GKN plc Annual Report and Accounts 2010
GKN
2010 PeRFORMANce
Annual Report and Accounts 2010
eNGINeeRING FOR THe FUTURe…
We believe that everything we do well today
can be done better tomorrow. Standards,
disciplines, systems and processes have
built a culture that encourages us to
challenge everything. This way of thinking
turns the insignificant into the significant;
it accelerates our momentum and delivers
the products of our imagination.
www.gkn.com
n
Group results reflect the strong recovery in Driveline, Powder Metallurgy and
Land Systems, a good performance in Aerospace and the on-going benefits
from restructuring.
n
Sales up 22% (£975 million) to £5.4 billion.
n
Trading profit of £411 million, up £255 million, and trading margin of 7.6%.
n
New business: Driveline achieves 80% win rate on new driveshaft business
and Aerospace wins $1.5 billion of new contracts.
n
Positive free cash flow of £188 million and net debt down £149 million to
£151 million.
n
Final dividend of 3.5 pence per share, giving a total dividend for 2010
of 5.0 pence per share.
n
Return on average invested capital of 17% reflecting higher profitability.
Statutory basis
Sales
Profit/(loss) before tax
Earnings/(loss) per share
£5,084m
£345m
19.6p
2009: £4,223m
2009: £(54)m
2009: (3.2)p
Management basis
ENGINEERING
for the future
www.gkn.com
Sales
Profit before tax
Earnings per share
£5,429m
£363m
20.7p
2009: £4,454m (restated)
2009: £87m (restated)
2009: 5.7p (restated)
See page 20 for details of measurement and reporting of performance on a management basis. 2009 figures have been restated following the decision to
exit the Axles business of the former OffHighway segment.
Directors’ report – business review
IFC
01
03
04
06
08
09
10
ENGINEERING FOR THE FUTURE…
We believe that everything we do well today
can be done better tomorrow. Standards,
disciplines, systems and processes have
built a culture that encourages us to
challenge everything. This way of thinking
turns the insignificant into the significant;
it accelerates our momentum and delivers
the products of our imagination.
2010 performance
GKN at a glance
This is GKN
Chairman’s statement
Chief Executive’s review
GKN strategy
Divisional strategies
Our strategy in action
– Driveline
– Powder Metallurgy
– Aerospace
– Land Systems
18 Key performance indicators
20 Review of performance
32 Risks and uncertainties
34 Sustainability report
Directors’ report – governance
38
40
46
48
59
62
The Board
Corporate governance
Audit Committee report
Remuneration report
Other statutory information
Statement of Directors’ responsibilities
Financial statements
63
64
109
110
113
Independent auditors’ report (Group)
Group financial statements
Independent auditors’ report (Company)
Company financial statements
Group financial record
Other information
114
116
118
119
Subsidiaries and joint ventures
Shareholder information
Subject index
Contact details
Key
IFC – Inside Front Cover
www.gkn.com
www.gkn.com
GKN plc Annual Report and Accounts 2010
GKN
2010 PeRFORMANce
Annual Report and Accounts 2010
eNGINeeRING FOR THe FUTURe…
We believe that everything we do well today
can be done better tomorrow. Standards,
disciplines, systems and processes have
built a culture that encourages us to
challenge everything. This way of thinking
turns the insignificant into the significant;
it accelerates our momentum and delivers
the products of our imagination.
www.gkn.com
n
Group results reflect the strong recovery in Driveline, Powder Metallurgy and
Land Systems, a good performance in Aerospace and the on-going benefits
from restructuring.
n
Sales up 22% (£975 million) to £5.4 billion.
n
Trading profit of £411 million, up £255 million, and trading margin of 7.6%.
n
New business: Driveline achieves 80% win rate on new driveshaft business
and Aerospace wins $1.5 billion of new contracts.
n
Positive free cash flow of £188 million and net debt down £149 million to
£151 million.
n
Final dividend of 3.5 pence per share, giving a total dividend for 2010
of 5.0 pence per share.
n
Return on average invested capital of 17% reflecting higher profitability.
Statutory basis
Sales
Profit/(loss) before tax
Earnings/(loss) per share
£5,084m
£345m
19.6p
2009: £4,223m
2009: £(54)m
2009: (3.2)p
Management basis
ENGINEERING
for the future
www.gkn.com
Sales
Profit before tax
Earnings per share
£5,429m
£363m
20.7p
2009: £4,454m (restated)
2009: £87m (restated)
2009: 5.7p (restated)
See page 20 for details of measurement and reporting of performance on a management basis. 2009 figures have been restated following the decision to
exit the Axles business of the former OffHighway segment.
01 /
02 /
GKN AT A GLANce
/ 119
cONTAcT DeTAILS
Delivering more through technology
and innovation…
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
Fax 0871 384 2100
(+44 1903 698403 from outside UK)
50 Pall Mall
London SW1Y 5JH
Tel +44 (0)20 7930 2424
Fax +44 (0)20 7930 3255
information@gkn.com
www.gkn.com
Registered in england No. 4191106
Driveline
Powder Metallurgy
Aerospace
Land Systems
GKN Driveline is the world’s leading supplier
of automotive driveline systems and solutions.
GKN Powder Metallurgy is the world’s leading
producer of sintered components and the largest
producer of metal powder in North America.
GKN Aerospace is a first tier supplier to the global
aviation industry and a leader in the manufacture
of highly complex composite aerostructures and
engine products.
GKN Land Systems designs, manufactures
and supplies a wide range of products for the
global agricultural, construction, mining and other
industrial markets.
Products
Products
Products
n
n
n
constant velocity jointed systems.
All-wheel drive 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.
Products
n
n
n
n
Sintered components for engines and gearboxes.
Sintered bearings and filters.
Metal injection moulded components.
Soft magnetic materials for use in electric motors.
n
n
Integrated aerostructures, including wing and flight
control surface assemblies and fuselage.
Propulsion products such as fan blades, exhaust
systems and nacelles.
Transparencies, including cockpit windows, bullet
resistant glass and coatings.
Niche technologies such as ice protection and noise
control systems.
n
n
n
Power management devices such as primary and
secondary driveshafts, clutches and gearboxes.
Single and multi-piece steel and aluminium wheels.
Structures such as chassis systems.
Aftermarket parts for use in a range of areas including
passenger cars and commercial and agricultural
vehicles.
n
The majority of our products are for applications in the
automotive industry, with the balance for a wide variety
of industrial and consumer uses.
n
We supply mainly to vehicle manufacturers in the
global car and light vehicle markets.
Technology trends
Markets
Technology trends
Trends in automotive and industrial markets have led to
greater demand for lower emissions, higher fuel
efficiency and lighter weight.
We supply our products to a wide range of aircraft and
engine prime contractors in both military and civil
aerospace markets.
In addition to existing markets, GKN Land Systems is
the platform to leverage GKN Group capability for new
business opportunities in emerging high growth markets
such as renewable energy and mass transit solutions.
Our response
Technology trends
Technology trends
Increasing investment in, and development of, lightweight
structures to improve fuel efficiency, lower emissions and
minimise the environmental impact of aviation.
There is heightened focus in all of our markets on
improving performance through efficient, reliable power
management, increased electrification and use of
lightweight structures.
Markets
Key trends in Driveline’s markets include demand for
improved fuel efficiency and increased concentration
on electric power as a solution to developing
sustainable, environmentally efficient transport.
n
Our response
n
n
Our products are developed with a clear focus on
providing weight, space and fuel savings.
Our eDrive Systems business continues to
develop innovative solutions, for use in vehicles
where the primary power is electricity and also
where the primary drive is a conventional engine
with a secondary electric drive.
SALeS BY cUSTOMeR
6%
Mitsubishi
8%
Ford
8%
Toyota
n
Powder metal technology enables the flexible design
of high performance complex shapes and the
production of components at, or close to, net shape,
leading to a reduction in material waste and
associated energy consumption in manufacture.
Demand for high precision and the use of new
materials has led to the development of components
such as helical gears for e-steering systems and,
in conjunction with GKN Driveline, sinter-forged
differential gears.
SALeS BY cUSTOMeR
4%
BMW
3% PSA Peugeot Citroen
15% Volkswagen Group
12%
Renault
Nissan Group
2% ThyssenKrupp Presta
2% Volkswagen Group
2% Linamar
3%
FiatChrysler
8%
General Motors
n
n
We are developing new applications for composites to
meet these requirements. Production on the A350 XWB’s
advanced composite rear wing spar recently commenced
at our dedicated composite facility in Filton, UK.
GKN Aerospace recently delivered the first major
structural assembly for the Sikorsky cH-53K helicopter,
featuring an advanced hybrid composite, aluminium
and titanium structure.
72%
Other
Markets
* calls to this number cost 8p per minute from a BT landline,
other providers’ costs may vary. Lines are open 8.30am to 5.30pm,
Monday to Friday.
Directors’ report – governance
38
40
46
48
59
62
The Board
corporate governance
Audit committee report
Remuneration report
Other statutory information
Statement of Directors’ responsibilities
Cautionary statement
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.
Financial statements
63
64
109
110
113
Independent auditors’ report (Group)
Group financial statements
Independent auditors’ report (company)
company financial statements
Group financial record
Our response
n
We are focused on developing products that meet
these challenges, such as our new Integrated
continuously Variable Drive System (IcVD®) for
agricultural and construction machinery, which can be
individually configured to vehicle-specific parameters
to optimise performance.
SALeS BY cUSTOMeR
3%
3%
Spirit Bombardier
3% Rolls Royce
4% General Electric
6% Lockheed Martin
28%
EADS
2% JCB
2% Ford
3% Claas
4% Caterpillar
2% Agco
2% Volkswagen Group
8% John Deere
6% Tata
6% Case New Holland
Other information
Images on pages 1, 2, 9 and 10-17 appear courtesy of Peugeot citroën,
Ford, Airbus S.A.S. and JcB.
The paper used in this report is produced with FSc mixed sources 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.
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.
ISO 14001 REGISTERED
DNV Certification BV
114
116
118
119
Subsidiaries and joint ventures
Shareholder information
Subject index
contact details
013
Key
IFc – Inside Front cover
Fulmar colour is a carbon Neutral Printing company.
14%
United
Technologies
10%
FiatChrysler
26%
Other
6%
General Motors
4% ZF Group
www.equiniti.com
www.shareview.co.uk
2010 performance
GKN at a glance
This is GKN
chairman’s statement
chief executive’s review
GKN strategy
Divisional strategies
Our strategy in action
– Driveline
– Powder Metallurgy
– Aerospace
– Land Systems
18 Key performance indicators
20 Review of performance
32 Risks and uncertainties
34 Sustainability report
Our response
SALeS BY cUSTOMeR
2%
Bosch
7% Ford
n
IFc
01
03
04
06
08
09
10
This annual report is available on our website.
Markets
n
Directors’ report – business review
65%
Other
18%
Other
21%
Boeing
Designed and produced by MAGEE
www.magee.co.uk
Printed by Fulmar colour
www.gkn.com
01 /
02 /
GKN AT A GLANce
/ 119
cONTAcT DeTAILS
Delivering more through technology
and innovation…
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
Fax 0871 384 2100
(+44 1903 698403 from outside UK)
50 Pall Mall
London SW1Y 5JH
Tel +44 (0)20 7930 2424
Fax +44 (0)20 7930 3255
information@gkn.com
www.gkn.com
Registered in england No. 4191106
Driveline
Powder Metallurgy
Aerospace
Land Systems
GKN Driveline is the world’s leading supplier
of automotive driveline systems and solutions.
GKN Powder Metallurgy is the world’s leading
producer of sintered components and the largest
producer of metal powder in North America.
GKN Aerospace is a first tier supplier to the global
aviation industry and a leader in the manufacture
of highly complex composite aerostructures and
engine products.
GKN Land Systems designs, manufactures
and supplies a wide range of products for the
global agricultural, construction, mining and other
industrial markets.
Products
Products
Products
n
n
n
constant velocity jointed systems.
All-wheel drive 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.
Products
n
n
n
n
Sintered components for engines and gearboxes.
Sintered bearings and filters.
Metal injection moulded components.
Soft magnetic materials for use in electric motors.
n
n
Integrated aerostructures, including wing and flight
control surface assemblies and fuselage.
Propulsion products such as fan blades, exhaust
systems and nacelles.
Transparencies, including cockpit windows, bullet
resistant glass and coatings.
Niche technologies such as ice protection and noise
control systems.
n
n
n
Power management devices such as primary and
secondary driveshafts, clutches and gearboxes.
Single and multi-piece steel and aluminium wheels.
Structures such as chassis systems.
Aftermarket parts for use in a range of areas including
passenger cars and commercial and agricultural
vehicles.
n
The majority of our products are for applications in the
automotive industry, with the balance for a wide variety
of industrial and consumer uses.
n
We supply mainly to vehicle manufacturers in the
global car and light vehicle markets.
Technology trends
Markets
Technology trends
Trends in automotive and industrial markets have led to
greater demand for lower emissions, higher fuel
efficiency and lighter weight.
We supply our products to a wide range of aircraft and
engine prime contractors in both military and civil
aerospace markets.
In addition to existing markets, GKN Land Systems is
the platform to leverage GKN Group capability for new
business opportunities in emerging high growth markets
such as renewable energy and mass transit solutions.
Our response
Technology trends
Technology trends
Increasing investment in, and development of, lightweight
structures to improve fuel efficiency, lower emissions and
minimise the environmental impact of aviation.
There is heightened focus in all of our markets on
improving performance through efficient, reliable power
management, increased electrification and use of
lightweight structures.
Markets
Key trends in Driveline’s markets include demand for
improved fuel efficiency and increased concentration
on electric power as a solution to developing
sustainable, environmentally efficient transport.
n
Our response
n
n
Our products are developed with a clear focus on
providing weight, space and fuel savings.
Our eDrive Systems business continues to
develop innovative solutions, for use in vehicles
where the primary power is electricity and also
where the primary drive is a conventional engine
with a secondary electric drive.
SALeS BY cUSTOMeR
6%
Mitsubishi
8%
Ford
8%
Toyota
n
Powder metal technology enables the flexible design
of high performance complex shapes and the
production of components at, or close to, net shape,
leading to a reduction in material waste and
associated energy consumption in manufacture.
Demand for high precision and the use of new
materials has led to the development of components
such as helical gears for e-steering systems and,
in conjunction with GKN Driveline, sinter-forged
differential gears.
SALeS BY cUSTOMeR
4%
BMW
3% PSA Peugeot Citroen
15% Volkswagen Group
12%
Renault
Nissan Group
2% ThyssenKrupp Presta
2% Volkswagen Group
2% Linamar
3%
FiatChrysler
8%
General Motors
n
n
We are developing new applications for composites to
meet these requirements. Production on the A350 XWB’s
advanced composite rear wing spar recently commenced
at our dedicated composite facility in Filton, UK.
GKN Aerospace recently delivered the first major
structural assembly for the Sikorsky cH-53K helicopter,
featuring an advanced hybrid composite, aluminium
and titanium structure.
72%
Other
Markets
* calls to this number cost 8p per minute from a BT landline,
other providers’ costs may vary. Lines are open 8.30am to 5.30pm,
Monday to Friday.
Directors’ report – governance
38
40
46
48
59
62
The Board
corporate governance
Audit committee report
Remuneration report
Other statutory information
Statement of Directors’ responsibilities
Cautionary statement
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.
Financial statements
63
64
109
110
113
Independent auditors’ report (Group)
Group financial statements
Independent auditors’ report (company)
company financial statements
Group financial record
Our response
n
We are focused on developing products that meet
these challenges, such as our new Integrated
continuously Variable Drive System (IcVD®) for
agricultural and construction machinery, which can be
individually configured to vehicle-specific parameters
to optimise performance.
SALeS BY cUSTOMeR
3%
3%
Spirit Bombardier
3% Rolls Royce
4% General Electric
6% Lockheed Martin
28%
EADS
2% JCB
2% Ford
3% Claas
4% Caterpillar
2% Agco
2% Volkswagen Group
8% John Deere
6% Tata
6% Case New Holland
Other information
Images on pages 1, 2, 9 and 10-17 appear courtesy of Peugeot citroën,
Ford, Airbus S.A.S. and JcB.
The paper used in this report is produced with FSc mixed sources 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.
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.
ISO 14001 REGISTERED
DNV Certification BV
114
116
118
119
Subsidiaries and joint ventures
Shareholder information
Subject index
contact details
013
Key
IFc – Inside Front cover
Fulmar colour is a carbon Neutral Printing company.
14%
United
Technologies
10%
FiatChrysler
26%
Other
6%
General Motors
4% ZF Group
www.equiniti.com
www.shareview.co.uk
2010 performance
GKN at a glance
This is GKN
chairman’s statement
chief executive’s review
GKN strategy
Divisional strategies
Our strategy in action
– Driveline
– Powder Metallurgy
– Aerospace
– Land Systems
18 Key performance indicators
20 Review of performance
32 Risks and uncertainties
34 Sustainability report
Our response
SALeS BY cUSTOMeR
2%
Bosch
7% Ford
n
IFc
01
03
04
06
08
09
10
This annual report is available on our website.
Markets
n
Directors’ report – business review
65%
Other
18%
Other
21%
Boeing
Designed and produced by MAGEE
www.magee.co.uk
Printed by Fulmar colour
www.gkn.com
/ 03
This is GKN…
GKN is a global engineering group.
Our technology and products are at
the heart of vehicles and aircraft
produced by the world’s leading
manufacturers.
GKN operates through four divisions:
Driveline, Powder Metallurgy,
Aerospace and Land Systems.
We employ approximately 40,000
people in over 30 countries,
harnessing our considerable
technology and manufacturing
resources to supply the highest
quality systems, structures,
components and services.
GKN plc Annual Report and Accounts 2010
04 /
CHAIRMAN’S STATEMENT
“
Our global footprint,
combined with our leading
product positions and
strong technology and
customer base, has
enabled us to take
advantage of the market
opportunities that arose.”
Results and dividend
2010 was a year in which the benefits of the decisive restructuring actions
taken during the recession saw us emerge much stronger as a business,
with a lower cost base and improved operational efficiency. In the recovery
that has followed, our global footprint, combined with our leading product
positions and strong technology and customer base, has enabled us to
take advantage of the market opportunities that arose. As a result, we
delivered management profit before tax of £363 million and earnings per
share of 20.7p. Our strong cash flow performance contributed to a reduction
in net debt to £151 million, underlining the strength of our balance sheet.
Against the background of this strong performance and our confidence in the
future, the Board is recommending to shareholders a final dividend of 3.5p
per share. Together with the interim dividend of 1.5p, this will bring the dividend
for the year to 5.0p per share. This is in line with our progressive dividend
policy, designed to align dividends with the long term trend in earnings.
We continue to make progress in addressing the Group’s pension liabilities.
In April, we announced an innovative asset-backed cash payment scheme to
provide £30 million per annum to the UK pension scheme for the next 20 years.
The combination of this and other actions taken to improve the funding of the
UK scheme should contribute to a significant reduction in the pension deficit
once the results of the current triennial funding valuation are implemented.
Our return to the FTSE 100 Index in September after an absence of some six years
was very pleasing. We are one of only two surviving members of the original
FT 30 Index, the oldest continuous index in the UK, established in 1935.
Board matters
2010 has seen a number of changes in the composition of the Board. At the
AGM in May, Sir Peter Williams and Sir Christopher Meyer retired from the
Board as non-executive Directors. Sir Peter had also been Chairman of the
Remuneration Committee and our Senior Independent Director. In October,
Helmut Mamsch also retired from the Board as a non-executive Director.
I would like to take this opportunity to thank them all for their contributions
to the Company during their time on the Board.
We welcomed Shonaid Jemmett-Page as a new non-executive Director
in June. Shonaid has a strong financial background together with extensive
experience of Asia which is an important market for our businesses. A
recruitment process to identify a further non-executive Director is nearing
its conclusion and an announcement will be made in due course. This
appointment will again ensure that we have an appropriate balance of
executive and independent non-executive Directors on the Board.
One of the Board highlights of the year was the visit to China in September
when Directors not only had the opportunity to visit Shanghai Expo, but also
toured GKN’s expanding operations in China and met with some of our major
Chinese customers.
/ 05
Governance
The publication of the new UK Corporate Governance Code in June introduced changes
that move the emphasis of the Code towards Board quality, risk and accountability to
shareholders. Whilst the revised Code does not apply to GKN until the 2011 financial
year, we have gone some way to meeting certain of the new provisions. We recently
conducted an externally facilitated Board evaluation which focused on those areas
that will inform and assist the Board’s effectiveness in driving the Company forward
through its next stage of growth and development. We are currently reviewing the
output from the evaluation with a view to implementing agreed changes as soon as
practicable. Shareholders can be assured of our continued commitment to strong
governance disciplines; these and the processes that underpin them are described
in more detail on pages 40 to 45.
Sir Trevor Holdsworth
Before leaving Board matters, I would like to pay tribute to Sir Trevor Holdsworth who
died in September 2010. Sir Trevor had a long and successful career with GKN
culminating in his tenure as Chairman from 1980 to 1988, a period of considerable
change and uncertainty in the industrial world. Sir Trevor helped to transform GKN
from a manufacturer predominantly of steel, nuts and bolts, and screws and fasteners
into areas such as constant velocity technology for the automotive market, effectively
laying the strong foundations of the GKN of today. GKN owes him a tremendous debt.
Outlook
As we progress to the next phase in our development, we do so as a Group much
more balanced between earnings contributions from our Automotive and Aerospace
businesses and with promising opportunities for growth in our Land Systems division.
Supported by strong operational performance and rapid growth in the emerging
markets we serve, we look forward to the future with confidence.
Roy Brown
Chairman
GKN plc Annual Report and Accounts 2010
06 /
CHIEF EXECUTIVE’S REVIEW
In closing last year’s statement, I wrote that “Against a background of expected
improvements in global economies, the Group should make significant
progress in 2010. Our balance sheet strength and excellent market positions
give the Board confidence in a strong and sustained GKN recovery.”
I am pleased to be able to report that the Group’s performance in the year
has fully underscored that statement. A strong set of financial results,
together with the excellent progress made in the continued development
of our market leading businesses, provide a solid platform for continued
above-market growth, improving profitability and strong cash generation.
“
New technologies and
new products are creating
opportunities to build
stronger relationships
with our customers as
they strive to develop
more highly engineered
solutions for a low
carbon world.”
Our markets and divisional performance
The recovery in global automotive production which started in the second
half of 2009 accelerated in 2010 with demand stronger than we had
anticipated. Global production reached 75 million units in the year, which
is now higher than 2007 pre-recession levels and compares with 60 million
vehicles in 2009. The geographical distribution of this production is now
however significantly different, with demand in Western Europe, North
America and Japan still down around 20% on 2007, whilst China’s output
has doubled and we have experienced strong growth in Brazil and India.
GKN’s global positioning, together with our exposure to the high performing
European premium brands, has enabled us to take full advantage and
revenues in Driveline and Powder Metallurgy increased by 38% in the year.
The benefits of the significant restructuring programme launched at the end
of 2008 also contributed to a very strong bounce back in profitability, and
trading profits for these two divisions reached £223 million, which compares
with £3 million in 2009.
Last June we launched a new division – GKN Land Systems, which brought
together the OffHighway business with our AutoStructures operations and
the Aftermarket business of GKN Driveline. This new division will focus on
better exploiting GKN’s competencies in markets we already serve, such
as agriculture, mining, construction, defence and rail, and also build positions
in new industrial sectors. In the first half of 2010 we saw the start of recovery
in the global heavy construction and mining equipment markets together
with improving agricultural equipment demand in North America and by the
final quarter the beginnings of the recovery in the European agricultural
machinery market. Land Systems performance also benefited from 2009
restructuring actions and, on revenues of £699 million (up £106 million), the
division turned a small prior year loss into a trading profit of £37 million.
In aerospace, notwithstanding the very negative impact of the recession on
the airline industry, large commercial aircraft production has fallen only slightly
and is already starting its recovery, with output for both wide bodied and
narrow bodied aircraft expected to increase in 2012. GKN’s defence activities
(47% of Aerospace revenues) are almost entirely associated with US
Government programmes, and in 2010 the production rundown of the F-22
fighter aircraft commenced and schedule reductions on the C-17 transporter
were implemented. Growth in new programme revenues was not able to
compensate and as a result GKN’s Aerospace revenues were down around
2% and profits reduced by £7 million to £162 million.
Group performance
Overall GKN Group sales were up 22% to £5.4 billion and trading profit more
than doubled to £411 million.
Group cash flow has again been strong, with particular emphasis on working
capital control where, notwithstanding rapidly increasing production activity,
inventory turns continued to improve. As a result net debt reduced from
£300 million to £151 million.
The final actions in the Group restructuring programme were launched in the
second half, and will conclude early in 2011. This will bring to an end a period
of extensive strategic and recessionary-driven restructuring which
commenced in 2004.
/ 07
Building the future
Outlook
It’s been extremely encouraging to see the continued success
of all four divisions in winning new business and launching
new products.
The outlook for our major markets is positive although some
uncertainty remains, particularly around macro-economic
conditions.
In Driveline, recent high levels of new driveshaft business
have led to the launch of an expansion programme in India,
China and North America which will add approximately 60%
to available capacity in those markets over the next few years.
Demand for new trans axle and electronic torque control
products has also been encouraging, and we have secured
new hybrid electric vehicle transmission programmes in Japan
and North America to add to the hybrid rear axle product that
will be available on the Peugeot 3008 HYbrid4 system in 2011.
Against this background, Driveline and Powder Metallurgy are
expected to show further good improvement in 2011. The
conclusion of Driveline's restructuring actions will also
provide some additional benefits to operating performance.
Powder Metallurgy continues to benefit from demands on
auto manufacturers to implement new technologies to
improve fuel efficiency and reduce emissions. Variable valve
timing in engines, dual clutch transmissions and lightweight,
high performance pumps, transmissions and differentials,
together with soft magnetic components in electric motors
and alternators, are examples of a whole range of new
applications secured by Powder Metallurgy which will
support strong revenue growth in the coming years.
Our strategy in Land Systems will take some time to evolve,
although we are already seeing the benefits in our order
books of providing an outlet for GKN driveline technology in
offhighway markets. A constant velocity jointed driveshaft has
been developed for agricultural tractors, improving mobility,
comfort and speed of operation, and a GKN torque sensing
product which links with the tractor GPS now enables much
more efficient land fertilisation. Land Systems has also
developed a hydro split gearbox which allows continued and
automatic variation of power to combine harvesters, optimising
performance irrespective of the crop being harvested.
Aerospace has continued to secure extensions to existing
programmes, such as a further multi-year contract for F-18
fighters, and to win additional work packages on new ones,
including A350 XWB, the Joint Strike Fighter and Boeing 747-8
and 787. Major multi-year contracts were secured with all three
main engine manufacturers which will provide over $1 billion of
revenues to GKN. New programme activity has made excellent
progress, with our first composite major assembly on the
Sikorsky CH-53K heavy lift helicopter being delivered, as was
our first complete composite fuselage for the HondaJet and in
December we started production of the first Airbus A350 wing
spars in our new purpose-built facility in Filton, UK. We were
pleased also that our joint venture with Rolls-Royce, initially
covering development of composite fan blades, has now been
extended to include front fan casings.
Right across GKN new technologies and new products are
creating opportunities to build stronger relationships with our
customers as they strive to develop more highly engineered
solutions for a low carbon world.
GKN plc Annual Report and Accounts 2010
Aerospace sales are expected to be broadly flat as second
half increases in revenue from civil aircraft offset reduced
military sales. The ramp up of a number of new aircraft
programmes and further increases in civil volumes should
return Aerospace to its strong growth trend in 2012.
Land Systems performance should continue to improve,
benefiting particularly from the expected increase in European
agricultural equipment markets, which represent around a
quarter of Land Systems sales.
Free cash flow is again expected to be positive, giving a further
reduction in net debt for the year.
In summary, GKN expects 2011 to be a year of good progress
for the Group. As end markets continue to improve, the
strength of our market positions and order books leaves GKN
well placed for a period of sustained growth, margin expansion
and strong free cash flow generation.
Enduring Values
As GKN employees we are bound together by shared values,
common ways of working and a continued drive for excellence
in everything we do.
In closing my report, I once again want to pay tribute to GKN’s
employees for their commitment, talent and enterprise, which
has not only enabled the Company to weather the worst global
recession of our time, but has also built an exceptional platform
for GKN to continue to develop and grow.
I congratulate and thank everyone who has crossed the GKN
threshold in 2010 for their contribution to a year of
exceptional progress.
Sir Kevin Smith
Chief Executive
08 /
GKN STRATEGY
We are committed to providing 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.
Our strategic objectives…
Market leadership
Achieve the highest market share in our chosen end markets.
Develop superior technology in all our businesses.
Deliver exceptional customer service.
Growth
Achieve above market growth in our chosen end markets.
Leverage and extend our global footprint to increase market share.
Accelerate growth through strategic acquisitions.
Operational excellence
Develop a world class lean manufacturing enterprise.
Be the employer of choice with a high performance culture, motivated people
and outstanding leaders.
Achieve preferred status with our strategic customers and suppliers.
Sustainability
Develop products and processes for the new low carbon world.
Achieve a world leading health and safety record.
Have a positive impact on the environment and the communities in which we operate.
KPIs…
Risk management…
Key capabilities…
We implement and monitor
performance against strategy
through key performance
indicators (KPIs), both financial
and non-financial.
We have an extensive risk
management framework designed
to identify, assess and mitigate
significant business risks which
could impact delivery of our
strategic plan.
Superior technology, world class
lean manufacturing, leveraging
our global footprint, exceptional
customer service, outstanding
leadership and development for
all are Group-wide key capabilities
that underpin the delivery of
our strategy.
Progress against these KPIs is
reported regularly to the Board
and senior management. In
addition, certain financial KPIs
are linked to executive
remuneration.
See pages 18 and 19 for more
information.
Risk management processes
operate throughout the Group at
plant, divisional and corporate
levels and regular reports are made
to the Board and its Committees.
See pages 32 and 33 for more
information.
At their heart are our Values which
bind GKN together and guide our
relationships with all our
stakeholders.
See pages 34 to 37 for more
information.
/ 09
DIVISIONAL STRATEGIES
Building world leaders
Driveline
Powder Metallurgy
GKN Driveline is the world’s leading supplier
of automotive driveline systems and solutions.
GKN Powder Metallurgy is the world’s leading
producer of sintered components and the largest
producer of metal powder in North America.
Our strategy is to exploit this market leading
presence and the business’ strong technology and
global manufacturing footprint to:
n
n
provide innovative driveline systems and
solutions, supporting developing market trends
for more fuel efficient vehicles; and
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:
n
to meet the rapidly developing requirements for
high efficiency engines, advanced transmission
applications and evolving emissions standards; and
n
to expand the business in high growth markets,
supporting customers through a global
operational network.
Aerospace
Land Systems
GKN Aerospace is a first tier supplier to the
global aviation industry and a leader in the
manufacture of highly complex composite
aerostructures and engine products.
GKN Land Systems designs, manufactures
and supplies a wide range of products for the
global agricultural, construction, mining and
other industrial markets.
Our strategy is to build on our superior technology
and design capabilities to grow the business by:
Our strategy is to bring Group-wide power
management and structures capabilities to existing
and new industrial markets thereby:
n
exploiting our strong positions on existing
programmes for new aircraft; and
n
developing new technologies for future
commercial and defence platforms.
GKN plc Annual Report and Accounts 2010
n
enhancing customer and market focus through
superior technology based solutions to our
chosen sectors; and
n
extending our ability to meet market needs
globally through world class operations.
10 /
OUR STRATEGY IN ACTION
Driveline
GKN Driveline continues to deliver driveline systems and solutions to the
world’s premier automotive manufacturers. GKN Driveline designs, develops
and manufactures a broad range of driveline systems – used in the smallest
ultra-low cost car through to the most sophisticated premium vehicle…
With a focus on efficiency, performance and dynamics,
GKN Driveline is a pioneer and leader in systems that provide
space, weight and fuel savings with greater all-round efficiency…
Brand New Thinking…
Case Study
eDrive Systems:
GKN Driveline is
pursuing globally more
than 25 different hybrid
and electric vehicle
projects in the wake
of its ground-breaking
electric rear axle project
with Peugeot Citroën…
/ 11
GKN Driveline has designed a new range of electric drive axles
both for use in pure electric vehicles and for converting
conventional vehicles into hybrids. An electric drive axle was
developed for use in the Peugeot 3008 HYbrid4, which comes
to market in 2011. The axle allows the front-wheel drive vehicle
to have all-wheel drive performance together with hybrid fuel
economy and the ability to operate in all-electric drive mode
with zero emissions.
In parallel with hybrids, interest in electric cars and vehicles with
range extenders has been evident at auto shows for several years,
and GKN Driveline has developed an electric drive eTransmission
on a demonstration electric vehicle for Beijing Automotive Industry
Holding Co Ltd as well as axles for electric car projects in Asia and
North America.
GKN plc Annual Report and Accounts 2010
12 /
OUR STRATEGY IN ACTION
Powder Metallurgy
GKN Powder Metallurgy comprises GKN Sinter Metals, the world’s
largest manufacturer of sintered components, and Hoeganaes,
which produces metal powder used in the manufacture of these
components. Powder metallurgy is an enabling technology that
is delivering smaller, lighter, and higher performing products…
Challenging Concepts…
Case Study
Sinter-forged differential
gears continue to
expand the potential
of powder metal
technology…
Differential gears are used to distribute
torque between two wheels or axles running
at different speeds. The differential is a
critical system which operates in an
increasingly high stress, space-constrained
environment. Sinter-forged differential
gears deliver weight savings and
consistently higher performance than
established gear technologies. The result is
a product that reduces driveline rotating
mass and system size – both essential
elements for future vehicle designs. These
benefits directly translate into lower fuel
consumption and CO2 emissions as well as
improved vehicle dynamic response.
/ 13
GKN Powder Metallurgy provides both sophisticated
raw materials and highly engineered components to
automotive and industrial markets in all major regions
of the world…
GKN plc Annual Report and Accounts 2010
14 /
OUR STRATEGY IN ACTION
Aerospace
GKN Aerospace is one of the world’s largest independent first tier aerospace
suppliers, providing complex, high-performance, high-value integrated metallic and
composite assemblies for aerostructures and engine products. GKN has significant
participation on almost every major civil and military fixed and rotary wing
programme in development and production today…
GKN Aerospace’s technology-led products are manufactured
using the latest developments in materials processing and
advanced metallic and composite manufacturing technologies.
GKN’s experience, knowledge and capabilities in integrated
aerostructures, propulsion systems, transparencies
and specialist products are supported by
aftermarket operations…
/ 15
Automated fibre placement (AFP) is one of many technologies in
which we are investing throughout the composite manufacturing
and assembly process, both for the A350 XWB and for future
products.
Expanding Horizons…
Automation enables the efficient production of complex
integrated structures and the attainment of high production rates
demanded by our customers.
Case Study
The purpose-built production facility at Filton, UK, was designed to
utilise lean manufacturing techniques and increased automation
in order to reduce production time and cost and increase output.
It is a centre of excellence for the design, manufacture and
assembly of complex integrated composite structures.
GKN has invested in a
state-of-the-art automated
composites design and
manufacturing facility
incorporating production
techniques that represent
the future of aerospace
composites…
GKN plc Annual Report and Accounts 2010
16 /
OUR STRATEGY IN ACTION
Land Systems
GKN Land Systems is a diversified manufacturer and aftermarket service supplier to
demanding global markets including agricultural, construction and mining, with a
focus on power management and high performance structures…
Our customers operate in a wide variety of working
environments and use our solutions every day to
improve their equipment, making the end user’s
daily work easier and more efficient…
A Joined Up Approach…
Case Study
We work in close
partnership with our
customers to ensure
that high performance
solutions are timely
and innovative…
/ 17
GKN and JCB have worked closely to develop and bring to market
an Integrated Continuously Variable Drive System (ICVD®).
The ICVD® is a ground-breaking hydrostatic drive system which
allows smooth driving between 0-40km/h with optimal power
transmission at all times.
This cost-effective transmission brings the following advantages:
n
high energy efficiency which significantly reduces fuel
consumption, supporting fulfilment of the latest emission
regulations;
n
high levels of comfort and simple handling improving safety;
and
n
extended range and higher speed.
All of this must be delivered globally to the highest standards.
GKN plc Annual Report and Accounts 2010
18 /
KEY PERFORMANCE INDICATORS
Financial KPIs
Earnings per share (EPS)(a) (b)
2010
2009
20.7p
5.7p
2008
2010
5.0p
2009 0p
16.0p
2008
23.5p
2007
2006
Dividend per share(b)
20.3p
3.0p
2007
9.1p
2006
8.6p
Method of calculation
Method of calculation
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).
Amount declared as payable by way of dividend divided by the
number of ordinary shares in issue (excluding treasury shares).
Target
Target
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%.
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.
2010 Performance
2010 Performance
Management EPS in 2010 was 20.7p compared with 5.7p in 2009.
This increase is principally due to the significantly improved
profitability of the Group in 2010.
2010 saw the re-commencement of dividend payments, reflective
of strong earnings and cash performance. The dividend for the
year, at 5.0p, is covered 4.1 times by management earnings.
Sales growth(a)
Trading margins(a)
2010
2009
2008
2007
2006
£5,429m
£4,454m
£4,617m
£4,100m
£3,815m
2010
2009
7.6%
3.5%
2008
2007
2006
4.8%
7.5%
7.1%
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 trading profit(c) as a percentage of management
sales(c).
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 medium term trading margins of between 8% and
10% for Driveline and Powder Metallurgy, 7% to 10% in Land
Systems and 10% to 12% in Aerospace, giving an overall Group
trading margin of between 8% and 10%.
2010 Performance
2010 Performance
Group management sales(c) grew by 22% on an absolute basis
and 21% on an underlying basis. The corresponding figures for
Driveline were increases of 35% and 32% respectively, for
Powder Metallurgy 48% absolute and underlying, for Aerospace
an absolute decline of 2% and an underlying decline of 4%, and
for Land Systems growth of 18% in absolute terms and 20% on
an underlying basis.
The Group trading margin in 2010 of 7.6% reflects a strong
recovery in Driveline (6.9%), Powder Metallurgy (7.1%) and Land
Systems (5.3%), a good performance in Aerospace (11.2%) and
the benefits of the Group’s restructuring activities.
/ 19
Return on average invested capital (ROIC)(a)
2010
17.0%
2009
6.2%
2008
Free cash flow before dividend
2010
£188m
2009
9.1%
2008
15.1%
2007
2006
14.4%
£136m
£59m
£68m
2007
2006
£42m
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.
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
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).
To generate positive free cash flow sufficient to cover dividend
payments and provide funding resources to support organic and
acquisitive earnings growth.
2010 Performance
2010 Performance
Group ROIC increased to 17.0% in 2010 as a result of significantly
improved profitability against a relatively stable asset base.
Divisional ROIC performance is as follows: Driveline – 16.0%;
Powder Metallurgy – 13.2%; Aerospace – 23.3%; Land Systems
– 15.8%.
Free cash flow amounted to £188 million reflecting the strong
focus on operating cash generation throughout 2010, including a
continued strong focus on working capital management, a
capital expenditure reinvestment ratio at 0.8 times, receipt of
government refundable advances (£10 million), and joint venture
dividends (£23 million).
(a)
(b)
(c)
2009 has been restated following the decision to exit the Axles business of the former OffHighway segment.
As restated in 2006-2008 for the bonus issue inherent in the July 2009 rights issue.
Management sales and management trading profit are defined on page 20.
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 employees and accident severity rate
(ASR) measured as the number of days/shifts lost due to
accidents and occupational ill health per 1,000 employees.
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
Aerospace.
Target
Target
Zero preventable accidents.
Improved year on year performance across all KPIs.
2010 Performance
2010 Performance
AFR in 2010 increased from 2.1 to 2.7; ASR showed a slight
decrease from 71 to 68. See page 36 for further information.
Performance in 2010 across all environmental KPIs improved with
a particularly good performance in regard to water consumption.
See pages 36 and 37 for further information.
GKN plc Annual Report and Accounts 2010
20 /
REVIEW OF PERFORMANCE
In this section
Group performance
page
Divisional performance
page
Other financial information
page
21
21
27
The Group operates in the global automotive, aerospace and land systems markets. In the
automotive market, Driveline sells to manufacturers of passenger cars and light vehicles.
Around 75% of Powder Metallurgy sales are also to automotive markets, with the balance to
other industrial customers. Aerospace sells to manufacturers of military and civil aircraft,
aircraft engines and equipment. Land Systems sells to producers of agricultural, construction,
mining and industrial equipment and to the automotive and commercial vehicle sectors.
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 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 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 and dividends
paid to non-controlling interests, but excluding dividends paid to GKN shareholders.
Return on average invested capital is management trading profit as a percentage of total
net assets of continuing subsidiaries and joint ventures deducting current and deferred
tax, net debt, post-employment obligations and derivative financial instruments.
Comparative data has been restated following the announcement to exit the Axles
operations of the former OffHighway segment.
Comparative segmental information has been restated following the creation of GKN
Land Systems, which was announced on 16 June 2010. Land Systems brought together
the operations of GKN OffHighway (excluding Axles), GKN AutoStructures and GKN
Industrial and Distribution Services (IDS). AutoStructures was included in the former
Other Automotive segment and IDS was included in the Driveline segment.
Exchange rates
Exchange rates used for currencies most relevant to the Group’s operations are:
Average
Euro
US dollar
Year End
2010
2009
2010
2009
1.16
1.55
1.12
1.56
1.17
1.57
1.13
1.61
The approximate impact on 2010 trading profit of subsidiaries and joint ventures of a 1%
movement in the average rate would be euro – £1.0 million, US dollar – £1.6 million.
/ 21
Group performance
Sales (£m)
Trading profit (£m)
Trading margin
2010
2009 restated
5,429
411
7.6%
4,454
156
3.5%
Management sales
MANAGEMENT SALES
Management sales increased 22% in the year ended 31 December 2010 to £5,429 million
(2009 restated: £4,454 million). The effect of currency translation was £35 million favourable
and there was a £17 million benefit from acquisitions. Excluding these items, the underlying
increase was £923 million (21%). Within this figure, Driveline was £589 million higher,
Powder Metallurgy increased by £247 million, Land Systems was £116 million higher, while
Aerospace was £56 million lower.
£699m
Land Systems
£2,433m
Driveline
£1,451m
Aerospace
Management trading profit
Management trading profit increased by £255 million to £411 million (2009 restated: £156
million). The currency translational benefit was £5 million and there was no net benefit from
acquisitions. Excluding these items, the underlying increase was £250 million. Within this
figure, Driveline was £156 million higher, Powder Metallurgy increased by £60 million and
Land Systems was £40 million higher, all largely as a result of volume improvements and cost
reduction benefits. Aerospace profit fell by £10 million. Group trading margin increased to
7.6% (2009 restated: 3.5%).
£87m
Other businesses
£759m
Powder Metallurgy
MANAGEMENT TRADING PROFIT
Restructuring charges
£37m
Land Systems
Restructuring charges in the year amounted to £39 million, including £2 million of short-time
working charged in the first half and £37 million redundancy and reorganisation charges.
The total benefit of the actions to address the cost base is estimated to be £156 million,
including £18 million in 2011. Cash expenditure on restructuring programmes amounted to
£55 million.
£169m
Driveline
£162m
Aerospace
Divisional performance
Launch of Land Systems
£3m
Other businesses
On 16 June 2010, the Group announced the formation of its Land Systems division which
brought together the operations of GKN OffHighway, GKN AutoStructures and GKN Industrial
and Distribution Services. The aim of GKN Land Systems is to develop a fourth global leader
alongside Driveline, Powder Metallurgy and Aerospace, building on existing strengths in the
off-highway market and, by applying the leading-edge technologies developed across the
Group, capitalising on growth opportunities in new and existing markets. Potential growth
opportunities exist in high speed rail, renewable energy and defence.
£54m
Powder Metallurgy
Total (including corporate costs) £411m
GLOBAL LIGHT VEHICLE PRODUCTION – MILLION UNITS
Compound Annual Growth Rate (CAGR) 1990-2016: 2.9%
120
Automotive markets
Production of cars and light vehicles continued to improve in 2010 as markets recovered
following the recession of late 2008 and 2009. As shown in the table below, all markets
experienced production growth, with the strongest being North America, India and China.
Million units
100
80
Car and light vehicle production
(millions of units)
60
40
20
0
90
93
96
99
02
CAGR
Total
05
08
11
14
16
1990-2010 actual
2011-2016 forecast
Source: IHS Automotive
2010
2009
Growth
(%)
Europe
North America
Brazil
Japan
China
India
Others
19.5
11.9
3.2
9.3
16.8
3.2
10.7
16.8
8.6
2.9
7.7
12.9
2.4
8.7
16
38
10
21
30
33
23
Total – global
74.6
60.0
24
Source: IHS Automotive
Overall, global production volumes of cars and light vehicles increased 24% in 2010 to
74.6 million vehicles (2009: 60.0 million) whilst sales increased by 13%, from 63.7 million
vehicles to 72.0 million vehicles.
GKN plc Annual Report and Accounts 2010
REVIEW OF PERFORMANCE CONTINUED
22 /
EUROPE LIGHT VEHICLE PRODUCTION
million units
Demand for larger (premium) vehicles and light commercial vehicles recovered strongly,
whereas the ending of scrappage and tax incentive schemes slowed demand for smaller
vehicles, particularly in Europe. Vehicle production in Europe and Japan benefited from a
strong rebound in exports.
6
5
4
External forecasts indicate that global production in 2011 will increase by approximately 5%
to 78.1 million vehicles. Major markets that are expected to grow fastest include India (20%),
North America (7%) and China (7%), whereas production in Europe is expected to grow at a
more modest pace of 3%.
3
2
1
0
Q1
Q2
Q3
Q4
Sales (£m)
Trading profit (£m)
Trading margin
2009 actual
2010 actual
Source: IHS Automotive
NORTH AMERICA LIGHT VEHICLE PRODUCTION
million units
4
3
2
1
0
Q1
Q2
Driveline
Q3
Q4
2009 actual
2010 actual
Source: IHS Automotive
BRAZIL, INDIA & CHINA LIGHT VEHICLE PRODUCTION
million units
7
6
2010
2009 restated
2,433
169
6.9%
1,803
10
0.6%
Driveline’s sales increased 35% to £2,433 million (2009 restated: £1,803 million) compared
with global vehicle production which increased 24%. Excluding the favourable impact of
currency translation of £41 million, underlying sales increased by £589 million (32%). This
market outperformance was particularly apparent in North America, China and Japan. It
reflects Driveline’s global footprint, new programme wins, a return to more normal vehicle
segment demand patterns as government support schemes are progressively withdrawn and
its strong position in European premium vehicles.
Trading profit increased substantially to £169 million (2009 restated: £10 million) reflecting
higher sales and the benefits of restructuring, partially offset by higher engineering costs to
support new programmes and future growth and some temporary costs incurred to raise
capacity in some regions to keep pace with significant increases in demand. Current year
trading profit included a £6 million curtailment gain arising from changes to pension
arrangements in Japan. The impact of translational currency was £3 million positive, with
underlying trading profit up by £156 million. Driveline trading margin was 6.9% (2009
restated: 0.6%).
Net restructuring charges were taken amounting to £29 million (2009 restated: £79 million),
reflecting the conclusion of charges on the programme that commenced in 2008.
Capital expenditure on tangible fixed assets was £73 million (2009 restated: £73 million),
0.7 times (2009 restated: 0.7 times) depreciation.
5
4
Return on average invested capital was 16.0% (2009 restated: 0.9%), reflecting the increase
in profitability.
3
2
1
0
Q1
Q2
Q3
Q4
2009 actual
2010 actual
Source: IHS Automotive
DRIVELINE SALES BY REGION OF ORIGIN
£185m
Other
£81m
India
£209m
China
£886m
Europe
£218m
Brazil
£426m
Japan
During the year, Driveline continued its good performance of new business awarded; as well
as continued strength in our core sideshafts business, there were notable successes with
propshaft, all-wheel drive (AWD) coupling, electronic differential locking and open differential
product lines. Driveline’s hybrid/electric drive products also won new contracts in North
America, Japan and Europe. Although initial volumes are small, these are important programmes
in positioning Driveline for the rapidly emerging hybrid electric vehicles segment.
Driveline also commenced production of open differentials in North America and power
transfer units (PTUs) in China, and launched a number of innovative products designed to
help vehicle manufacturers improve vehicle handling performance, including:
n
Direct Torque Flow technology: a new design solution to connect the propshaft to the
vehicle’s transmission in a way that saves weight, assembly time, space and cost.
The first application is on the Audi A8 Quattro high performance luxury saloon;
n
Face Spline and Twin Ball CVJ: results in smaller products, lighter weight and tighter
turning circles. This has launched on the BMW 7 Series and will appear on the new BMW
5 and 6 Series all-wheel drive vehicles later this year;
n
ElectroMagnetic Coupling Device (EMCD): GKN Driveline’s AWD coupling is now being
produced for the first time in Europe and appears on the new Mini Countryman ALL4
crossover vehicle;
n
Front electronic limited slip differential (eLSD): a world first application of EMCD
technology as a front eLSD in a Japanese OEM’s performance SUV;
n
New propshaft business won with Mercedes, for the first time, and a contract to supply
a major European customer with 100% of their propshaft needs, commencing in 2013.
£428m
North America
/ 23
As previously announced, in order to meet production demands from underlying growth in
China, India and North America, major driveshaft capacity expansion is underway which will
increase capacity in these markets by around 60% over the next four years. Driveline also
opened a new sideshaft plant in Turkey, a small but high growth market.
Powder Metallurgy
POWDER METALLURGY SALES
2010
£53m
GKN Sinter Metals
– Rest of World
£136m
Hoeganaes
Sales (£m)
Trading profit (£m)
Trading margin
759
54
7.1%
2009
512
(7)
(1.4)%
Powder Metallurgy sales were £759 million (2009: £512 million), an increase of 48%. There
was no net impact from currency translation. Sales increased in all regions as automotive
markets recovered and recent new business wins entered production.
£286m
GKN Sinter Metals
– Europe
£284m
GKN Sinter Metals
– Americas
GKN Sinter Metals sales by region of origin
POWDER METALLURGY SALES BY PRODUCT TYPE
£136m
Hoeganaes
– metal powder
Underlying sales for Sinter Metals increased by 43%, with strong growth achieved in North
America, Europe, India and Brazil.
Overall, Hoeganaes’ total tons shipped were 46% higher than in 2009 and underlying sales
were 76% higher, the difference reflecting an increase in the commodity metals surcharge
passed on to customers as raw material prices increased. A new powder mixing and finishing
facility was opened by Hoeganaes, in China, towards the end of the year, to support growth in
that rapidly expanding market.
Powder Metallurgy reported a trading profit of £54 million (2009: £7 million trading loss) with
a divisional trading margin of 7.1% (2009: (1.4)%).
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 driving the demand for products made by powder
metallurgy. During the year approximately £100 million (annualised sales) of new programme
business was awarded and more than 30 technical days were hosted for existing and new
customers, in order to promote the applicability of powder metallurgy products and
applications.
£156m
Sintered
components
– industrial
£467m
Sintered
components
– automotive
Restructuring costs in 2010 totalled £1 million (2009: £20 million) reflecting the conclusion
of the programme.
Capital expenditure on tangible fixed assets was £27 million (2009: £10 million). The ratio of
capital expenditure to depreciation was 0.9 times (2009: 0.3 times).
Return on average invested capital was 13.2% (2009: (1.6)%), reflecting the improvement in
profitability.
Aerospace
Sales (£m)
Trading profit (£m)
Trading margin
2010
2009
1,451
162
11.2%
1,486
169
11.4%
The overall aerospace market remained subdued in 2010. There was modest growth in the
defence sector while large civil aircraft production was down around 6%, as the impact of the
recession worked its way through the airline sector. The division has a balanced position in
civil (53%) and defence (47%) programmes.
US defence spending remained robust apart from the planned reduction in sales of the F-22;
production across most programmes such as F-18, F-15, C-130J and C-17 transport aircraft
remained stable. 2011 production volumes for the C-17 programme have been reduced from
14 aircraft to 10. The initial production phase for the Lockheed F-35 (Joint Strike Fighter) has
commenced and although volumes may now be lower in the initial years than originally
planned, this aircraft remains a key part of the US defence programme with plans to build in
excess of 2,500 aircraft. Although still to be formally voted into law, the US Defense
Department 2011 budget plan shows around 1% growth over the next five years. In Europe,
where GKN has very limited exposure, defence budgets remain under significant pressure
and in Asia and the Middle East, a number of significant export programmes are being
pursued by GKN’s customers.
GKN plc Annual Report and Accounts 2010
24 /
REVIEW OF PERFORMANCE CONTINUED
AEROSPACE SALES BY PRODUCT
£406m
Engine components
and sub-systems
£929m
Aerostructures
In the civil aerospace market, Airbus and Boeing benefited from their extensive backlogs
and delivered a combined total of 923 aircraft, a reduction of 6% compared with the 979
deliveries in 2009. Airbus delivered 461 aircraft (2009: 498 aircraft) and Boeing delivered
462 aircraft (2009: 481 aircraft). The recovery in passenger and cargo volumes, a significant
increase in net orders and a growing backlog, have led both Airbus and Boeing to announce
increases in production levels of single aisle and wide bodied aircraft from 2012.
Aerospace sales of £1,451 million were £35 million lower than the prior year (2009: £1,486
million). The impact from currency on translation of sales was £6 million positive and from
acquisitions was £15 million positive, representing sales from GKN Aerospace Services
Structures Corp., of which the Group gained management control in April 2010 (see note 24
to the financial statements for further details). The underlying decrease in sales of £56 million
represented a 4% reduction. This decline reflects lower F-22 sales as the programme started
its run down and softer military aftermarket business, particularly for rotorcraft, partly offset
by higher F-18 sales. Increased sales for the Boeing 787 more than offset a decline in other
civil market sales across a broad range of programmes and sectors.
£116m
Special products
AEROSPACE SALES BY MARKET
47%
Military
Trading profit decreased by £7 million to £162 million (2009: £169 million). The impact from
currency on translation of results was £1 million positive and from acquisitions was £2 million
positive. The trading margin was 11.2% (2009: 11.4%).
Restructuring charges were taken amounting to £4 million (2009: £10 million).
53%
Civil
Capital expenditure on tangible assets in 2010 amounted to £51 million (2009: £43 million)
which represents 1.3 times depreciation (2009: 1.0 times). Expenditure on intangible assets,
mainly initial non-recurring programme costs, was £26 million (2009: £13 million).
£39 million of the capital expenditure and non-recurring programme costs relate to the
Airbus A350 wing assembly and trailing edge programme. A total of £79 million had been
invested by 31 December 2010. Spending is likely to continue at around the current level in
2011 and reduce thereafter. This programme is partly funded by UK Government refundable
advances, £10 million of which was received in 2010 (2009: £28 million).
Customer advances in the Aerospace businesses, which are shown in trade and other
payables in the balance sheet, amounted to £70 million (2009: £66 million).
Return on average invested capital was 23.3% (2009: 24.2%) reflecting increased investment
in new programmes.
/ 25
CIVIL AIRCRAFT MARKET 2009-2015
by aircraft type US$ billion
GKN Aerospace secured a number of new programme wins and achieved a number of
significant milestones during the year, including:
100
90
n
two new contracts for detailed parts for the inboard and outboard landing flaps for the
Airbus A350 XWB;
n
a five year $300 million agreement with GE Aviation to supply a range of new and existing
flight critical aluminium and titanium components for GE’s range of commercial and
military engines;
n
a ten year agreement with a value of $360 million with Pratt & Whitney for high
performance engine ducts for the F135 engine;
n
a $300 million ten year contract with Rolls-Royce for Trent 700 and Trent 1000 engine
structures;
n
a multi-year production contract to supply lightweight titanium thrust links for the Boeing
747-8 and Boeing 787;
n
a number of transparency contracts including Airbus A350, Boeing 787 and Bombardier
C Series cabin windows and cockpit windows for the Boeing 747-8;
n
delivery of its first major assembly of the Sikorsky CH-53K heavy lift helicopter which
features an advanced hybrid composite, aluminium and titanium structure covered with
external composite skins;
n
installation and commissioning of the first two auto fibre placement machines for
production of A350 wing spars, with manufacturing of the first spar commencing at the
end of 2010.
80
70
60
50
40
30
20
10
0
2009 2010 2011 2012 2013 2014
Regional aircraft
Business jets
Commercial jetliners
2015
2009-2010 actual
2011-2015 forecast
Source: Teal
MILITARY AIRCRAFT MARKET 2009-2015
by aircraft type US$ billion
50
45
40
The division has an excellent position on new programmes that come into full production
over the period 2012 to 2016, providing significant growth potential.
35
30
Land Systems
25
2010
2009 restated
20
Sales (£m)
Trading profit (£m)
Trading margin
15
10
699
37
5.3%
593
(3)
(0.5)%
5
0
2009 2010 2011 2012 2013 2014 2015
Trainers/light attack
Military transports
Rotorcraft
Fighters
2009-2010 actual
2011-2015 forecast
Source: Teal
Following a very difficult second half of 2009 for Land Systems businesses, 2010 started
more positively with the recovery continuing throughout the year, especially for mining,
heavy construction and general industrial equipment and for automotive products.
In Europe, the strongest recovery occurred in construction and in the structures market,
relating to new vehicle production. The Aftermarkets and Services business was not
impacted by the recession to the same extent as other parts of Land Systems and therefore
has seen a more modest improvement in sales as markets have recovered. The weakest
recovery has been in European agricultural equipment markets which remained relatively soft
during the first half but started to improve in the second half, supported by higher global
commodity prices and some re-stocking within the supply chain.
In North America, agriculture, construction and mining markets all enjoyed good growth.
Against this background, sales in the period were £699 million, 18% higher than the prior
year (2009 restated: £593 million). Excluding currency translation of £10 million negative, the
underlying increase in sales was £116 million (20%) with all product areas and regions seeing
an improvement.
GKN plc Annual Report and Accounts 2010
REVIEW OF PERFORMANCE CONTINUED
26 /
LAND SYSTEMS SALES BY MARKET
The division reported trading profit of £37 million (2009 restated: £3 million trading loss).
There was no net impact from currency translation. The trading margin was 5.3% compared
with (0.5)% in 2009 (restated).
£80m
Construction
& Mining
£260m
Agriculture
£136m
Industrial
Restructuring actions during the year resulted in charges of £5 million (2009 restated:
£20 million).
Capital expenditure on tangible fixed assets was £7 million (2009 restated: £11 million),
0.5 times (2009 restated: 0.7 times) depreciation.
Return on average invested capital increased to 15.8% (2009 restated: (1.1)%), reflecting the
return to profitability of the division.
Good progress was made in winning new business. Specific areas of success included:
£223m
Commercial vehicle,
passenger cars and other
n
CVJ for 4x4 tractors – utilising our automotive driveline technology a CVJ shaft was
developed for the agricultural tractor market, which is increasingly moving towards
independent suspension. This innovative solution allows tractor designers to improve
mobility, comfort, speed of operation and reduce running noise;
n
Rauch fertilising equipment – following the trend for precision farming a torque sensing
device has been developed. The device is linked to a global positioning system (GPS)
and allows farmers to fertilise the farm according to defined soil requirements in a
repeatable and accurate way;
n
Combine hydro split drive – in order to improve further the efficiency of a combine
harvester, the hydro split gearbox allows the transfer of power to the areas where it is
most needed with infinite variable speed;
n
Specialist driveshafts for electric cars – the Aftermarkets and Services business secured
further driveshaft business for the Fisker electric car, offering a highly efficient low weight
driveshaft;
n
New wheels business in the fast growing South American market with a major original
equipment manufacturer.
LAND SYSTEMS SALES BY BUSINESS
£190m
Power Management
Devices
£253m
Wheels
& Structures
£256m
Aftermarkets
& Services
The requirement to make off highway vehicles more fuel efficient and with lower emissions
will provide opportunities for Land Systems to utilise its own expertise and leverage technology
from Driveline in making lighter components and increasing the efficiency of power management
products. Furthermore, a strategic review identified a number of potential growth
opportunities that could utilise GKN’s core skills and technologies. Examples include military
vehicles requiring independent suspension and advanced driveline solutions to cope with
more challenging terrain, increasing urbanisation leading to demand for high speed rail
solutions and increasing use of renewable energy to meet lower carbon emission targets.
Looking forward to 2011, land systems markets are expected to continue to improve and we
expect the division to make further progress in developing stronger positions in existing and
new markets.
Other businesses
GKN’s other businesses comprise Cylinder Liners, which is mainly a 60% 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.
Sales in the year were £87 million (2009 restated: £60 million), reflecting the recovery in
automotive markets. A profit of £3 million for the year compares to a loss of £1 million
(restated) in 2009. During the year Emitec acquired NoNox, one of the world’s leading
producers of pumps and related metering equipment for selective catalytic reduction
systems which is investing heavily in new products, mainly for the truck market.
/ 27
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 £14 million (2009:
£12 million).
Other financial information
Restructuring and impairment charges
Group restructuring and impairment charges of £39 million (2009: £141 million) relate to the
final charges on the restructuring programme initially announced in November 2008 which
was completed during 2010. The major elements arose within subsidiaries and represent
redundancy and re-organisation costs of £37 million and short-time working costs of £2 million.
Impairment charges were a net nil in the year. No further restructuring charges are expected
in 2011 although £31 million of cash expenditure is expected as the actions charged in 2010
are implemented.
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 2010, the net fair value of such instruments was a liability of £54 million
(2009: £52 million liability). Where hedge accounting has not been applied, the change in
fair value resulted in a charge of £3 million (2009: £106 million credit). There was a £3 million
credit arising from the change in the value of embedded derivatives in the year (2009:
£29 million charge) and a net gain of £12 million attributable to the currency impact on
Group funding balances (2009: £3 million net loss). There was no change in the value
of Powder Metallurgy commodity contracts (2009: £2 million credit).
Amortisation of non-operating intangible assets arising on business combinations
The charge for the amortisation of non-operating intangibles (for example customer
contracts, order backlogs and intellectual property rights) arising on business combinations
was £19 million (2009: £24 million). The decrease relates to the amortisation of short-life
customer order backlog intangible assets arising from the Filton acquisition in 2009.
Gains and losses on changes in Group structure
In the first half of 2010, the decision was taken to exit the Axles business of the former
OffHighway segment. During the year, the business incurred a trading loss of £2 million
(2009: £4 million) and impairment charges of £4 million. In September 2010, the Group
concluded the sale of the European agricultural axles operations, with other operations
closed during the year.
Post-tax earnings of joint ventures
The post-tax earnings of joint ventures in the year were £35 million (2009: £21 million). Posttax earnings on a management basis were £36 million (2009: £18 million), with trading profit
of £44 million (2009: £23 million). The tax charge amounted to £7 million (2009: £4 million)
with an interest charge of £1 million (2009: £1 million). Underlying trading profit increased
£22 million due to strong performance in our Chinese joint ventures, up £13 million, and
improvements in Emitec (£5 million) and Chassis Systems (£3 million).
Net financing costs
Net financing costs totalled £75 million (2009: £114 million) and include the non-cash charge
on post-employment benefits of £31 million (2009: £49 million) and unwind of discounts of
£4 million (2009: £1 million). Interest payable was £46 million (2009: £67 million), whilst
interest receivable was £6 million (2009: £3 million) resulting in net interest payable of
£40 million (2009: £64 million). The £24 million decrease in net interest payable includes
the benefits from the bond buy-backs in December 2009 and May 2010. Capitalised interest
costs attributable to the Group’s A350 investment were £4 million (2009: £1 million) and
interest charged on UK Government refundable advances was £2 million (2009: less than
£1 million).
The non-cash charge on post-employment benefits arises as the expected return on scheme
assets of £145 million (2009: £121 million) was more than offset by interest on postemployment obligations of £176 million (2009: £170 million). Details of the assumptions
used in calculating post-employment costs and income are provided in note 26(b) to the
financial statements.
GKN plc Annual Report and Accounts 2010
REVIEW OF PERFORMANCE CONTINUED
28 /
Profit/(loss) before tax
MANAGEMENT PROFIT BEFORE TAX
OF CONTINUING OPERATIONS
£m
400
363
350
Taxation
The book tax rate on management profit of subsidiaries was 11% (2009 restated: 17%),
arising as a £37 million tax charge on management profit of subsidiaries of £327 million.
300
255
250
The management profit before tax was £363 million (2009 restated: £87 million). The profit
before tax on a statutory basis was £345 million compared with a £54 million loss before tax
in 2009.
230
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 32% (2009: 31%).
The book tax rate is significantly lower, largely because of the recognition of substantial
deferred tax assets (mainly in the US) due to increased confidence in the Group’s ability to
make future taxable profit to absorb brought forward tax deductions and the fact that certain
profit making territories have benefited from the use of tax deductions.
170
150
87
100
50
0
2006
2007
2008
2009
2010
MANAGEMENT EARNINGS PER SHARE
pence
25.0
One of GKN’s core tax strategic objectives is to access brought forward tax deductions in
order to sustain a ‘cash tax’ charge on management profit at or below 20%. Cash tax
provides a proxy for the cash cost of taxation of management profit. The cash tax charge
was 13% (2009 restated: 29%). In the near term, we expect the cash tax rate to continue at
or below 20% as we utilise brought forward tax deductions.
The tax rate on statutory profit of subsidiaries was 6% (2009: 20%) arising as a £20 million
tax charge on statutory profit of £310 million.
23.5
20.7
20.3
Non-controlling interests
20.0
The profit attributable to non-controlling interests was £20 million (2009: £2 million)
reflecting a £15 million impact from the pension partnership arrangement (see note 26(d)
to the financial statements for further details).
16
15.0
Earnings per share
10.0
Management earnings per share was 20.7 pence (2009 restated: 5.7 pence). On a statutory
basis earnings per share was 19.6 pence (2009: (3.2) pence). The improvement is mainly
due to the higher profitability of the Group. Average shares outstanding in 2010 were
1,552.6 million.
5.7
5.0
0.0
2006
2007
2008
2009
2010
As restated in 2006-2008 for the bonus
issue inherent in the July 2009 rights issue.
Dividend
In view of the improving trading environment and taking into account the Group’s future
prospects, the Board has decided to recommend a final dividend of 3.5 pence per share
(2009: no final dividend). The total dividend for the year is, therefore, 5.0 pence (2009: no
dividend). Our objective, in the medium term, is a progressive dividend policy based on a
management earnings cover ratio of around 2.5 times. The final dividend will be paid on
19 May 2011 to shareholders on the register at 26 April 2011.
Cash flow
Operating cash flow, which is defined as cash generated from operations of £420 million
(2009: £288 million) adjusted for capital expenditure (net of proceeds from capital grants) of
£190 million (2009: £153 million), proceeds from the disposal / realisation of fixed assets of
£5 million (2009: £35 million) and UK Government refundable advances of £10 million (2009:
£28 million), was an inflow of £245 million (2009: £198 million).
Within operating cash flow there was an outflow of working capital and provisions of £59 million
(2009: £133 million inflow), principally as a result of higher inventory across the Group as
volumes increased. Average working capital as a percentage of sales continued to improve
from 9.2% in 2009, to 6.8% in 2010.
/ 29
OPERATING CASH FLOW*
£m
245
250
198
200
150
128
131
Free cash flow before dividends
100
100
50
0
2006
2007
2008
Capital expenditure (net of proceeds from capital grants) on both tangible and intangible
assets totalled £190 million (2009: £153 million), including £39 million (2009: £32 million)
on the A350 programme. Of this, £159 million (2009: £139 million) was on tangible fixed
assets and was 0.8 times (2009: 0.7 times) the depreciation charge. Expenditure on
intangible assets, mainly initial non-recurring costs on Aerospace programmes, totalled
£31 million (2009: £14 million). The Group invested £92 million in the year (2009: £83 million)
on research and development activities not qualifying for capitalisation.
2009
2010
* Operating cash flow is cash generated from
operations adjusted for capital expenditure,
proceeds from disposal/realisation of fixed assets,
government refundable advances, joint venture
dividends and a £200 million special UK pension
payment in 2006.
Free cash flow, which is operating cash flow including joint venture dividends and after
interest, tax and dividends paid to non-controlling interests but before dividends paid to
GKN shareholders, was an inflow of £188 million (2009: £136 million), after £55 million
(2009: £99 million) of expenditure on the Group’s restructuring programmes. The year on
year improvement reflects the improving profitability of the Group and a continued focus
on our balance sheet. Net interest paid totalled £46 million (2009: £61 million) including
£14 million interest benefit relating to the December 2009 and May 2010 bond buy-backs
and tax paid in the year was £33 million (2009: £15 million).
Net borrowings
At the end of the year, the Group had net borrowings of £151 million (2009: £300 million).
The Group’s share of net funds in joint ventures was £17 million (2009: £9 million).
Pensions and post-employment obligations
GKN operates a number of defined benefit and defined contribution pension schemes
together with retiree medical arrangements across the Group. The net amount included
within trading profit of £26 million (2009: £22 million) includes the current service cost of
£35 million (2009: £34 million) partly offset by credits arising from initiatives taken to reduce
the Group’s pension liabilities. Other net financing charges of £31 million (2009: £49 million)
have reduced mainly due to the impact of the pension partnership arrangement.
NET BORROWINGS
£m
(800)
(708)
(600)
(506)
(426)
Net amount included
within trading profit
Current service cost
(400)
2010
£m
(300)
(200)
(151)
UK pensions
Overseas pension
Retiree medical
and life insurance
2009
£m
(22)
(12)
(20)
(13)
(1)
(1)
(35)
(34)
2010
£m
Other net
financing charges
2009
£m
2010
£m
2009
£m
(20)
(6)
(20)
(6)
(7)
(21)
(23)
(23)
–
4
(3)
(3)
(26)
(22)
(31)
(49)
0
2006
2007
2008
2009
2010
During the year the Group has agreed benefit changes and a payment arrangement to
improve the funding position of the UK pension scheme. The impact of benefit changes gave
rise to a £68 million curtailment credit which has been reported as a separate component of
operating profit. The agreement of an asset-backed cash payment arrangement resulted in
the recognition of a £331 million plan asset. Further details are provided below.
UK pensions
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 16% of total liabilities of £2,435
million (2009: £2,429 million).
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.
A curtailment gain of £68 million resulted from benefit changes introduced in the UK in April
2010 whereby accrued final salary benefits for active members were crystallised, whilst
future revaluation will be linked to RPI compared to the previous salary increase assumption
of RPI + 1%. In addition, a number of benefits were harmonised across the different sections
of the UK scheme.
GKN plc Annual Report and Accounts 2010
REVIEW OF PERFORMANCE CONTINUED
30 /
UK PENSION ACCOUNTING DEFICIT
£m
The accounting deficit at 31 December 2010 of £71 million was significantly lower than the
£499 million at the end of 2009. The reduction was mainly due to the £331 million special
contribution provided as part of the pension partnership arrangement. Under the partnership
arrangement, the special contribution allows the UK pension scheme a distribution of
£30 million per annum for 20 years, subject to a funding condition and discretion exercisable
by the Group. The partnership receives rental income from various UK freehold properties and
global trade mark royalty income (see note 26(d) to the financial statements for further details).
600
499
500
400
272
300
200
174
100
71
3
0
2006
2007
2008
2009
2010
GROUP POST-EMPLOYMENT OBLIGATIONS
– ACCOUNTING BASIS
£m
996
1,000
900
700
600
561
500
400
331
200
100
0
2007
Trading profit benefited from the one-time curtailment/past service credit in Japan of
£6 million. Similar actions in 2009 in the US gave rise to a £7 million credit.
The deficit increased by £25 million to £468 million largely as a result of discount rate
reductions in the US and Europe by 50 and 40 basis points, respectively.
The obligation in respect of all schemes at the end of the year was £61 million compared with
£54 million at the end of 2009 largely due to the impact of lower discount rates and changes
that reflect actual experience in place of previous assumptions.
Summary
At 31 December 2010, the total deficit on post-employment obligations of the Group totalled
£600 million (2009: £996 million), comprising the deficit on funded obligations of £193
million (2009: £610 million) and unfunded obligations of £407 million (2009: £386 million).
300
2006
Overseas pensions
Overseas pension obligations arose mainly in the US, Germany and Japan.
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.
834
800
600
Other changes to the accounting deficit included £147 million of gains that reflect actual
experience of assets and liabilities during 2010 compared to the 2009 end year assumptions,
the £68 million curtailment, a £13 million reduction following changes in the statutory
minimum increase from RPI to CPI partly offset by a £100 million impact from the 30 basis
point reduction in the discount rate to 5.4% and £48 million from the change in mortality
assumptions to a 1% underpin.
2008
2009
2010
Net assets
Net assets of £1,687 million were £715 million higher than the December 2009 year end
figure of £972 million. The increase includes the £331 million impact of the pension
partnership, retained profit of £325 million and currency movements of £50 million.
Financing
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.
/ 31
Funding and liquidity
The Group funds its operations through a mixture of retained earnings and borrowing
facilities, including bank and capital markets borrowings and leasing. The relative
proportions of equity and borrowings are governed by specific Board-approved parameters.
These are designed to preserve prudent financial ratios, including interest, dividend and
cash flow cover, whilst also minimising the overall weighted average cost of capital to the
Group. The Group’s borrowing facilities are arranged by Group Treasury and the funds raised
are then lent to operating subsidiaries on commercial arm’s length terms. In some cases,
operating subsidiaries have external borrowings, but these are supervised and controlled
centrally. The Group’s objective is to maintain a balance between continuity of funding and
flexibility through borrowing at a range of maturities. Wherever practicable, pooling, netting
or concentration techniques are employed to minimise gross debt of the Group.
At 31 December 2010, there were £10 million of drawings related to the issuance of letters of
credit against the £358 million of the Group’s UK committed credit facilities. Following a £25
million bond buy-back in May 2010, capital market borrowings reduced to £526 million and
include unsecured issues of £176 million 7% bonds maturing in May 2012 and £350 million
6.75% bonds maturing in October 2019. In total, the Group’s bank committed credit facilities
have maturities ranging from 2011 to 2019. The weighted average maturity profile of the
Group’s committed borrowing facilities was 5.3 years. This leaves the Group well placed in
the short term to withstand sudden changes in liquidity in the financial markets.
All of the Group’s committed credit facilities have a single financial covenant requiring
EBITDA of subsidiaries to be at least 3.5 times net financing costs. EBITDA of subsidiaries
is operating profit before restructuring charges, impairment of goodwill, amortisation of
non-operating intangible assets, revaluation of financial instruments, profit and losses on
sale or closures of businesses, other items reported as separate components of operating
profit and depreciation, impairment and amortisation charged into trading profit. Net
financing costs exclude other financing charges and capitalised borrowing costs. For the
12 months to 31 December 2010 this ratio stood at 13 times.
Financial resources and going concern
At 31 December 2010, the Group had gross borrowings of £593 million (2009: £636 million)
and cash and deposits of £442 million (2009: £336 million) resulting in net borrowings of
£151 million. In addition, it had available, but undrawn, committed UK borrowing facilities
totalling £348 million. Of the Group’s total committed borrowing facilities, €50 million is
due to expire in October 2011.
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 15 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 ample headroom in the foreseeable future and
an assessment of the likelihood of breaching banking 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.
GKN plc Annual Report and Accounts 2010
32 /
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 44.
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
Market cycles
Changes in macro-economic conditions, consumer demand
and preferences. GKN’s financial performance could be
impacted by 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; volatility in agricultural, construction,
mining and industrial markets.
n
Significant customer concentration in automotive
and aerospace industries. Some 67% of Group sales
are from 25 major customers, although no customer
represented more than 10% of Group sales at
31 December 2010. 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.
n
Highly competitive markets with customer decisions
based typically on price, quality, technology and service.
Customer vertical integration (including OEMs taking
production in-house), the entry of new competitors or
consolidation of existing competitors could restrict GKN’s
ability to grow its business.
n
Inability to launch new products, new product
applications or derivations of existing products to meet
customers’ needs. GKN may lose customers to
competitors offering new technologies in the event of
an inability to adapt to market developments. Changes
in legislative, regulatory or industry requirements,
competitive technologies or consumer preferences
may render GKN’s products obsolete or less attractive.
n
Legal, regulatory, political and socio-economic
conditions in countries of operation. Given the global
footprint of the Group, its operations could be adversely
impacted by changes in the political, economic and
regulatory environments in countries in which it
does business.
n
Customers
Competition
Technology
Geo-political
n
n
n
n
n
n
n
n
n
n
n
n
n
Diverse business portfolio serving different markets
Effective management of the cost base
Efficient cash management including focus on working
capital and investment spending
Ongoing review of market indicators
GKN is not dependent on contractual or other
arrangements with any individual customer
Active management of customer relations and credit
exposure
Strong commercial and engineering focus at
customer level
Effective programme management
Continual review of competition and market trends
Investment in engineering and lean manufacturing
capabilities
Strong customer relationships
New product technology
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
Ongoing review of market environment including
political, fiscal and regulatory developments
Group-wide governance framework supported by
a strong control environment
/ 33
Operational risks
Risk
Nature of risk and potential impact
Mitigation
Supply chain
Lack of availability of equipment, components,
services and raw materials that meet specifications.
Volatility in production and the need to maintain
appropriate inventory levels requires effective supply
chain management. Supply chain disruption could
impact GKN’s sales to and relationships with its
customers and result in additional unrecoverable costs.
n
Rising cost of raw materials, labour and energy. The cost
of raw materials for the Group’s products and other key
inputs may fluctuate and could adversely affect the
Group’s earnings if it were unable to pass increases
on to its customers.
n
Input costs
n
n
n
n
n
Product quality
Ongoing assessment of supplier technology and
dependency
Dual sourcing to reduce dependence on single
supplier
Monitoring of financial viability of key suppliers
Contract negotiations to ensure the ability to pass on
charges to customers
Secure long term contracts for key inputs with stable
pricing
Forward purchasing of energy requirements where
appropriate
Maintaining good labour relations
Potential liabilities for defects in products, warranty
claims or product recalls. Product quality issues could
adversely affect profits and damage GKN’s reputation.
n
Inability to attract and retain qualified personnel,
particularly engineering professionals. The absence
of adequate talent and a lack of continuity in
management and leadership could result in an inability
to execute the strategic plan and deliver improving
financial performance.
n
Inability to realise expected benefits of acquisitions.
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.
n
Risk
Nature of risk and potential impact
Mitigation
Pensions
Pension deficit levels are affected by changes in asset
values, discount rates, inflation and mortality assumptions.
Accounting valuations of pension obligations can cause
volatility in financial results. Additional Company pension
contributions may restrict investment in businesses.
n
Currency risks: 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.
n
GKN is subject to complex tax laws and audit procedures.
Actual tax liabilities could differ from accruals which are
based on management judgements.
n
People
Acquisitions
n
n
n
n
n
n
High levels of quality assurance
Robust manufacturing systems
Annual talent management and performance
development process
Competitive reward packages and Group-wide training
and development programmes
A high performance culture and motivating environment
Focused reviews to ensure strategic alignment
of acquisitions
Extensive pre-acquisition due diligence
Careful management of integration plans by
experienced on-site management
Post acquisition reviews
Financial risks
Exchange rates
Taxation
n
n
n
n
n
Active management of pension scheme assets and
long term view of liability assumptions
Continuing review of the level of benefits provided
Alternative funding and deficit reduction plans
implemented where appropriate
Hedging of transaction exposures through forward
foreign exchange contracts
Balance sheet translational hedging policy (currently
suspended due to continuing volatility of foreign
currencies against sterling)
Borrowings in local currency including access to
overseas debt capital markets
Ongoing monitoring of tax developments in major
jurisdictions
Group-wide tax compliance programme
The Group insures against the impact of a range of unpredictable losses associated with both its 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.
GKN plc Annual Report and Accounts 2010
34 /
SUSTAINABILITY REPORT
Underpinning our
strategic objectives
GKN is committed to providing long term shareholder value in the form of steadily growing
earnings and dividends. To help deliver our strategic objectives, which we summarise under
the four headings of market leadership, growth, operational excellence and sustainability,
we develop and deploy key capabilities across the Group. These are superior technology,
world class lean manufacturing, leveraging our global footprint, exceptional customer
service, outstanding leadership and development for all. At the heart of all of these
are our Values which bind the Group together.
This review summarises activity during the year in relation to certain key capabilities,
not covered elsewhere in this report, with a particular focus on corporate responsibility.
Living our Values
In our relationships with shareholders, employees, customers, suppliers and other
stakeholders, we are guided by our Values. These Values are contained in the GKN Code
which, together with a series of related policies, provides a framework for the behaviour of all
our employees whatever their job and wherever they work. The GKN Code and policies can be
found on our website at www.gkn.com.
Responsible business conduct
All our employees are required to maintain the highest standards of integrity, honesty and
fair dealing. Compliance with all relevant laws and regulations wherever we operate is a
minimum requirement in all our policies. We support the Universal Declaration of Human
Rights and do not tolerate the use of child labour or forced labour. Through our supplier
management policy we require equivalent standards through our supply chain; Group
companies are prohibited from engaging suppliers that offer inadequate health and safety
standards for employees, infringe internationally accepted standards of workers’ rights, use
child or forced labour, unsound environmental practices, have poor standards of social
responsibility or that fail to comply with relevant laws and regulations. The policy encourages
Group companies to develop and maintain value adding relationships with our supply base.
Superior technology
Superior technology is the cornerstone of our strategy. The Group’s technology plan is
developed on a Group and divisional basis, reflecting the priorities of each of the Group’s
portfolios, and focusing on the products we make, how we make them, the material we use
in the manufacturing process, how our customers use our products and how they can be
recycled or disposed of safely. The plan takes into account market drivers for each business
area, such as the low carbon agenda, electrification, urbanisation, water shortage and
changes in food consumption, all of which help define the technologies of the future.
GKN’s Technology Strategy Board, sponsored by the Chief Executive and 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,
through 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 sources of funding.
An important focus of the Strategy Board’s work during the year has been on ensuring that
GKN has the necessary internal resources to deliver the technology plan. To this end, a career
framework for engineers, based on the GKN leadership framework, has been developed
which defines the skills and experience required to progress from team member through
to senior executive level. Common training and development programmes to enable
individuals to advance their careers are being developed.
/ 35
EMPLOyEES By REGION
as at 31 December 2010
Continuous improvement
GKN’s culture of continuous improvement in everything we do is reinforced through the
application of Lean Enterprise techniques in our business and production processes worldwide.
All our sites have a continuous improvement plan, which is refreshed regularly and aligned
to business objectives. Employee involvement is a core concept of GKN’s Lean Enterprise
approach; continuous improvement plans engage all employees in driving the flow of value
through the business, eliminating waste in all its forms including materials and time.
5,500
UK
9,200
Rest of World
13,100
Continental
Europe
12,200
Americas
Total 40,000
Including subsidiaries and joint ventures
One of our strategic objectives is to be the employer of choice with a high performance
culture, motivated employees and outstanding leaders. An important factor in this is for all
employees to understand the Group’s strategy and their individual roles in delivering it.
8,500
Aerospace
5,900
Powder
Metallurgy
GKN’s businesses use Business Excellence based on the EFQM model to assess their
performance in their ‘journey towards excellence’ and to identify improvement actions.
These are then implemented through the continuous improvement planning process.
More fundamentally, Business Excellence is also an important tool in the development of
business strategy and establishing an environment for its successful execution.
Our employees
EMPLOyEES By BUSINESS
as at 31 December 2010
19,200
Driveline
4,700
Land Systems
The recessionary conditions in 2009 in many of our markets caused us to focus efforts on
inventory management to ensure that our businesses were able to match the dramatic changes
in customer demand. Significant reductions in production inventory were achieved throughout
the Group through the use of Lean techniques and we continued our focus on this area in 2010.
1,700
Other
businesses
Total 40,000
Including subsidiaries and joint ventures
To this end, in 2010 we deployed globally a visual strategy map, based on the EFQM Business
Excellence model, which describes the strategy, the processes and enablers involved in
delivering the strategy and how we will measure progress against our strategic objectives.
At divisional and site level this is used to create a framework for the contribution of business
units to the achievement of the overall Group strategy.
Our organisation planning process (OPP) is designed to enable us to identify and develop the
capability of the people needed at every level to deliver GKN’s strategy. In 2010, some 8,500
employees were included in the process. The OPP is supported by the performance
development process (PDP) through which an employee’s development needs are identified
and addressed. This process is carried out against the GKN leadership framework which
defines the skills, competencies and experience needed to be successful at every level in the
organisation. 76% of senior management vacancies were filled internally in 2010.
A suite of three leadership development programmes has been launched globally as we build
a strong leadership culture: the Essential Leadership Development Programme for junior
management, the Advanced Leadership Development Programme for middle/senior
management and the Executive Leadership Programme for the executive population.
The GKN Academy, an online training resource accessible to all GKN employees launched
in 2010, represents the next step in realising our vision of ‘Development for All’. It offers
programmes on a variety of subjects including finance, Lean techniques, customer
relationship management, communication skills, health, safety and the environment.
Employee engagement is key to our success. Every two years each site conducts an employee
opinion survey and action plans are put in place. Monthly, a subset of questions from the
employee opinion survey is used to conduct sensing sessions with groups of between 10-20
employees at locations globally. The results of these Positive Climate Index (PCI) sessions
provide a PCI score. Improvement actions arising from PCI sessions are incorporated into site
continuous improvement plans. The next global survey will be carried out in 2011.
In 2010, GKN won the category Employee Engagement Strategy of the Year at the annual
Chartered Management national management and leadership awards.
On an ongoing basis, we use a variety of communication channels, with the emphasis on
two-way face to face techniques, to ensure that employees are kept informed of business
developments at a local and Group level.
Our objective is to have a positive and inclusive working environment free from all kinds of
discrimination and in which employees are motivated to maximise their contribution. All
Group companies must ensure that employees are treated justly and with respect and that
their abilities, differences and achievements are recognised. Employees can report and
discuss problems on a confidential basis. We operate an international whistleblowing
hotline (which is run independently) to ensure that employees can make, anonymously if
they wish, confidential disclosures about suspected wrongdoing without fear of recrimination.
GKN plc Annual Report and Accounts 2010
SUSTAINABILITY REPORT CONTINUED
36 /
ACCIDENT FREqUENCy RATE
Number of lost time accidents per 1,000 employees
4.0
4.0
3.4
3.5
3.0
2.7
2.5
2.5
2.1
1.5
1.0
0.5
0.0
2007
2008
2009
2010
ACCIDENT SEvERITy RATE
Number of days/shifts lost due to accidents and
occupational ill health per 1,000 employees
150
129
120
99
90
75
71
GKN is committed to continuous improvement in health and safety performance. Our goal
is zero preventable accidents.
The management of health and safety, including compliance with laws and regulations in
GKN, is based on the internationally recognised health and safety system standard – OHSAS
18001. So far 94 locations (68% of the total number) have achieved certification to OHSAS
18001 and the remaining sites are working towards this.
RADAR (Risk Awareness, Detection, Action and Review), a GKN developed behaviour awareness
and improvement tool, assists employees in recognising hazards and risks in their working
area and empowers them to take action for themselves to improve their workplace.
Employees receive training and then take part in a RADAR event. During 2010, we trained
over 29,000 employees who have subsequently participated in events in their workplace.
2.0
2006
Health and safety
68
60
GKN has developed an intensive machinery risk assessment programme aimed at building
on existing assessments but broadening the scope and increasing employee involvement
and awareness. In 2010, some 20,000 machines were assessed to the new standard,
representing approximately 90% of the total.
Employee communication is an important element of good health and safety performance.
An increasing number of GKN plants have implemented a safety corner, located in a prominent
position within the plant, to give employees an opportunity to learn about hazards in their
working environment, often by interactive displays. Employees receive safety briefings,
audio/visual content and are made aware of any Group-wide safety alerts or incidents.
GKN recognises the need to share good practice, knowledge and experience throughout the
Group. With this in mind in 2010 a new improvement initiative known as the ‘Assess and
Improve’ programme was piloted and will be rolled out in 2011. Initially 20 locations will be
visited by GKN global safety specialists who will focus on a simple qualitative assessment
of safety systems in a plant, sharing best practice and identifying areas for improvement.
Health and safety performance is measured on a regular basis and reports are made
periodically to the Executive Sub-Committee on Governance and Risk and to the Executive
Committee; a half yearly report is made to the Board.
30
0
2006
2007
2008
2009
2010
Accident frequency rate (AFR) and accident severity rate (ASR) are key health and safety
performance indicators for the Group and our performance against these in 2010 is shown in
the charts above left.
Whilst performance over the last ten years by reference to both these metrics has been
extremely positive (an 86% improvement in AFR and an 81% improvement in ASR), 2010 has
seen an increase in AFR compared with 2009 which is disappointing. To address this we are
driving the use of RADAR consistently throughout our businesses such that its disciplines
become an integral part of every employee’s daily working life. Assess and Improve will also
support further improvements in performance.
Each business is required to target annual performance improvements. Targets are set at
portfolio, divisional and plant level taking into account risk and improvement priorities.
During 2010 there were three health and safety enforcement actions against GKN companies
in the USA, two of which were issued by the relevant authorities with fines totalling US $4,295.
ENERGy CONSUMPTION PER UNIT OF PRODUCTION
kWh/tonne
3,500
3,000
2,500
Environment
Our main impacts on the environment are energy use and associated CO2 emissions, waste
generation and recycling, and water consumption. We are committed to continuous improvement
in our environmental performance and have taken strong action in 2010 to address each of
these impact areas.
2,000
All significant GKN manufacturing locations are either certified to ISO 14001, the
internationally recognised environmental management system, or are in the process of
obtaining certification.
1,500
1,000
500
0
Driveline
Powder Aerospace*
Metallurgy
Land
Systems
2008
2009
2010
* Aerospace measured against £1,000 sales.
To improve our energy efficiency we apply Lean Enterprise techniques focused on identifying
and reducing energy waste, both in the office and on the shop floor. Most GKN manufacturing
locations have established energy efficiency targets and incorporated those objectives in
their site continuous improvement plans, ensuring regular management attention and the
necessary resources. The targets set at site level must meet, at a minimum, the Group objective,
which is to improve energy efficiency by 15% over the five year period from 2009 to 2014.
/ 37
CO2 EMISSIONS PER UNIT OF PRODUCTION
kg/tonne
1,200
1,000
800
600
400
200
0
Driveline
Powder Aerospace*
Metallurgy
Land
Systems
2008
2009
2010
WASTE GENERATION PER UNIT OF PRODUCTION
kg/tonne
All four divisions improved energy efficiency in 2010, albeit with some of the improvement
attributable to increased production volumes. Powder Metallurgy, our most energy intensive
business, achieved an improvement in energy efficiency of almost 10% over the prior year, as
did Driveline. Because our CO2 emissions closely track energy use, our CO2 performance also
improved across all four divisions.
Our actions to reduce the generation of waste adhere to the waste hierarchy of first, and
the best alternative, of not producing waste, secondly (the next best alternative) of reusing
materials, and finally, if neither of these is possible, to recycle rather than simply dispose
of the material. Our particular focus is to reduce the quantity of waste generated per unit
of production, and then to recycle as much of the waste as we can. With regard to our
performance, all four divisions reduced the quantity of waste generated per unit of
production, and three of the four divisions also maintained or improved the percentage
of waste recycled. In the period 2008 to 2010, waste generation and recycling levels in
the Powder Metallurgy division have been impacted by the recycling of large amounts of
stockpiled slag from historic powder production. During the year, 89% of overall Group
waste was recycled.
In 2009 the Group Excellence Award for Environment was won by GKN Land Systems Rockford
plant for a significant reduction in water consumption. One of the drivers for these awards is
to communicate and promote best practice throughout the Group. In that regard we are
pleased to report significant improvements in water consumption across all four divisions:
18% in Driveline, 14% in Powder Metallurgy, 11% in Land Systems and 10% in Aerospace.
350
300
250
200
150
100
Compliance with all applicable rules and regulations is a priority for us. Unfortunately in
2010 we received five notices of non compliance and paid US$90,425 in penalties.
50
0
Driveline
Powder Aerospace*
Metallurgy
Land
Systems
2008
2009
2010
Our priority for 2011 is to strengthen the bonds between our Lean Enterprise systems and
environmental improvements. We will also be sharing new environmental training material
with all GKN employees.
Working in our communities
GKN has a proud history of working with its communities. In 2009, to celebrate our 250th
anniversary, we launched a global competition to encourage and fund ideas to establish
sustainable engineering and educational projects. Three winners were finally selected from
nearly 100 entries from around the world and during 2010 they have progressed the
implementation of these projects.
RECyCLED WASTE
% of total waste
100
80
60
40
20
0
Driveline
Powder
Aerospace
Metallurgy
Land
Systems
2008
2009
2010
WATER CONSUMPTION PER UNIT OF PRODUCTION
m3/tonne
8
7
6
5
4
3
2
1
0
Driveline
Powder Aerospace*
Metallurgy
Land
Systems
Winning the prize of £100,000 was a project based in India to create an engineering education
centre and industry stepping-stone programme for children and young adults in the rural
region of Pabal. The programme is a partnership with the Vigyan Ashram organisation,
already well established in the regional education system. The funding is being used to
create a 520 square metre teaching facility at one of Vigyan Ashram’s existing sites with
mechanical, electrical and electronic workshops together with training rooms and changing
facilities for students.
Receiving an award of £50,000, our Powder Metallurgy plant in Chivilcoy, Argentina,
established a partnership with a local educational establishment to develop a specialised
powder metallurgy course and facility. The plant worked with the local authorities to design
and integrate a technology course into the national school curriculum. The project includes
the creation of a mini production line within the technical school in Chivilcoy (approximately
650 students), which will provide direct experience of the process and the opportunity to
carry out research and experiments.
£25,000 was awarded to GKN Aerospace to establish a teaching and innovation facility
within an industrial research and development centre at Filton in the UK. Leveraging GKN’s
position within the UK National Composites Network, it will provide access and training to
students to help them design new products and minimise their environmental impact
through the consideration of the life-cycle analysis. This year the project launched a pilot
programme supporting the teaching of engineering and manufacturing in the Bristol area
and has potential to expand across the region.
We recognise, each year, the contributions made to our local communities by groups and
individuals across the Company through our Hearts of Gold programme. We are extremely
proud of their efforts which make a sustainable difference to the lives of people in the
communities of which we are a part.
2008
2009
2010
* Aerospace measured against £1,000/sales.
GKN plc Annual Report and Accounts 2010
38 /
THE BOARD
Roy Brown (64)
Chairman
Sir Kevin Smith, CBE (56)
Chief Executive
Marcus Bryson (56)
Divisional Chief Executive
N
NE
E
Appointed a non-executive Director in
Appointed Chief Executive in January 2003. Appointed to the Board in June 2007.
1996 and became Chairman in May 2004.
Experience
Experience
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.
Joined GKN in 1999 as Managing Director,
Aerospace. Prior to GKN he held various
positions in BAE Systems plc over a 20
year period, latterly as Group Managing
Director – New Business. Former nonexecutive director of Scottish and
Southern Energy plc. Former Co-Chairman
of the Government’s Manufacturing
Forum. Fellow of the Royal Aeronautical
Society and Companion of the Chartered
Management Institute.
External Appointments
Joined GKN with the acquisition of the
Westland Group in 1994 and has
extensive experience of the aerospace
industry. Having joined Westland in
1984, he held a number of finance and
commercial roles within the business
prior to its acquisition by GKN. He was
appointed Chief Executive GKN Aerospace
Services – Europe in 2000 and Chief
Executive Propulsion Systems and
Special Products in 2004. Joined the
Executive Committee as Chief Executive
Aerospace in January 2006.
Member of the Government’s Asia Task
Force and a UK Business Ambassador.
External Appointments
External Appointments
Non-executive director of Santander UK plc
and Alliance & Leicester plc.
Vice-President, Aerospace of A|D|S.
William Seeger (59)
Finance Director
John Sheldrick (61)
Nigel Stein (55)
Independent non-executive Director Divisional Chief Executive
E
ARN
E
Appointed to the Board in September 2007. Appointed to the Board in December 2004. Appointed to the Board in August 2001.
Experience
Experience
Experience
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.
Joined GKN in 1994 and has held a range
of commercial, general management and
finance roles, including Finance Director.
Appointed Chief Executive Automotive
in June 2007. 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. Member of the
Institute of Chartered Accountants of
Scotland.
External Appointments
Non-executive director of Fenner plc.
External Appointments
Non-executive director of Wolseley plc
and President of The Society of Motor
Manufacturers and Traders Ltd. Member
of the Automotive Council.
/ 39
Shonaid Jemmett-Page (50)
Richard Parry-Jones, CBE (59)
Andrew Reynolds Smith (44)
Independent non-executive Director Independent non-executive Director Divisional Chief Executive
ARN
ARN
E
Appointed to the Board on 1 June 2010.
Appointed to the Board in March 2008.
Appointed to the Board in June 2007.
Experience
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 non-executive
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.
Joined GKN in 2002 as Managing Director
Operations – Europe for GKN Driveline.
Appointed Chief Executive GKN Sinter
Metals in 2004, joined the Executive
Committee in January 2006 and was
appointed Chief Executive Powder
Metallurgy, OffHighway and Industrial
Services in June 2007, becoming Chief
Executive Powder Metallurgy and Land
Systems in June 2010. Prior to GKN, he
held various management and functional
positions at Ingersoll Rand, Siebe plc
(now Invensys plc) and Delphi
Automotive Systems.
External Appointments
Chair of the Sustainability Committee of
the Institute of Chartered Accountants in
England & Wales (ICAEW) and an
Association Member of BUPA.
External Appointments
Chairman of the Welsh Assembly
Government Ministerial Advisory Group.
Visiting Professor within the Department
of Aeronautical and Automotive
Engineering at Loughborough University. External Appointments
Joint Chairman of the Automotive Council. Chairman of the CBI Manufacturing
Council. Member of the Ministerial
Advisory Group for Manufacturing and
of the Government’s Green Economy
Council.
Michael Turner, CBE (62)
Senior Independent Director
Judith Felton
Company Secretary
ARN
E
Appointed to the Board in September
2009 and became Senior Independent
Director in May 2010.
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
Has extensive experience of the aerospace
External Appointments
industry having worked for BAE Systems
Non-executive director and Trustee of
plc for over 40 years, and where he was
Chief Executive from 2002 to 2008. Former Young Enterprise UK.
President of the Aerospace & Defence
Industries Association of Europe. Fellow
of the Royal Aeronautical Society.
External Appointments
Non-executive chairman of Babcock
International Group plc and non-executive
director of Lazard Ltd. Member of the
Government’s Apprenticeship
Ambassadors Network.
GKN plc Annual Report and Accounts 2010
A
R
N
E
Member of Audit Committee
Member of Remuneration Committee
Member of Nominations Committee
Member of Executive Committee
40 /
CorporaTe GoVerNaNCe
In this section
Leadership
Effectiveness
Accountability
Relations with shareholders
Compliance statement
The GKN Board remains
committed to high standards
of corporate governance
which are key to the Group’s
objective of delivering long
term shareholder value.
41
page 43
page 44
page 45
page 45
page
GKN’s governance framework, led by the
Chairman of the Board, 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.
/ 41
Leadership
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.
roy Brown has been Chairman since 2004; he is responsible for leading the Board and for its effectiveness. Sir Kevin Smith leads the business as
Chief executive, a position he has held since 2003. With the support of the executive Committee he is responsible for the execution of the Group’s
strategy and the day-to-day running of the business.
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 2010.
Strategy
Capabilities
n
approved strategic plans
and considered the risks
inherent in them.
n
Succession planning for
the Board and senior
executives.
n
approved the Group’s
annual budget to support
the strategic plans.
n
reviewed the Group’s
technology plan and the
activities of the Group
Technology Strategy Board.
n
approved a 20 year assetbacked cash payment
arrangement for the UK
pension scheme.
n
Considered progress on the
deployment of Lean
enterprise across the
Group.
Performance
n
Discussed divisional
operating performance.
n
Considered Group financial
performance, with
particular focus on cash
generation and working
capital.
n
reviewed performance
against the Group’s nonfinancial KpIs (covering
health, safety and
environmental matters).
Control
n
assessed, with the support
of the audit Committee, the
effectiveness of internal
control and audit
processes.
n
Considered a post
acquisition review in
respect of Stellex
aerostructures.
n
assessed the effectiveness
of the Board and its
Committees.
The Board meets formally at least eight times a year. at least one meeting is combined with a Board visit to one of the Group’s business locations. In
2010, to coincide with the Shanghai expo (GKN was one of the founder sponsors of the UK pavilion), the Board visited China and toured a number of
the Group’s businesses and joint venture operations. 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. all Board Committees are supported by the Company Secretariat. Their terms of reference are available on our
website.
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 2010 is given on pages 46 and 47.
Remuneration Committee
(chaired by richard parry-Jones)
determines and makes recommendations on the Group’s remuneration policy and framework to recruit, retain
and reward Directors and senior executives. The remuneration report is set out on pages 48 to 58.
Nominations Committee
(chaired by roy Brown)
recommends Board and Board Committee appointments and reviews succession planning against the
leadership needs of the Group.
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.
GKN plc annual report and accounts 2010
CorporaTe GoVerNaNCe CoNTINUeD
42 /
Operational Governance Committees
Executive Committee
(chaired by Sir Kevin Smith)
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.
Board and Committee attendance
The attendance of Directors at relevant meetings of the Board and of the audit, remuneration and Nominations Committees held during 2010 was as
follows:
Board
(10 meetings)
audit
Committee
(4 meetings)
remuneration
Committee
(8 meetings)
Nominations
Committee
(8 meetings)
Chairman
roy Brown
10
–
–
8
Executive Directors
Sir Kevin Smith
Marcus Bryson
andrew reynolds Smith
William Seeger
Nigel Stein(a)
10
10
10
10
9
–
–
–
–
–
–
–
–
–
–
8
–
–
–
–
Non-executive Directors
Shonaid Jemmett-page
richard parry-Jones(b)
John Sheldrick(c)
Michael Turner(d)
6/6*
10
9
9
2/2*
3
4
3
4/4*
8
7
7
4/4*
8
8
7
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 January due to illness.
(b) richard parry-Jones was unable to attend the audit Committee meeting in February due to personal commitments.
(c) John Sheldrick was unable to attend the remuneration Committee meeting in January due to a prior business commitment and the Board meeting in September due to personal
commitments.
(d) Michael Turner was unable to attend the Board, remuneration and Nominations Committee meetings in February and the audit Committee meeting in July due to prior business
commitments with Lazard Ltd, of which he is a non-executive director.
/ 43
Effectiveness
Board composition
The Board currently comprises five executive and five non-executive
Directors, including the Chairman. Biographical details of all Directors are
given on pages 38 and 39. The Board considers that all of the non-executive
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 2010 are set out below:
n
on 6 May Sir peter Williams and Sir Christopher Meyer retired from
the Board as non-executive Directors after nine and six years’
service respectively.
n
Shonaid Jemmett-page was appointed a non-executive Director on
1 June for an initial term of three years. She brings considerable
experience of asia and has a strong financial background.
n
on 31 october Helmut Mamsch retired from the Board as a nonexecutive Director after seven years’ service.
n
In December the Board renewed the terms of appointment for
John Sheldrick for a further and final three year period.
at the aGM on 5 May 2011, and in accordance with the Company’s
articles of association, shareholders will be asked to elect Shonaid
Jemmett-page to the Board. all other Directors will be seeking
re-election in accordance with the provisions of the UK Corporate
Governance Code published in 2010. This will be the final time the
Chairman will be seeking re-election as his term of appointment will
expire at the date of the Company’s aGM in 2012.
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.
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. In 2010, Directors
attended external training courses on a number of matters including
risk, board effectiveness, climate change and sustainability, and
advanced financial leadership. Two executive Directors also completed
the Group’s Strategic Leadership Development programme.
Information and support
The Chairman is responsible for ensuring that Directors receive accurate,
timely and clear information. The provision of information to the Board
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.
as part of their induction Shonaid Jemmett-page and Michael Turner
visited GKN operations in the UK, Germany and India during 2010.
Performance evaluation
These procedures were used by the Nominations Committee in
recommending to the Board the appointment of Shonaid Jemmett-page
as a non-executive Director. The Committee engaged the services of an
external search consultant in relation to her appointment.
recognising the benefits that an external evaluation could bring, the
Board appointed a third party to evaluate the performance of the Board
and its Committees towards the end of 2010. The external facilitator has
no other connection with the Company.
Development
The evaluation process involved expansive face to face interviews with
each Director to gather feedback on the following areas believed to be
critical to informing and assisting the Board’s effectiveness:
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.
GKN plc annual report and accounts 2010
n
strategy and process;
n
Board composition and balance;
n
succession planning;
n
monitoring financial and non-financial performance;
n
deep dive topics;
n
risk and risk management systems;
n
overall Board working (meetings and agenda, papers and executive
reporting);
n
key themes for discussion focus in 2011;
n
Board development; and
n
Board Committee feedback.
44 /
CorporaTe GoVerNaNCe CoNTINUeD
The external facilitator also observed a Board meeting to view first hand
the way in which it fulfils its responsibilities.
a summary of those risks which could have a material impact on the
Group is given on pages 32 and 33.
The results of the evaluation exercise were presented at a separate
meeting of the Board in late January 2011. The output remains under
consideration by the Board; any agreed changes will be implemented as
soon as practicable. Board and Committee terms of reference will also
be reviewed in light of the changes adopted.
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:
n
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;
n
Group and divisional policies governing the maintenance of
accounting records, transaction reporting and key financial control
procedures;
n
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;
n
monthly operational review meetings which include, as necessary,
reviews of internal financial reporting issues and financial control
monitoring; and
Accountability
n
ongoing training and development of financial reporting personnel.
Financial and business reporting
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 individual performance of the Directors was also evaluated through
one-to-one interviews with the Chairman. To assist this process, a number
of assessment areas were identified in advance and used as a framework
for conducting the appraisal interviews. Michael Turner, as Senior
Independent Director, led the review by the non-executive Directors of
the Chairman’s performance, which took into account the views of the
executive Directors. Similarly, the views of the other Directors were
taken into account by the Chairman in his review of the Chief executive’s
performance. 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 62 and the
auditors’ report on page 63 includes a statement by pwC about their
reporting responsibilities. as set out on page 31, 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, 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.
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 46 and 47.
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 appended to the Code (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.
/ 45
Relations with shareholders
Compliance statement
The Board maintains a dialogue with shareholders directed towards
ensuring a mutual understanding of objectives.
This corporate governance statement, together with the audit
Committee report on pages 46 and 47 and the remuneration report on
pages 48 to 58, provide a description of how the main principles of the
2008 Combined Code on Corporate Governance (the Code) have been
applied within GKN during 2010. The Code is published by the Financial
reporting Council and is available on its website at www.frc.org.uk.
Major shareholders
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, with support from the
Company Secretary, meet with institutional shareholders and investor
representatives to discuss matters relating to governance and strategy.
They are joined by the remuneration Committee Chairman where
discussion includes matters relating to executive remuneration. 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.
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. In late 2010 the Board commissioned an investor perception
survey, the results of which were considered by the Board in January 2011.
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 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 2011 aGM is given on page 59. Shareholders
who attend the aGM are invited to ask questions during the meeting
and to meet with Directors after the formal proceedings have ended.
Details of the level of proxy votes received are advised to shareholders
at the meeting and are published on our website.
GKN plc annual report and accounts 2010
Throughout the financial year ended 31 December 2010, GKN was in
compliance with the relevant provisions set out in Section 1 of the Code
with the exception of provision a.3.2 which requires that at least half
the Board, excluding the Chairman, should comprise independent nonexecutive Directors. For the period from 6 May to 31 May 2010 and since
1 November 2010 the Board has comprised five executive Directors and
four non-executive Directors (excluding the Chairman).
The importance of succession planning is recognised by the Board as is
the need to appoint non-executive Directors with the necessary skills
and experience to complement the existing Board composition. Whilst
the appointment of Shonaid Jemmett-page was confirmed prior to 6 May
2010, her existing commitments meant that it was not possible for her
to take up the role as non-executive Director with GKN until 1 June 2010.
Helmut Mamsch decided to retire from the Board on 31 october 2010
for personal reasons and a recruitment process to identify a new
non-executive Director to replace him was started immediately. an
announcement confirming the outcome of this process will be made
in due course. The Board is content that the independent judgement
of the non-executive Directors has not been adversely impacted during
the periods of non-compliance.
a revised Code (entitled the UK Corporate Governance Code) was
published by the Financial reporting Council in June 2010. Whilst this
does not apply to GKN until the 2011 financial year a number of new
provisions have already been addressed during 2010. The Board will
report on compliance against the revised Code in its annual report for
the year ending 31 December 2011.
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 59 to 61.
46 /
aUDIT CoMMITTee reporT
Composition
Activities
The audit Committee comprises the following independent nonexecutive Directors:
The Committee met on four occasions in 2010 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 42.
Name
John Sheldrick
Shonaid Jemmett-page
richard parry-Jones
Michael Turner
audit Committee position
Chairman
Member (from 1 June 2010)
Member
Member
Sir Christopher Meyer and Sir peter Williams were members of the
Committee until they retired from the Board on 6 May 2010. Helmut
Mamsch was also a Committee member until his retirement from the
Board on 31 october 2010.
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. This was strengthened during the year with the
appointment of Shonaid Jemmett-page who 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. 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.
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:
n
the integrity of the Group’s financial statements and the significant
reporting judgements contained in them;
n
the appropriateness of the Group’s relationship with the external
auditors, including auditor independence, fees and provision of
non-audit services;
n
the effectiveness of the external audit process, making
recommendations to the Board on the appointment of the external
auditors;
n
the activities and effectiveness of the internal audit function
(Corporate audit);
n
the effectiveness of the Group’s internal control and risk
management systems; and
n
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.
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 2010 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 three meetings. 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
and impairment charges, tax and warranty provisioning, non-recurring
costs on aerospace contracts, and assumptions in respect of postemployment obligations. Key points of disclosure and presentation
to ensure the adequacy, clarity and completeness of the financial
statements were also considered, including the accounting treatment
in respect of the asset-backed cash payment arrangement implemented
during the year for the UK pension scheme. 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 31 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. any amendments required to the latter policy as a
result of the recent consultation by the auditing practices Board on the
provision of non-audit services by auditors will be considered by the
Committee in 2011.
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, who is permitted to delegate
approval to the Group Financial Controller for amounts below £20,000,
will, depending on the nature of the service, seek the prior
authorisation of the Chairman of the audit Committee. The non-audit
fees incurred during 2010 are set out in note 4(a) to the financial
statements. These 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 procedures; all such activities remain within the policy
approved by the audit Committee.
/ 47
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
The Committee has undertaken its annual review of the qualification,
expertise, resources and independence of the external auditors and the
effectiveness of the external audit process by:
n
reviewing and approving pwC’s plans for the audit of the Group’s
2010 financial statements, the terms of engagement for the audit
and the proposed audit fee;
n
considering the views of Directors, senior management and the pwC
engagement partner on pwC’s independence, objectivity, integrity,
audit strategy and its relationship with the Group, obtained by way
of interview by Corporate audit; and
n
taking into account information provided by pwC on their
independence and quality control procedures.
In making its recommendation to the Board that pwC be reappointed for
a further year, the Committee took into account their tenure as auditors
and considered whether there should be a full tender process. a review
of the external auditor appointment is currently underway to ensure that
the objectivity and independence of the relationship remains appropriate.
There are no contractual obligations restricting the Committee’s choice
of external auditors.
Details of the fees paid to pwC in 2010 can be found in note 4(a) to the
financial statements.
Internal control
In 2010 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. It also approved proposals to amend the
existing audit rating and reporting system to encourage further
improvement in the control environment. The Committee considered
and approved the 2011 Corporate audit programme, including the
proposed audit approach, 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. The appointment of a new Head of Corporate audit
was also approved by the Committee following the retirement of the
previous incumbent.
GKN plc annual report and accounts 2010
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 control monitoring system (GKN reporting and Integrity
procedures), and activities to ensure compliance with both the Senior
accounting officer provisions of the Finance act 2009 and XBrL
reporting requirements for UK tax returns, computations and accompanying
accounts. 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 internal control system is closely aligned to the
Group’s enterprise risk management system designed to assess, monitor,
manage and control risk; the Committee received a demonstration of
this system during the year. 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 page 44.
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.
Performance evaluation
Details of the Board and Committee evaluation process which
commenced in 2010 can be found on pages 43 and 44.
on behalf of the Committee
John Sheldrick
Chairman of the audit Committee
28 February 2011
48 /
reMUNeraTIoN reporT
In this section
The Remuneration Committee
Executive Directors
Chairman and non-executive Directors
Shareholding requirement
Historical TSR performance
Directors’ remuneration 2010
The remuneration report
for 2010 sets out the
remuneration policy for
Directors and how it has
been applied, including
disclosures on directors’
remuneration required
by law.
49
page 49
page 53
page 54
page 54
page 55
page
During the year, and against the backdrop of
recovery from severe recessionary conditions,
the Committee continued to take a conservative
approach to Directors’ remuneration, applying
the remuneration policy prudently and with a
clear alignment to the interests of shareholders:
n
Below inflation average increases to basic salaries were awarded in 2010
following a year of no salary increase in 2009.
n
The maximum potential payments under the short term variable
remuneration scheme (STVrS) were restored, for 2011, to the prerecessionary level of 110%.
n
a Deferred Bonus plan was introduced under which any bonus payable
above target performance under the STVrS is deferred in shares for a
period of two years.
n
The shareholding requirement for Directors was amended to take account
of the Deferred Bonus plan.
n
Both long term and short term incentives continued to support the
Group’s strategic objectives with targets that were not only stretching
but also achievable without taking inappropriate business risks.
In 2011, the Committee will review the policy and structure of remuneration
for executive Directors in order to ensure its continued alignment with the
Group’s strategy. The Committee will consult with principal shareholders
should any material changes be proposed as a result of this review.
/ 49
The Remuneration Committee
Activities
Composition
The Committee met on eight occasions in 2010; members’ attendance
at meetings is set out in the table on page 42. The key matters that were
considered by the Committee during the year were as follows:
The Committee comprises the following independent non-executive
Directors:
Name
remuneration Committee position
richard parry-Jones
Shonaid Jemmett-page
John Sheldrick
Michael Turner
Chairman (from 6 May 2010)
Member (from 1 June 2010)
Member
Member
Sir peter Williams chaired the Committee until he retired from the Board
on 6 May 2010. Sir Christopher Meyer and Helmut Mamsch were members
of the Committee until they retired from the Board on 6 May 2010 and
31 october 2010 respectively.
n
awards under the Group’s long term incentive arrangements for
2010 and the outturn of awards made in 2007;
n
payments under the short term variable remuneration scheme for
2009 and proposals for 2010 awards;
n
salary review proposals for executive Directors and senior
executives immediately below Board level;
n
a review of Directors’ shareholding requirement guidelines;
n
a review of external advisers and remuneration Committee procedures;
n
external adviser’s review of trends in remuneration practices,
benchmarking and governance;
n
a review of the Directors’ remuneration and severance policies
together with a review of the remuneration policy in the context of
risk; and
n
approval of the 2009 remuneration report.
The secretary to the Committee is Judith Felton, Company Secretary.
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:
n
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;
n
determining the fees of the Chairman; and
n
recommending to the Chief executive and monitoring the level and
structure of remuneration of the most senior executives immediately
below Board level.
Written terms of reference that outline the Committee’s authority and
responsibilities are available on our website at www.gkn.com.
Advice provided to the Committee
The Committee appointed Hewitt New Bridge Street (HNBS) in 2006 as
its independent consultants to provide advice on executive Directors’
remuneration and incentive arrangements for senior executives below
Board level. HNBS provides input to papers to be considered by the
Committee and representatives attend Committee meetings by invitation.
HNBS also provides the total shareholder return monitoring service in
connection with the Group’s long term incentive arrangements, a role
it has performed for the Group since 2004. HNBS did not provide any
other services direct to the Group during the year. aon Hewitt (the parent
company of HNBS since october 2010) provided advice to the Company
in relation to a UK pension de-risking project in 2010 and provides ongoing
administration services relating to US employee healthcare benefits.
The Committee receives input from the Chief executive when
considering the remuneration of other executive Directors and of the
Company Secretary.
GKN plc annual report and accounts 2010
Executive Directors
The Company’s remuneration strategy is closely aligned with its
business strategy, summarised on page 8, and is delivered through
the policy set out below. In particular, long term incentives measure
performance against growth in earnings and total shareholder return
relative to companies in the FTSe 350 Index; 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; in setting performance targets under both short
and long term incentives, the Committee ensures 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.
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 55% and 45% respectively. 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.
50 /
reMUNeraTIoN reporT CoNTINUeD
Summary of key elements of executive Directors’ remuneration
element of remuneration
purpose
Basic salary
n
n
n
Help recruit and retain.
recognise skills, experience
and responsibility.
reward individual
performance.
policy
n
To maintain salaries at
around median level of
the relevant employment
markets.
Basis of delivery
n
n
n
Short term variable remuneration
n
n
Drive and reward the
achievement of short term
financial targets relevant to
GKN’s long term strategic
objectives.
Deferred proportion of award,
delivered in shares, provides
a retention element.
n
n
n
annual awards based on
a one year measurement
period.
Targets, whilst stretching,
do not encourage
inappropriate business
risks to be taken.
percentage of payment
deferred and awarded
in shares.
n
n
n
n
n
Longer term incentives
n
n
Drive and reward the
achievement of longer term
objectives aligned closely
to shareholders’ interests.
retain key executives over
a three year measurement
period.
n
n
annual awards over a
three year measurement
period which deliver
shares on vesting.
Targets, whilst stretching,
do not encourage
inappropriate business
risks to be taken.
n
n
n
n
n
retirement benefits
n
n
Help recruit and retain.
ensure adequate income
in retirement.
n
To provide market
competitive arrangements.
n
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 Directors is reviewed to
ensure that payment of salaries in
accordance with the stated policy is entirely
justified.
Salary is supplemented with normal benefits
available to senior managers including car
allowance and healthcare arrangements.
Structure of plan is reviewed annually.
Stretching financial 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% (2010: 60%) of
basic salary is paid in deferred shares to be
held for two years.
Structure of plans is considered annually as
part of the award process.
Current plans target epS growth and relative
TSr performance.
remuneration Committee must also be
satisfied that the underlying financial
performance of the Group justifies the
vesting of shares.
Combined maximum potential annual award
under plans is 250% of basic salary.
a personal shareholding requirement must
be satisfied before shares can vest
(see page 54).
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.
/ 51
Basic salary
Individual 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.
Following the latest review, effective 1 July 2010, the basic annual
salaries payable in respect of executive Directors as at 31 December
2010 were:
Salary
£
Director
Sir Kevin Smith
Marcus Bryson
andrew reynolds Smith
William Seeger
Nigel Stein
747,579
420,000(a)
420,000
410,000
500,000
Increase
%
0.0%
6.1%
5.0%
2.5%
2.6%
(a) In addition, a subsistence allowance of £21,000 per annum to which Marcus
Bryson was entitled following the relocation of GKN’s operational headquarters
was consolidated into his basic salary with effect from 1 July 2010 and is reflected
in the annual salary shown above.
Sir Kevin Smith’s basic salary has remained unchanged since 2007; he
chose not to take an increase in either 2008 or 2010 and no increases
were awarded to Directors in 2009. The salary increases for William
Seeger and Nigel Stein were in line with the 2010 global budget set for
the general management population of around 2.5%. The salary increases
for Marcus Bryson and andrew reynolds Smith reflected the increased
contribution made to Group performance by each Director’s portfolio.
The weighted average increase in executive Directors’ salaries in 2010
was 2.75%.
The average basic salary of those nine executives in the most senior
executive grade below Board level whose remuneration is monitored by
the remuneration Committee was £262,590 as at 31 December 2010 (all
non-sterling amounts have been translated into sterling at the year end
exchange rate for this purpose).
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. These benefits do not form part of pensionable earnings.
Details of the benefits in kind provided to executive Directors in 2010
are set out in the first table on page 55.
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.
Performance-related short term variable remuneration scheme (STVRS)
For the 2010 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
60% of an executive Director’s salary and payments were capped at
100% of salary. Details of the targets applied and payments made in
respect of the 2010 STVrS are set out in the second table on page 55.
The maximum payment opportunity for 2011 has been increased to 110%
of salary, representing a return to pre-recessionary levels.
GKN plc annual report and accounts 2010
STVrS payments made in respect of above target performance 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. Details
of the amounts invested in respect of the STVrS payments for the 2010
financial year are set out in footnote (a) to the first table on page 55.
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
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
These 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 Committee
believes that these arrangements, aligned to the Group’s growth strategy
and reflecting performance relative to the external market, provide a
meaningful incentive package for the motivation and retention of
executive Directors which is linked directly to shareholders’ interests.
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 will depend 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 54). 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 56 and 57.
Neither the GKN Long Term Incentive plan nor the GKN executive Share
option Scheme contains provisions for the automatic release of
unvested awards 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 award in each year. The value of shares
for this purpose is calculated by reference to the average of the daily
closing prices of a GKN share during the preceding year.
Vesting levels 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.
reMUNeraTIoN reporT CoNTINUeD
52 /
2009 awards:
n
Vesting levels under the rules of the eSoS are as follows:
performance targets were set by the remuneration Committee to
take account of the impact of the severe recessionary conditions
on the Group’s earnings;
n
these performance targets were aligned to the strategic plan at the
time of award and aimed to incentivise earnings recovery following
the recession and, in the Committee’s view, were no less
challenging than those that would normally have applied;
n
in setting the performance targets the Committee took account of
market expectations of the Group’s earnings performance and
performance in 2009 to date of grant;
n
epS of 12.4p in 2011 is required for minimum vesting (30%) and
15.5p for maximum vesting (100%).
2010 awards:
n
performance targets were set by the remuneration Committee to
take account of unusually low base 2009 earnings due to
recessionary conditions;
n
these performance targets were aligned to the strategic plan at the
time of award and market expectations of GKN’s performance;
n
epS of 15.3p in 2012 is required for minimum vesting (30%) and
18.0p for maximum vesting (100%).
2011 awards:
n
performance targets to be applied will be in accordance with the
table on page 51.
The table below 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 2010:
LTIP
Year of award
Performance condition
2006
2007
2008
2009
2010
TSr
TSr
No award made
epS
epS
Percentage vested on maturity
or indicative vesting percentage
based on performance as at
31 December 2010
0% (ended on 31 December 2008)
0% (ended on 31 December 2009)
N/a
100% (performance after 24 months)
100% (performance after 12 months)
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
remuneration Committee believes the FTSe 350 Index to be appropriate
as it is a broadly based index which contains more manufacturing and
engineering companies than the FTSe 100 Index.
TSR ranking in comparator group
Vesting level
Upper quartile
Median level
Below median level
Between median and upper quartile
100%
35%(a)
0
Straight line basis
(a) reduced from 50% in 2008.
The TSr data and ranking information is obtained from HNBS to ensure
that the comparative performance is independently verified.
The table below 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 2010:
ESOS
Year of award
Performance condition
2006
2007
2008
2009
2010
TSr
TSr
No award made
TSr
TSr
Percentage vested on maturity
or indicative vesting percentage
based on performance as at
31 December 2010
0% (ended on 31 December 2008)
0% (ended on 31 December 2009)
N/a
100% (performance after 24 months)
100% (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 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 earnings caps).
Details of the supplementary allowances paid to executive Directors in
the year are set out in footnote (b) to the first table on page 55.
GKN’s defined benefit pension scheme provides executive Directors
with a pension of up to two-thirds of basic annual salary (up to their
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 7.9% of salary (8.6% from 1 January
2011) up to their earnings cap is required under the scheme. Details of
defined benefit provisions for executive Directors are set out in the first
table on page 58.
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 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.
/ 53
executive Directors with non-UK service agreements typically receive
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 is deducted from the supplementary allowance that would
otherwise have been payable to him (a maximum of 40% of salary).
Service agreements
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).
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. 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.
GKN plc annual report and accounts 2010
External appointments
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.
Nigel Stein is a non-executive director of Wolseley plc. He retains the fee
payable in respect of this appointment (currently £61,800 per annum).
Chairman and non-executive Directors
Remuneration policy
The remuneration policy for the Chairman and the other non-executive
Directors is for recompense by way of fees in line with those paid by
other UK listed companies of comparable size. Such fees may include
additional payments to the Senior Independent Director and in respect
of the chairmanship 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
£000
Chairman
Non-executive Directors
300
50
Additional fees
£000
Senior Independent Director
audit Committee Chairman
remuneration Committee Chairman
5
11
10
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.
roy Brown became Chairman in May 2004 for an initial period of three
years, this term being subsequently extended to 2010, terminable at any
time upon 12 months’ notice by either party. In 2009, by resolution of the
Board, his term was further extended until the date of the Company’s
aGM in 2012. The current policy for other 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 3 months’ notice by either party
and there are no provisions for compensation in the event of termination.
roy Brown’s letter of appointment provides for the payment of fees up to
the date of the 2012 aGM in the event that his service is terminated by the
Company other than in accordance with his letter of appointment.
reMUNeraTIoN reporT CoNTINUeD
54 /
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 58.
Historical TSR performance
TOTAL SHAREHOLDER RETuRN – %
2007-2009
Executive Directors
Until the required shareholding level is reached, an executive Director
must:
n
use 30% of that amount of the gross (i.e. before tax) payment under
the STVrS which exceeds 50% of the Director’s gross basic salary at
that time to buy GKN shares (shares deferred under the Deferred
Bonus plan (DBp) are counted towards this requirement); and
n
retain such number of shares received under the LTIp and eSoS as
represents at least 30% of the gross gain which the Director would
have realised on the exercise of such an award had the shares been
sold on the day of exercise.
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
Share-based incentive awards are satisfied by the issue of new shares,
the transfer of shares held in treasury or by shares purchased in the
market. 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 2010, the Company had used 1.4% of the share capital
available under the 5% in ten years limit and 1.9% of the share capital
available under the 10% in ten years limit.
The DBp will operate using market-purchased shares to be held in an
employee Benefit Trust.
2006-2008
2005-2007
GKN TSR
2004-2006
LTIP Comparator
Group Median TSR
2003-2005
ESOS Comparator
Group Median TSR
-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 the measurement period under the LTIp that ended on 31 December
2005 the comparator group was based on the FTSe 100 Index less the
telecommunications, media, technology and financial services sectors
and comprised 64 companies (including GKN). For the measurement
periods that ended on 31 December 2006, 2007, 2008 and 2009, they
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 – £ STERLING
140
120
Value (£)
Under a policy adopted by the remuneration Committee, executive
Directors are required to establish and maintain an investment in GKN
shares equivalent to at least 100% of their basic salary. 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
2005
2006
2007
GKN TSR
FTSE 350 Index TSR
2008
2009
2010
Source: Hewitt 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 2010.
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.
/ 55
Directors’ remuneration 2010
With the exception of the dates shown in the first table below and in the first two tables on page 56 and the section headed ‘Share interests’ on page 58,
the information set out on pages 55 to 58 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, excluding retirement benefits/allowances and long term incentives, was as follows:
executive Director
Sir Kevin Smith
Marcus Bryson
andrew reynolds Smith
William Seeger(e)
Nigel Stein
Date of service
agreement
Basic salary
£000
24.01.03
01.10.07
14.11.07
11.02.08
22.08.01
748
376
400
405
484
2,413
performancerelated
(STVrS – cash)
£000
426(a)
227(a)
234(a)
231(a)
281(a)
1,399
Car allowance
£000
other benefits
£000
14
15
12
12
12
6
16(c)
5
15
4
65
46
Total 2010
£000
1,194(b)
634(b)
651(b)
663(b)
781(b)
3,923(b)
Total 2009
£000
968(d)
669
516(d)
593
624(d)
3,370
(a) of the 2010 STVrS payments agreed by the remuneration Committee in respect of the executive Directors, 57% is paid in cash and included in the table above. 2010 STVrS
payments which will be deferred into shares under the DBp are as follows: Sir Kevin Smith £285,426; Marcus Bryson £115,593; andrew reynolds Smith £164,000; William Seeger
£154,629; Nigel Stein £187,625. No amounts were deferred in 2009.
(b) The total remuneration shown above excludes the following supplementary 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: Sir Kevin Smith £299,031 (2009: £299,031); Marcus Bryson £50,460 (2009: £44,160);
andrew reynolds Smith £115,760 (2009: £112,960); William Seeger £100,260 (2009: £107,225); Nigel Stein £149,260 (2009: £147,960). The actual pension cost for William Seeger
was £162,000 (2009: £160,000); this includes GKN’s contribution to Mr Seeger’s US qualified and non-qualified defined contribution pension arrangement (equivalent to 11% of
Mr Seeger’s gross earnings).
(c) a total of £10,557 of this amount relates to a subsistence allowance to which Mr Bryson was entitled following the relocation of GKN’s operational headquarters and which was
consolidated into his basic salary with effect from 1 July 2010. The payment was subject to normal tax and national insurance deductions.
(d) Due to prevailing conditions in the Group’s markets and their impact on Group profitability, Sir Kevin Smith and Nigel Stein waived 20% of their basic salary entitlement and
andrew reynolds Smith waived 15% of his basic salary entitlement for the period 1 January 2009 to 31 august 2009.
(e) 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 2010. as a result of the complicated interaction of the UK and US tax regimes, an additional payment of £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 £166,684 (2009: £60,858); these
amounts are not included in the total remuneration shown above.
The 2010 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 actual total payments to executive Directors under the 2010 STVrS were as follows:
element
profit
Margin
Cash flow
Group net debt
GKN plc annual report and accounts 2010
Target %
Maximum %
actual %
25
20
10
5
50
30
10
10
41.6 to 50.0
24.5 to 27.0
10.0
10.0
60
100
86.1 to 97.0
reMUNeraTIoN reporT CoNTINUeD
56 /
The remuneration of the non-executive Directors who served during the year was as follows:
Non-executive Director
Date of current letter
of appointment
roy Brown
Shonaid Jemmett-page(c)
richard parry-Jones
John Sheldrick
Michael Turner
Former non-executive Directors
Helmut Mamsch
Sir Christopher Meyer
Sir peter Williams
expiry of
current term(a)
2010
£000
2009
£000
28.04.09
28.04.10
03.02.11
05.01.11
31.07.09
2012 aGM
31.05.13
28.02.14
19.12.13
01.09.12
300
29
57
61
53
280(b)
–
50
61
17
Date of leaving
the Board
expiry of
current term
2010
£000
2009
£000
31.10.10
06.05.10
06.05.10
N/a
N/a
N/a
42
17
23
50
50
65
582
573
(a) In accordance with the Company’s articles of association, Directors are subject to re-election at the aGM following their appointment and subsequently at intervals of no more
than three years. In accordance with provisions of the UK Corporate Governance Code published in June 2010, all Directors will offer themselves for annual re-election from the
2011 aGM.
(b) In light of prevailing conditions in the Group’s markets and their impact on Group profitability, roy Brown waived 10% of his fee from 1 January 2009 to 31 august 2009.
(c) appointed 1 June 2010.
Directors’ aggregate emoluments for 2010 amounted to £6.4 million (2009: £4.7 million).
LTIP
awards over GKN shares under the LTIp held by the executive Directors who served during the year, together with any movements in those awards in
the year, are shown below:
Sir Kevin Smith
Marcus Bryson
andrew reynolds Smith
William Seeger
Nigel Stein
awards lapsed
during year
Awards held
31 December 2010
–
–
678,383
346,398
–
–
–
400,000
678,383
746,398
678,383
346,398
1,078,383
30,400
200,647
–
–
–
381,125
30,400
–
–
–
200,647
381,125
231,047
381,125
30,400
581,772
37,794
214,024
–
–
–
381,125
37,794
–
–
–
214,024
381,125
251,818
381,125
37,794
595,149
214,024
–
–
372,050
–
–
214,024
372,050
214,024
372,050
–
586,074
206,447
260,841
–
–
–
453,720
206,447
–
–
–
260,841
453,720
467,288
453,720
206,447
714,561
Date of grant
awards held
1 January 2010
02.04.07
12.08.09
11.08.10
346,398
400,000
–
02.04.07
12.08.09
11.08.10
02.04.07
12.08.09
11.08.10
12.08.09
11.08.10
02.04.07
12.08.09
11.08.10
awards made
during year(a)
(a) The closing mid-market price of a GKN share on the date of award was 138.4p. The measurement period relating to these awards ends on 31 December 2012 and the performance
condition is described on page 51.
(b) During 2010, no awards vested and no shares were released to Directors.
/ 57
ESOS
options over GKN shares under the eSoS held by the executive Directors who served during the year, together with any movements in those options
in the year, are shown below:
Sir Kevin Smith
Marcus Bryson
andrew
reynolds Smith
William Seeger
Nigel Stein
Date of grant
Shares
under option
1 January
2010
options
granted
during year
options
lapsed
during year
options
exercised
during year(a)
Shares
under option
31 December
2010
15.03.02
19.03.03
02.04.07
12.08.09
07.05.10
147,196
940,481
323,605
1,154,509
–
–
–
–
–
666,489
–
–
323,605
–
–
–
150,000(d)
–
–
–
147,196
790,481
–
1,154,509
666,489
2,565,791
666,489
323,605
150,000
2,758,675
22,638
45,489
579,124
–
–
–
–
334,323
–
–
–
–
–
45,489(e)
–
–
22,638
–
579,124
334,323
647,251
334,323
–
45,489
936,085
33,957
87,095
617,732
–
–
–
–
356,612
–
–
–
–
–
–
–
–
33,957
87,095
617,732
356,612
738,784
356,612
–
–
1,095,396
617,732
–
–
356,612
–
–
–
–
617,732
356,612
617,732
356,612
–
–
974,344
129,878
359,834
192,864
752,861
–
–
–
–
–
434,621
–
–
192,864
–
–
–
–
–
–
–
129,878
359,834
–
752,861
434,621
1,435,437
434,621
192,864
–
1,677,194
15.03.02
19.03.03
12.08.09
07.05.10
15.03.02
19.03.03
12.08.09
07.05.10
12.08.09
07.05.10
15.03.02
19.03.03
02.04.07
12.08.09
07.05.10
exercise
price(b)
exercisable
from(c)
exercisable
to(c)
207.87p
110.04p
256.66p
110.08p
134.60p
15.03.05
19.03.06
02.04.10
12.08.12
07.05.13
14.03.12
18.03.13
01.04.17
11.08.19
06.05.20
207.87p
110.04p
110.08p
134.60p
15.03.05
19.03.06
12.08.12
07.05.13
14.03.12
18.03.13
11.08.19
06.05.20
207.87p
110.04p
110.08p
134.60p
15.03.05
19.03.06
12.08.12
07.05.13
14.03.12
18.03.13
11.08.19
06.05.20
110.08p
134.60p
12.08.12
07.05.13
11.08.19
06.05.20
207.87p
110.04p
256.66p
110.08p
134.60p
15.03.05
19.03.06
02.04.10
12.08.12
07.05.13
14.03.12
18.03.13
01.04.17
11.08.19
06.05.20
(a) The aggregate gains made by Directors on the exercise of options was £55,273 (2009: £nil).
(b) adjusted where appropriate to take account of the dilutive effect of the 2009 rights issue.
(c) 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 52.
(d) The options were exercised on 30 March 2010, on which date the closing mid-market price of a GKN share was 137.5p. all shares were retained on exercise.
(e) The options were exercised on 1 april 2010, on which date the closing mid-market price of a GKN share was 141p. all shares were retained on exercise.
(f ) The closing mid-market price of a GKN share on 31 December 2010 was 222.2p and the price range during the year was 102p to 226p.
awards held by the executive Directors under the GKN profit Growth Incentive plan (pGIp) as at 1 January 2010 were as follows: Sir Kevin Smith – nil;
Marcus Bryson – 30,199; andrew reynolds Smith – 37,543; William Seeger – 10,790; Nigel Stein – nil. Directors are prohibited from participating in
the pGIp; awards were granted prior to the relevant individual’s appointment as a Director of the Company.
Under the pGIp, the shares which are the subject of the awards would be capable of release dependent on the extent to which profit growth targets were
satisfied by the Group over a three year measurement period which commenced on 1 January 2007 (the Group’s reported profit for 2006 formed the
baseline for this performance measure) and the satisfaction of a personal shareholding requirement. The above pGIp awards lapsed during the year.
GKN plc annual report and accounts 2010
reMUNeraTIoN reporT CoNTINUeD
58 /
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
2010(a)
£000
Marcus Bryson
andrew reynolds Smith
Nigel Stein
158
29
63
accrued annual
pension at
31 December
2009(a)
£000
Transfer value
of accrued
annual pension
at 31 December
2010
£000
Transfer value
of accrued
annual pension
at 31 December
2009
£000
Change in
transfer value
in 2010
£000
3,287
371
1,233
2,911
301
1,085
376
70
148
149
25
60
Transfer value at
31 December 2010
Increase in
of increase in
annual pension
annual pension
in 2010(b)
in 2010(b)
£000
£000
21
25
17
1
2
1
(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) Increase over the year in accrued pension in excess of inflation to which the Director would have been entitled on leaving service.
(c) 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. The transfer values have been calculated in
accordance with the method and assumptions used to calculate transfer values from the GKN Group pension Scheme. These assumptions were adopted by the Trustees with
effect from april 2008 in order to meet the requirements of new transfer value legislation which came into effect on 1 october 2008.
Total amounts paid to Directors as supplementary cash allowances and/or as payments to defined contribution retirement plans are set out in
footnote (b) to the first table on page 55. 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 2010
31 December
2010
1 January
2010
Executive Directors
Sir Kevin Smith
Marcus Bryson
andrew reynolds Smith
William Seeger
Nigel Stein
1,460,928
207,214
283,123
100,000
510,398
1,204,401
161,725
283,123
100,000
460,398
80,780
80,780
7,854
20,000
20,000
160,000
1,989(a)
20,000
20,000
100,000
Chairman
roy Brown
Non-executive Directors
Shonaid Jemmett-page
richard parry-Jones
John Sheldrick
Michael Turner
(a) on appointment to the Board on 1 June 2010.
There were no changes in the Directors’ interests in shares or options between 31 December 2010 and 28 February 2011*.
on behalf of the Board
Richard Parry-Jones
Chairman of the remuneration Committee
28 February 2011
*
as at 1 March 2011, there were no changes to the interests of the Directors.
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 Combined Code and, where applicable, has already adopted principles from the UK Corporate Governance Code
which will come into effect for financial years beginning on or after 29 June 2010. 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 109 and those aspects
of the report which have been subject to audit are clearly marked.
/ 59
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, 5 May 2011 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.
Dividend
The Directors recommend a final dividend of 3.5p per ordinary share
in respect of the year ended 31 December 2010, payable to shareholders
on the register at the close of business on 26 april 2011. This, together
with the interim dividend of 1.5p paid in September 2010, brings the
total dividend for the year to 5.0p.
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.
Full details of the rights and obligations attaching to the Company’s
shares are contained in the articles of association; these are available
on our website at www.gkn.com.
Issued share capital
at 31 December 2010, the issued share capital of the Company consisted
of 1,590,529,859 ordinary shares of 10p, of which 37,565,178 shares
(2.36%) were held in treasury. a total of 636,687 ordinary shares were
issued during the year in connection with the exercise of options under the
Company’s share option schemes, of which 634,401 were treasury shares.
To simplify the share capital structure and to enable an appropriate
reserve to be created, the Company purchased and subsequently
cancelled 705,519,691 deferred shares of 40p each (representing 64%
of the Company’s issued share capital) for an aggregate consideration
of 1p. It also cancelled the remaining 38,384,253 deferred shares which
had been held in treasury.
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.
The ordinary shares are listed on the London Stock exchange. In addition,
GKN has a sponsored Level 1 american Depository 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.
Substantial shareholders
as at 28 February 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
% of issued capital held
Standard Life Investments Ltd
Direct
Indirect
7.62%
5.39%
Total
13.01%
Capital Group International Inc
Indirect
6.98%
ameriprise Financial Inc
Direct
Indirect
Contracts for difference
0.15%
4.98%
0.02%
Total
5.15%
aXa S.a.
Indirect
5.12%
Legal & General Group plc
Direct
3.89%
Ignis Investment Services Ltd
Indirect
Contracts for difference
2.69%
0.32%
Total
3.01%
*
see footnote on page 61.
GKN plc annual report and accounts 2010
oTHer STaTUTorY INForMaTIoN CoNTINUeD
60 /
Directors
The Directors who served during the financial year were as follows:
Name
Position
roy Brown
Sir Kevin Smith
Marcus Bryson
Shonaid Jemmett-page
Helmut Mamsch
Sir Christopher Meyer
richard parry-Jones
andrew reynolds Smith
William Seeger
John Sheldrick
Nigel Stein
Michael Turner
Chairman
Chief executive
Divisional Chief executive
Independent non-executive Director
Independent non-executive Director
Independent non-executive Director
Independent non-executive Director
Divisional Chief executive
Finance Director
Independent non-executive Director
Divisional Chief executive
Senior Independent Director
Sir peter Williams
Senior Independent Director
Membership of the Board and biographical details of the Directors in
office at the date of this report are shown on pages 38 and 39. Further
details relating to Board and Committee composition are disclosed in
the corporate governance statement on pages 40 to 45.
Following her appointment to the Board in June 2010 and in accordance
with the Company’s articles of association, Shonaid Jemmett-page will
retire and offer herself for election at the 2011 aGM. all other Directors
will retire and offer themselves for re-election in accordance with the
UK Corporate Governance Code published in June 2010.
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 48 to 58.
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.
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 buy back of shares.
at the 2010 aGM the Company was authorised to purchase up to
155,232,799 of its ordinary shares. No shares were purchased under this
authority in 2010. a special resolution to renew the authority will be
proposed at the 2011 aGM.
Service in the year ended 31 December 2010
Served throughout the year
Served throughout the year
Served throughout the year
appointed 1 June 2010
retired 31 october 2010
retired 6 May 2010
Served throughout the year
Served throughout the year
Served throughout the year
Served throughout the year
Served throughout the year
Served throughout the year as non-executive Director
and appointed Senior Independent Director on 6 May 2010
retired 6 May 2010
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.
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. at the 2010 aGM shareholders approved
the adoption of new articles of association which reflected those
provisions of the Companies act 2006 which came into effect on
1 october 2009 and the implementation of the Shareholders’ rights
Directive in the UK.
/ 61
Change of control
Auditors & disclosure of information
The Company’s subsidiary, GKN Holdings plc, entered into separate
agreements in 2008 with the following banks each in relation to a
bilateral banking facility in an amount of £20 million: Barclays Bank plc;
Calyon; Commerzbank aktiengesellschaft; Citibank N.a.; Deutsche Bank
a.G.; HSBC Bank plc; ING Bank N.V.; The royal Bank of Scotland plc; and
Wachovia Bank National association. GKN Holdings plc also entered
into a £55 million bilateral banking facility with Bank of China Ltd and
a €50 million bilateral facility with Landesbank Baden-Württemberg in
2008. 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.
resolutions to reappoint pricewaterhouseCoopers LLp as auditors
of the Company and to authorise the Directors to determine their
remuneration will be proposed at the 2011 aGM.
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 53.
Payments to suppliers
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.
GKN plc, as a holding company, did not have any amounts owing to
trade creditors at 31 December 2010.
Donations
In 2010, charitable donations made by Group companies around the
world totalled £537,000, of which £77,000 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 2010. The Trust also provided funding 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 more than 220 organisations in the
US in 2010 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 2010.
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.
GKN plc annual report and accounts 2010
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.
This Directors’ report comprising the inside front cover and pages
1 to 62 has been approved by the Board and is signed on its behalf by
Judith Felton
Company Secretary
28 February 2011
as at 1 March 2011, the Company had not been advised of any changes
or additions to the notifiable interests set out on page 59.
62 /
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.
The Directors as at the date of the annual report, whose names and
functions are set out on pages 38 and 39, 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).
n
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
n
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 Group financial statements are required to
present fairly the financial position and performance of the Group. The
Company financial statements are required by law to give a true and fair
view of the affairs of the Company and of the profit or loss of the
Company for that period.
approved by the Board of GKN plc and signed on its behalf by
In preparing each of the Group and Company financial statements the
Directors are required to:
n
select appropriate accounting policies and apply them consistently;
n
make judgements and estimates that are reasonable and prudent;
n
for the Group financial statements, state whether they have been
prepared in accordance with IFrSs as adopted by the eU;
n
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
n
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 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 have a general responsibility for
taking such steps as are reasonably open to them to safeguard the
assets of the Company and the Group and to prevent and detect 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.
Roy Brown
Chairman
28 February 2011
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 2010 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 on
page 62, 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.
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:
n
certain disclosures of Directors’ remuneration specified by law are
not made; or
n
we have not received all the information and explanations we
require for our audit.
Under the Listing rules we are required to review:
n
the Directors’ statement, on page 31, in relation to going concern;
and
n
the part of the corporate governance statement relating to the
Company’s compliance with the nine provisions of the June 2008
Combined Code specified for our review; and
n
certain elements of the report to shareholders by the Board on
Directors’ remuneration.
Other matter
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 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.
We have reported separately on the Company financial statements
of GKN plc for the year ended 31 December 2010 and on the information
in the Directors’ remuneration report that is described as having
been audited.
Opinion on financial statements
In our opinion the Group financial statements:
n
give a true and fair view of the state of the Group’s affairs as at
31 December 2010 and of its profit and cash flows for the year
then ended;
n
have been properly prepared in accordance with IFrSs as adopted
by the european Union; and
n
have been prepared in accordance with the requirements of the
Companies act 2006 and article 4 of the laS regulation.
Roy Hodson
(Senior Statutory auditor)
for and on behalf of pricewaterhouseCoopers LLp
Chartered accountants and Statutory auditors
Birmingham
28 February 2011
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.
GKN plc annual report and accounts 2010
/ 63
64 /
CoNSoLIDaTeD INCoMe STaTeMeNT
For THe Year eNDeD 31 DeCeMBer 2010
2010
Sales
Notes
£m
2009
restated
£m
2
5,084
4,223
367
(39)
12
(19)
68
(4)
133
(144)
76
(24)
–
(2)
4
385
39
14
35
21
(46)
6
(35)
(67)
3
(50)
(75)
(114)
345
(54)
(20)
15
325
(39)
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/(loss) before taxation
Taxation
6
Profit/(loss) from continuing operations
profit after taxation from discontinued operations
7
Profit/(loss) after taxation for the year
325
5
15
profit attributable to other non-controlling interests
profit attributable to the pension partnership
profit attributable to non-controlling interests
profit/(loss) attributable to equity shareholders
Earnings per share – p
Continuing operations – basic
Continuing operations – diluted
–
5
(34)
2
–
20
305
2
(36)
325
(34)
19.6
19.6
(3.2)
(3.2)
8
/ 65
CoNSoLIDaTeD STaTeMeNT oF CoMpreHeNSIVe INCoMe
For THe Year eNDeD 31 DeCeMBer 2010
Notes
profit/(loss) 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
2010
£m
325
4
14
2009
£m
(34)
42
(1)
(154)
8
9
–
(12)
(2)
1
–
2
5
21
(24)
–
58
(190)
–
17
85
(326)
Total comprehensive income/(expense) for the year
410
(360)
Total comprehensive income/(expense) for the year attributable to:
equity shareholders
387
(362)
26
14
6
other non-controlling interests
pension partnership
8
15
2
–
Non-controlling interests
23
2
410
GKN plc annual report and accounts 2010
(360)
66 /
CoNSoLIDaTeD STaTeMeNT oF CHaNGeS IN eqUITY
For THe Year eNDeD 31 DeCeMBer 2010
Other reserves
Notes
At 1 January 2010
Total comprehensive
income/(expense) for the year
Investment in pension
partnership by
UK pension scheme
26
purchase of non-controlling
interests
Share-based payments
11
Transfers
Dividends paid to equity
shareholders
9
Dividends paid to
non-controlling interests
Capital
Share redemption
capital
reserve
£m
£m
Share
premium
account
£m
Retained
earnings
£m
Exchange
reserve
£m
Hedging
reserve
£m
Shareholders’
equity
£m
Pension
partnership
£m
Other
£m
Total
equity
£m
(95)
948
–
24
972
Other
reserves
£m
457
–
9
431
343
–
–
–
341
45
1
–
387
15
8
410
–
–
–
–
–
–
–
–
331
–
331
–
–
298
–
–
–
(2)
3
38
–
–
–
–
–
–
–
–
(38)
(2)
3
–
–
–
–
(3)
–
–
(5)
3
–
–
–
–
(23)
–
–
–
(23)
–
–
(23)
–
–
–
–
–
–
–
–
–
(1)
At 31 December 2010
159
298
9
788
388
(196)
(133)
1,313
346
28
1,687
at 1 January 2009
Total comprehensive
income/(expense) for the year
rights issue
rights issue costs charged
to share premium
Share-based payments
Transfers
Dividends paid to
non-controlling interests
372
–
29
290
499
(204)
(81)
905
–
23
928
–
85
–
–
–
–
(213)
–
(156)
–
–
–
–
–
–
–
(20)
–
–
–
2
352
–
–
–
457
–
9
at 31 December 2009
11
–
–
(298)
(197)
Non-controlling interests
(1)
7
–
–
338
(362)
423
–
–
2
–
(360)
423
–
–
–
–
–
–
–
–
(352)
(20)
2
–
–
–
–
–
–
–
(20)
2
–
–
–
–
–
–
(1)
431
343
948
–
(197)
–
(95)
24
(1)
972
other reserves include accumulated reserves where distribution has been restricted due to legal or fiscal requirements and accumulated adjustments
in respect of piecemeal acquisitions.
/ 67
CoNSoLIDaTeD BaLaNCe SHeeT
aT 31 DeCeMBer 2010
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
2010
£m
2009
£m
12
12
13
14
15
21
6
350
200
1,651
143
23
19
171
338
187
1,636
112
24
16
71
2,557
2,384
637
762
10
13
4
438
563
644
13
6
20
316
1,864
1,562
4,421
3,946
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
Total liabilities
Net assets
(61)
(13)
(1,065)
(100)
(57)
(72)
(14)
(873)
(79)
(84)
(1,296)
(1,122)
(532)
(61)
(63)
(108)
(74)
(600)
(564)
(51)
(57)
(97)
(87)
(996)
(1,438)
(1,852)
(2,734)
(2,974)
1,687
972
159
298
9
788
59
457
–
9
431
51
Non-controlling interests
1,313
374
948
24
Total equity
1,687
972
Shareholders’ equity
Share capital
Capital redemption reserve
Share premium account
retained earnings
other reserves
23
23
The financial statements on pages 64 to 108 were approved by the Board of Directors and authorised for issue on 28 February 2011. They were signed
on its behalf by:
Sir Kevin Smith, William Seeger – Directors
GKN plc annual report and accounts 2010
68 /
CoNSoLIDaTeD CaSH FLoW STaTeMeNT
For THe Year eNDeD 31 DeCeMBer 2010
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)
purchase of non-controlling interests
proceeds from sale of businesses
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
Net proceeds from rights issue
Net proceeds from other ordinary share capital transactions
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
4e
14
24
26
23
9
2009
£m
420
(331)
7
(53)
(33)
23
288
–
7
(68)
(15)
15
33
227
(162)
3
(31)
10
5
(6)
(5)
5
1
(10)
(3)
(140)
1
(14)
28
35
(99)
–
–
1
(2)
(11)
(193)
(201)
331
–
–
38
(26)
(48)
(1)
(4)
20
(23)
(1)
–
403
–
148
(131)
(221)
(1)
(20)
–
–
(1)
286
177
7
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
2010
£m
25
(9)
133
288
194
94
421
288
/ 69
NoTeS To THe FINaNCIaL STaTeMeNTS
For THe Year eNDeD 31 DeCeMBer 2010
1
Accounting policies and presentation
The Group’s key 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 2010.
No standards or interpretations have been adopted before the required implementation date.
During the year the decision was taken to exit the axles business of the former offHighway segment. The trading losses of this business have been
re-analysed from Trading profit to profits and losses on sale or closure of businesses which is included within Gains and losses on changes in
Group structure. There was no impact on operating profit, eps or the balance sheet arising from this restatement. The impact of this restatement
is as follows:
as previously
reported
£m
Trading profit
Gains and losses on changes in Group structure
operating profit
adjusted performance measures
Management profit before tax
Management profit after tax
Management basic eps – pence
restated
£m
129
2
39
133
(2)
39
83
72
5.5
87
75
5.7
Standards, revisions and amendments to standards and interpretations
as outlined in the audited statements for the year ended 31 December 2009, IFrS 3 (revised) ‘Business combinations’, accompanied by IaS 27
(revised) ‘Consolidated and separate financial statements’ were identified as likely to impact the reporting of the Group’s results, assets and
liabilities. These standards were adopted on 1 January 2010. During the year there has been one business combination and a purchase of a noncontrolling interest. as a consequence of the revised standards a £1 million gain on revaluation of the Group’s existing shareholding has been
recorded in Gains and losses on changes in Group structure arising from the business combination with a corresponding increase in goodwill and
a £2 million charge to retained earnings arising from the purchase of a non-controlling interest has been recognised which would have previously
been recognised as goodwill or non-operating intangibles assets.
In addition, following the amendment to IaS 21 ‘The effects of changes in foreign exchange rates’ reclassification adjustments regarding intragroup funding are no longer required with effect from 1 January 2010.
The Group also adopted the following relevant amendments to standards with no material impact on its results, assets and liabilities;
annual improvements 2009
amendment to IaS 39 ‘Financial instruments: recognition and measurement’, on eligible hedged items
amendment to IFrS 2 ‘Share-based payment’, group cash-settled share-based payment transactions
IFrIC 12 ‘Service concession arrangements’
IFrIC 15 ‘arrangements for construction of real estates’
IFrIC 16 ‘Hedges of a net investment in a foreign operation’
IFrIC 17 ‘Distributions of non cash assets to owners’
IFrIC 18 ‘Transfer of assets from customers’.
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.
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. except as noted below, 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.
In a single case the Company indirectly owned 100% of the voting share capital of an entity but was precluded from exercising either control or
joint control by a contractual agreement with the United States Department of Defense. In accordance with IaS 27 this entity was excluded from
the consolidation and treated as an investment. During 2010 this contractual agreement changed such that the Group obtained control of the
entity. Further details are contained in note 24.
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.
GKN plc annual report and accounts 2010
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
70 /
1
Accounting policies and presentation (continued)
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.
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:
n
charges relating to the Group wide restructuring programme announced in 2008;
n
the impact of the annual goodwill impairment review;
n
asset impairment and restructuring charges which arise from events which are significant to any reportable segment;
n
amortisation of the fair value of non-operating intangible assets arising on business combinations;
n
changes in the fair value of derivative financial instruments and material currency translation movements arising on intra-group funding;
n
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;
n
profits or losses arising from business combinations including fair value adjustments to pre-combination shareholdings, changes in estimates
of deferred and contingent consolidation made after the provisional fair value period and material expenses incurred on a business
combination; and
n
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.
/ 71
1
Accounting policies and presentation (continued)
Revenue recognition (continued)
Other income
Interest income is recognised using the effective interest rate method. revenue from dividends 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 a valuation at 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.
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 attributable to leasehold properties are written off to profit by 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.
GKN plc annual report and accounts 2010
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
72 /
1
Accounting policies and presentation (continued)
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.
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.
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. Impairments are charged to the income statement. 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 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 are 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
30-50
Life of agreement
Length of backlog
2-15
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.
/ 73
1
Accounting policies and presentation (continued)
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 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.
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 postemployment 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 the IFrS 9 ‘Financial instruments’ is being assessed.
The following is a summary of revisions and amendments to standards and interpretations which the Group does not currently believe will have
a material impact on the Group’s results, assets or liabilities.
annual improvements 2010
IaS 12 (amendment) regarding deferred tax recognition on investment properties
IaS 24 (revised) regarding government related entities
IaS 32 regarding presentation on classification of rights issues
IFrS 7 (amendment) regarding derecognition of financial assets
IFrIC 14 (amendment) regarding prepayments of a minimum funding requirement
IFrIC 19 extinguishing financial liabilities with equity instruments
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 non-operating intangible assets – 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.
GKN plc annual report and accounts 2010
74 /
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.
on 16 June 2010 the Group announced the formation of GKN Land Systems. Land Systems brought together the operations of GKN offHighway
(excluding axles), GKN autoStructures and GKN Industrial and Distribution Services. Land Systems builds on existing strengths in the agricultural,
mining and construction equipment markets with a strategic focus on developing these and new markets in defence vehicles, mass transit and
renewable energy. autoStructures was included in the former other automotive segment and IDS was included in the Driveline segment. The
remaining businesses in the former other automotive reportable segment, emitec and Cylinder Liners, are no longer reportable and are included
as reconciling items as other businesses. Comparative information has been restated. Driveline, aerospace and Land Systems are operating and
reportable segments. powder Metallurgy comprises GKN Sinter Metals and Hoeganaes Corporation.
(a) Sales
Automotive
2010
Subsidiaries
Joint ventures
Driveline
£m
Powder
Metallurgy
£m
Aerospace
£m
Land
Systems
£m
2,180
253
759
–
1,451
–
664
35
2,433
759
1,451
699
Total
£m
5,342
87
other businesses
Management sales
Businesses sold and closed – axles
Less: Joint venture sales
5,429
10
(355)
Income statement – sales
5,084
2009 – restated
Subsidiaries
Joint ventures
other businesses
1,628
175
512
–
1,486
–
569
24
1,803
512
1,486
593
4,394
60
Management sales
Businesses sold and closed – axles
Less: Joint venture sales
4,454
14
(245)
Income statement – sales
4,223
/ 75
2 Segmental analysis (continued)
(b) Trading profit
Automotive
Driveline
£m
Powder
Metallurgy
£m
Aerospace
£m
Land
Systems
£m
2010
Trading profit before depreciation, impairment and amortisation
Depreciation and impairment of property, plant and equipment
amortisation of operating intangible assets
238
(107)
(3)
84
(30)
–
209
(39)
(6)
49
(15)
(1)
Trading profit – subsidiaries
Trading profit/(loss) – joint ventures
128
41
54
–
164
(2)
33
4
169
54
162
37
Total
£m
422
other businesses
Corporate and unallocated costs
3
(14)
Management trading profit
Less: Joint venture trading profit
411
(44)
Income statement – trading profit
367
2009 – restated
Trading profit before depreciation, impairment and amortisation
Depreciation and impairment of property, plant and equipment
amortisation of operating intangible assets
Trading profit/(loss) – subsidiaries
Trading profit/(loss) – joint ventures
95
(107)
(3)
24
(30)
(1)
217
(41)
(6)
12
(15)
(1)
(15)
25
(7)
–
170
(1)
(4)
1
10
(7)
169
(3)
169
other businesses
Corporate and unallocated costs
(1)
(12)
Management trading profit
Less: Joint venture trading profit
156
(23)
Income statement – trading profit
133
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.
Credits included within trading profit in respect of changes to retiree benefit arrangements, net of expenses, arose as follows: Driveline £6 million
and Corporate £2 million (2009: Driveline £3 million; powder Metallurgy £1 million; aerospace £5 million and Corporate £1 million). as a result
of changed customer contract requirements, 2009 trading profit included a £3 million credit from the release of unutilised provisions
established on acquisition in an aerospace business.
restructuring and impairment disclosures, including segmental analysis, are included in note 4b.
GKN plc annual report and accounts 2010
76 /
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
2010
property, plant and equipment and operating
intangible fixed assets
Working capital
878
72
307
89
421
67
110
58
1,716
286
Net operating assets
Goodwill and non-operating intangible fixed assets
950
81
396
29
488
296
168
54
1,031
425
784
222
2009 – restated
property, plant and equipment and operating intangible fixed assets
Working capital
870
53
313
65
374
80
120
58
Net operating assets
Goodwill and non-operating intangible fixed assets
923
78
378
28
454
294
178
56
1,001
406
748
234
Net investment
Net investment
1,677
256
(d) Fixed asset additions, investments in joint ventures and other non-cash items
Automotive
Driveline
£m
Powder
Metallurgy
£m
Aerospace
£m
Land
Systems
£m
Other
Businesses
£m
Corporate
£m
Total
£m
88
4
107
26
–
–
60
26
–
8
1
12
1
–
24
–
–
–
183
31
143
1
–
1
–
–
1
3
61
1
86
9
–
–
45
14
–
7
–
10
–
–
16
–
–
–
122
15
112
1
–
–
–
–
1
2
united
Kingdom
£m
uSA
£m
Germany
£m
Other
countries
£m
Total
non-uK
£m
Total
£m
819
1,571
858
2,181
4,610
5,429
355
695
354
940
1,989
2,344
794
1,325
729
1,606
3,660
4,454
318
677
330
948
1,955
2,273
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
2009 – restated
Fixed asset additions and
capitalised borrowing costs
– property, plant and equipment
– intangible assets
Investments in joint ventures
other non-cash items –
share-based payments
(e) Country analysis
2010
Management sales by origin
Goodwill, other intangible assets, property,
plant and equipment and investments
in joint ventures
2009
Management sales by origin – restated
Goodwill, other intangible assets, property,
plant and equipment and investments
in joint ventures
/ 77
2 Segmental analysis (continued)
(f) Other sales information
Subsidiary segmental sales gross of inter segment sales are; Driveline £2,234 million (2009 restated: £1,669 million), powder Metallurgy
£765 million (2009: £515 million), aerospace £1,451 million (2009: £1,486 million) and Land Systems £665 million (2009 restated: £571 million).
In 2010 and 2009, no customer accounted for 10% or more of subsidiary sales or management sales.
Management sales by product are: Driveline – driveshafts 76% (2009 restated: 79%), propshafts 7% (2009 restated: 7%), torque
management products 15% (2009 restated: 12%) and other goods 2% (2009 restated: 2%). powder Metallurgy – sintered components 82%
(2009: 85%) and metal powders 18% (2009: 15%). aerospace – aerostructures 64% (2009: 65%), engine components and sub-systems 28%
(2009: 27%) and special products 8% (2009: 8%). Land Systems – power management devices 27% (2009 restated: 28%), wheels and
structures 36% (2009 restated: 32%) and aftermarket 37% (2009 restated: 40%).
(g) Reconciliation of segmental property, plant and equipment and operating intangible fixed assets to the balance sheet
2010
£m
2009
restated
£m
Segmental analysis – property, plant and equipment and operating intangible fixed assets
Segmental analysis – goodwill and non-operating intangible fixed assets
Goodwill
other businesses
Businesses sold and closed – axles
Corporate assets
1,716
460
(350)
19
–
6
1,677
456
(338)
18
5
5
Balance sheet – property, plant and equipment and other intangible assets
1,851
1,823
2010
2009
restated
£m
(h) Reconciliation of segmental working capital to the balance sheet
£m
Segmental analysis – working capital
other businesses
Businesses sold and closed – axles
Corporate items
Short term joint venture financing facilities
accrued net financing costs
restructuring provisions
Deferred and contingent consideration
Government refundable advances
Investment and loan to GKN aerospace Services Structures Corp.
Balance sheet – inventories, trade and other receivables, trade and other payables and provisions
GKN plc annual report and accounts 2010
286
6
–
(47)
–
(19)
(41)
(27)
(40)
–
256
5
2
(44)
1
(24)
(59)
(31)
(28)
12
118
90
78 /
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
3 Adjusted performance measures
(a) Reconciliation of reported and management performance measures
2010
2009 – restated
Exceptional
and nontrading items
£m
As
reported
£m
Joint
ventures
£m
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
367
44
(39)
Operating profit
exceptional
and nontrading items
£m
Management
basis
£m
as
reported
£m
Joint
ventures
£m
5,429
4,223
245
(14)
–
411
133
23
–
156
–
39
–
(144)
–
144
–
12
–
(12)
–
76
–
(76)
–
(19)
68
–
–
19
(68)
–
–
(24)
–
–
–
24
–
–
–
(4)
–
4
–
(2)
–
2
–
385
44
(18)
39
23
94
156
Share of post-tax earnings
of joint ventures
35
(44)
Interest payable
Interest receivable
other net financing charges
(46)
6
(35)
Net financing costs
Sales
411
Management
basis
£m
4,454
1
(8)
21
(23)
(3)
(5)
–
–
–
–
–
35
(46)
6
–
(67)
3
(50)
–
–
–
–
–
50
(67)
3
–
(75)
–
35
(40)
(114)
–
50
(64)
Profit/(loss) before taxation
345
–
18
363
(54)
–
141
87
Taxation
(20)
–
(17)
(37)
15
–
(27)
(12)
325
–
1
(39)
–
114
75
(20)
–
15
(2)
–
–
earnings
305
–
16
321
(41)
–
114
73
earnings per share – p
19.6
–
1.1
20.7
(3.2)
–
8.9
5.7
Profit/(loss from continuing
operations
profit attributable to
non-controlling interests
326
(5)
(2)
(b) Summary by segment
2010
Sales
£m
Driveline
powder Metallurgy
aerospace
Land Systems
other businesses (Cylinder Liners and emitec)
Corporate and unallocated costs
2009 – restated
Trading
profit
£m
Margin
Sales
£m
Trading
profit
£m
2,433
759
1,451
699
87
–
169
54
162
37
3
(14)
6.9%
7.1%
11.2%
5.3%
1,803
512
1,486
593
60
–
10
(7)
169
(3)
(1)
(12)
5,429
411
7.6%
4,454
156
Margin
0.6%
(1.4)%
11.4%
(0.5)%
3.5%
/ 79
4 Operating profit
The analysis of the components of operating profit is shown below:
(a) Trading profit
2010
£m
Sales by subsidiaries
Less: Businesses sold and closed – 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
other costs
Trading profit
2009
restated
£m
5,084
(10)
4,223
(14)
5,074
4,209
31
(2,157)
(1,346)
(82)
(1,747)
(1,219)
(4)
–
(191)
(2)
(10)
(3)
–
(193)
(2)
(11)
(13)
(32)
(7)
1
2
(979)
(13)
(29)
(4)
1
7
(781)
(4,707)
(4,076)
367
133
(i) eBITDa is subsidiary trading profit before depreciation, impairment and amortisation charges included in trading profit. eBITDa in 2010
was £570 million (2009 restated – £339 million).
(ii) reorganisation costs shown above reflect ongoing 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 £1 million (2009: £1 million).
(iv) research and development expenditure in subsidiaries was £92 million (2009: £83 million).
(v) other costs include less than £1 million in respect of directly attributable expenses on business combinations.
(vi) Auditors’ remuneration
The analysis of auditors’ remuneration is as follows:
2010
£m
2009
£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
(0.6)
(0.7)
(3.1)
(3.2)
Total audit fees
(3.7)
(3.9)
– Tax services
– Corporate finance transaction services
– other services
–
(0.1)
(0.6)
–
(0.1)
(1.1)
(0.1)
(0.6)
–
(0.1)
Total non-audit fees
(0.8)
(1.9)
– other services pursuant to legislation
– rights issue
– other
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
GKN plc annual report and accounts 2010
–
–
–
–
–
–
(4.5)
(5.8)
80 /
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
4 Operating profit (continued)
(a) Trading profit (continued)
(vi) Auditors’ remuneration (continued)
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 except for those in relation to associated pension schemes,
which are borne by the respective schemes, those in respect of the rights issue, which were charged to share premium and fees which
relate to directly attributable expenses on business combinations which occurred prior to 1 January 2010 which have been capitalised.
(b) Restructuring and impairment charges – 2008 Restructuring programme
The 2008 programme restructuring actions comprise 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. Short-time working arrangements concluded in the year.
2008 Restructuring programme
2010
£m
2009
£m
Goodwill impairment
Fixed asset impairments/reversals
other asset write-downs
–
–
–
(7)
(2)
(3)
Impairments
–
(12)
Short-time working costs
redundancy and post-employment costs
other reorganisation costs
(2)
(12)
(25)
(24)
(86)
(22)
redundancy and other costs
(39)
(132)
Subsidiaries
Joint ventures – impairment reversal
(39)
–
(144)
3
Subsidiaries and joint ventures
(39)
(141)
2008 Restructuring programme – analysis by segment
2010
Impairments
/reversals
£m
Driveline
powder Metallurgy
aerospace
Land Systems
Businesses sold and closed
– axles
Corporate
Subsidiaries
Joint ventures
Short-time
working
£m
2009 – restated
Redundancy
and other
costs
£m
Total
£m
Impairments
/reversals
£m
Short-time
working
£m
redundancy
and other
costs
£m
Total
£m
1
–
–
(1)
(2)
–
–
–
(28)
(1)
(4)
(4)
(29)
(1)
(4)
(5)
1
–
(1)
–
(19)
(4)
–
(1)
(61)
(16)
(9)
(19)
(79)
(20)
(10)
(20)
–
–
–
–
–
–
–
–
(9)
–
–
–
(3)
–
(12)
–
–
(2)
(37)
(39)
(9)
(24)
(108)
(141)
–
–
(2)
–
(37)
–
(39)
–
(12)
3
(24)
–
(108)
–
(144)
3
In Driveline, reorganisation costs of £16 million have been charged in respect of the announced UK and Japanese site rationalisation
initiatives and redundancy and reorganisation charges of £12 million were made regarding headcount and capacity reduction actions in
european operations. Short-time working arrangements concluded in the year with £2 million charged in european and Japanese operations.
The impairment reversal arose in the UK following completion of the sale of one site. In powder Metallurgy, a further £1 million of integration
costs were charged in finalisation of the european rationalisation. In aerospace, actions included the announcement of the closure of one
facility in France, with a £2 million charge made in respect of redundancy costs. In Land Systems, actions initiated in the former offHighway
segment, autoStructures and Industrial and Distribution Services have continued. These included rationalisation at a UK facility with associated
redundancy costs of £1 million, restructuring of the european distribution network including redundancy charges of £1 million and fixed asset
impairments of £1 million and reorganisation costs of £1 million associated with manufacturing concentration initiatives in North america.
Cash outflow in respect of the 2008 and 2004 restructuring plans was £55 million (2009: £99 million). proceeds from sale of fixed assets, put
out of use as part of the 2008 restructuring programme, of £2 million were recognised in the year (2009: nil).
/ 81
4 Operating profit (continued)
(c) Change in value of derivative and other financial instruments
2010
£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
2009
£m
(3)
3
–
106
(29)
2
–
79
12
–
5
(8)
12
(3)
12
76
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 2010 and 2009 the Group used transactional hedge accounting in a limited number of instances.
(d) Amortisation of non-operating intangible assets arising on business combinations
2010
£m
Marketing related
Customer related
Technology based
2009
£m
–
(16)
(3)
(1)
(20)
(3)
(19)
(24)
(e) Gains and losses on changes in Group structure
2010
£m
profits and losses on sale or closure of businesses
Business sold and closed – axles
Trading losses
Tangible fixed asset impairment
other asset write downs
recycling of cumulative translational currency adjustments
profit on sale of joint venture
Investment write up on acquisition of GKN aerospace Services Structures Corp.
2009
restated
£m
(2)
(1)
(3)
1
–
1
(4)
–
–
–
2
–
(4)
(2)
on 1 September 2010 the Group concluded the sale of the european agricultural axles operations of the former offHighway axles business to
Sviluppo europa Spa, a subsidiary of La Leonessa Spa, with other operations closed during the year. Sale proceeds were £5 million.
GKN plc annual report and accounts 2010
82 /
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
5 Net financing costs
2010
£m
(a) Interest payable and fee expense
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
2009
£m
(7)
(15)
(24)
(1)
(2)
4
(1)
(13)
(24)
(24)
(7)
–
1
–
(46)
(67)
6
3
(40)
(64)
The capitalisation rate on specific funding was 5.6% (2009: 6.4%) and on general borrowings was 6.8% (2009: 6.1%).
2010
£m
2009
£m
(b) other net financing charges
expected return on scheme assets
Interest on post-employment obligations
145
(176)
121
(170)
post-employment finance charges
Unwind of discounts
(31)
(4)
(49)
(1)
(35)
(50)
6 Taxation
(a) Tax expense
Analysis of charge in year
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
(65)
20
(27)
(1)
(31)
1
25
5
(73)
–
(23)
(2)
72
(2)
8
54
(3)
(41)
2
3
53
15
(20)
15
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)/credit for the year
2009
£m
/ 83
6 Taxation (continued)
(a) Tax expense (continued)
Analysed as:
2010
Tax in respect of management profit
£m
Current tax
Deferred tax
2009
restated
£m
(84)
47
(1)
(11)
(37)
(12)
11
6
1
26
17
27
(20)
15
Tax in respect of items excluded from management profit
Current tax credit
Deferred tax credit
Total for tax (charge)/credit for the year
Management tax rate
The tax charge arising on management profits of subsidiaries of £327 million was £37 million (2009 restated: £12 million charge) giving an
effective tax rate of 11% (2009 restated: 17%).
The Group is required to estimate the income tax due in each of the jurisdictions in which it operates. This requires an estimation of the
current tax liability together with an assessment of the temporary differences which arise as a consequence of differing accounting and tax
treatments. These temporary differences result in deferred tax assets or liabilities which are measured using substantively enacted tax rates
expected to apply when the temporary differences reverse. recognition of deferred tax assets, and hence credits to the income statement,
is based on forecast future taxable income and therefore involves the exercise of management’s judgement regarding the future financial
performance of particular legal entities or tax groups in which the deferred tax assets are recognised.
The Group is subject to many different tax jurisdictions and tax rules as a consequence of its geographic spread. It is also subject to tax audits
which, by their nature, are often complex and can require several years to conclude. The total accrual for income tax in any year requires the
exercise of management judgement in respect of the interpretation of country specific tax law and the likelihood of challenge of uncertain tax
positions and their subsequent settlement. Where appropriate, estimates of interest and penalties are included in these provisions for
uncertain tax positions. Tax benefits are not recognised unless it is probable that the tax positions are sustainable. as amounts set aside in
any year could differ from actual tax liabilities, adjustments may be required in subsequent years which may have a material impact on the
Group’s income statement and/or cash tax payments. payments in respect of tax liabilities for an accounting period comprise payments on
account and payments on the final resolution of open items with tax authorities and, as a result, there can be substantial differences between
the charge in the income statement and cash tax payments.
Details of the effective tax rate for the Group and the underlying events and transactions affecting this are given on page 28.
2010
Tax reconciliation
£m
2009
%
£m
%
profit/(loss) before tax
Less share of post-tax earnings of joint ventures
345
(35)
(54)
(21)
profit/(loss) before tax excluding joint ventures
310
(75)
Tax (charge)/credit calculated at 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
(87)
8
(11)
20
72
(2)
(28)
3
(4)
7
23
(1)
21
2
(3)
1
(41)
2
28
3
(4)
1
(55)
3
Current year tax (charge)/credit on ordinary activities
Net movement on provision for uncertain tax positions
other adjustments in respect of prior years
–
(27)
7
–
(8)
2
(18)
25
8
(24)
33
11
Total tax (charge)/credit for the year
(20)
(6)
15
20
GKN plc annual report and accounts 2010
84 /
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
6 Taxation (continued)
(b) Tax included in comprehensive income
2010
£m
Deferred tax on post-employment obligations
Deferred tax on non-qualifying assets
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
2009
£m
46
–
(3)
14
1
14
(1)
(2)
–
6
58
17
2010
£m
2009
£m
(c) Current tax
assets
Liabilities
10
(100)
13
(79)
(90)
(66)
(d) Recognised deferred tax
2010
£m
Deferred tax assets
Deferred tax liabilities
2009
£m
171
(63)
71
(57)
108
14
There is a net £53 million deferred tax credit to the income statement in the year, primarily on account of the recognition of previously
unrecognised future tax deductions in the US. In addition, a deferred tax credit of £46 million has been recorded directly in other
comprehensive income in relation to the availability of future tax deductions for post-employment contributions in the US and UK. The
recognition of these assets has been based on management projections which indicate the availability of taxable profits to absorb the
deductions in future years. In territories where there is more uncertainty regarding the availability of a sufficient level of future taxable profits,
deferred tax assets have not been recognised in full.
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
Postemployment
obligations
£m
Liabilities
Tax losses
£m
Other
£m
Fixed assets
£m
Total
Other
£m
£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)
–
–
14
–
53
43
(3)
1
At 31 December 2010
111
120
47
(161)
(9)
at 1 January 2009
other movements
Included in the income statement
Included in other comprehensive income
Businesses acquired
Currency variations
44
32
(9)
14
1
(8)
27
–
19
–
–
(1)
87
(32)
(5)
–
–
(4)
(166)
–
10
(1)
–
12
(3)
–
–
(2)
–
(1)
(11)
–
15
11
1
(2)
at 31 December 2009
74
45
46
(145)
(6)
14
108
Deferred tax assets totalling £39 million (2009: £41 million) have been recognised relating to territories where tax losses have been incurred
in the year. It is anticipated that future profitability arising from restructuring and other actions will result in their realisation.
/ 85
6 Taxation (continued)
(e) unrecognised deferred tax assets
Deferred tax assets have not been recognised in relation to certain tax losses and other temporary differences on the basis that the Group’s
ability to utilise them in the future is uncertain. The gross and tax values of these unrecognised assets together with any expiry periods, where
relevant, are shown below.
2010
2009
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
215
41
109
619
480
399
2011-2030
2011-2030
293
41
105
846
491
349
2010-2029
2010-2029
Total tax losses
365
1,498
439
1,686
66
38
245
136
149
43
518
142
Total other temporary differences
104
381
192
660
Unrecognised deferred tax assets
469
1,879
631
2,346
post-employment obligations
other temporary differences
No deferred tax is recognised on the unremitted earnings of overseas subsidiaries except where the distribution of such profits is planned.
If the earnings were remitted in full tax of £25 million (2009: £19 million) would be payable.
(f) Pension partnership
Note 26 refers to an asset-backed cash payment arrangement which the Group has agreed with the Trustee of the UK pension scheme. as a
result of this arrangement, the Group will obtain UK tax deductions spread over 4 years for the £331 million initial cash pension contribution.
over the next 20 years, the Group is also expected to obtain tax deductions for the remaining £269 million of the total amount likely to be paid
to the UK pension scheme. Where there is insufficient tax capacity to utilise these two types of tax deductions as they fall due, they will be
carried forward as tax losses with the potential to be used to reduce future taxable profits in the UK.
as this arrangement has been put in place to fund a pension deficit which arose partly as a result of actuarial losses, the current tax benefits
for the deductions will be reflected partly in other comprehensive income and partly in the income statement as they are utilised. Current tax
benefits of £17 million (£3 million income statement; £14 million other comprehensive income) have been recognised in the year in this
respect. a deferred tax asset of £26 million has been recognised on the balance sheet (£5 million income statement; £21 million other
comprehensive income) in respect of the initial cash pension contribution. Further deferred tax assets may become recognisable in the future.
Similar to the current tax credits referred to above, the deferred tax credits for these deferred tax assets are recognised partly in other
comprehensive income and partly in the income statement.
(g) Changes in uK tax rate
on 22 June 2010, the UK Government announced a number of tax measures in its emergency Budget, including a phased reduction in the
mainstream rate of UK corporation tax from 28% to 24% over the next four years. The first stage of these reductions, to 27%, had been enacted
at the year end, with the result that the recognised UK deferred tax asset was valued at 27%. as further reductions to reach the anticipated
24% rate are enacted, there will be a corresponding reduction in the value of UK deferred tax assets since deferred tax is measured at the
prevailing tax rate. Since a large part of the potential UK deferred tax asset currently remains unrecognised, there is not expected to be a
material impact on the tax rate.
(h) Franked investment income – litigation
Since 2003 the Group has been involved in litigation with HMrC in respect of various advance corporation tax payments made and corporate
tax paid on certain foreign dividend receipts which, in its view, were levied by HMrC in breach of the Group’s eU community law rights. During
2009, the Group received a £4 million payment on account from HMrC in respect of the litigation, but following a Court of appeal judgement
issued on 23 February 2010 £3 million of this payment on account was repaid to HMrC. This has had no impact on the income statement.
a further Court of appeal hearing to decide whether the remaining payment on account should be repaid will take place in early 2011. The
main case has been appealed both to the UK Supreme Court (on effective remedies) and to the european Court of Justice (for further guidance
on breach of community law) and these judgements are not expected until late 2011/early 2012. The continuing complexity of the case and
uncertainty over the issues raised 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.
7 Discontinued operations
reversal of 2008 discontinued tax charge
There were no discontinued operations in 2010.
GKN plc annual report and accounts 2010
2010
£m
2009
£m
–
5
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
86 /
8 Earnings per share
2010
2009
Earnings
£m
Weighted
average
number of
shares
m
Earnings per
share
pence
Continuing operations
Basic eps
Dilutive securities
305
–
1,552.6
0.7
19.6
–
Diluted eps
305
1,553.3
19.6
Weighted
average
number of
shares
m
earnings per
share
pence
(41)
–
1,271.7
–
(3.2)
–
(41)
1,271.7
(3.2)
earnings
£m
2009 total basic and total diluted eps were (2.8)p. 2009 discontinued basic and discontinued diluted eps were 0.4p.
9 Dividends
Paid or proposed
in respect of
2009 interim dividend paid
2009 final year dividend paid
2010 interim dividend paid
2010 final year dividend proposed
Recognised
2010
pence
2009
pence
2011
£m
2010
£m
2009
£m
–
–
1.5
3.5
–
–
–
–
–
–
–
54
–
–
23
–
–
–
–
–
5.0
–
54
23
–
The 2010 final year proposed dividend will be paid on 19 May 2011 to shareholders who are on the register of members at close of business on
26 april 2011.
10 Employees including Directors
Employee benefit expense
Wages and salaries
Social security costs
post-employment costs
Share-based payments
2010
£m
2009
£m
(1,128)
(179)
(40)
(3)
(1,021)
(166)
(35)
(2)
(1,350)
(1,224)
amounts included above relating to the former offHighway axles business are wages and salaries £3 million (2009: £4 million) and social security
£1 million (2009: £1 million).
Short-time working expense of £2 million (2009: £24 million) included in restructuring charges comprises wages and salaries £2 million (2009:
£17 million) and social security costs nil (2009: £7 million).
2010
Number
2009
restated
Number
By business
Driveline
powder Metallurgy
aerospace
Land Systems
other businesses
Businesses sold and closed – axles
Corporate
15,472
5,738
8,609
4,294
716
98
169
15,341
5,552
8,958
4,492
638
152
182
Total
35,096
35,315
Average monthly number of subsidiary employees (including Executive Directors)
/ 87
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 48 to 58.
Key management compensation
2010
£m
2009
£m
Salaries and short term employee benefits
post-employment benefits
Termination benefits
Share-based and medium term incentives and benefits
6.0
0.8
–
3.2
5.6
0.7
0.5
1.0
10.0
7.8
The amount outstanding at 31 December 2010 in respect of annual short term variable remuneration payable in cash was £1.8 million (2009:
£1.4 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 28 of the business review. Management eps using the cash tax rate is 20.4p (2009: 5.1p).
a total of £27,100 in dividends was received by key management in 2010 (2009: nil).
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 2010 are set out below. Details of awards made since 7 November 2002 that impact the 2010 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 and May 2010 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 31% 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 and august 2010 under the 2004 scheme. In april 2005 awards were made to Directors under the 2004 scheme. Under
both schemes, options were granted subject to TSr performance over a three year period compared with a comparator group. 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 and 2010 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 april 2007 and august 2010 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
given below will be released following the performance period if the minimum targeted profit growth is achieved. a maximum of twice the
amount of shares listed below 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.
The 2009 pGIp award is a 2 year award that is entirely cash based and therefore not subject to the IFrS 2 requirements. any benefit under this
scheme will be delivered dependent upon the extent to which profit growth targets are satisfied by the Group over a 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.
Further details of the eSoS, LTIp and pGIp schemes are given in the Directors’ remuneration report on pages 48 to 58.
GKN plc annual report and accounts 2010
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
88 /
11 Share-based payments (continued)
a reconciliation of option movements over the year to 31 December 2010 is shown below:
2010
2009
Number
000s
Weighted
average
exercise price
pence
Number
000s
Weighted
average
exercise price
pence
outstanding at 1 January
17,096
121.32
7,381
247.34
Granted
Forfeited
exercised
5,446
(1,289)
(636)
134.70
178.28
112.03
–
(3,548)
–
–
279.33
–
3,833
217.73
1,839
12,257
(648)
(185)
146.97
110.16
138.04
110.04
outstanding at 21 July
post rights issue
adjustment for rights issue
Granted
Forfeited
exercised
outstanding at 31 December
20,617
121.58
17,096
121.32
exercisable at 31 December
3,666
138.28
4,590
135.25
For options outstanding at 31 December the range of exercise prices and weighted average contractual life is shown in the following table:
2010
Range of exercise price
110p-180p
205p-230p
240p-260p
2009
Number
of shares
000s
Contractual
weighted
average
remaining life
years
Number
of shares
000s
Contractual
weighted
average
remaining life
years
19,613
1,004
–
7.95
1.21
–
15,492
1,088
516
8.16
2.21
7.25
The weighted average share price during the year for options exercised over the year was 146.60p (2009: 110.04p). The total charge for the year
relating to share-based payment plans was £3 million (2009: £2 million) all of which related to equity-settled share-based payment transactions.
after deferred tax, the total charge was £3 million (2009: £2 million).
Liabilities in respect of share-based payments were not material at either 31 December 2010 or 31 December 2009. There were no vested rights to
cash or other assets at either 31 December 2010 or 31 December 2009.
12 Goodwill and other intangible assets
Goodwill
2010
£m
2009
£m
Cost
at 1 January
Businesses acquired
Currency variations
507
4
16
549
8
(50)
At 31 December
527
507
Accumulated impairment
at 1 January
Impairment losses
Currency variations
169
–
8
182
7
(20)
At 31 December
177
169
Net book amount at 31 December
350
338
/ 89
12 Goodwill and other intangible assets (continued)
The carrying value of goodwill at 31 December comprised:
reportable segment
Business
Geographical location
Driveline
Driveline
Driveline
Hoeganaes
aerostructures
propulsion Systems
propulsion Systems
Wheels and structures
americas
europe
North america
North america
North america
North america
Italy
powder Metallurgy
aerospace
Land Systems
other businesses not individually significant to the carrying value of goodwill
2010
£m
2009
£m
58
18
22
32
97
38
20
55
19
21
31
94
37
21
285
65
278
60
350
338
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 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.
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 (propulsion Systems) business, value in use at 31 December 2010 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.
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% (2009: 13%-24%), europe 12%-13% (2009: 12%-13%) and Japan and asia pacific region countries
10%-17% (2009: 10%-17%).
powder Metallurgy: europe 12% (2009: 12%) and North america 13% (2009: 13%).
aerospace: europe 11% (2009: 11%) and North america 12% (2009: 12%).
Land Systems: europe 12% (2009: 12%) and North america 13% (2009: 13%).
GKN plc annual report and accounts 2010
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
90 /
12 Goodwill and other intangible assets (continued)
Key assumptions (continued)
Long term growth rates
To forecast beyond the five years covered by detailed forecasts into perpetuity, a long term average growth rate has been used. In each case, this
is not greater than the published oxford economic Forecast 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 from 1% to 9% (2009: 1% to 9%) with most
countries between 2% and 4% in both years.
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 2010, the date of the Group’s annual impairment test, the estimated recoverable amount of two individual CGUs within the
Group’s aerospace operations and one CGU within the Group’s Driveline operations exceeded their carrying value by £53 million, £11 million and
£74 million respectively. The table below shows the discount rate, long term growth rate and forecast operating cashflow 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
exceed the carrying value.
Segment
Driveline
americas
propulsion
Systems
£74m
£53m
£11m
13%
3%
£955m
12%
3%
£527m
12%
3%
£178m
2.0% pts
3.3% pts
15%
2.3% pts
5.9% pts
25%
2.6% pts
14.1% pts
10%
Business
Value in use excess over carrying value
assumptions used in calculation of value in use
pre-tax adjusted discount rate
Long term growth rate
Total pre-discounted forecast operating cashflow
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 cashflow
aerospace
propulsion
Systems
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.
2010
Other Intangible Assets
Development
costs
£m
Cost
at 1 January
Businesses acquired
additions
Capitalised borrowing costs
Disposals
Currency variations
101
–
24
1
–
–
At 31 December
126
Computer
software
£m
Total
£m
Development
costs
£m
Computer
software
£m
assets
arising on
business
combinations
£m
Total
£m
170
9
–
–
–
3
370
9
30
1
(3)
5
109
–
12
–
(19)
(1)
104
–
3
–
(1)
(7)
104
182
412
101
99
170
370
48
83
52
183
44
82
31
157
3
–
–
–
–
7
–
1
(3)
1
–
19
–
–
1
4
–
–
–
–
7
–
–
(1)
(5)
–
24
–
–
(3)
At 31 December
51
89
72
212
48
83
52
183
Net book amount at 31 December
75
15
110
200
53
16
118
187
Accumulated amortisation
at 1 January
Charge for the year
Charged to trading profit
Non-operating intangible assets
restructuring and impairment
Disposals
Currency variations
99
–
6
–
(3)
2
2009
Assets
arising on
business
combinations
£m
10
19
1
(3)
2
97
84
–
–
–
(11)
310
84
15
–
(20)
(19)
11
24
–
(1)
(8)
other intangible assets include development costs of £28 million (2009: £11 million) which is in the course of development and £14 million (2009:
£15 million) with a remaining amortisation period of up to 9 years (2009: 10 years) in respect of two aerospace programmes and £61 million
(2009: £70 million) in respect of a customer relationship asset arising from one business combination with a remaining amortisation period of
7 years (2009: 8 years).
The net book amount of assets arising on business combinations includes marketing related assets of £4 million (2009: £4 million), customer
related assets of £93 million (2009: £103 million) and technology based assets of £13 million (2009: £11 million).
/ 91
13 Property, plant and equipment
2010
Land and
buildings
£m
Other
tangible
assets
£m
2009
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
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
696
–
15
–
(2)
–
4
(53)
3,743
57
90
1
(84)
–
43
(286)
123
–
16
–
–
–
(47)
(10)
4,562
57
121
1
(86)
–
–
(349)
At 31 December
693
3,678
91
4,462
660
3,564
82
4,306
185
2,485
–
2,670
184
2,581
–
2,765
16
–
–
–
(1)
–
(14)
177
2
2
–
(75)
–
(202)
–
–
–
–
–
–
–
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
17
1
–
–
(3)
–
8
174
1
(1)
1
(91)
(4)
38
–
–
–
–
–
–
–
191
2
(1)
1
(94)
(4)
46
193
2
2
–
(76)
–
(216)
At 31 December
208
2,603
–
2,811
185
2,485
–
2,670
Net book amount at 31 December
485
1,075
91
1,651
475
1,079
82
1,636
Included within other tangible assets at net book amount are general plant, machinery and steel powder production plant £1,056 million (2009:
£1,055 million), fixtures, fittings and computers £17 million (2009: £22 million) and commercial vehicles and cars £2 million (2009: £2 million).
The net book amount of assets under finance leases is land and buildings £2 million (2009: £2 million) and plant and equipment nil (2009: £1 million).
14 Investments in joint ventures
Group share of results
2010
£m
2009
£m
355
(311)
245
(222)
Trading profit
Net financing costs
44
(1)
23
(1)
profit before taxation
Taxation
43
(7)
22
(4)
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 nil
Impairment reversal, including tax of nil
36
18
Share of post-tax earnings
35
Sales
operating costs
GKN plc annual report and accounts 2010
(1)
–
–
3
21
92 /
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
14 Investments in joint ventures (continued)
Group share of net book amount
2010
Group
share of
equity
£m
2009
Provisions
for
impairment
£m
Net book
amount
£m
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
113
35
(1)
(1)
–
1
112
35
–
129
18
(1)
(10)
3
1
119
21
–
–
(23)
10
–
9
–
–
–
–
–
–
(23)
10
–
9
–
(15)
2
(7)
(13)
–
–
–
4
1
–
(15)
2
(3)
(12)
At 31 December
143
–
143
113
(1)
112
2010
£m
Non-current assets
Current assets
Current liabilities
Non-current liabilities
2009
£m
117
139
(87)
(26)
86
99
(61)
(12)
143
112
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.
on 15 September 2010, emitec the Group’s 50% joint venture with Continental aG acquired Grundfos NoNox Holdings a/S from Grundfos Holding a/S.
15 Other receivables and investments
other investments
Indirect taxes and amounts recoverable under employee benefit plans
other receivables
2010
£m
2009
£m
–
20
3
1
19
4
23
24
2010
£m
2009
£m
305
208
124
266
188
109
637
563
16 Inventories
raw materials
Work in progress
Finished goods
Inventories of £65 million (2009: £59 million) are carried at net realisable value. The amount of any write down of inventory recognised as an
expense in the year was £4 million (2009: £1 million).
/ 93
17 Trade and other receivables
Trade receivables
amounts owed by joint ventures
Loan to GKN aerospace Services Structures Corp.
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
At 31 December
Trade receivables subject to provisions for doubtful debts
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
2010
£m
2009
£m
664
17
–
36
17
28
547
15
11
29
15
27
762
644
(8)
(9)
(7)
2
3
–
(4)
2
2
1
(10)
(8)
11
13
36
7
2
5
40
8
3
8
18 Trade and other payables
2010
Current
£m
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
2009
Non-current
£m
Current
£m
Non-current
£m
(766)
–
(19)
–
(5)
(46)
(148)
(4)
(77)
(4)
–
–
(40)
(22)
(1)
(31)
(4)
(6)
(600)
–
(26)
–
(5)
(43)
(118)
(1)
(80)
(2)
–
–
(28)
(27)
(1)
(33)
(5)
(1)
(1,065)
(108)
(873)
(97)
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 (2009: £5 million) and two-five years £17 million (2009: £22 million). Non-current
amounts owed to suppliers and customers fall due within 2 years.
GKN plc annual report and accounts 2010
94 /
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
19 Net borrowings
(a) Analysis of net borrowings
Current
Notes
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
Within
one year
£m
Non-current
One to two
years
£m
Two to five
years
£m
Total
More than
five years
£m
Total
£m
£m
–
–
(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)
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
2009
other borrowings
£350 million 6¾% 2019 unsecured bond
£201 million 7% 2012 unsecured bond
other secured US$ denominated loan
other long term borrowings
Finance lease obligations
Bank overdrafts
other short term bank borrowings
381
i
i
iv
Borrowings
(179)
(6)
(347)
(532)
(151)
–
–
(2)
(6)
(1)
(28)
(35)
–
–
(2)
(6)
(1)
–
–
–
(201)
(5)
–
(1)
–
–
(347)
–
–
–
(1)
–
–
(347)
(201)
(7)
(6)
(3)
–
–
(347)
(201)
(9)
(12)
(4)
(28)
(35)
(72)
(9)
(207)
(348)
(564)
(636)
Bank balances and cash
Short term bank deposits
ii
132
184
–
–
–
–
–
–
–
–
132
184
Cash and cash equivalents
v
316
–
–
–
–
316
iii
20
–
–
–
–
20
264
(9)
other financial assets – bank deposits
Net borrowings
(207)
(348)
(564)
(300)
other borrowings include: Unsecured £350 million (2009: £350 million) 6¾% bond maturing in 2019 less unamortised issue costs of £3 million
(2009: £3 million); unsecured £176 million (2009: £201 million) 7% bond maturing in 2012 less unamortised issue costs of nil (2009: nil); and
a secured term loan of £8 million (2009: £9 million) secured by way of a fixed and floating charge on certain aerospace fixed assets.
Notes
(i) Denotes borrowings at fixed rates of interest until maturity. all other borrowings and cash and cash equivalents are at variable interest
rates.
(ii) The average interest rate on short term bank deposits was 0.5% (2009: 0.5%). Deposits at 31 December 2010 had no fixed maturity date
(2009: no fixed maturity date).
(iii) The interest rate on bank deposits was 2% (2009: 0.85%); deposits mature on 27 May 2011 (2009: 1 april 2010).
(iv) Finance lease obligations gross of finance charges fall due as follows: £1 million within one year (2009: £1 million), £3 million in one to
five years (2009: £3 million) and £1 million in more than five years (2009: £1 million).
(v) £11 million (2009: £9 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 can
not be circulated within the Group on demand.
/ 95
19 Net borrowings (continued)
(b) Fair values
2010
2009
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
(537)
(3)
(53)
158
284
(564)
(3)
(53)
158
284
(569)
(4)
(63)
132
204
(570)
(4)
(63)
132
204
(151)
(178)
(300)
(301)
(40)
(27)
(40)
(27)
(28)
(32)
(28)
(32)
(67)
(67)
(60)
(60)
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 2010. 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.
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.
(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 £1.0 million and £1.6 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)
0.3
Derivative
financial
instruments
£m
(0.3)
7.2
Intra-group
funding
£m
0.8
1.1
The derivative sensitivity analysis has been prepared by re-performing 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.
GKN plc annual report and accounts 2010
96 /
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
20 Financial risk management (continued)
(a) Foreign currency risk (continued)
analysis of net borrowings by currency
2010
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
Sterling
US dollar
euro
others
2009
Total
£m
Cash and
cash
equivalents
£m
other
financial
assets
£m
(548)
(24)
(17)
(47)
187
18
36
75
20
–
–
–
(341)
(6)
19
28
(636)
316
20
(300)
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 given the absence of floating rate bank
debt. at 31 December 2010 88% (2009: 86%) of the Group’s gross borrowings were subject to fixed interest rates.
as at 31 December 2010 £284 million (2009: £204 million) was in bank deposits of which £267 million (2009: £186 million) was on deposit
with banks in the UK.
a 100 basis point increase in interest rates on deposits would result in a £2.8 million reduction in net interest expense. This sensitivity flexes
the interest rate of variable deposits assuming deposits as at 31 December 2010 remain in place for 12 months.
(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:
2010
Driveline
powder Metallurgy
aerospace
Land Systems
%
2009
restated
%
50
17
66
25
51
20
64
28
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 £761 million (2009: £642 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 £56 million (2009: £61 million), whilst the maximum mark to market exposure for
forward foreign currency contracts at 31 December 2010 to a single bank was £1 million (2009: nil). The amounts on deposit at year end
represent the Group’s maximum exposure to financial credit risk with Group indebtedness varying over the course of a year in line with normal
financing and trading patterns.
/ 97
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 an eBITDa of subsidiaries
to gross debt ratio of 2.5 times or less and the ratios at 31 December 2010 and 2009 were as follows:
2010
Gross borrowings
eBITDa
Gross borrowings to EBITDA ratio
£m
2009
restated
£m
593
570
1.0 times
636
339
1.9 times
The Group’s only external banking covenant requires an eBITDa of subsidiaries to net interest payable and receivable ratio of 3.5 times or
more. The ratios at 31 December 2010 and 2009 were as follows:
2010
£m
570
(44)
13.0 times
eBITDa
Net interest payable and receivable (excluding borrowing costs capitalised)
EBITDA to net interest payable and receivable ratio
2009
restated
£m
339
(65)
5.2 times
The Group monitors these ratios on a rolling basis and are part of the budgeting and forecasting processes.
(e) Liquidity risk
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 £358 million of which £43 million
expire in october 2011. There were no drawings on these facilities at 31 December 2010 although £10 million was utilised for Letters of Credit.
Committed facilities are provided through 12 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
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)
2009
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
(72)
(39)
–
(6)
182
(196)
(9)
(39)
–
(6)
91
(98)
(207)
(78)
(3)
(24)
211
(232)
(348)
(114)
(53)
–
145
(160)
(636)
(270)
(56)
(36)
629
(686)
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.
GKN plc annual report and accounts 2010
98 /
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
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
2009
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
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)
4
602
–
20
316
–
–
–
–
–
–
–
–
(636)
(680)
(35)
–
–
21
–
–
–
–
–
–
–
(64)
–
–
–
–
–
–
–
–
–
–
–
–
–
4
602
(43)
20
316
(636)
(680)
(35)
942
(1,351)
21
(64)
–
(452)
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 £8 million (2009: £8 million) is categorised as a Level 3 fair value measurement, see note 27.
21 Derivative financial instruments
2010
Assets
Forward currency contracts
Not hedge accounted
Hedge accounted
Commodity contracts
Not hedge accounted
embedded derivatives
2009
Liabilities
Noncurrent
£m
Total
Noncurrent
£m
Current
£m
3
–
11
1
(56)
–
(13)
–
–
16
–
1
–
(5)
19
13
(61)
assets
Liabilities
Noncurrent
£m
Current
£m
(55)
1
2
–
5
1
(46)
–
–
–
–
12
–
14
–
–
(13)
(42)
16
6
Current
£m
£m
Noncurrent
£m
Total
Current
£m
£m
(13)
(1)
(52)
–
–
(5)
–
–
–
9
(51)
(14)
(43)
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 between european aerospace subsidiaries
and suppliers outside the USa which are denominated in US dollars.
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 £1 million (2009: nil). The cash flows and profit impact will occur in 2011 and
2012 (2009: 2010 to 2012). a £1 million gain was recognised in equity during the year (2009: £2 million gain) in respect of contracts outstanding at
31 December 2010. No accumulated gain or loss was recycled through cost of sales in the year (2009: £5 million loss). Cash flow hedging was
100% effective during 2010 and 2009.
/ 99
22 Provisions
Restructuring
£m
Warranty
£m
Legal and
environmental
£m
Other
£m
Total
£m
at 1 January 2010
Net charge for the year:
additions
Unused amounts reversed
Unwind of discounts
Businesses acquired
amounts used
Currency variations
(59)
(30)
(24)
(58)
(171)
(38)
1
–
–
55
–
(9)
7
–
–
10
(1)
–
1
–
–
14
–
(6)
3
(3)
(1)
7
–
(53)
12
(3)
(1)
86
(1)
at 31 December 2010
(41)
(23)
(9)
(58)
(131)
Due within one year
Due in more than one year
(31)
(10)
(11)
(12)
(5)
(4)
(10)
(48)
(57)
(74)
(41)
(23)
(9)
(58)
(131)
Restructuring
restructuring provisions outstanding at 31 December 2010 relate primarily to the estimated future cash outflows in respect of redundancies 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: £5 million in 2012 and £5 million from 2013.
Warranty
provisions set aside for warranty exposures either relate to amounts provided systematically based on historical experience under contractual
warranty obligations attaching to the supply of goods or specific provisions created in respect of individual customer issues undergoing
commercial resolution and negotiation. In the event of a claim, settlement will be negotiated with the customer based on supply of replacement
products and compensation for the customer’s associated costs. amounts set aside represent 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 2012 and £3 million from 2013.
Legal and environmental
Legal provisions amounting to £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 £12 million
of environmental remediation expenditure.
Utilisation of the provision due in more than one year is estimated as £3 million in 2012 and £1 million from 2013.
Other
other provisions include claims provisions held within the Group’s captive insurance company £13 million, provisions held in respect of onerous
contracts and leases £2 million and long service non-pension and other employee related obligations arising primarily in the Group’s continental
european subsidiaries £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 £30 million (2009: £32 million). The movement on this provision
included a reversal of £2 million following a rental reassessment, utilisation of £3 million and discount unwind of £3 million. Utilisation of other
provisions due in more than one year is expected as follows: £8 million in 2012; £3 million in 2013; £5 million in 2014 and £32 million from 2015.
Vacant leasehold property provisions and non-beneficial lease rentals included in restructuring and other provisions above amount to £31 million
(2009: £35 million).
GKN plc annual report and accounts 2010
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
100 /
23 Share capital
Issued and Fully paid
2010
£m
2009
£m
ordinary shares of 10p each
Deferred shares of 40p each
159
–
159
298
Total nominal value of shares
159
457
2010
Number
000s
2009
Number
000s
ordinary shares of 50p each
at 1 January
Increase in authorised share capital
Capital reorganisation
Shares issued under share option schemes
–
–
–
–
at 31 December
–
–
ordinary shares of 10p each
at 1 January
Capital reorganisation
rights issue
Shares issued under share option schemes
1,590,528
–
–
2
–
743,904
846,624
–
at 31 December
1,590,530
1,590,528
Deferred shares of 40p each
at 1 January
Capital reorganisation
Cancellation
743,904
–
(743,904)
–
743,904
–
–
743,904
1,590,530
2,334,432
at 31 December
at 31 December (ordinary and deferred)
743,904
–
(743,904)
–
Notes
(i) Following shareholder approval given at the annual General Meeting held on 6 May 2010, the Company adopted new articles of association
which removed provisions relating to authorised share capital as permitted under the Companies act 2006.
(ii) 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 2010 there were 37,565,178 ordinary shares of 10p each, with a total nominal value of £3.8 million, held as treasury shares (2009:
38,199,579 ordinary shares of 10p each and 38,384,253 deferred shares of 40p each with a total nominal value of £19.2 million). No shares were
purchased in the open market during 2010 or 2009. a total of 634,401 shares were transferred out of treasury during 2010 to satisfy the exercise of
options by former employees under share option schemes. The remaining treasury shares, which represented 2.4% (2009: 4.2%) 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.
During the year shares issued under the share option schemes generated less than £1 million (2009: less than £1 million).
/ 101
24 Business combinations
GKN aerospace Services Structures Corp. (“GaSS”) is an entity in which the Group has, since 2003, had a 100% share in the equity. GaSS
operated under a proxy agreement with the United States Department of Defense developing high technology, classified products for the United
States airforce. The proxy agreement placed significant restrictions on the Group’s management and control of the business so that, in
accordance with IaS 27, it was excluded from consolidation and treated as an investment. In January 2010 clearance was obtained to commence
the process to remove the significant restrictions on the Group’s management and control of GaSS and on 1 april 2010 all significant restrictions
were removed. The assumption of control by the Group has been accounted for as a business combination.
The values stated below are provisional as the review of acquired assets and liabilities remains ongoing.
£m
Intangible fixed assets
– customer related
– technology based
property, plant and equipment
Inventories
Trade and other payables
Deferred tax
provisional goodwill
5
4
3
5
(2)
(3)
4
16
Satisfied by:
Investment – cost
Investment – fair value write up
Loan
10
1
5
16
Since acquisition GaSS contributed sales of £15 million and trading profit of £2 million. If the acquisition had occurred on 1 January 2010 sales
and trading profit are estimated at £18 million and £1 million. acquisition related expenses of less than £1 million were incurred. Goodwill is
attributable to the value of the assembled workforce and the application of the technology into new products with new and existing customers.
GKN plc annual report and accounts 2010
102 /
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
25 Cash flow reconciliations
2010
£m
2009
£m
385
39
191
2
10
19
–
(12)
(1)
(1)
(1)
3
(116)
(63)
(117)
121
193
2
11
24
9
(71)
(1)
(6)
(2)
2
(45)
133
(36)
36
420
288
133
(6)
25
1
(4)
–
194
93
124
1
(4)
–
149
(300)
408
(708)
Net debt at end of year
(151)
(300)
Reconciliation of cash and cash equivalents
Cash and cash equivalents per balance sheet
Bank overdrafts included within “current liabilities – borrowings”
438
(17)
316
(28)
Cash and cash equivalents per cashflow
421
288
2010
£m
2009
£m
(176)
(363)
(17)
(44)
(597)
(345)
(13)
(41)
(600)
(996)
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
Changes 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
Movement in cash and cash equivalents
Net movement in other borrowings and deposits
Bond buy back
Finance leases
Currency variations
Businesses acquired and sold
Movement in year
Net debt at beginning of year
26 Post-employment obligations
post-employment obligations as at the year end comprise:
pensions
Medical
– funded
– unfunded
– funded
– unfunded
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.
/ 103
26 Post-employment obligations (continued)
(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 2010. 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.
Key assumptions were:
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
2009
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
%
4.35
2.90
5.40
3.35
3.5
2.0
5.5
2.5
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
4.25
3.40
5.70
3.25
3.5
2.0
6.0
2.5
2.50
1.75
5.40
1.75
3.5
n/a
2.0
1.0
7.0/4.5
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 matched the Citigroup liability index as at 31 December 2010 of 5.5%.
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 year age rating for female members. Using these assumptions
a male aged 65 lives for a further 20.6 years and a female aged 65 lives for a further 23.2 years. a male aged 45 is expected to live a further
22.5 years from age 65 and a female aged 45 is expected to live a further 25.1 years from age 65. The prior period valuation used pa92 (year of
birth) tables allowing for medium cohort but without a minimum improvement. The prior period age adjustments to pa92 (year of birth tables)
were equivalent to that of the age rating adjustment to S1Na (year of birth) tables.
Overseas
In the USa, ppa2010 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 years (female 21 years) whilst in Germany a male aged 65 lives for a further 18.1 years (female
22.4 years). The longevity assumption for a USa male currently aged 45 is that he also lives for a further 19 years once attaining 65 years
(female 21 years), with the German equivalent assumption for a male being 18.2 years (female 23.6 years). These assumptions are based
solely on the prescribed tables not on actual GKN experience.
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 2010 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%
GKN plc annual report and accounts 2010
314
(391)
(298)
246
(1)
1
americas
Income
statement
£m
2.8
(1.8)
(21.3)
18.2
–
–
Liabilities
£m
45
(56)
–
–
(1)
1
europe
Income
statement
£m
(0.2)
0.2
–
–
(0.2)
0.2
Liabilities
£m
49
(58)
(33)
30
–
–
roW
Income
statement
£m
0.4
–
(2.2)
2.0
–
–
Liabilities
£m
6
(6)
–
–
–
–
Income
statement
£m
(0.3)
0.3
–
–
–
–
104 /
NoTeS To THe FINaNCIaL STaTeMeNTS CoNTINUeD
26 Post-employment obligations (continued)
(b) Defined benefit schemes – reporting
The amounts included in operating profit are:
Trading Profit
Employee
benefit
expense
£m
2010
Current service cost
past service cost
Settlement/curtailments
2009
Current service cost
past service cost
Settlement/curtailments
Redundancy
and other
employment
amounts
£m
Restructuring
and
impairment
charges
£m
uK Pension
scheme
curtailment
£m
Total
£m
(35)
1
9
–
(1)
–
–
–
–
–
–
68
(35)
–
77
(25)
(1)
–
68
42
(34)
5
7
–
–
–
–
(1)
–
–
–
–
(34)
4
7
(22)
–
(1)
–
(23)
The benefits from an enhanced transfer value exercise in the UK together with scheme design changes in Japan resulted in a £9 million
settlement/curtailment credit to Trading profit. a number of scheme design changes introduced in UK pension arrangements that included a
move from final salary basis to that of career average resulted in a curtailment credit of £68 million.
The amounts recognised in the balance sheet are:
2010
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
Total
£m
2009
£m
(13)
(2,435)
2,364
(39)
(360)
245
(347)
(22)
28
(8)
(36)
23
(407)
(2,853)
2,660
(386)
(2,800)
2,190
(84)
(154)
(341)
(21)
(600)
(996)
The contributions expected to be paid by the Group during 2011 to the UK scheme is £28 million and to overseas schemes £38 million. Section
(d) of this note describes the pension partnership interest created on 31 March 2010 under which the first distribution of £23 million is
expected to be made in the second quarter of 2011.
Cumulative actuarial gains and losses recognised in equity are as follows:
2010
£m
2009
£m
at 1 January
Net actuarial losses in year
(334)
(24)
(144)
(190)
at 31 December
(358)
(334)
/ 105
26 Post-employment obligations (continued)
(b) Defined benefit schemes – reporting (continued)
Post-employment obligations
Movement in schemes’ obligations (funded and unfunded) during the year
uK
£m
Americas
£m
Europe
£m
ROW
£m
Total
£m
at 1 January 2010
Businesses acquired
Current service cost
Interest
Contributions by participants
actuarial gains and losses
Benefits paid
past service cost
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)
at 1 January 2009
Businesses acquired
Current service cost
Interest
Contributions by participants
actuarial gains and losses
Benefits paid
past service cost
Settlements/curtailments
Currency variations
(2,043)
(20)
(20)
(129)
(4)
(346)
123
(1)
–
–
(401)
–
(5)
(21)
–
5
15
6
6
40
(353)
–
(6)
(19)
–
(22)
17
(1)
–
32
(46)
–
(3)
(1)
–
1
3
–
1
6
(2,843)
(20)
(34)
(170)
(4)
(362)
158
4
7
78
at 31 December 2009
(2,440)
(355)
(352)
(39)
(3,186)
Movement in schemes’ assets during the year
uK
£m
Americas
£m
Europe
£m
ROW
£m
Total
£m
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
at 1 January 2009
Businesses acquired
expected return on assets
actuarial gains and losses
Contributions by Group
Contributions by participants
Benefits paid
Currency variations
1,759
–
106
152
32
4
(123)
–
202
–
13
21
15
–
(15)
(21)
29
–
2
(1)
1
–
(1)
(3)
19
–
–
–
3
–
(2)
(2)
2,009
–
121
172
51
4
(141)
(26)
at 31 December 2009
1,930
215
27
18
2,190
GKN plc annual report and accounts 2010
106 /
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:
2010
uK
£m
Funded
Unfunded
Americas
£m
Europe
£m
ROW
£m
Total
£m
2009
£m
(2,435)
(13)
(360)
(39)
(22)
(347)
(36)
(8)
(2,853)
(407)
(2,800)
(386)
(2,448)
(399)
(369)
(44)
(3,260)
(3,186)
The fair value of the assets in the schemes and the expected rates of return were:
uK
At 31 December 2010
equities (inc. Hedge Funds)
Bonds
property
Cash and net current assets
partnership plan asset
other assets
Long term
rate of
return
expected
%
7.8
5.0
6.6
0.5
6.1
5.5
Americas
Value
£m
Long term
rate of
return
expected
%
741
1,115
90
39
346
33
8.5
3.6
–
2.8
–
–
2,364
at 31 December 2009
equities (inc. Hedge Funds)
Bonds
property
Cash/short term mandate
other assets
7.8
5.3
6.6
0.5
5.7
696
1,054
82
67
31
1,930
Europe
Value
£m
Long term
rate of
return
expected
%
171
69
–
5
–
–
–
–
–
–
–
4.8
245
8.5
4.2
–
3.2
–
143
67
–
5
–
215
ROW
Value
£m
Long term
rate of
return
expected
%
Value
£m
–
–
–
–
–
28
5.5
1.0
–
–
–
1.25
11
8
–
–
–
4
28
–
–
–
–
5.1
–
–
–
–
27
23
5.70
1.35
–
–
1.25
27
8
7
–
2
1
18
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 £230 million (2009: £293 million).
/ 107
26 Post-employment obligations (continued)
(b) Defined benefit schemes – reporting (continued)
History of experience gains and losses
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
uK
Americas
Europe
ROW
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)
(1)
(4.3%)
2009
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)
2006
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
GKN plc annual report and accounts 2010
35
1.6%
15
7.6%
(1)
(4.5%)
–
–
15
0.6%
(2,375)
2,187
–
–
(301)
196
–
–
(277)
19
(1)
(6.7%)
(23)
13
(188)
(105)
(258)
(10)
108 /
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 (2009: £13 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 is expected to be 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 2010.
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 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.
28 Operating lease commitments – minimum lease payments
The minimum lease payments which the Group is committed to make at 31 December are:
2010
Payments under non-cancellable operating leases:
Within one year
Later than one year and less than five years
after five years
2009
Property
£m
Vehicles, plant
and equipment
£m
property
£m
Vehicles, plant
and equipment
£m
26
75
105
10
17
2
30
82
118
10
18
2
206
29
230
30
29 Capital expenditure
Contracts placed against capital expenditure sanctioned at 31 December 2010 so far as not provided by subsidiaries amounted to £96 million
(2009: £84 million) and the Group’s share not provided by joint ventures amounted to less than £1 million (2009: £1 million).
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 2010 totalled £89 million (2009: £62 million). The amount due at the year end in
respect of such sales was £17 million (2009: £14 million). purchases by subsidiaries from joint ventures in 2010 totalled £2 million (2009: £4 million).
The amount due at the year end in respect of such purchases was nil (2009: nil).
at 31 December 2009 a Group subsidiary had £1 million receivable from a joint venture in respect of an unsecured financing facility bearing
interest at six month LIBor plus 1%. The facility was repaid in 2010.
The Group obtained control of GKN aerospace Services Structures Corp. (GaSS) on 1 april 2010. The Group provided services to GaSS during the
first quarter of 2010 amounting to less than £1 million (2009 full year: £1 million). No goods were supplied to the Group by GaSS during the first
quarter of 2010 (2009 full year: £1 million). Transactions between the Group and GaSS were priced on an ‘arm’s length’ basis. at 31 December
2009 a Group subsidiary had £11 million receivable from GaSS in respect of a loan bearing interest at US prime rate minus 2%.
INDepeNDeNT aUDITorS’ reporT To THe MeMBerS oF GKN pLC
We have audited the Company financial statements of GKN plc for
the year ended 31 December 2010 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).
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
n
the part of the Directors’ remuneration report to be audited has
been properly prepared in accordance with the Companies act
2006; and
n
the information given in the Directors’ report for the financial year
for which the Company financial statements are prepared is
consistent with the Company financial statements.
Respective responsibilities of Directors and auditors
as explained more fully in the Statement of Directors’ responsibilities
on page 62, the Directors are responsible for the preparation of the
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 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 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.
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:
n
adequate accounting records have not been kept by the Company,
or returns adequate for our audit have not been received from
branches not visited by us; or
n
the 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
n
certain disclosures of Directors’ remuneration specified by law are
not made; or
n
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 2010.
Opinion on financial statements
In our opinion the Company financial statements:
n
give a true and fair view of the state of the Company’s affairs as
at 31 December 2010;
n
have been properly prepared in accordance with United Kingdom
Generally accepted accounting practice; and
n
have been prepared in accordance with the requirements of the
Companies act 2006.
Roy Hodson
(Senior Statutory auditor)
for and on behalf of pricewaterhouseCoopers LLp
Chartered accountants and Statutory auditors
Birmingham
28 February 2011
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.
GKN plc annual report and accounts 2010
/ 109
110 /
BaLaNCe SHeeT oF GKN pLC
aT 31 DeCeMBer 2010
Fixed assets
Investment in subsidiaries at cost
Notes
2010
£m
2009
£m
3
3,572
3,569
9
10
Current assets
amounts due from subsidiaries
Creditors: amounts falling due within one year
amounts owed to subsidiaries
(2,100)
(2,188)
Net current liabilities
(2,091)
(2,178)
Total assets less current liabilities
1,481
1,391
Net assets
1,481
1,391
159
298
9
1,015
457
–
9
925
1,481
1,391
Capital and reserves
Share capital
Capital redemption reserve
Share premium account
profit and loss account
5
5
2, 4
The financial statements on pages 110 to 112 were approved by the Board of Directors and authorised for issue on 28 February 2011. They were signed
on its behalf by:
Sir Kevin Smith, William Seeger – Directors
/ 111
NoTeS To THe FINaNCIaL STaTeMeNTS oF GKN pLC
1
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 2010 was £110 million (2009: £10 million).
auditors’ remuneration for audit services to the Company was £0.6 million (2009: £0.7 million).
3 Fixed asset investments
£m
at 1 January 2010
additions – share-based payments
3,569
3
at 31 December 2010
3,572
principal subsidiary and joint venture companies, the investments in which are held through intermediate holding companies, are shown on
pages 114 and 115.
4 Reserves
Capital
redemption
reserve
£m
at 1 January 2010
profit for the year
Share-based payments
Transfers
Dividends paid to equity shareholders
–
–
–
298
–
at 31 December 2010
298
GKN plc annual report and accounts 2010
Profit
and loss
account
£m
925
110
3
–
(23)
1,015
112 /
NoTeS To THe FINaNCIaL STaTeMeNTS oF GKN pLC CoNTINUeD
5 Share capital and capital redemption reserve
Share capital disclosure and details of the cancellation of deferred ordinary shares are shown in note 23 of the notes to the consolidated financial
statements on page 100.
6 Reconciliation of movements in shareholders’ funds
£m
at 1 January 2010
profit for the year
Share-based payments
Dividends paid to equity shareholders
1,391
110
3
(23)
At 31 December 2010
1,481
/ 113
GroUp FINaNCIaL reCorD
2010
£m
Consolidated income statements
Sales
5,084
2009**
£m
4,223
2008
£m
2007
£m
4,376
3,869
2006***
£m
3,634
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
367
(39)
12
133
(144)
76
201
(153)
(124)
277
(31)
(10)
251
(74)
33
(19)
68
(4)
(24)
–
(2)
(10)
–
–
(8)
–
(7)
(3)
–
(4)
Operating profit/(loss)
Share of post-tax earnings of continuing joint ventures
Net financing costs
385
35
(75)
39
21
(114)
(86)
6
(50)
221
24
(46)
203
17
(38)
Profit/(loss) before taxation from continuing operations
Taxation
345
(20)
(54)
15
(130)
10
199
(1)
182
(5)
Profit/(loss) after taxation from continuing operations
profit after taxation from discontinued operations
325
–
(39)
5
(120)
13
198
–
177
–
Profit/(loss) for the year
Less: profit attributable to non-controlling interests
325
(20)
(34)
(2)
(107)
(2)
198
(2)
177
–
profit/(loss) attributable to equity shareholders
305
(36)
(109)
196
177
Earnings per share – p****
Dividend per share – p****
19.6
5.0
(3.2)
–
(11.7)
3.0
18.8
9.1
16.9
8.6
Management performance measures*
Sales
Trading profit
profit before taxation
earnings per share – p****
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
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
5,429
411
363
20.7
4,454
156
87
5.7
4,617
221
170
16.0
4,100
309
258
23.5
3,815
272
234
20.3
550
1,651
143
171
42
525
1,636
112
71
40
520
1,797
119
52
65
416
1,462
100
56
22
356
1,354
83
114
24
2,557
2,384
2,553
2,056
1,931
637
762
442
23
563
644
336
19
718
645
114
37
552
571
282
27
470
520
342
32
1,864
1,562
1,514
1,432
1,364
(61)
(1,065)
(100)
(92)
(837)
(104)
(39)
(743)
(93)
(70)
(98)
(105)
(75)
(77)
(1,122)
(1,289)
(1,108)
(952)
(532)
(63)
(169)
(74)
(600)
(564)
(57)
(148)
(87)
(996)
(725)
(63)
(174)
(54)
(834)
(696)
(75)
(31)
(51)
(331)
(729)
(63)
(29)
(53)
(561)
(1,438)
(1,852)
(1,850)
(151)
*
(97)
(972)
(115)
(1,296)
1,687
Net debt
(72)
(873)
(79)
(1,184)
(1,435)
972
928
1,196
908
(300)
(708)
(506)
(426)
Management sales and trading profit aggregate the sales and trading profit of subsidiaries (excluding 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 noncontrolling interests.
** as restated following the announcement to exit the axles operations of the former offHighway segment.
*** as restated for reclassification of the trading results of the UK cylinder liner manufacturing operation.
**** as restated in 2006-2008 for the bonus issue inherent in the rights Issue that was approved on 6 July 2009.
GKN plc annual report and accounts 2010
114 /
SUBSIDIarIeS aND JoINT VeNTUreS
aT 31 DeCeMBer 2010
Driveline
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 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 Walsall Ltd England
GKN Driveline Zumaia Sa Spain
GKN eskisehir automotive products Manufacture and Sales a.S. Turkey
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 North america Inc USA*
GKN Driveline Uruguay Sa Uruguay
GKN Driveline Villagran Sa de CV Mexico
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 (51%) 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
GKN JTeKT Ltd (49%) Japan
GKN JTeKT (Thailand) Ltd (49%) Thailand
Shanghai GKN Driveline Sales Company Ltd (49%) 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
Hoeganaes Corporation USA*
Hoeganaes Corporation europe GmbH Germany
Hoeganaes Corporation europe Sa Romania
/ 115
Aerospace
Other businesses
Europe
Composite Technology and applications Ltd (49%) England
GKN aerospace Deutschland GmbH Germany
GKN aerospace La pacaudière SaS France
GKN aerospace Services Ltd England*
GKN CeDU Ltd England
Emitec
emitec Denmark a/S (50%) Denmark
emitec France SaS (50%) France
emitec Gesellschaft für emissionstechnologie mbH (50%) Germany
emitec Inc (50%) USA
emitec produktion eisenach GmbH (50%) Germany
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 do Brasil Ltda Brazil
GKN aerospace Transparency Systems Inc USA
GKN Westland aerospace Inc USA*
Cylinder Liners
GKN Zhongyuan Cylinder Liner Company Ltd (59%) China
Rest of World
GKN aerospace engineering Services pty Ltd Australia
GKN aerospace Transparency Systems (Thailand) Ltd Thailand
Corporate
Europe
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
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 FaD Spa Italy
GKN Geplasmetal Sa Spain
GKN Glenco Sa France
GKN Land Systems Ltd England
GKN Service austria GmbH Austria
GKN Service Benelux BV Netherlands
GKN Service International GmbH Germany
GKN Walterscheid Getriebe GmbH Germany
GKN Walterscheid GmbH Germany
GKN Wheels Nagbøl a/S Denmark
Americas
GKN armstrong Wheels Inc USA
GKN rockford Inc USA
GKN Walterscheid Inc USA
Rest of World
GKN Wheels (Liuzhou) Company Ltd China
Matsui-Walterscheid Ltd (40%) Japan
*
Denotes a subsidiary whose results or financial position 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, and GKN Sinter Metals 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.
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.
GKN plc annual report and accounts 2010
116 /
SHareHoLDer INForMaTIoN
Financial calendar 2011
ordinary shares quoted ex-dividend
2010 final dividend record date
annual General Meeting
Final date for receipt of DrIp mandates
2010 final dividend payable
announcement of half year results for 2011
American Depositary Receipts
20 april 2011
26 april 2011
5 May 2011
5 May 2011
19 May 2011
2 august 2011
Annual General Meeting
The annual General Meeting will be held on Thursday, 5 May 2011 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 website and share price information
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
registrars. 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.
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.
Dividend payments are generally taxable and will be distributed to
aDr holders in US dollars by The Bank of New York Mellon.
any queries relating to GKN’s aDr facility should be directed to
The Bank of New York Mellon:
BNY Mellon Shareowner Services
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
Shareholders are advised to be wary of any unsolicited phone calls or
correspondence concerning investment matters, offers to buy shares
at a discount or free company reports.
These are typically from overseas based ‘brokers’ who target UK
shareholders, offering to sell them what are often worthless or high risk
shares in US or UK investments. These operations are commonly known
as ‘boiler rooms’.
If you receive any unsolicited investment advice:
n
make sure you obtain the correct name of the person and
organisation;
n
check that they are properly authorised by the Financial Services
authority by checking the FSa register of regulated firms at
www.fsa.gov.uk/register/
n
check the person is who they say they are by calling the firm using
the contact number listed 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;
n
report any suspicions to the FSa by calling 0300 500 5000 or by
visiting www.moneymadeclear.org.uk; and
n
if the calls persist, hang up.
Dividend reinvestment plan (DRIP)
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.
/ 117
To reduce the risk of becoming a victim of fraud you should:
n
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.
n
Keep all correspondence containing your shareholder reference
number in a safe place.
n
Shred all unwanted correspondence.
n
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.
n
Know when dividends will be paid. You can request that dividends
be paid directly into 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 2010:
Shareholders
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 37.6 million ordinary shares in treasury as at 31 December 2010.
GKN plc annual report and accounts 2010
Shares
Number
%
Number
(million)
6,714
4,048
9,377
3,070
107
234
63
194
28.2
17.0
39.4
12.9
0.4
1.0
0.3
0.8
1.4
3.0
22.1
34.5
7.5
59.0
44.7
1,380.7
0.1
0.2
1.4
2.2
0.5
3.8
2.9
88.9
23,807
100
1,552.9
100
21,101
2,403
303
88.6
10.1
1.3
53.1
1,476.4
23.4
3.4
95.1
1.5
23,807
100
1,552.9
100
%
118 /
SUBJeCT INDeX
accounting policies
acquisitions
aerospace
american depositary receipts
annual general meeting
assets
– goodwill and other intangible
– property, plant and equipment
audit Committee report
auditors
– audit information
– independence
– reappointment
– remuneration
– reports
Balance sheets
Board and committees
– audit Committee
– executive Committee
– Nominations Committee
– remuneration Committee
Borrowings
Business review
Capital expenditure
Capital reorganisation
Cash flow
Cautionary statement
Chairman’s statement
Changes in equity statement
Chief executive’s review
Combined Code compliance
Community involvement
Comprehensive income statement
Corporate governance
Directors
– attendance record
– biographies
– conflicts of interest
– interests in shares
– report
– remuneration
– responsibility for the accounts
– service agreements
Disposals
Dividend
– reinvestment plan
Driveline
earnings per share
employees
environment
Financial
– funding and liquidity
– instruments
– record
– treasury management
Key
IFC – Inside Front Cover
69-73, 111
26, 33, 81, 101
2, 6, 7, 9, 14-15, 21, 23-25,
37, 115
59, 116
45, 59, 116
72, 88-90
71, 91
46-47
61
46-47
47, 61
61, 79-80
63, 109
67, 110
4, 38-39, 40-45
41, 46-47
42
41, 43
41, 49
29, 31, 71, 94-95
IFC, 1-37
19, 22, 23, 24, 26 28, 29, 108
100, 117
IFC, 6, 7, 19, 20, 28-29, 68, 102
119
4-5
66
6-7
45
37, 61
65
5, 40-45
60
42
38-39
60
56-58
IFC, 1-62
55-56
62, 63, 109
53
27, 81
IFC, 4, 18, 28, 59, 86
116
1, 6, 7, 9, 10-11, 21, 22-23, 37, 114
IFC, 18, 28, 86
7, 34, 35, 37, 86-87
19, 36-37
31
27, 72, 81, 98
113
30
Financing costs (net)
Foreign currencies
Going concern
Government refundable advances
Group overview
Health and safety
Income statement
Internal control
Joint ventures
Key performance indicators
– financial
– non-financial
Land Systems
27, 82
20, 33, 70
31, 46
19, 24, 27, 73
1-2
19, 36
64, 70
44, 47
7, 27, 29, 70, 91-92 114-115
18-19
19, 36-37
2, 6, 7, 9, 16-17, 20, 21,
25-26, 37, 115
Long term incentives
51-52, 87-88
Margins
IFC, 18, 20, 21, 22, 23, 24, 25, 26, 78
Markets
1, 2, 6, 7, 20-22,
23-24, 25, 26, 32
offHighway
6, 20, 21
other businesses
26, 115
other statutory information
59-61
outlook
5, 7
pensions/post-employment obligations
4, 29-30, 33,
73, 85, 102-108
powder Metallurgy
1, 6, 7, 9, 12-13,
21, 23, 37, 115
profit/Loss
– before tax
IFC, 4, 28, 78
– operating
79-81
– trading
IFC, 6, 20, 21, 22, 23, 24, 25, 75, 79-80
registrar
116, 119
related party transactions
108
remuneration report
48-58
research and development
29, 72, 79
restructuring and impairment
6, 21, 22, 23, 24, 26,
27, 29, 80
risk and risk management
32-33, 44, 95-98
Sales
IFC, 6, 7, 18, 20, 21, 22, 23,
24, 25, 26, 70, 74
Segmental analysis
74-77
Share-based payments
73, 87-88
Shareholder analysis
117
Shares
– capital
59, 100
– dealing service
116
– price information
116
– substantial shareholders
59
Strategy
– Group
8
– divisional
9, 10-17
Subsidiary companies
114-115
Sustainability report
34-37
Taxation
28, 33, 73, 82-85, 117
Technology
1, 2, 7, 10-17, 22, 23, 25, 26, 32, 34, 42
Values
7, 34
Website
116, 119
01 /
02 /
GKN AT A GLANce
/ 119
cONTAcT DeTAILS
Delivering more through technology
and innovation…
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
Fax 0871 384 2100
(+44 1903 698403 from outside UK)
50 Pall Mall
London SW1Y 5JH
Tel +44 (0)20 7930 2424
Fax +44 (0)20 7930 3255
information@gkn.com
www.gkn.com
Registered in england No. 4191106
Driveline
Powder Metallurgy
Aerospace
Land Systems
GKN Driveline is the world’s leading supplier
of automotive driveline systems and solutions.
GKN Powder Metallurgy is the world’s leading
producer of sintered components and the largest
producer of metal powder in North America.
GKN Aerospace is a first tier supplier to the global
aviation industry and a leader in the manufacture
of highly complex composite aerostructures and
engine products.
GKN Land Systems designs, manufactures
and supplies a wide range of products for the
global agricultural, construction, mining and other
industrial markets.
Products
Products
Products
n
n
n
constant velocity jointed systems.
All-wheel drive 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.
Products
n
n
n
n
Sintered components for engines and gearboxes.
Sintered bearings and filters.
Metal injection moulded components.
Soft magnetic materials for use in electric motors.
n
n
Integrated aerostructures, including wing and flight
control surface assemblies and fuselage.
Propulsion products such as fan blades, exhaust
systems and nacelles.
Transparencies, including cockpit windows, bullet
resistant glass and coatings.
Niche technologies such as ice protection and noise
control systems.
n
n
n
Power management devices such as primary and
secondary driveshafts, clutches and gearboxes.
Single and multi-piece steel and aluminium wheels.
Structures such as chassis systems.
Aftermarket parts for use in a range of areas including
passenger cars and commercial and agricultural
vehicles.
n
The majority of our products are for applications in the
automotive industry, with the balance for a wide variety
of industrial and consumer uses.
n
We supply mainly to vehicle manufacturers in the
global car and light vehicle markets.
Technology trends
Markets
Technology trends
Trends in automotive and industrial markets have led to
greater demand for lower emissions, higher fuel
efficiency and lighter weight.
We supply our products to a wide range of aircraft and
engine prime contractors in both military and civil
aerospace markets.
In addition to existing markets, GKN Land Systems is
the platform to leverage GKN Group capability for new
business opportunities in emerging high growth markets
such as renewable energy and mass transit solutions.
Our response
Technology trends
Technology trends
Increasing investment in, and development of, lightweight
structures to improve fuel efficiency, lower emissions and
minimise the environmental impact of aviation.
There is heightened focus in all of our markets on
improving performance through efficient, reliable power
management, increased electrification and use of
lightweight structures.
Markets
Key trends in Driveline’s markets include demand for
improved fuel efficiency and increased concentration
on electric power as a solution to developing
sustainable, environmentally efficient transport.
n
Our response
n
n
Our products are developed with a clear focus on
providing weight, space and fuel savings.
Our eDrive Systems business continues to
develop innovative solutions, for use in vehicles
where the primary power is electricity and also
where the primary drive is a conventional engine
with a secondary electric drive.
SALeS BY cUSTOMeR
6%
Mitsubishi
8%
Ford
8%
Toyota
n
Powder metal technology enables the flexible design
of high performance complex shapes and the
production of components at, or close to, net shape,
leading to a reduction in material waste and
associated energy consumption in manufacture.
Demand for high precision and the use of new
materials has led to the development of components
such as helical gears for e-steering systems and,
in conjunction with GKN Driveline, sinter-forged
differential gears.
SALeS BY cUSTOMeR
4%
BMW
3% PSA Peugeot Citroen
15% Volkswagen Group
12%
Renault
Nissan Group
2% ThyssenKrupp Presta
2% Volkswagen Group
2% Linamar
3%
FiatChrysler
8%
General Motors
n
n
We are developing new applications for composites to
meet these requirements. Production on the A350 XWB’s
advanced composite rear wing spar recently commenced
at our dedicated composite facility in Filton, UK.
GKN Aerospace recently delivered the first major
structural assembly for the Sikorsky cH-53K helicopter,
featuring an advanced hybrid composite, aluminium
and titanium structure.
72%
Other
Markets
* calls to this number cost 8p per minute from a BT landline,
other providers’ costs may vary. Lines are open 8.30am to 5.30pm,
Monday to Friday.
Directors’ report – governance
38
40
46
48
59
62
The Board
corporate governance
Audit committee report
Remuneration report
Other statutory information
Statement of Directors’ responsibilities
Cautionary statement
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.
Financial statements
63
64
109
110
113
Independent auditors’ report (Group)
Group financial statements
Independent auditors’ report (company)
company financial statements
Group financial record
Our response
n
We are focused on developing products that meet
these challenges, such as our new Integrated
continuously Variable Drive System (IcVD®) for
agricultural and construction machinery, which can be
individually configured to vehicle-specific parameters
to optimise performance.
SALeS BY cUSTOMeR
3%
3%
Spirit Bombardier
3% Rolls Royce
4% General Electric
6% Lockheed Martin
28%
EADS
2% JCB
2% Ford
3% Claas
4% Caterpillar
2% Agco
2% Volkswagen Group
8% John Deere
6% Tata
6% Case New Holland
Other information
Images on pages 1, 2, 9 and 10-17 appear courtesy of Peugeot citroën,
Ford, Airbus S.A.S. and JcB.
The paper used in this report is produced with FSc mixed sources 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.
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.
ISO 14001 REGISTERED
DNV Certification BV
114
116
118
119
Subsidiaries and joint ventures
Shareholder information
Subject index
contact details
013
Key
IFc – Inside Front cover
Fulmar colour is a carbon Neutral Printing company.
14%
United
Technologies
10%
FiatChrysler
26%
Other
6%
General Motors
4% ZF Group
www.equiniti.com
www.shareview.co.uk
2010 performance
GKN at a glance
This is GKN
chairman’s statement
chief executive’s review
GKN strategy
Divisional strategies
Our strategy in action
– Driveline
– Powder Metallurgy
– Aerospace
– Land Systems
18 Key performance indicators
20 Review of performance
32 Risks and uncertainties
34 Sustainability report
Our response
SALeS BY cUSTOMeR
2%
Bosch
7% Ford
n
IFc
01
03
04
06
08
09
10
This annual report is available on our website.
Markets
n
Directors’ report – business review
65%
Other
18%
Other
21%
Boeing
Designed and produced by MAGEE
www.magee.co.uk
Printed by Fulmar colour
www.gkn.com
GKN plc Annual Report and Accounts 2010
GKN
2010 PeRFORMANce
Annual Report and Accounts 2010
eNGINeeRING FOR THe FUTURe…
We believe that everything we do well today
can be done better tomorrow. Standards,
disciplines, systems and processes have
built a culture that encourages us to
challenge everything. This way of thinking
turns the insignificant into the significant;
it accelerates our momentum and delivers
the products of our imagination.
www.gkn.com
n
Group results reflect the strong recovery in Driveline, Powder Metallurgy and
Land Systems, a good performance in Aerospace and the on-going benefits
from restructuring.
n
Sales up 22% (£975 million) to £5.4 billion.
n
Trading profit of £411 million, up £255 million, and trading margin of 7.6%.
n
New business: Driveline achieves 80% win rate on new driveshaft business
and Aerospace wins $1.5 billion of new contracts.
n
Positive free cash flow of £188 million and net debt down £149 million to
£151 million.
n
Final dividend of 3.5 pence per share, giving a total dividend for 2010
of 5.0 pence per share.
n
Return on average invested capital of 17% reflecting higher profitability.
Statutory basis
Sales
Profit/(loss) before tax
Earnings/(loss) per share
£5,084m
£345m
19.6p
2009: £4,223m
2009: £(54)m
2009: (3.2)p
Management basis
ENGINEERING
for the future
www.gkn.com
Sales
Profit before tax
Earnings per share
£5,429m
£363m
20.7p
2009: £4,454m (restated)
2009: £87m (restated)
2009: 5.7p (restated)
See page 20 for details of measurement and reporting of performance on a management basis. 2009 figures have been restated following the decision to
exit the Axles business of the former OffHighway segment.