(743,904)
Notes
(i) A special resolution was passed at the 2010 Annual General Meeting to approve the purchase and subsequent cancellation of 705,519,691
deferred shares of 40p. The shares were purchased for an aggregate consideration of £0.01 and subsequently cancelled. The 38,384,253
deferred shares held in treasury were also cancelled. The deferred shares were not listed, had no voting or dividend rights, and only very
limited rights on a return of capital.
At 31 December 2011, there were 37,388,984 ordinary shares of 10p each, with a total nominal value of £3.7 million, held as treasury shares
(2010: 37,565,178 ordinary shares of 10p each with a total nominal value of £3.8 million). A total of 176,194 (2010: 634,401) shares were
transferred out of treasury during 2011 to satisfy the exercise of options by participants under share option schemes. The remaining treasury
shares, which represented 2.4% (2010: 2.4%) of the called up share capital at the end of the year, have not been cancelled but are held
as treasury shares and represent a deduction from shareholders’ equity.
At 31 December 2011, the GKN Employees’ Share Ownership Plan Trust (“the Trust”) held 2,219,116 ordinary shares (2010: 5,810). A total
of 2,213,306 shares with a nominal value of £0.2 million were purchased by the Trust in the open market during 2011 (2010: nil) for cash
consideration of £5 million (2010: nil). The shares held in the Trust will be used to satisfy the vesting and exercise of awards of ordinary
shares made under the Group’s share-based incentive arrangements. A dividend waiver operates in respect of shares held by the Trust.
During the year, shares issued under the share option schemes generated nil (2010: less than £1 million).
.
111
GKN plc
Annual Report
and Accounts 2011
24 Business combinations
Acquisition of Getrag Driveline Products
GKN Driveline acquired the all-wheel-drive (AWD) components businesses from Getrag KG on 30 September 2011. The Group acquired 100%
of the equity of:
1) Getrag Corporation, formerly a joint venture with Dana Corporation, based in the United States; and
2) Getrag All Wheel Drive AB, formerly a joint venture with Dana Holding Corporation and Volvo Car Corporation, based in Sweden.
The entities acquired are together referred to as “Getrag Driveline Products”.
The core business of Getrag Driveline Products is the Tier 1 supply of geared driveline products, namely Power Transfer Units and Rear Drive Units
for AWD vehicles, along with Final Drive Units for high performance rear wheel drive vehicles. It is an excellent fit with GKN’s existing range of
products and technology. The operations have a product, manufacturing and customer footprint which is complementary to GKN’s own geared
product business, which is predominantly based in Asia.
As part of the overall transaction, GKN is also acquiring an exclusive licence, principally for Europe and the Americas, to Getrag’s electric
drivetrain technology for use in electric and certain hybrid vehicles.
The identifiable assets acquired and liabilities assumed below are provisional as the review of certain liabilities and provisions is on-going.
£m
Intangible fixed assets
– customer related
– technology based
– marketing related
Property, plant and equipment
Other non-current assets
Cash
Inventories
Trade and other receivables
Trade and other payables
Post-employment obligations
Provisions
Deferred tax
Provisional goodwill
75
53
2
94
1
23
36
84
(96)
(1)
(33)
(38)
115
Satisfied by:
Cash
Repayment of loan
287
22
Total cash and cash equivalents
Contingent consideration
309
6
Fair value of consideration
315
The Group has agreed to pay the selling shareholders additional consideration of up to £6 million depending on Getrag Driveline Products’
success in achieving future business awards in the post-acquisition period. The range of the total contingent consideration payment, based on
individual contracts is nil to £8 million, however, there is a maximum cap of £6 million. The fair value of the contingent consideration at the
acquisition date was £6 million, calculated using a discount rate equal to the incremental short term borrowing rate of 2%. There was no change
in the contingent consideration balance at 31 December 2011.
From the date of acquisition to the balance sheet date, Getrag Driveline Products contributed £117 million to sales and £7 million to trading profit.
If the acquisition had been completed on 1 January 2011 the Group’s statutory sales and trading profit for the year ended 31 December 2011 are
estimated at £6,082 million and £438 million respectively.
Acquisition related fees of £2 million incurred have all been charged to the income statement within trading profit.
Goodwill (which is not tax deductible) is attributable to the value of the assembled workforce, intangible assets that do not qualify for separate
recognition and expected future synergies from combination with the Group’s existing Driveline business.
Financial statements
315
112
.
Notes to the financial statements
Continued
24 Business combinations (continued)
Acquisition of Stromag
GKN Land Systems acquired the entire share capital of Stromag Holding GmbH (Stromag) from former shareholders which included Equita GmbH
& Co. Holding KGaA and a large number of other organisations and individuals, including management on 5 September 2011.
Stromag is a market leading engineer of industrial power management components with a strong technology base and focus on providing tailored
solutions for its customers. Its core products include 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 with a recognised
brand. The business is headquartered in Germany and has operations in Germany, France, USA, Brazil, India and China.
The identifiable assets acquired and liabilities assumed below are provisional as the review of certain liabilities and provisions remains on-going.
£m
Intangible fixed assets
– customer related
– technology based
– marketing related
Property, plant and equipment
Indemnity asset
Cash
Inventories
Trade and other receivables
Trade and other payables
Provisions
Post-employment obligations
Deferred tax
Provisional goodwill
51
23
5
31
12
12
26
20
(24)
(18)
(11)
(30)
73
170
Satisfied by:
Cash
Repayment of loan
143
27
Fair value of total consideration, all cash and cash equivalents
170
From the date of acquisition to the balance sheet date, Stromag contributed £38 million to sales and £4 million to trading profit. If the acquisition
had been completed on 1 January 2011 the Group’s statutory sales and trading profit for the year ended 31 December 2011 are estimated at £5,827
million and £428 million respectively.
Acquisition related fees of £2 million incurred have all been charged to the income statement within trading profit.
Goodwill (which is not tax deductible) is attributable to the value of the assembled workforce, intangible assets that do not qualify for separate
recognition and expected future synergies from combination with the Group’s existing Land Systems business.
The Group was indemnified for certain legal, environmental and warranty issues under the sale and purchase agreement. Provisions have
been established under IAS 37 and a corresponding indemnity asset of £12 million was recorded. The indemnity asset is recorded in other
receivables; non current £9 million, current £3 million. The range of outcomes for the indemnity receipt is nil to £12 million with payment
based on contractual events.
.
113
GKN plc
Annual Report
and Accounts 2011
24 Business combinations (continued)
Judgements and estimates
Valuation of non-operating intangibles – methodology
The fair value exercise was carried out in conjunction with third party experts and considered the existence of the intangible assets relevant and
attributable to the businesses.
The intangible assets inherent in both Stromag and Getrag Driveline Products’ customer relationships/contracts were valued using an excess
earnings method. This methodology places a value on the asset as a function of (a) management’s estimate of the attrition rates on the expected
cash flows arising from the contracts and forecast cash flows likely to accrue from the customer base; (b) expected cash flows arising from the
asset; (c) discount rates reflective of the risks inherent in the cash flows; and (d) an asset charge attributable to operating assets needed to
generate the cash flows. The cash flows attributable to customer relationships include an annual attrition rate of between 5% and 10% to reflect
expected decay in future revenues. An after tax discount rate of 13.0% to 14.0% was applied to the forecast cash flows.
The proprietary technology and know-how has been valued using a relief from royalty methodology. The cash flow forecasts supporting this
valuation reflect the future sales to be generated in conjunction with the technology. The fair value attributed to proprietary technology represents
the theoretical costs avoided by both Stromag and Getrag Driveline Products from not having to pay a licence fee for the technology. The royalty
rate used in the valuations was between 2.5% and 3%, based on a review of licence agreements for comparable technologies in similar industrial
segments. An after tax discount rate of between 13% and 14.5% was applied to the forecast cash flows, a rate that reflects the higher inherent risk
within cash flows compared to the weighted average cost of capital for the acquisitions.
As part of the Getrag Driveline Products transaction the vendor signed a non-compete agreement and in respect of relevant individuals was
to keep confidential all information about technology, operations, or customers obtained of the business acquired for a period of five years.
Although the vendor still operates in the automotive business it has retained no activities of a similar nature to those it disposed of. The costs
of recreating the specific technology and processes it disposed of would be significant. A fair value of £2 million was identified for the covenant
not to compete.
The tradename of Stromag was deemed to have measurable value as it is well recognised in its industry. It has been valued using a Relief from
Royalty methodology based on projected cash flows attributable to the tradename and an assumed royalty rate (0.5%) that would be charged if
the name were subject to licence within a comparable trade situation and an appropriate discount rate (15.5%) reflecting inherent risk in the
project cash flows. A fair value of £5 million has been recognised.
Valuation of other assets and liabilities – methodology
Fair value adjustments on tangible fixed assets represent a net uplift on property, plant and equipment to fair values following external third party
appraisal. The uplift primarily represents the restoration of asset values fully depreciated and the current market conditions.
Inventories acquired were assessed for scrap and obsolete items before being fair valued. Inventories acquired have been valued at current
replacement cost for raw materials and selling price, adjusted for costs of disposal and a selling margin, for finished goods and work-in-progress.
The value of the inventory uplift was £4 million with an adjustment for scrap and obsolete items of £1 million.
Liabilities include an amount in respect of an onerous contract and a refundable advance.
At acquisition there were forecast unavoidable costs of meeting the obligations under long term agreements which exceed the contractual
economic inflow they will generate. Accordingly an onerous contract liability of £20 million has been recognised using a risk adjusted discount
rate of 12.5%. Unavoidable costs include direct labour, material and specific engineering costs in addition to the net cost of purchasing fixed
assets dedicated to the contract.
A liability of £19 million is included on the acquisition balance sheet for a contractual requirement to repay refundable advances provided.
The liability has been valued based on forecast cash flow, with the effect of discounting assessed as immaterial.
Financial statements
The valuation of all intangible assets reflects the tax benefit of amortisation, which in the context of Getrag Driveline Products has meant a benefit
assessed with reference to US and Swedish tax laws and in the context of Stromag has meant a benefit assessed with reference to German tax
laws. According to US and German tax law an intangible asset may be rateably amortised over 15 years regardless of its actual useful life and in
Sweden the amortisation period is 5 years. As such, there is a tax benefit to an acquirer and hence values attributable to the intangible assets
have been recognised. This value amounts to £12 million across all the intangibles recognised.
114
.
Notes to the financial statements
Continued
25 Cash flow reconciliations
2011
£m
2010
£m
374
385
191
1
10
22
–
31
(1)
(3)
(8)
6
(34)
(60)
(109)
80
191
2
10
19
–
(12)
(1)
(1)
(1)
3
(116)
(63)
(117)
121
500
420
Movement in cash and cash equivalents
Net movement in other borrowings and deposits
Bond buy back
Finance leases
Currency variations
(276)
(109)
–
–
(2)
133
(6)
25
1
(4)
Movement in year
Net debt at beginning of year
(387)
(151)
149
(300)
Net debt at end of year
(538)
(151)
Cash and cash equivalents per balance sheet
Bank overdrafts included within “current liabilities – borrowings”
156
(11)
438
(17)
Cash and cash equivalents per cash flow
145
421
Cash generated from operations
Operating profit
Adjustments for:
Depreciation, impairment and amortisation of fixed assets
Charged to trading profit
Depreciation
Impairment
Amortisation
Amortisation of non-operating intangible assets arising on business combinations
Restructuring and impairment charges
Change in fair value of derivative and other financial instruments
Amortisation of government capital grants
Net profits on sale and realisation of fixed assets
Gains and losses on changes in Group structure
Charge for share-based payments
Movement in post-employment obligations
Change in inventories
Change in receivables
Change in payables and provisions
Movement in net debt
Reconciliation of cash and cash equivalents
.
115
GKN plc
Annual Report
and Accounts 2011
26 Post-employment obligations
Post-employment obligations as at the year end comprise:
Pensions
Medical
– funded
– unfunded
– funded
– unfunded
2011
£m
2010
£m
(443)
(355)
(22)
(48)
(176)
(363)
(17)
(44)
(868)
(600)
The Group’s pension arrangements comprise various defined benefit and defined contribution schemes throughout the world. The main externally
funded defined benefit pension schemes operate in the UK, US and Japan. In Europe, funds are retained within certain businesses to provide
defined benefit pension benefits. In addition, in the US and UK a number of retirement plans are operated which provide certain employees with
post-employment medical benefits.
(a) Defined benefit schemes – measurement and assumptions
Independent actuarial valuations of all major defined benefit scheme assets and liabilities were carried out at 31 December 2011. The present
value of the defined benefit obligation, the related current service cost and the past service cost were measured using the projected unit
credit method.
2011
Rate of increase in pensionable salaries
Rate of increase in payment and deferred pensions
Discount rate
Inflation assumption
Rate of increases in medical costs:
Initial/long term
2010
Rate of increase in pensionable salaries
Rate of increase in payment and deferred pensions
Discount rate
Inflation assumption
Rate of increases in medical costs:
Initial/long term
uK
%
Americas
%
Europe
%
ROW
%
4.00
3.10
4.70
3.00
3.50
2.00
4.50
2.50
2.50
1.75
4.90
1.75
–
n/a
1.65
n/a
6.0/5.4
8.5/5.0
n/a
n/a
4.35
2.90
5.40
3.35
3.50
2.00
5.50
2.50
2.50
1.75
5.00
1.75
–
n/a
1.75
0.75
6.5/6.0
9.0/5.0
n/a
n/a
The discount rates in the table above for the UK and Europe were referenced against specific iBoxx indices, whilst the Citigroup liability index
was the reference point for the USA discount rate. The reference for the UK discount rate was the yield as at 31 December on the iBoxx GBP
Corporate rated AA bonds with a maturity of 15 years plus. The reference for the European discount rate was the yield as at 31 December on
the iBoxx Euro Corporate rated AA bonds with a maturity of 10 years plus of 4.7%, adjusted to reflect the duration of liabilities. For the USA,
the discount rate referenced both the Citigroup liability index and the Merrill Lynch US corporate AA 15+ years as at 31 December 2011 of 4.4
and 4.55, respectively.
The underlying mortality assumptions for the major schemes are as follows:
united Kingdom
Such is the size and profile of the UK scheme that data on the scheme’s mortality experience is collected and reviewed annually. The key
current year mortality assumptions for the scheme use S1NA (year of birth) mortality tables allowing for medium cohort projections with a
minimum improvement of 1% and a +0.5 age rating for male members and a +0.7 age rating for female members consistent with the prior year.
Using these assumptions, a male aged 65 lives for a further 20.7 years and a female aged 65 lives for a further 23.3 years. A male aged 45 is
expected to live a further 22.4 years from age 65 and a female aged 45 is expected to live a further 25.1 years from age 65.
Overseas
In the USA, PPA2011 tables have been used, whilst, in Germany the RT2005-G tables have again been used. In the USA, the longevity
assumption for a male aged 65 is that he lives a further 19.1 years (female 21.0 years) whilst, in Germany, a male aged 65 lives for a further
18.4 years (female 22.5 years). The longevity assumption for a USA male currently aged 45 is that he also lives for a further 19.1 years once
attaining 65 years (female 21.0 years), with the German equivalent assumption for a male being 21.1 years (female 25.1 years). These
assumptions are based solely on the prescribed tables not on actual GKN experience.
Financial statements
Key assumptions were:
116
.
Notes to the financial statements
Continued
26 Post-employment obligations (continued)
(a) Defined benefit schemes – measurement and assumptions (continued)
Assumption sensitivity analysis
The impact of a one percentage point movement in the primary assumptions on the defined benefit net obligations as at 31 December 2011 is
set out below:
UK
Liabilities
£m
Discount rate +1%
Discount rate -1%
Rate of inflation +1%
Rate of inflation -1%
Rate of increase in medical costs +1%
Rate of increase in medical costs -1%
366
(433)
(342)
291
(1)
1
Americas
Income
statement
£m
1.8
0.8
(22.1)
20.3
(0.1)
0.1
Liabilities
£m
56
(70)
–
–
(2)
1
Europe
Income
statement
£m
Liabilities
£m
(0.5)
0.5
–
–
(0.2)
0.2
ROW
Income
statement
£m
44
(54)
(37)
31
–
–
Liabilities
£m
–
(0.1)
(2.3)
2.0
–
–
5
(5)
–
–
–
–
Income
statement
£m
(0.2)
0.2
–
–
–
–
(b) Defined benefit schemes – reporting
The amounts included in operating profit are:
Trading Profit
Redundancy
and other
employment
amounts
£m
uK Pension
scheme
curtailment
(38)
1
4
–
–
–
–
–
–
(38)
1
4
(33)
–
–
(33)
(35)
1
9
–
(1)
–
–
–
68
(35)
–
77
(25)
(1)
68
42
Total
£m
2010
£m
Employee
benefit
expense
£m
2011
Current service cost
Past service
Settlement/curtailments
2010
Current service cost
Past service
Settlement/curtailments
£m
Total
£m
The amounts recognised in the balance sheet are:
2011
uK
£m
Present value of unfunded obligations
Present value of funded obligations
Fair value of plan assets
Net obligations recognised in the balance sheet
Americas
£m
Europe
£m
ROW
£m
(13)
(2,650)
2,391
(39)
(430)
248
(351)
(32)
31
–
(46)
23
(403)
(3,158)
2,693
(407)
(2,853)
2,660
(272)
(221)
(352)
(23)
(868)
(600)
The contribution expected to be paid by the Group during 2012 to the UK scheme is £29 million and to overseas schemes £45 million. Section
(d) of this note describes the Pension partnership interest created on 31 March 2010 under which the second distribution of £30 million is
expected to be made in the first half of 2012.
Cumulative actuarial gains and losses recognised in equity are as follows:
2011
£m
2010
£m
At 1 January
Net actuarial losses in year
(358)
(277)
(334)
(24)
At 31 December
(635)
(358)
.
117
GKN plc
Annual Report
and Accounts 2011
26 Post-employment obligations (continued)
(b) Defined benefit schemes – reporting (continued)
Movement in schemes’ obligations (funded and unfunded) during the year:
uK
£m
Americas
£m
Europe
£m
ROW
£m
Total
£m
At 1 January 2011
Businesses acquired
Current service cost
Interest
Contributions by participants
Actuarial gains and losses
Benefits paid
Past service
Settlements/curtailments
Currency variations
(2,448)
–
(24)
(129)
(4)
(201)
127
–
16
–
(399)
(1)
(4)
(21)
–
(55)
17
1
–
(7)
(369)
(13)
(6)
(19)
–
(2)
16
–
–
10
(44)
–
(4)
(1)
–
2
3
–
1
(3)
(3,260)
(14)
(38)
(170)
(4)
(256)
163
1
17
–
At 31 December 2011
(2,663)
(469)
(383)
(46)
(3,561)
At 1 January 2010
Businesses acquired
Current service cost
Interest
Contributions by participants
Actuarial gains and losses
Benefits paid
Past service
Settlements/curtailments
Currency variations
(2,440)
–
(22)
(135)
(4)
(61)
129
(1)
86
–
(355)
–
(4)
(22)
–
(26)
17
1
–
(10)
(352)
–
(6)
(18)
(1)
(20)
17
–
–
11
(39)
–
(3)
(1)
–
(2)
3
–
6
(8)
(3,186)
–
(35)
(176)
(5)
(109)
166
–
92
(7)
At 31 December 2010
(2,448)
(399)
(369)
(44)
(3,260)
Movement in schemes’ assets during the year:
Americas
£m
Europe
£m
ROW
£m
Total
£m
At 1 January 2011
Businesses acquired
Expected return on assets
Actuarial gains and losses
Contributions by Group
Contributions by participants
Settlements/curtailments
Benefits paid
Currency variations
2,364
–
134
–
23
4
(13)
(121)
–
245
–
17
(19)
19
–
–
(17)
3
28
2
1
–
–
–
–
–
–
23
–
1
(2)
3
–
–
(3)
1
2,660
2
153
(21)
45
4
(13)
(141)
4
At 31 December 2011
2,391
248
31
23
2,693
At 1 January 2010
Businesses acquired
Expected return on assets
Actuarial gains and losses
Contributions by Group
Special contribution
Contributions by participants
Settlements/curtailments
Benefits paid
Currency variations
1,930
–
128
76
39
331
4
(15)
(129)
–
215
–
16
10
16
–
–
–
(18)
6
27
–
1
–
–
–
1
–
(1)
–
18
–
–
(1)
2
–
–
–
(1)
5
2,190
–
145
85
57
331
5
(15)
(149)
11
At 31 December 2010
2,364
245
28
23
2,660
Financial statements
uK
£m
118
.
Notes to the financial statements
Continued
26 Post-employment obligations (continued)
(b) Defined benefit schemes – reporting (continued)
The defined benefit obligation is analysed between funded and unfunded schemes as follows:
2011
uK
£m
Funded
Unfunded
Americas
£m
Europe
£m
ROW
£m
Total
£m
2010
£m
(2,650)
(13)
(430)
(39)
(32)
(351)
(46)
–
(3,158)
(403)
(2,853)
(407)
(2,663)
(469)
(383)
(46)
(3,561)
(3,260)
The fair value of the assets in the schemes and the expected rates of return were:
Americas
uK
At 31 December 2011
Equities (inc. Hedge Funds)
Bonds
Property
Cash and net current assets
Partnership plan asset
Other assets
Long term
rate of
return
expected
%
7.8
3.9
6.6
0.5
6.1
4.7
Value
£m
Long term
rate of
return
expected
%
696
1,182
97
39
344
33
8.9
3.0
–
2.3
–
–
2,391
At 31 December 2010
Equities (inc. Hedge Funds)
Bonds
Property
Cash and net current assets
Partnership plan asset
Other assets
7.8
5.0
6.6
0.5
6.1
5.5
741
1,115
90
39
346
33
2,364
Europe
Value
£m
Long term
rate of
return
expected
%
166
75
–
7
–
–
–
–
–
–
–
4.8
248
8.5
3.6
–
2.8
–
–
171
69
–
5
–
–
245
ROW
Value
£m
Long term
rate of
return
expected
%
Value
£m
–
–
–
–
–
31
5.8
0.9
–
–
–
0.9
8
9
–
–
–
6
31
–
–
–
–
–
4.8
–
–
–
–
–
28
23
5.5
1.0
–
–
–
1.3
28
11
8
–
–
–
4
23
The expected return on plan assets is a blended average of projected long term returns for the various asset classes. Equity returns are
developed based on the selection of the equity risk premium above the risk-free rate which is measured in accordance with the yield on
government bonds. Bond returns are selected by reference to the yields on government and corporate debt, as appropriate to the plan's
holdings of these instruments. All other asset classes returns are determined by reference to current experience.
The Pension partnership interest has been valued on a discounted cash flow basis. The valuation considered separately the profiles of the
originating royalty and rental income streams using the Group’s current budget and forecast data with other factors considered being related
expenses including taxation, timing of the distributions, exchange rates, bond yields and the Group’s weighted average cost of capital.
The actual return on plan assets was £132 million (2010: £230 million).
.
119
GKN plc
Annual Report
and Accounts 2011
26 Post-employment obligations (continued)
(b) Defined benefit schemes – reporting (continued)
history of experience gains and losses:
2011
Experience adjustments arising on scheme assets:
Amount – £m
Percentage of scheme assets
Experience gains/(losses) on scheme liabilities:
Amount – £m
Percentage of the present value of scheme liabilities
Present value of scheme liabilities – £m
Fair value of scheme assets – £m
Deficit – £m
uK
–
–
Americas
(19)
(7.7%)
Europe
–
–
ROW
(2)
(8.7%)
(34)
(1.3%)
(2,663)
2,391
1
0.2%
(469)
248
4
1.0%
(383)
31
1
2.2%
(46)
23
(272)
(221)
(352)
(23)
77
3.3%
10
4.1%
71
2.9%
(2,448)
2,364
(5)
(1.3%)
(398)
245
(1)
(0.3%)
(369)
28
–
–
(45)
23
(84)
(153)
(341)
(22)
2010
Experience adjustments arising on scheme assets:
Amount – £m
Percentage of scheme assets
Experience gains/(losses) on scheme liabilities:
Amount – £m
Percentage of the present value of scheme liabilities
Present value of scheme liabilities – £m
Fair value of scheme assets – £m
Deficit – £m
–
–
(1)
(4.3%)
Experience adjustments arising on scheme assets:
Amount – £m
Percentage of scheme assets
Experience gains/(losses) on scheme liabilities:
Amount – £m
Percentage of the present value of scheme liabilities
Present value of scheme liabilities – £m
Fair value of scheme assets – £m
Deficit – £m
152
7.9%
21
9.8%
(1)
(3.7%)
–
–
–
–
(2,440)
1,930
1
0.3%
(355)
215
6
1.7%
(352)
27
–
–
(39)
18
(510)
(140)
(325)
(21)
(539)
(30.6%)
(86)
(43.1%)
7
0.3%
(2,043)
1,759
2
0.5%
(401)
202
(5)
(1.4%)
(353)
29
–
–
(46)
19
(284)
(199)
(324)
(27)
(1)
(4.8%)
(1)
(7.1%)
2008
Experience adjustments arising on scheme assets:
Amount – £m
Percentage of scheme assets
Experience gains/(losses) on scheme liabilities:
Amount – £m
Percentage of the present value of scheme liabilities
Present value of scheme liabilities – £m
Fair value of scheme assets – £m
Deficit – £m
–
–
(4)
(21.0%)
2007
Experience adjustments arising on scheme assets:
Amount – £m
Percentage of scheme assets
Experience gains/(losses) on scheme liabilities:
Amount – £m
Percentage of the present value of scheme liabilities
Present value of scheme liabilities – £m
Fair value of scheme assets – £m
Deficit – £m
21
0.9%
–
–
(7)
(0.3%)
(2,264)
2,248
4
1.6%
(270)
212
(3)
(1.4%)
(268)
21
–
–
(24)
14
(16)
(58)
(247)
(10)
Financial statements
2009
120
.
Notes to the financial statements
Continued
26 Post-employment obligations (continued)
(c) Defined contribution schemes
The Group operates a number of defined contribution schemes outside the United Kingdom. The charge to the income statement in the year
was £15 million (2010: £15 million).
(d) Pension partnership interest
On 31 March 2010 the Group agreed an asset-backed cash payment arrangement with the Trustee of the UK Pension scheme to help address
the UK pension funding deficit. In connection with the arrangement certain UK freehold properties and a non-exclusive licence over the
GKN trade marks, together with associated rental and royalty rights, were transferred to a limited partnership established by the Group.
The partnership is controlled by and its results are consolidated by the Group. The fair value of the assets transferred was £535 million.
On 31 March 2010, the Group made a special contribution to the UK Pension scheme of £331 million and on the same date the UK Pension
scheme used this contribution to acquire a nominal limited interest in the partnership for its fair value of £331 million. The UK Pension
scheme’s nominal partnership interest entitles it to a distribution from the income of the partnership of £30 million per annum for 20 years
subject to a discretion exercisable by the Group in certain circumstances. At inception the discounted value of the cash distributions was
assessed at £331 million which was recognised as a pension plan asset and as a non-controlling interest in equity. The first distribution
of £23 million for the period from 31 March to 31 December 2010 was made in the second quarter of 2011.
27 Contingent assets and liabilities
Aside from the unrecognised contingent asset referred to in note 6 in respect of Franked Investment Income, there were no other material
contingent assets at 31 December 2011.
In the case of certain businesses performance bonds and customer finance obligations have been entered into in the normal course of business.
Contingent consideration of £9 million (2010: £9 million) is payable and provided upon Filton achieving certain levels of sales in 2013, 2014
and 2015. The range of contingent consideration payable is nil to £9 million. Note 24 contains details of contingent consideration relating to
the current year acquisition of Getrag Driveline Products.
28 Operating lease commitments – minimum lease payments
The minimum lease payments which the Group is committed to make at 31 December are:
2011
Payments under non-cancellable operating leases:
Within one year
Later than one year and less than five years
After five years
2010
Property
£m
Vehicles, plant
and equipment
£m
Property
£m
Vehicles, plant
and equipment
£m
25
78
118
12
20
2
26
75
105
10
17
2
221
34
206
29
29 Capital expenditure
Contracts placed against capital expenditure sanctioned at 31 December 2011 so far as not provided by subsidiaries amounted to £118 million
property, plant and equipment, £6 million intangible assets (2010: £89 million property, plant and equipment, £7 million intangible assets) and
the Group’s share not provided by joint ventures amounted to £1 million property, plant and equipment, nil intangible assets (2010: less than
£1 million property, plant and equipment, nil intangible assets).
30 Related party transactions
In the ordinary course of business, sales and purchases of goods take place between subsidiaries and joint venture companies priced on an
‘arm’s length’ basis. Sales by subsidiaries to joint ventures in 2011 totalled £88 million (2010: £89 million). The amount due at the year end
in respect of such sales was £19 million (2010: £17 million). Purchases by subsidiaries from joint ventures in 2011 totalled £1 million (2010:
£2 million). The amount due at the year end in respect of such purchases was nil (2010: nil).
At 31 December 2011 a Group subsidiary had £2 million payable to a joint venture company in respect of an unsecured financing facility bearing
interest at 1 month LIBOR plus 1/8% (2010: nil).
GKN invested £1 million in GKN EVO eDrive Systems Limited, a joint venture company between GKN plc and EVO Electric Limited. The joint venture
company was established in June 2011.
31 Post balance sheet events
On 27 January 2012 the Group announced the dissolution of its Driveline joint arrangements with JTEKT Corporation (‘JTEKT’) in Rayong, Thailand.
On the same date the Group acquired the remaining shares in a non-controlling interest, GKN Driveline JTEKT Manufacturing Limited. Following
the dissolution, GKN now owns 100% of GKN Driveline JTEKT Manufacturing Limited. The Group paid JTEKT net consideration of approximately
£8 million, with further deferred consideration of £1 million contingent upon certain specified future business awards.
.
Independent auditors’ report to the members of GKN plc
Respective responsibilities of directors and auditors
As explained more fully in the Statement of Directors’ Responsibilities
set out on page 72, the Directors are responsible for the preparation of
the parent Company financial statements and for being satisfied that
they give a true and fair view. Our responsibility is to audit and express
an opinion on the parent Company financial statements in accordance
with applicable law and International Standards on Auditing (UK and
Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only
for the Company’s members as a body in accordance with Chapter 3 of
Part 16 of the Companies Act 2006 and for no other purpose. We do not,
in giving these opinions, accept or assume responsibility for any other
purpose or to any other person to whom this report is shown or into
whose hands it may come save where expressly agreed by our prior
consent in writing.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to
the parent Company’s circumstances and have been consistently
applied and adequately disclosed; the reasonableness of significant
accounting estimates made by the Directors; and the overall
presentation of the financial statements. In addition, we read all
the financial and non-financial information in the annual report to
identify material inconsistencies with the audited financial statements.
If we become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
GKN plc
Annual Report
and Accounts 2011
Opinion on financial statements
In our opinion the parent Company financial statements:
■
give a true and fair view of the state of the Company’s affairs as
at 31 December 2011;
■
have been properly prepared in accordance with United Kingdom
Generally Accepted Accounting Practice; and
■
have been prepared in accordance with the requirements of the
Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
■
the part of the Directors’ remuneration report to be audited has
been properly prepared in accordance with the Companies Act
2006; and
■
the information given in the Directors’ report for the financial year
for which the parent Company financial statements are prepared is
consistent with the parent Company financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the
Companies Act 2006 requires us to report to you if, in our opinion:
■
adequate accounting records have not been kept by the parent
Company, or returns adequate for our audit have not been received
from branches not visited by us; or
■
the parent Company financial statements and the part of the
Directors’ remuneration report to be audited are not in agreement
with the accounting records and returns; or
■
certain disclosures of Directors’ remuneration specified by law are
not made; or
■
we have not received all the information and explanations we
require for our audit.
Other matter
We have reported separately on the Group financial statements
of GKN plc for the year ended 31 December 2011.
Ian Chambers
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Birmingham
27 February 2012
Notes
(a) The maintenance and integrity of the GKN plc website is the responsibility of the
Directors; the work carried out by the auditors does not involve consideration of
these matters and, accordingly, the auditors accept no responsibility for any changes
that may have occurred to the financial statements since they were initially
presented on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Financial statements
We have audited the parent Company financial statements of GKN plc
for the year ended 31 December 2011 which comprise the Balance
Sheet and the related notes. The financial reporting framework that
has been applied in their preparation is applicable law and United
Kingdom Accounting Standards (United Kingdom Generally Accepted
Accounting Practice).
121
122
.
Balance Sheet of GKN plc
At 31 December 2011
Fixed assets
Investment in subsidiaries at cost
Notes
2011
£m
2010
£m
3
3,578
3,572
9
9
Current assets
Amounts due from subsidiaries
Creditors: amounts falling due within one year
Amounts owed to subsidiaries
(2,176)
(2,100)
Net current liabilities
(2,167)
(2,091)
Total assets less current liabilities
1,411
1,481
Net assets
1,411
1,481
Capital and reserves
Share capital
Capital redemption reserve
Share premium account
Profit and loss account
4
5
5
5
159
298
9
945
159
298
9
1,015
Total shareholders’ equity
6
1,411
1,481
The financial statements on pages 122 to 124 were approved by the Board of Directors and authorised for issue on 27 February 2012. They were signed
on its behalf by:
Nigel Stein, William Seeger – Directors
.
GKN plc
Annual Report
and Accounts 2011
Notes to the financial statements of GKN plc
1
123
Significant accounting policies and basis of preparation
The separate financial statements of the Company are presented as required by the Companies Act 2006. They have been prepared under the
historical cost convention except where other measurement bases are required to be applied and in accordance with applicable United Kingdom
Accounting Standards and law. In accordance with FRS 1 (revised 1996) and FRS 8 the Company has taken advantage of the exemptions not to
prepare a cash flow statement and not to disclose transactions with related parties. As the consolidated financial statements have been prepared
in accordance with IFRS 7, the Company is exempt from the disclosure requirements of FRS 29.
The principal accounting policies are summarised below. They have been applied consistently in both years presented.
Investments
Fixed asset investments in subsidiaries are shown at cost less provision for impairment.
Treasury shares
GKN shares which have been purchased and not cancelled are held as treasury shares and deducted from shareholders' equity.
Share-based payments
Equity-settled share-based payments are measured at fair value at the date of grant. The Company has no employees. Equity-settled share-based
payments that are made available to employees of the Company’s subsidiaries are treated as increases in equity over the vesting period of the
award, with a corresponding increase in the Company’s investments in subsidiaries, based on an estimate of the number of shares that will
eventually vest.
Profit and loss account
Interest income is recognised using the effective interest method. Dividend income is recognised when the right to receive payment is
established. Current tax is recognised in the profit and loss account unless items relate to equity.
Dividends
The annual final dividend is not provided for until approved at the annual general meeting whilst interim dividends are charged in the period they
are paid.
2 Profit and loss account
As permitted by section 408 of the Companies Act 2006 the Company has elected not to present its own profit and loss account for the year.
The profit for the year ended 31 December 2011 was £9 million (2010: £110 million).
Auditors’ remuneration for audit services to the Company was £0.3 million (2010: £0.6 million).
3 Fixed asset investments
At 1 January 2011
Additions – share-based payments
3,572
6
At 31 December 2011
3,578
Principal subsidiary and joint venture companies, the investments in which are held through intermediate holding companies, are shown on
pages 126 and 127.
4 Share capital and capital redemption reserve
Share capital disclosure and details of the cancellation of deferred ordinary shares in the prior year are shown in note 23 of the notes to the
consolidated financial statements.
5 Reserves
Capital
redemption
reserve
£m
Share
premium
account
£m
Profit
and loss
account
£m
At 1 January 2011
Profit for the year
Share-based payments
Dividends paid to equity shareholders
298
–
–
–
9
–
–
–
1,015
9
6
(85)
At 31 December 2011
298
9
945
Financial statements
£m
124
.
Notes to the financial statements of GKN plc
Continued
6 Reconciliation of movements in shareholders’ funds
£m
At 1 January 2011
Profit for the year
Share-based payments
Dividends paid to equity shareholders
1,481
9
6
(85)
At 31 December 2011
1,411
.
GKN plc
Annual Report
and Accounts 2011
2011
£m
2010
£m
2009**
£m
2008
£m
2007
£m
5,746
419
–
(31)
5,084
367
(39)
12
4,223
133
(144)
76
4,376
201
(153)
(124)
3,869
277
(31)
(10)
(22)
–
8
(19)
68
(4)
(24)
–
(2)
(10)
–
–
(8)
–
(7)
Operating profit/(loss)
Share of post-tax earnings of continuing joint ventures
Net financing costs
374
38
(61)
385
35
(75)
39
21
(114)
(86)
6
(50)
221
24
(46)
Profit/(loss) before taxation from continuing operations
Taxation
351
(45)
345
(20)
(54)
15
(130)
10
199
(1)
Profit/(loss) after taxation from continuing operations
Profit after taxation from discontinued operations
306
–
325
–
(39)
5
(120)
13
198
–
Profit/(loss) for the year
Less: profit attributable to non-controlling interests
306
(27)
325
(20)
(34)
(2)
(107)
(2)
198
(2)
Profit/(loss) attributable to equity shareholders
279
305
(36)
(109)
196
Earnings per share – p ***
Dividend per share – p ***
18.0
6.0
19.6
5.0
(3.2)
–
(11.7)
3.0
18.8
9.1
Management performance measures *
Sales
Trading profit
Profit before taxation
Earnings per share – p ***
6,112
468
417
22.6
5,429
411
363
20.7
4,454
156
87
5.7
4,617
221
170
16.0
4,100
309
258
23.5
Consolidated balance sheets
Non-current assets
Intangible assets (including goodwill)
Property, plant and equipment
Investments in joint ventures
Deferred tax assets
Other non-current assets
958
1,812
147
224
58
550
1,651
143
171
42
525
1,636
112
71
40
520
1,797
119
52
65
416
1,462
100
56
22
3,199
2,557
2,384
2,553
2,056
749
962
156
637
762
442
563
644
336
718
645
114
552
571
282
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents and other financial assets
Other (including assets held for sale)
Current liabilities
Borrowings
Trade and other payables
Current income tax liabilities
Other current liabilities (including liabilities associated
with assets held for sale)
Non-current liabilities
Borrowings
Deferred tax liabilities
Other non-current liabilities
Provisions
Post-employment obligations
Net assets
Net debt
*
21
23
19
37
27
1,888
1,864
1,562
1,514
1,432
(228)
(1,308)
(138)
(61)
(1,065)
(100)
(72)
(873)
(79)
(97)
(972)
(115)
(92)
(837)
(104)
(76)
(70)
(98)
(105)
(75)
(1,750)
(1,296)
(1,122)
(1,289)
(1,108)
(466)
(96)
(192)
(91)
(868)
(532)
(63)
(169)
(74)
(600)
(564)
(57)
(148)
(87)
(996)
(725)
(63)
(174)
(54)
(834)
(696)
(75)
(31)
(51)
(331)
(1,713)
(1,438)
(1,852)
(1,850)
(1,184)
1,624
1,687
(538)
(151)
972
928
1,196
(300)
(708)
(506)
Management sales and trading profit aggregate 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. Management profit 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. Management earnings includes subsidiary tax related to subsidiary management profit before tax less other non-controlling interests.
** As restated following the announcement to exit the Axles operations of the former OffHighway segment.
*** As restated in 2007-2008 for the bonus issue inherent in the Rights Issue that was approved on 6 July 2009.
Financial statements
Group Financial Record
Consolidated income statements
Sales
Trading profit
Restructuring and impairment charges
Change in value of derivative and other financial instruments
Amortisation of non-operating intangible assets arising
on business combinations
UK Pension scheme curtailment
Gains and losses on changes in Group structure
125
126
.
Key subsidiaries and joint ventures
Automotive
Powder Metallurgy
Europe
GKN Automotive Ltd England
GKN Driveline Birmingham Ltd England
GKN Driveline Bruneck AG Italy
GKN Driveline Deutschland GmbH Germany*
GKN Driveline Firenze SpA Italy
GKN Driveline International GmbH Germany
GKN Driveline Köping AB Sweden*
GKN Driveline Polska Sp. z o.o. Poland*
GKN Driveline SA France
GKN Driveline Slovenija d.o.o. Slovenia
GKN Driveline Trier GmbH Germany
GKN Driveline Vigo SA Spain
GKN Driveline Zumaia SA Spain
GKN Eskisehir Automotive Products Manufacture and Sales A.S. Turkey
GKN EVO eDrive Systems Ltd (50%) England
GKN Freight Services Ltd England
GKN Gelenkwellenwerk Kaiserslautern GmbH Germany
Sinter Metals
Europe
GKN Sinter Metals Components GmbH Germany
GKN Sinter Metals Engineering GmbH Germany
GKN Sinter Metals Filters GmbH Radevormwald Germany
GKN Sinter Metals GmbH, Bad Brückenau Germany
GKN Sinter Metals GmbH, Bad Langensalza Germany
GKN Sinter Metals GmbH Radevormwald Germany
GKN Sinter Metals Holding GmbH Germany
GKN Sinter Metals Holdings Ltd England
GKN Sinter Metals SpA Italy*
Americas
GKN do Brasil Ltda Brazil*
GKN Driveline Bowling Green Inc USA
GKN Driveline Celaya SA de CV Mexico
GKN Driveline Newton LLC USA*
GKN Driveline North America Inc USA*
GKN Driveline Uruguay SA Uruguay
GKN Driveline Villagran SA de CV Mexico
GKN Freight Services Inc USA
Transejes Transmisiones Homocinéticas de Colombia SA (49%) Colombia
Rest of World
GKN Driveline (India) Ltd (97%) India
GKN Driveline Japan Ltd Japan*
GKN Driveline JTEKT Manufacturing Ltd Thailand
GKN Driveline Korea Ltd South Korea
GKN Driveline Malaysia Sdn Bhd (68.4%) Malaysia
GKN Driveline Singapore Pte Ltd Singapore
GKN Driveline (Thailand) Ltd Thailand
GKN Driveline Torque Technology (Shanghai) Co Ltd China
GKN Driveshaft (Chongqing) Ltd (34.5%) China
Shanghai GKN Drive Shaft Company Ltd (50%) China
Taiway Ltd (36.25%) Taiwan
Unidrive Pty Ltd (60%) Australia
Americas
GKN Sinter Metals de Argentina SA Argentina
GKN Sinter Metals LLC USA*
GKN Sinter Metals Ltda Brazil
GKN Sinter Metals St Thomas Ltd Canada
Rest of World
GKN Danyang Industries Company Ltd China
GKN Sinter Metals Cape Town (Pty) Ltd South Africa
GKN Sinter Metals Private Ltd India
Hoeganaes
GKN Danyang Industries Company Limited China
Hoeganaes Corporation USA*
Hoeganaes Corporation Europe GmbH Germany
Hoeganaes Corporation Europe SA Romania
.
127
GKN plc
Annual Report
and Accounts 2011
Aerospace
Other businesses
Europe
Composite Technology and Applications Ltd (49%) England
GKN Aerospace Deutschland GmbH Germany
GKN Aerospace Services Ltd England*
GKN CEDU Ltd England
Emitec
Emitec Denmark A/S (50%) USA
Emitec Emission Control Technologies India PVT Ltd. (50%) India
Emitec France SAS (50%) France
Emitec Gesellschaft für Emissionstechnologie mbH (50%) Germany
Emitec Inc (50%) USA
Emitec Japan KK (50%) Japan
Emitec Korea Inc. (50%) South Korea
Emitec Produktion Eisenach GmbH (50%) Germany
Emitec Produktion Lohmar GmbH & Co. KG (50%) Germany
Land Systems
Europe
Chassis Systems Ltd (50%) England
GKN AutoStructures Ltd England
GKN Ayra Servico SA Spain
GKN Driveline Service Ltd England
GKN Driveline Service Scandinavia AB Sweden
GKN Geplasmetal SA Spain
GKN Land Systems Ltd England
GKN Service Austria GmbH Austria
GKN Service Benelux BV Netherlands
GKN Service France SAS France
GKN Service International GmbH Germany
GKN Walterscheid Getriebe GmbH Germany
GKN Walterscheid GmbH Germany
GKN Wheels Carpenedolo SpA Italy
GKN Wheels Nagbøl A/S Denmark
Stromag AG Germany
Stromag Dessau GmbH Germany
Stromag France SAS France
Americas
GKN Armstrong Wheels Inc USA
GKN Rockford Inc USA
GKN Walterscheid Inc USA
GKN Stromag Inc USA
Rest of World
GKN Wheels (Liuzhou) Company Ltd China
Matsui-Walterscheid Ltd (40%) Japan
Stromag Friccoes e Acoplamentos Brazil
Stromag India Pvt. Ltd India
Cylinder Liners
GKN Zhongyuan Cylinder Liner Company Ltd (59%) China
Corporate
Europe
GKN Group Services Ltd England
GKN Holdings plc England
GKN Industries Ltd England
GKN Investments LP Scotland
GKN (United Kingdom) plc England
Ipsley Insurance Ltd Isle of Man
Americas
GKN America Corp USA
Rest of World
GKN China Holding Co Ltd China
* Denotes a subsidiary whose results or financial position as at
31 December 2011 principally affected the figures shown in the Group’s
financial statements. These subsidiaries were included
in the consolidation and are held indirectly by GKN plc through
intermediate holding companies. All shares held are ordinary shares
or common stock with the exception of GKN do Brasil Ltda, in which
the Group’s interest is held as quota capital, GKN Sinter Metals LLC
and GKN Driveline Newton LLC, in which the Group’s interest is held as
a membership interest. The principal place of business of GKN Sinter
Metals LLC is 3300 University Drive, Auburn Hills, Michigan, USA and
the principal place of business of GKN Driveline Newton LLC is 550
Warrenville Road, Lisle, Illinois, USA.
A full list of subsidiaries and joint ventures will be attached to the next
annual return of GKN plc. The percentage of the share capital held by
the Group is indicated where companies are not wholly owned.
Other information
Americas
GKN Aerospace Bandy Machining Inc USA
GKN Aerospace Chem-tronics Inc USA*
GKN Aerospace Cincinnati Inc USA
GKN Aerospace Monitor Inc USA
GKN Aerospace Muncie Inc USA
GKN Aerospace New England Inc USA
GKN Aerospace North America Inc USA*
GKN Aerospace Precision Machining Inc USA
GKN Aerospace Services Structures Corp. USA
GKN Aerospace Transparency Systems Inc USA
GKN Westland Aerospace Inc USA*
128
.
Shareholder information
Financial calendar 2012
Ordinary shares quoted ex-dividend
2011 final dividend record date
Final date for receipt of DRIP mandates
Annual General Meeting
2011 final dividend payable
Dividend reinvestment plan (DRIP)
25 April 2012
27 April 2012
27 April 2012
3 May 2012
21 May 2012
GKN offers a DRIP which enables shareholders to reinvest their cash
dividends to buy additional GKN shares. If you would like more
information about the DRIP or would like to apply online, please go
to Equiniti’s website www.shareview.co.uk or call the shareholder
helpline on 0871 384 2962*.
Annual General Meeting
American Depositary Receipts
The Annual General Meeting will be held on Thursday, 3 May 2012 at
the Cavendish Conference Centre, 22 Duchess Mews, London W1G 9DT,
commencing at 2.00 pm. The notice of meeting, together with an
explanation of the resolutions to be considered at the meeting,
is contained within the AGM circular.
GKN has a sponsored Level 1 American Depositary Receipt (ADR)
facility in the US, with each ADR representing one GKN ordinary
share. GKN’s ADRs are traded on the US over-the-counter (OTC)
market under the symbol ‘GKNLY’. The ADR facility is managed by
The Bank of New York Mellon.
GKN website and share price information
Dividend payments are generally taxable and will be distributed to
ADR holders in US dollars by The Bank of New York Mellon.
Information on GKN, including this and prior years’ annual reports, half
year reports, results announcements and presentations together with
the GKN share price, is available on our website at www.gkn.com.
Shareholding enquiries and information
GKN’s register of members is maintained by Equiniti who act as our
registrar. If you have any questions about your shareholding or you
require any other guidance, you can contact Equiniti as follows:
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Tel: 0871 384 2962*
(+44 121 415 7039 from outside the UK)
Correspondence should refer to GKN and include your full name,
address and, if available, the 8 or 11 digit reference number which
can be found on your GKN share certificate, dividend stationery or
proxy card.
A range of shareholder information is available online at Equiniti’s
website www.shareview.co.uk. Here you can also view information
on your shareholding and obtain forms that you may need to manage
your shareholding, such as a change of address form or a stock
transfer form.
Share dealing service
GKN shares can be traded via the internet or by phone through
Shareview Dealing, a service provided by Equiniti Financial Services Ltd.
For further details, visit www.shareview.co.uk/dealing or call Equiniti
on 08456 037 037. Equiniti Financial Services Ltd is authorised and
regulated by the UK Financial Services Authority. The registered details
of the provider are available from the above number.
A telephone dealing service is also available through Stocktrade.
For further details, telephone 0845 601 0995 (+44 131 240 0414 from
outside the UK) and quote reference Low Co139.
GKN does not endorse or recommend any particular share dealing
service. The value of shares can fall and you may get back less than
you invest; if you are unsure as to the suitability of an investment,
you should seek professional advice.
*
Calls to this number cost 8p per minute from a BT landline; other providers’ costs
may vary. Lines are open 8.30 am to 5.30 pm, Monday to Friday.
Any queries relating to GKN’s ADR facility should be directed to
The Bank of New York Mellon:
The Bank of New York Mellon
PO Box 358516
Pittsburgh
PA 15252-8516
USA
Tel: +1 201 680 6825
(From the US, toll free: +1 888 BNY ADRS)
Email: shrrelations@bnymellon.com
Electronic communications
As an alternative to receiving documents in hard copy, shareholders can
elect to be notified by email as soon as shareholder documents such as
our annual report and notice of meeting are published. This notification
includes details of where you can view or download the documents on
our website. Shareholders who wish to register for email notification
can do so via Equiniti’s website www.shareview.co.uk.
Unsolicited mail
GKN is obliged by law to make its share register publicly available
and, as a consequence, some shareholders may receive unsolicited
mail. If you wish to limit the amount of unsolicited mail you receive,
you can register with the Mailing Preference Service by visiting
www.mpsonline.org.uk or by telephoning the MPS registration line on
0845 703 4599. The use of a nominee company can also help protect
your privacy. You can transfer your shares into our corporate nominee
by contacting Equiniti on 0845 300 0430.
Shareholder security
We are aware that a small number of shareholders have received
unsolicited telephone calls concerning their investment in GKN. These
calls are from overseas based organisations who offer to buy GKN
shares for considerably more than the current market price. In some
cases the caller has suggested that there is currently a takeover offer for
GKN. There is no such offer and we suspect that the calls were bogus.
Shareholders are advised to be very wary of any unsolicited investment
advice, offers to buy shares or offers of free company reports.
Operations, commonly known as ‘boiler rooms’, are targeting UK
shareholders and callers can be very persistent and extremely
persuasive. We are aware that they attempt to persuade individuals to
provide email addresses or other personal information; shareholders
are strongly advised not to provide any such details.
.
129
GKN plc
Annual Report
and Accounts 2011
The Financial Services Authority (FSA) provides the following guidance
should you be contacted in this manner:
■
obtain the name of the person calling and the organisation
they represent;
■
check that they are properly authorised by the FSA by checking the
FSA register of regulated firms at www.fsa.gov.uk/register/home.do;
■
call the organisation back to verify their identity using the telephone
number listed for them on the FSA register. If you deal with an
unauthorised firm you would not be eligible to receive payment
under the Financial Services Compensation Scheme;
■
search the FSA list of unauthorised firms and individuals to avoid
doing business with at www.fsa.gov.uk/Pages/Doing/Regulated/
Law/Alerts/Overseas.shtml;
■
report any suspicions to the FSA either by calling 0845 606 1234
or completing the online form at www.fsa.gov.uk/Pages/Doing/
Regulated/Law/Alerts/form.shtml; and
■
if the calls persist, hang up.
To reduce the risk of becoming a victim of fraud, you should:
■
ensure all your certificates are stored in a safe place, or hold your
shares electronically in CREST (electronic settlement system for
UK and Irish securities) via a nominee;
■
keep all correspondence containing your shareholder reference
number in a safe place;
■
shred all unwanted correspondence;
■
if you change your address, inform Equiniti as soon as possible.
If you receive a letter from Equiniti regarding a change of address
and have not recently moved house, please contact them
immediately. You may be a victim of identity theft; and
■
know when dividends will be paid. You can request that dividends
be paid direct to your bank, reducing the risk of cheques being
intercepted or lost in the post. If you change your bank account,
inform Equiniti of the details of your new account.
Capital gains tax
A capital gains tax (CGT) liability may arise when you dispose of an
asset (e.g. shares) which is worth more when you sell it than when you
acquired it.
Over the years the capital structure of GKN plc has changed. Events that
may need to be considered when calculating any CGT liability in relation
to our shares are set out in the following paragraphs.
2001 demerger of the industrial services businesses
The market values of a GKN ordinary share and a Brambles Industries plc
(Brambles) ordinary share on 7 August 2001 (the first day of trading of
Brambles shares) to be used to allocate the base cost of GKN ordinary
shares acquired since 31 March 1982 are: GKN ordinary shares – 282.5p
(43.943224%) and Brambles ordinary shares – 360.375p (56.056776%).
2000 ‘B’ share issue
The market values of a GKN ordinary share and a GKN ‘B’ share on
30 May 2000 (the first day of trading of ‘B’ shares) to be used to
allocate the base cost of GKN ordinary shares acquired since 31 March
1982 are: GKN ordinary shares – 914.5p (98.736774%) and GKN ‘B’
shares – 11.7p (1.263226%).
1982 base values
The adjusted 31 March 1982 base value of one GKN ordinary share held
immediately before the 2009 capital reorganisation and rights issue
was 45.501p. The adjusted base value immediately after the capital
reorganisation and rights issue was 47.955p.
This information is provided primarily for the purpose of individual
shareholders resident in the UK when calculating their personal tax
liability. Shareholders who are in any doubt as to their tax position or
who may be subject to tax in a jurisdiction other than the UK should
seek professional advice. Neither GKN plc nor our registrar can advise
on CGT matters.
Shareholder analysis
Holdings of ordinary shares at 31 December 2011:
holdings
1–500
501–1,000
1,001–5,000
5,001–50,000
50,001–100,000
100,001–500,000
500,001–1,000,000
above 1,000,000
Shareholder type
Individuals
Institutions
Other corporates
In addition, GKN held 37.4 million ordinary shares in treasury as at 31 December 2011.
Shares
Number
%
Number
(million)
6,665
3,949
9,052
2,990
133
270
93
204
28.54
16.91
38.76
12.80
0.57
1.15
0.40
0.87
1.4
3.0
21.3
34.6
9.4
66.3
66.3
1,350.8
0.09
0.19
1.37
2.23
0.61
4.27
4.27
86.97
23,356
100.00
1,553.1
100.00
20,546
2,471
339
87.97
10.58
1.45
51.5
1,489.6
12.0
3.32
95.91
0.77
23,356
100.00
1,553.1
100.00
%
Other information
Shareholders
130
.
Subject index
79-83, 123
Accounting policies
Acquisitions
14, 17, 25, 26, 32, 34, 37, 47, 78, 82, 111-113
Aerospace
2, 6, 7, 15, 18, 23, 29-30, 39, 127
American depositary receipts
69, 128
Annual general meeting
51, 69, 128
Assets
– goodwill and other intangible
82, 98, 99
– property, plant and equipment
81, 101
Audit Committee report
54-55
Auditors
– audit information
71
– independence
54-55
– reappointment
55, 71
– remuneration
71, 90
– reports
73, 121
Balance sheets
77, 122
Board and committees
5, 44-45, 46-52
– Audit Committee
48, 54-55
– Executive Committee
48
– Nominations Committee
48, 53
– Remuneration Committee
48, 57
Borrowings
34, 35, 81, 104, 105
Business model
8, 9, 38
Business review
IFC, 1-43
Capital expenditure
12, 26, 28, 30, 31, 33, 120
Capital reorganisation
110, 129
Cash flow
7, 12, 33, 78, 114
Cautionary statement
131
Chairman’s statement
4-5
Changes in equity statement
76
Chief Executive’s review
6-7
UK Corporate Governance Code compliance
52
Community involvement
43, 71
Comprehensive income statement
75
Corporate governance
4, 46-52
Directors
70
– attendance record
48
– biographies
44-45
– conflicts of interest
70
– interests in shares
64-66
– report
IFC, 1-72
– remuneration
63-64
– responsibility for the accounts
72, 73, 121
– service agreements
61
Disposals
25, 29, 100-102
Diversity
46, 49
Dividend
IFC, 4, 7, 13, 33, 69, 95
– reinvestment plan
128
Driveline
1, 6, 7, 14, 16, 20, 22, 26, 27, 126
Earnings per share
IFC, 12, 33, 95
Employees
7, 39, 40, 43, 95, 96
Environment
13, 41
Financial
– funding and liquidity
35
– instruments
32, 81, 90, 108, 109
– record
125
– treasury management
35
Key
IFC – Inside Front Cover
32, 91
Financing costs (net)
Foreign currencies
24, 37, 79
Gallatin
4, 6, 13, 25, 28, 32, 34, 41, 42
Going concern
35
Government refundable advances
12, 32
Group overview
1-2
Health and safety
6, 11, 13, 41-43
Income statement
74, 80
Internal control
50, 55
Joint ventures
20, 24, 26, 30, 32, 40
Key performance indicators
– financial
12, 13
– non-financial
13, 40-41
Land Systems
2, 7, 17, 23, 31, 32, 127
Lean Enterprise
8, 18, 40
Long term incentives
59-60, 96-97
Margins
IFC, 7, 12, 25, 26, 28, 29, 31, 89
Markets
6, 10, 22-23, 25, 29
Nominations Committee Report
53
Other businesses
31, 127
Other statutory information
69
Outlook
5, 7
Pensions/post-employment obligations
34, 37, 58, 60, 66, 115-120
Powder Metallurgy
1, 7, 20, 22, 28, 41, 126
Profit/Loss
– before tax
IFC, 4, 33, 88
– operating
89-91
– trading
IFC, 7, 24, 25, 26, 28, 29, 31, 85
Registrar
128, 131
Related party transactions
120
Remuneration report
56-68
– Remuneration review
56, 67-68
Research and development
33, 82, 89
Restructuring and impairment
32, 34
Risk and risk management
36, 37, 50, 105-108
Sales
IFC, 1, 2, 7, 12, 25, 26, 28, 29, 31, 80
Segmental analysis
84-87
Share-based payments
83, 96, 97
Shareholder analysis
129
Shares
– capital
69, 110
– dealing service
128
– price information
128
– substantial shareholders
69
Strategy
– Group
8, 10, 14-21
– divisional
1, 2
Subsidiary companies
126-127
Sustainability report
38-43
Taxation
33, 37, 82, 92-94, 129
Technology
1, 2, 6, 7, 8, 9, 10, 15, 39
Values
8, 38
Website
128, 131
.
01
.
GKN at a glance
02
.
GKN plc
Annual Report
and Accounts 2011
Contact details
GKN Driveline
GKN Powder Metallurgy
GKN Aerospace
GKN Land Systems
GKN Driveline is the world’s leading supplier of automotive
driveline systems and solutions. As a global business serving
the leading vehicle manufacturers, GKN Driveline develops,
builds and supplies an extensive range of automotive
driveline products and systems – for use in the smallest
ultra low-cost car to the most sophisticated premium
vehicle demanding the most complex driving dynamics.
GKN Powder Metallurgy is the world’s largest manufacturer
of sintered components. It comprises Hoeganaes and GKN
Sinter Metals. Hoeganaes produces the metal powder that
GKN Sinter Metals uses to manufacture precision automotive
components for engines, transmissions and body and
chassis applications. It also produces a range of components
for industrial and consumer applications.
GKN Aerospace is a world leading global first tier supplier
of airframe and engine structures, components, assemblies
and transparencies to a wide range of aircraft and engine
prime contractors and other first tier suppliers. It operates
in three main product areas: aerostructures, engine
components/sub-systems and special products.
GKN Land Systems is a leading supplier of technology
differentiated power management solutions and services.
It designs, manufactures and supplies products and
services for the agricultural, construction, mining and
industrial machinery markets. In addition, it provides
global aftermarket distribution and through-life support.
Products
Products
Products
Products
n
n
n
n
Constant velocity jointed systems including CV joints
and sideshafts.
All-wheel drive (AWD) systems including propshafts,
couplings and final drive units.
Trans-axle solutions including open, limited slip
and locking differentials and electronic torque
vectoring products.
eDrive systems including electric rear axles and
electric transmissions.
n
n
n
n
n
Sintered components for engines and gearboxes,
as well as bodies and chassis.
Sintered bearings and filters.
Metal injection moulded components.
Soft magnetic components for use in electric motors.
Sintered components for numerous industrial
applications.
n
n
n
n
Integrated aerostructures, including wing and flight
control surface sub-assemblies and fuselage structures
and surfaces.
Fixed and rotating propulsion products for aircraft engines;
fan cases, blades, exhaust systems and nacelles.
Transparencies including specially coated cockpit and
cabin windows.
Niche products such as ice protection, fuel systems
and flotation devices.
n
n
n
n
n
Electro-mechanical power management devices such
as electro-magnetic brakes, engineered flexible
couplings, clutches, driveshafts and gear technology.
Sensors, actuators and controls.
Single and multi-piece steel and aluminium wheels.
Structures and chassis systems.
Aftermarket parts and remanufacturing for
passenger cars, commercial trucks, agricultural
and construction vehicles.
Strategy
Strategy
Strategy
Strategy
Our strategy is to develop our market-leading presence,
superior technology and global manufacturing footprint to:
n provide innovative driveline systems and solutions,
supporting developing market trends for more fuelefficient vehicles; and
n increase our business in high-growth regions serving
the needs of strategic customers.
Our strategy is to exploit powder metal technology, working
closely with our customers to develop ‘design for powder
metal’ applications to:
n meet the rapidly developing requirements for highefficiency engines, advanced transmission applications
and evolving emissions standards; and
n expand the business in high-growth markets,
supporting customers globally.
Our strategy is to focus investment in core market technology
development and application, to:
n exploit our strong positions on existing programmes for
new aircraft and pursue long-term contracts on selective
high-growth and long-running platforms;
n develop new technologies for future commercial and
defence aircraft, improve fuel efficiency, reduce emissions
and minimise the environmental impact of aviation; and
n expand into adjacent markets with similar product
technologies and manufacturing capabilities.
Our strategy is to build a global leader in industrial
power management solutions on a platform of integrated
powertrain systems and services, including:
n developing capability in electro-mechanical components;
n expanding the business for existing products into
new markets; and
n improving customer performance by offering safe,
efficient and reliable power management, together
with increased electrification and use of lightweight
structures.
Number of employees: 21,100
Number of employees: 6,400
Number of employees: 8,500
Number of employees: 5,900
Locations: Operational in 51 locations across 23 countries.
Locations: Operational in 30 locations across 14 countries.
Locations: Operational in 27 locations across five countries.
Locations: Operational in 40 locations across 17 countries.
SALES BY CUSTOMER
6%
Mitsubishi
SALES BY CUSTOMER
5%
BMW
2% Tata Group
16% Volkswagen Group
7%
Toyota
13%
Renault
Nissan Group
8%
Ford
23%
Other
2% Hilite
2% Volkswagen Group
2% Linamar
3%
Fiat/Chrysler
2%
Bosch
8% Ford
6%
General Motors
5% ZF Group
2%
Honeywell
2% Bombardier
3% Spirit
3% Rolls-Royce
5% General Electric
SALES BY CUSTOMER
31%
EADS
5% Lockheed
Martin
17%
Other
11%
Fiat/Chrysler
9%
General Motors
SALES BY CUSTOMER
70%
Other
13%
United Technologies
1% Daimler
Group
2% Volkswagen Group
2% JCB
2% Ford Group
3% Agco
4% Claas
4% Caterpillar
GKN plc
Registrar
PO Box 55
Ipsley House
Ipsley Church Lane
Redditch
Worcestershire B98 0TL
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Tel +44 (0)1527 517715
Fax +44(0)1527 517700
Tel 0871 384 2962*
(+44 121 415 7039 from outside UK)
London Office
50 Pall Mall
London SW1Y 5JH
Tel +44 (0)20 7930 2424
Fax +44 (0)20 7930 3255
enquiries@gkn.com
www.gkn.com
Registered in England No. 4191106
*
Calls to this number cost 8p per minute from a BT landline; other providers’
costs may vary. Lines are open 8.30 am to 5.30 pm, Monday to Friday.
This annual report and accounts has been prepared for the members
of GKN plc and should not be relied upon by any other party or for
any other purpose. It contains forward looking statements which are
made in good faith based on the information available at the time
of its approval. It is believed that the expectations reflected in these
statements are reasonable but they may be affected by a number
of risks and uncertainties that are inherent in any forward looking
statement which could cause actual results to differ materially from
those currently anticipated. Nothing in this document should be
regarded as a profits forecast.
Fulmar Colour is FSC certified, PEFC certified and ISO 14001 certified
showing that it is committed to all round excellence and improving
environmental performance is an important part of this strategy. Fulmar
Colour aim to reduce at source the effect their operations have on the
environment, and are committed to continual improvement, prevention
of pollution and compliance with any legislation or industry standards.
Fulmar Colour is a CarbonNeutral® Printing Company
6% Tata Group
61%
Other
19%
Boeing
www.equiniti.com
www.shareview.co.uk
Cautionary statement
8% John Deere
7% Case New Holland
Fax 0871 384 2100
(+44 1903 698403 from outside UK)
This annual report is available on our website.
The paper used in this report is produced using FSC® mix pulp which is
fully recyclable, biodegradable, pH Neutral, heavy metal absence and
acid-free. It is manufactured within a mill which complies with the
international environmental ISO 14001 standard.
Designed and produced by MAGEE
www.magee.co.uk
Printed by Fulmar Colour
131
ISO 14001 REGISTERED
DNV Certification BV
013
GKN plc Annual Report and Accounts 2011
GKN
2011 performance
Annual Report and Accounts 2011
Financial highlights
(12 months ended 31 December 2011)
n
Group sales up £683 million (13%) to £6.1 billion.
n
Excluding net £19 million charge for temporary plant closure at Hoeganaes, Gallatin, USA:
n
Trading profit of £487 million, up £76 million – an increase of 18%.
n
Group trading margin of 8.0%, up from 7.6%; increased targets set for three divisions.
n
Profit before tax of £417 million, an increase of 15%. Reported profit before tax, £351 million.
n
Return on average invested capital (excluding 2011 acquisitions) of 18.3%, reflecting
higher profitability.
MARKET LEADERSHIP
G RO W T H
O P E R AT I O N A L E XC E L L E N CE
S U S TA I N A B I L I TY
ENGINEERING
n
Earnings per share up 9% to 22.6 pence per share.
n
Final dividend of 4.0 pence per share, giving a total for 2011 of 6.0 pence per share,
a 20% increase.
n
Net debt of £538 million, reflecting £444 million expenditure on new acquisitions.
for the future
Statutory basis
Sales
Profit before tax
Earnings per share
£5,746m
£351m
18.0p
2010: £5,084m
2010: £345m
2010: 19.6p
Management basis*
Sales
Profit before tax
Earnings per share
£6,112m
£417m
22.6p
2010: £5,429m
2010: £363m
2010: 20.7p
www.gkn.com
* See page 24 for details of measurement and reporting of performance on a management basis.