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HALF YEAR
REPORT
2008
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Cautionary Statement
This half year report contains forward looking statements which are made in
good faith based on the information available to 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.
Exchange rates used for currencies most important to the Group’s
operations are:
Basis of Reporting
The financial statements for the period are shown on pages 8 to 22
and have been prepared using accounting policies which were used
in the preparation of audited accounts for the year ended
31 December 2007 and which will form the basis of the 2008 Annual
Report.
Further details on the basis of preparation are shown on page 15.
Average
First Half
Euro
US dollar
Period End
2007 Full Year
June
June
2008
2007
2008
2007 Average
Period
1.30
1.98
1.48
1.97
1.26
1.99
1.49
2.01
1.46
2.00
End
1.36
1.99
Measurement and reporting of performance
In this half year report, in addition to statutory measures of profit, we
have made reference to profits and earnings excluding the impact of:
strategic restructuring and impairment charges,
amortisation of non-operating intangible assets arising on
business combinations,
profits and losses on sale or closures of businesses, and
changes in fair value of derivative financial instruments
since we believe they show more clearly the underlying trend in
business performance.
The approximate impact on the annual trading profit of 2007
(including the Group’s share of joint ventures) of a 1% movement in
the average rate is euro — £1.6 million, US dollar — £0.7 million.
In our internal performance reporting we aggregate our share of sales
and trading profits of joint ventures with those of subsidiaries. This
is particularly important in assessing sales and profit progress in our
Driveline and Other Automotive businesses where significant activity
takes place in joint ventures. Reference to these combined figures is
made, where appropriate, as “management sales” and “management
trading profits”.
Trading profit is defined as operating profit before any of the above.
Where appropriate, reference is also made to results excluding the
impact of 2007 acquisitions as well as the impact of currency
translation on the results of overseas operations.
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1 GKN plc Half Year Report 2008
FINANCIAL PERFORMANCE
Business performance
– see note below
As reported
First Half
2008
£m
First Half
2007
£m
Change
£m
Sales – including share of joint ventures
First Half
2008
£m
First Half
2007
£m
2,402
2,056
(132)
Less share of joint ventures
(125)
Change
17%
6%
2,270
1,931
339
2,270
1,931
18%
Trading profit – subsidiaries
146
137
9
146
137
7%
Operating profit
133
113
20
146
137
7%
12
12
–
12
12
–
(27)
(24)
(3)
(27)
(24)
(13%)
118
101
17
131
125
5%
99
101
(2)
112
122
(8%)
13.8
14.2
(0.4)
15.6
17.2
(9%)
Sales – subsidiaries
Share of joint ventures (post-tax)
Net financing costs
Profit before tax
Profit after tax
Earnings per share – p
18%
Tax rate
2008
Interim dividend per share
4.5p
–
–
2007
Change
4.3p
16%
3%
–
5%
Note
Figures exclude the impact of restructuring and impairment charges, amortisation of non-operating intangible assets arising on business
combinations, profits and losses on sale or closures of businesses and changes in fair value of derivative financial instruments. These figures
represent underlying performance of continuing businesses.
BUSINESS PERFORMANCE HIGHLIGHTS
> Sales up 17% and profit before tax up 5%
> Aerospace and OffHighway both deliver double digit sales and profit growth
> Good sales increase in Driveline with small profit increase
Raw material increases hold back profits
> Difficult North American markets impact Powder Metallurgy
> Substantial new business wins support continued above market growth
Driveshafts secures 64% of available volume
Aerospace over $1 billion of order wins
> EPS 15.6p down from 17.2p due to change in tax rate
> Interim dividend increase of 5% to 4.5p
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CHAIRMAN’S AND CHIEF EXECUTIVE’S STATEMENT
GKN’s resilience has been demonstrated by our performance and our
successes during the first half of 2008.
A 17% increase in revenues, a 5% improvement in profit before tax and an
excellent increase in operating cash flow clearly show the strength of our
global businesses, each of which continues to enjoy market leading positions
in their sectors.
Our Automotive businesses have shown resilience in tough market conditions
and Aerospace and OffHighway have performed strongly.
We have also taken a number of actions to protect the performance of our
business as automotive markets soften in the second half.
We have continued to win substantial new business which has further
strengthened order books across Automotive, OffHighway and Aerospace.
Discussions with Airbus are close to a conclusion on the acquisition of the
Filton site and the sourcing of a major A350 work package — completion of
this transaction would be the next major step for Aerospace.
Our major businesses are in good shape to prosper in an uncertain economic
environment and the resilience of GKN will support continued development
and growth.
Group Performance
Management sales (subsidiaries and share of joint ventures)
£2,402 million (first half 2007 – £2,056 million)
Sales of subsidiaries £2,270 million (first half 2007 – £1,931 million)
Subsidiaries’ sales for the period were £2,270 million (first half 2007 – £1,931
million). The effect of exchange rates on the translation of the sales of
overseas subsidiaries was £139 million positive whilst 2007 acquisitions
added £43 million. Underlying sales increased by £157 million (8%) with
improvements in all divisions except Other Automotive.
Share of sales of joint ventures £132 million (first half 2007 – £125 million)
The Group’s share of joint venture sales was £132 million compared with £125
million in the first half of 2007. There were no acquisitions or divestments and
the translational impact of exchange rates was £11 million positive. The
underlying decrease was £4 million (3%) with further strong growth in
Driveline’s Chinese joint ventures offset by reductions at both Emitec and
Chassis Systems.
Management trading profit (subsidiaries and joint ventures)
£161 million (first half 2007 – £153 million)
Trading profit of subsidiaries £146 million (first half 2007 – £137 million)
Trading profit of continuing subsidiaries rose to £146 million from £137 million
in the first half of 2007. The translational impact of exchange rates was £14
million positive, the transactional effect £7 million negative while 2007
acquisitions contributed £6 million. Excluding these items, the decrease was
£4 million. Within this figure, Driveline was £6 million lower and Powder
Metallurgy reduced by £5 million, largely as a result of higher raw material
costs. Other Automotive fell by £2 million. Against these reductions, market
conditions remained good for both OffHighway and Aerospace where
underlying profit rose strongly by £5 million and £4 million respectively as a
consequence of strong sales growth.
Share of trading profit of joint ventures £15 million (first half 2007 – £16
million)
The Group’s share of the trading profit of joint ventures fell by £1 million from
the first half of 2007. Currency translation was £2 million favourable so that
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the underlying reduction was £3 million. Within this, Driveline businesses
showed growth in line with the sales increase whilst there were reductions in
Chassis Systems and Emitec.
Divisional Performance
The Group operates mainly in the global automotive, off-highway and
aerospace markets. Virtually the whole of Driveline and Other Automotive
sales are in the automotive market to manufacturers of passenger cars and
light vehicles. Some 80% of Powder Metallurgy sales are also to this market
with the balance to other industrial customers. OffHighway sells to producers
of agricultural, construction, mining and industrial equipment whilst
Aerospace sells to manufacturers of military and civil aircraft, aircraft engines
and equipment. The Group’s performance is heavily influenced by conditions
in these markets and the current behaviour of both end markets and costs is
discussed in the relevant sections of this report.
Automotive
Markets
With the exception of North America, automotive markets in the first half year
behaved much as previously anticipated.
In North America, production of cars and light vehicles in the period was 12%
lower than the same period in 2007 and there was a sharp change in
production mix from SUVs to smaller cars and crossover vehicles. Western
European production was level with the first half of 2007 with export sales,
particularly to Eastern Europe, offsetting weaker Western European demand.
In most emerging markets recent growth trends continued with production in
both Brazil and China rising by 16%. India, however, showed only a small
increase of 1%.
Looking forward to the second half of the year we expect production in our
major markets to show a slight reduction compared with the same period of
2007. Specifically, North America is anticipated to be down by 12% and Europe
slightly lower with continued growth in Eastern Europe more than offset by
weakening in the West. Our second half forecasts for emerging markets are for
continued growth in Brazil and some slowing of growth in Asia.
Costs
The major raw material for our Automotive businesses is steel (bar and scrap)
either directly or through steel-based products. During the six months to June,
prices for scrap steel rose dramatically and the average price for the half was
around 70% higher than in the same period of 2007 with the sharpest
increases occurring in the second quarter. The impact of these increases on
each business is discussed below.
GKN Driveline (Subsidiaries’ Trading Profit £71 million; first half 2007 –
£71 million)
GKN Driveline comprises GKN Driveshafts, which is the global leader in the
production of constant velocity jointed (‘CVJ’) products for use in light vehicle
drivelines, Torque Technology (‘TTG’), which produces a wide variety of
components aimed at actively managing the flow of torque to the driven
wheels and Industrial and Distribution Services (‘IDS’) which services mainly
the driveline aftermarket.
Driveline subsidiary sales in the period were £1,142 million compared with
£969 million in the first half of 2007. The impact of currency translation was
positive at £97 million. Excluding this, sales increased by £76 million (7%),
with increases in Driveshafts in all regions of operation, TTG and IDS.
Driveline subsidiaries’ trading profit of £71 million was level with the same
period of 2007. The impact of translational currency was £11 million positive
whilst the transactional impact was £5 million negative. Excluding these
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3 GKN plc Half Year Report 2008
factors, profit reduced by £6 million with the benefits of higher volumes more
than offset by costs associated with changes in model mix and the impact of
higher raw material costs. The gross impact of raw material price increases
was £16 million with some £4 million being recovered from customers. In the
second quarter we entered into discussion with all our major customers with a
view to embedding price adjustment clauses in our sales contracts. These
discussions are reaching a conclusion and we anticipate that we will have
arrangements in place to recover around 80% of raw material price increases
in the second half and beyond.
Subsidiaries’ margin in the period was 6.2% compared with 7.3% in the first
half of 2007. Looking forward to the second half, margins are anticipated to
improve as a consequence of the increased level of cost price recovery.
On a management basis (i.e. including the Group’s share of joint ventures)
total divisional sales showed £83 million (7%) underlying growth to £1,218
million. On the same basis, trading profit of £81 million compared with £79
million in 2007 and the margin of 6.7% compared with 7.7% a year earlier.
Driveline joint ventures, the principal one being Shanghai GKN Drive Shaft
Company Ltd, again saw good growth in both sales and profit.
During the period, Driveshafts was again successful in obtaining a significant
level of new and replacement business and won some 64% (first half 2007 –
68%) of all available sideshaft business, equating to approximately 48% of the
total market. Production of Countertrack™ joints commenced in the period and
additional programmes will come on stream during the second half of the year.
GKN Driveline’s high performance Torque Vectoring technology made its debut
on the new BMW X6 ‘sports activity coupe’. This new technology is a key
element of BMW’s Dynamic Performance Control system, which is being
pioneered on the new, highly acclaimed, vehicle. There is growing interest
from major manufacturers in torque vectoring and other axle control
technologies and, in July, we were awarded Nissan’s global innovation award
for our contribution to the Nissan GT-R.
IDS continued its steady improvement and plans are in place to further extend
its operations through the opening of new service centres.
Other Automotive (Subsidiaries’ Trading Loss £(2)m; first half 2007 – £nil)
The Other Automotive businesses manufacture structural chassis components
for the passenger car, SUV and light vehicle markets in Western Europe and
engine cylinder liners for the North American and, increasingly, Chinese truck
markets. Emitec, in which we have a 50% stake, produces metallic substrates
for catalytic converters in Germany, the US, China and India.
Sales in the period of £48 million were £9 million lower than the first half of
2007. £13 million of the reduction was the result of the closure of Sheepbridge
Stokes in 2007 so that in ongoing businesses there was an increase of £4
million largely as a result of improvements in the Chinese business.
The Chinese operations made a small profit in the period against break-even in
the first half of 2007 but this was offset by losses in the UK AutoStructures
businesses, largely as a result of reorganisation costs incurred in the period.
Within joint ventures, sales at Chassis Systems Ltd were somewhat lower
than in the first half of 2007 and profit reduced as a result both of lower volumes
and the absence of one-off credits which had benefited the first half of last year.
£104 million in the first half of 2007 and trading profit fell to £3 million from
£8 million.
Powder Metallurgy (Trading Profit £11 million; first half 2007 – £15 million)
Powder Metallurgy produces metal powder (Hoeganaes) and sintered products
(Sinter Metals). Approximately 80% of sales are into the automotive market
with the balance to a variety of other industrial manufacturers.
Powder Metallurgy sales in the period were £333 million compared with
£309 million in the same period in 2007. Excluding the favourable impact
of currency on translation of £20 million, there was an increase of
£4 million (1%).
Within Sinter Metals, the European business achieved sales growth of 5% and
Asia Pacific sales increased by 8%. Sinter Metals North American business
experienced a sales reduction of 11%, primarily due to very weak sales to
General Motors. However, new programme launches partially mitigated the
negative impact.
Hoeganaes increased overall sales volumes by 3% due to new business wins,
market share gains in North America and increased exports to Asia Pacific and
Europe, all of which more than offset the impact of market weakness on sales
in North America.
First half trading profit fell to £11 million from £15 million. In Sinter Metals there
were increased profits in Europe related to the benefits of restructuring
completed in 2007 and volume growth. North America reported a loss in line
with sharply lower sales and the impact of rapidly increasing material costs not
yet recovered from customers. The strike at American Axle affected a number of
GKN plants, including the closure of two facilities for a number of weeks.
In Hoeganaes, underlying profits were level with the first half of 2007
supported by good growth in sales to both Europe and Asia Pacific.
For Powder Metallurgy as a whole, the gross impact of raw material cost
increases was approximately £12 million, of which some £6 million was
recovered from customers through the surcharge mechanism in Hoeganaes
and surcharge/customer price actions in Sinter Metals. In light of the
unprecedented volatility in the scrap market, the Hoeganaes surcharge was
moved to a monthly basis to provide better alignment between volumes
shipped and surcharging.
The division’s trading margins in the first half fell to 3.3% from 4.9% in the
same period of 2007. The positive impact of prior year restructuring activity
was clearly seen in the results of the European Sinter business but the
benefits in North America were offset by the weak automotive trading
environment. Work continues to implement material surcharging at Sinter
Metals customers to reduce risk given the current high levels of raw material
volatility. Actions have also been implemented to align the North American
cost structure to the developing market conditions and the workforce will be
reduced by around 400 by September.
Approximately £50 million of new business was won in the period which will
continue to support the anticipated growth in all regions of 6%–8% in the
medium term.
Underlying sales of Emitec were lower as German retrofit demand fell sharply
and profits consequently reduced from the first half of 2007.
OffHighway (Trading Profit £25 million; first half 2007 – £19 million)
OffHighway designs and manufactures steel wheels, gearboxes, axles and
driveline systems for the global agricultural, construction, mining and
industrial machinery sectors.
On a management basis (i.e. including the Group’s share of joint ventures)
divisional sales of continuing businesses were £102 million compared with
European agricultural markets (50% of divisional sales) performed strongly in
the first half with demand up significantly by comparison to the first half of
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CHAIRMAN’S AND CHIEF EXECUTIVE’S STATEMENT CONTINUED
2007. This has been fuelled by both an increase in farm incomes in 2007 and
higher commodity prices. Demand for US agricultural machinery (14% of
divisional sales) was also sharply higher as farm incomes rose on the back of
higher commodity prices. Generally, the harvesting market is forecast to be
strong globally for the remainder of 2008 and into 2009.
In the construction equipment market (22% of divisional sales) the picture has
been mixed. The lower level of housing starts in the US has led to a decline in
demand for light construction equipment but demand has remained strong in
mining markets. Whilst local demand in the US has been weak there has been
an increasing level of exports by our customers and this trend is expected to
continue for the remainder of the year. European volumes have continued to
be strong. However, we are seeing a slowing of demand for light construction
equipment, particularly in the UK and Spain (though this sector accounts for
only around £25 million of annual sales across the division). The Asian market
still continues to grow, but at slower pace than last year. Our Chinese plants
have seen strong demand in the first 6 months partly driven by higher local
demand but also by additional demand from Europe.
The major input cost for the division remains steel, and overall material prices
in the first half of 2008 have increased significantly as a result of strong global
demand. These price increases are carefully monitored and we have been
successful in mitigating much of the increase in the period.
Against this background, subsidiary sales in the first half were £280 million
compared with £219 million in the same period of last year. The impact of
currency on translation was £20 million positive so that the underlying increase
was £41 million (17%) with good progress in all product areas and regions.
Trading profit also improved significantly to £25 million from £19 million.
The impact of movements in exchange rates on the translation of results was
£2 million favourable whilst transactional effects were £1 million negative.
Excluding these factors the increase was £5 million, in line with the
improvement in sales.
Margin improved to 8.9% (first half 2007 – 8.7%).
The overall performance of GKN OffHighway has been strong so far in 2008
and, with order books at record levels, we anticipate this will continue for the
second half of the year consistent with normal seasonal trends. The breadth of
our product portfolio and geographical coverage provides a strong basis for
further growth.
GKN Aerospace (Trading Profit £47 million; first half 2007 – £38 million)
GKN Aerospace is a global first tier supplier of airframe and engine structures,
components, assemblies and engineering services to aircraft prime contractors.
The aerospace market conditions of 2007 continued into the first half of 2008
with strength in both civil and military sectors.
During the period January to June Airbus and Boeing delivered 486 aircraft, an
increase of 8% over the first half of 2007, and the order backlog increased to
7,324. At the same time, increased oil prices and general economic conditions
are likely to result in fewer passenger miles being flown and increased
financial pressure on some airlines. Both Airbus and Boeing expect a reduction
of order intake but are maintaining current production plans as a result of the
strong order book.
There is, however, a growing expectation that some of these will be subject to
delay or cancellation.
The regional and business sector has also seen growth, with turbo props
securing new orders as a result of operating cost benefits compared with
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regional jets, and there have been a number of new product launches in
both sectors.
Military demand, which is largely driven by US defence spending, is likely to
remain solid in the medium term. The Joint Strike Fighter programme
continues its development phase and has moved into its initial production
schedule and preparation for higher rate manufacturing.
Sales in the first half of £467 million were £90 million (24%) higher than the
same period of 2007. The impact of currency translation was £2 million
positive while Teleflex, acquired at the end of June 2007, added £43 million.
The underlying increase of £45 million represented a 12% improvement and
was the result of the ramp-up of production on a number of programmes. The
annual delays in the Boeing 787 programme will reduce our expected 2008
revenues by about £40 million and has led to lay-offs in one of our US plants.
Trading profit increased by £9 million to £47 million. The impact from currency
on translation of results was nil while the transactional impact was £1 million
negative. The 2007 acquisition of Teleflex and synergies arising from its
integration added £6 million. Excluding these factors, the increase was £4
million. The margin was steady at 10.1%.
During the period orders won included the HTF 7000 third Nacelle application
and an additional C130J Nacelle Multi Year from the US Department of
Defense. We also entered a joint venture with Rolls-Royce for the development
of composite fan blades, initially focused on future 150 seat aircraft
applications.
As a result of increasing fuel costs the pressure to improve operating costs is
driving demand for retrofit winglet programmes and we have increased rate
deliveries on the B737 Winglet and delivered the first B767 Winglet to
American Airlines.
Across the portfolio the division has maintained its balanced position in civil
and defence programmes and has continued to secure its market position
with a range of customers and programmes that maintains its diversity.
A large proportion of these programmes are now entering the initial phase of
production schedule ramp-up and are projected to reach volume rates over the
period 2010 to 2014.
If, as we expect, we finalise a deal with Airbus for the acquisition of the Filton
wing assembly plant and associated A350 wing package it will add in the
region of £400 million to our annual revenues and significantly increase our
order book.
Corporate costs (£6 million; first half 2007 – £6 million)
Corporate costs, which comprise the costs of stewardship of the Group,
remained at the same level as the first half of 2007.
Restructuring and impairment charges (£4 million; first half 2007 –
£13 million)
The first half charges of £4 million (first half 2007 – £13 million) related
primarily to the final phase of the strategic restructuring programme, first
announced in March 2004, with the major element representing the final costs
associated with Driveline operations in North America and Europe. There are
no further restructuring costs to be charged in respect of this programme.
Amortisation of non-operating intangibles arising on business combinations
(£5 million; first half 2007 – £3 million)
The charge of £5 million in the period was £2 million higher than in the same
period of 2007. The increase was in respect of intangible assets (e.g. customer
contracts and relationships, technological know-how and intellectual property
rights) of the Teleflex acquisition.
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5 GKN plc Half Year Report 2008
Profits and losses on sale or closures of businesses (£nil; first half 2007 –
£7 million)
There were no businesses sold or closed during the period. The prior year
charge of £7 million related to the results of the Group’s UK cylinder liner
business, GKN Sheepbridge Stokes, which ceased trading in the second half
of 2007.
The ‘cash tax’ charge for the period (which excludes deferred taxes,
movements in provisions for uncertain tax positions and tax relating to
restructuring, impairment charges and sale of businesses) was 17% and we
continue to expect ‘cash tax’ to average 20% or less for the near term as we
continue to make use of prior years’ tax losses, incentives and deductions in
the various countries in which we operate.
Changes in fair value of derivative financial instruments (£4 million charge;
first half 2007 – £1 million charge)
The Group enters into foreign exchange contracts to hedge much of its
transactional exposure. Hedge accounting continues to be applied to a small
proportion of these transactions. Where hedge accounting has not been
applied, the change in fair value between 1 January 2008 and 30 June 2008, or
the date of maturity if earlier, is reflected in the income statement as a
component of operating profit and has resulted in a charge of £5 million (first
half 2007 – £1 million charge). In addition, during the first half year, there were
changes in the value of Powder Metallurgy commodity contracts of £1 million
credit (2007 – £1 million credit). There were no changes in the value of
embedded derivatives in the period (2007 – £1 million charge).
For the 2008 full year the tax rate is likely to be broadly in line with the half
year rate. For 2009 and beyond, the overall reported tax rate on underlying
profits of subsidiaries may continue to be volatile, being influenced by the
possible further recognition of currently unrecognised deferred tax assets and
the settlement of prior year tax disputes.
Operating profit (£133 million, first half 2007 – £113 million)
Operating profit of £133 million compared with £113 million in the first half of
2007, reflecting the movements discussed above.
Post-tax earnings of joint ventures (£12 million; first half 2007 – £12 million)
The post-tax earnings of joint ventures in the period were £12 million, the same
figure as the comparable period in 2007. As noted above, there was a net £1
million reduction in trading profit but a corresponding decrease in the tax charge.
Net financing costs (£27 million; first half 2007 – £24 million)
Net financing costs totalled £27 million (first half 2007 – £24 million) and
included financing costs of post-employment benefits of £1 million (first half
2007 – £1 million). The net of interest payable and interest receivable was
£26 million (first half 2007 – £23 million). The £3 million increase largely
resulted from the impact of 2007 acquisitions and higher investments in
emerging markets.
Profit before tax (£118 million; first half 2007 – £101 million)
Profit before tax on a statutory basis was £118 million compared with £101
million in the first half of 2007. Excluding the impact of restructuring and
impairment charges, amortisation of non-operating intangible assets arising
on business combinations, profits and losses on the sale or closures of
businesses and changes in fair value of derivative financial instruments, the
figure was £131 million (first half 2007 – £125 million), an increase of 5%.
Taxation (£19 million charge; first half 2007 – £nil)
The tax charge for subsidiaries for the period, including deferred taxation, was
£19 million (first half 2007 – £nil).
The tax charge as a percentage of subsidiaries’ profit before tax, before
restructuring and impairment charges, amortisation of non-operating assets
arising on business combinations, profits and losses on sale or closures of
businesses and changes in fair value of derivative financial instruments, is
16.0% compared with 2.7% in the first half of 2007. The increase in the
effective rate from 2007 is partly attributable to the benefit arising from the
utilisation and recognition of previously unrecognised deferred tax assets
being smaller than the equivalent benefit recognised in the first half of 2007;
and partly attributable to a charge arising from the reversal, via use, of
previously recognised deferred tax assets. The recognition of previously
unrecognised deferred tax assets has been based upon management
projections which indicate an improvement in future taxable profits in the
relevant territories.
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Minority Interests (£2 million; first half 2007 – £1 million)
The movement of £1 million in the profit attributable to minority interests was
largely the result of improved profitability in the Chinese cylinder liner
Company and in Driveshaft’s Asian businesses.
Earnings per share
Earnings per share were 13.8p (first half 2007 – 14.2p). Before restructuring
and impairment charges, amortisation of non-operating intangible assets
arising on business combinations, profits and losses on the sale or closures
of businesses and changes in the fair value of derivative financial instruments,
the figure was 15.6p (first half 2007 – 17.2p). The reductions are mainly due
to the increased tax charge discussed above.
Dividend
The Board has decided to pay an interim dividend of 4.5p per share,
representing an increase of 4.7% over the 2007 interim dividend. The cost of
the dividend will be £32 million (first half 2007 – £30 million).
The interim dividend will be paid on 30 September 2008 to shareholders on
the register at 15 August 2008. Shareholders may choose to use the Dividend
Reinvestment Plan (DRIP) to reinvest the interim dividend. The closing date
for receipt of new DRIP mandates is 16 September 2008.
Cash Flow
Operating cash flow, which we define as cash generated from operations of
£159 million (first half 2007 – £98 million) adjusted for capital expenditure of
£101 million (first half 2007 – £89 million) and proceeds from the disposal of
fixed assets of £2 million (first half 2007 – £7 million), was an inflow of £60
million compared with an inflow of £16 million in the first half of 2007.
Within operating cash flow there was an outflow on working capital and
provisions of £63 million (first half 2007 – £87 million) reflecting both the
higher level of sales and usual seasonality.
Capital expenditure on both tangible and intangible assets totalled £101
million (first half 2007 – £89 million). Of this, £95 million (first half 2007 – £80
million) was on tangible fixed assets and was 1.2 times (first half 2007 – 1.1
times) the depreciation charge. The ratio for the full year is expected to trend
down closer to 1.1 times.
Expenditure on intangible assets, mainly initial non-recurring costs on
Aerospace programmes, totalled £6 million (first half 2007 – £9 million).
Net interest paid totalled £30 million compared with £25 million in the same
period last year, mainly reflecting the higher level of debt following the
acquisition of Teleflex at the end of the first half of 2007.
Tax paid in the period was £14 million (first half 2007 – £14 million).
The cash cost of the 2007 final dividend was £65 million (first half 2007 – £61
million) and acquisition expenditures, net of cash acquired, was £2 million
(first half 2007 – £70 million).
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6 GKN plc Half Year Report 2008
CHAIRMAN’S AND CHIEF EXECUTIVE’S STATEMENT CONTINUED
Post-employment costs
Post-employment costs comprise both pensions and post-employment
medical benefits. Details of the amounts included in the Balance Sheet and
the assumptions used in their computation are shown in Note 9 on page 20.
Outlook
In uncertain economic conditions, GKN expects that its global positioning,
diversity of end markets and strong order books will support continued above
market growth. Cost recovery measures and increased operational flexibility
are anticipated to deliver improved performance in Driveline and Powder
Metallurgy when compared with the first half, against a background of
softening markets. Aerospace and OffHighway are expected to perform
strongly.
Income Statement
For the six month period, the current service cost included in operating profit
was £15 million compared with £17 million in the first half of 2007. Changes to
retiree medical arrangements in the US in 2007 were the major reason for the
reduction.
In detail, Automotive markets are likely to soften further, with the Americas
continuing their first half trend, Europe set to weaken and a potential
slowdown in growth in Asia. We now expect second half light vehicle
production in our major markets to show a small reduction against last year,
leaving the year as a whole slightly ahead.
Financing charges in respect of post-employment obligations totalled
£1 million (first half 2007 – £1 million) and comprised expected returns on
pension scheme assets for the period of £81 million (first half 2007 – £74
million) which were more than offset by the £82 million (first half 2007 –
£75 million) of notional interest on pension scheme liabilities.
Global OffHighway markets for agricultural and mining and heavy construction
equipment remain strong.
Period end borrowings totalled £529 million compared with £574 million at
30 June 2007 and £506 million at the end of December 2007, leaving the
balance sheet in a strong position.
Balance Sheet and funding
The gross deficit of all schemes at 30 June 2008 was £450 million, a £119
million increase over December 2007, which is shown on the balance sheet as
a non-current liability. The increase in the deficit was largely due to asset
returns that were £227 million lower than expected, partially offset by a £108
million reduction in liabilities from higher discount rate increases from end
2007 levels in the UK, the Americas and Europe.
Company contributions for the six months across the Group totalled £21
million (first half 2007 – £21 million).
UK post-employment obligations
The gross deficit of £122 million was £106 million higher than the December
2007 year end figure of £16 million. The increase was mainly due to asset
returns that were £203 million lower than expected, partially offset by lower
liabilities from a 60 basis point increase in the discount rate.
In Aerospace, the US defence market continues to support a healthy
procurement programme. Civil aerospace growth looks set to soften, although
this is unlikely to have much impact in the second half.
Raw material costs, particularly steel, remain high and volatile. However, the
Group has undertaken initiatives in the first half that will improve the level of
cost recovery from our customers.
Exchange rates at current levels would continue to provide a translational
benefit to earnings, although this will be partially offset by adverse
transactional impacts.
Conclusion of the negotiations for the acquisition of the Airbus Filton wing
aerostructures site is imminent with completion expected before the end of
the year.
In summary, we anticipate that second half performance will benefit from
actions taken in the first half and that progress for the year as a whole will be
in line with expectations.
Mortality assumptions were adjusted at 2007 year end, in part to reflect
specific scheme longevity. It is normal policy to review mortality assumptions
in the second half following the annual publication of scheme specific
mortality experience.
Principal risks and uncertainties
The principal risks and uncertainties to which the Group is exposed are set out
on pages 37–39 of the 2007 Annual Report. There have been no changes in the
nature of the risks identified but the weaknesses emerging in some of the
world’s major economies and the significant rise in oil prices which have
occurred during the first half year have increased uncertainties concerning:
●
●
the overall levels of global car and light vehicle production in the near
term and the mix of types of vehicles likely to be produced, and
the number of passenger miles flown and airline profitability, both of
which could affect demand for new aircraft.
Roy Brown
Chairman
Sir Kevin Smith
Chief Executive
5 August 2008
As noted in the Annual Report, in 2007 56% of the Group’s sales were for
automotive vehicle manufacturers and 20% for original equipment on aircraft
or aircraft components and the Group’s performance is dependent on levels of
demand in these areas.
In addition, these macro economic trends, together with liquidity issues
arising from the ‘credit crunch’, have increased pressure on some of our
customers and suppliers. We continue to monitor the situation closely with a
view to minimising any adverse consequences.
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7 GKN plc Half Year Report 2008
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The half yearly financial report is the responsibility of the Directors who
confirm that to the best of their knowledge:
●
the condensed set of financial statements has been prepared in
accordance with IAS 34 Interim Financial Reporting as endorsed and
adopted by the EU;
●
the interim management report includes a fair review of the information
required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication
of important events that have occurred during the first six months of the
financial year and their impact on the condensed set of financial
statements; and a description of the principal risks and uncertainties for
the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure of Transparency Rules, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the entity during that period; and any changes in the
related party transactions described in the 2007 Annual Report.
The Directors of GKN plc are listed in the GKN Annual Report for 31 December
2007, with the exception of the following change in the period: Richard
Parry-Jones CBE was appointed a non-executive Director with effect from
1 March 2008.
By order of the Board of GKN plc.
Roy Brown
Chairman
Sir Kevin Smith
Chief Executive
Bill Seeger
Finance Director
4 August 2008
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8 GKN plc Half Year Report 2008
CONSOLIDATED INCOME STATEMENT
FOR THE HALF YEAR ENDED 30 JUNE 2008
Unaudited
Continuing operations
Sales
Notes
First
half
2008
£m
First
half
2007
£m
Full
year
2007
£m
1
2,270
1,931
3,869
146
(4)
(5)
–
(4)
137
(13)
(3)
(7)
(1)
277
(31)
(8)
(7)
(10)
133
12
113
12
221
24
(33)
7
(1)
(30)
7
(1)
(62)
19
(3)
(27)
(24)
(46)
118
(19)
101
–
199
(1)
Profit after taxation for the period
99
101
198
Profit attributable to minority interests
Profit attributable to equity shareholders
2
97
1
100
2
196
99
101
198
13.8
13.7
14.2
14.2
27.9
27.8
4.5
–
4.3
–
4.3
9.2
Trading profit
Restructuring and impairment charges
Amortisation of non-operating intangible assets arising on business combinations
Profits and losses on sale or closures of businesses
Changes in fair value of derivative financial instruments
Operating profit
Share of post-tax earnings of joint ventures
Interest payable
Interest receivable
Other net financing charges
1, 3
1, 4
5
Net financing costs
Profit before taxation
Taxation
6
Earnings per share – p
Basic
Diluted
7
Dividends per share – p
Interim dividend per share
Final dividend per share
8
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9 GKN plc Half Year Report 2008
CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE
FOR THE HALF YEAR ENDED 30 JUNE 2008
Unaudited
First
half
2008
£m
Currency variations
Derivative financial instruments:
Transactional hedging
Translational hedging
Actuarial gains and losses on post-employment obligations including tax:
Subsidiaries
Joint ventures
Deferred tax on other items
First
half
2007
£m
Full
year
2007
£m
58
(12)
66
–
(32)
–
11
–
(28)
(95)
–
–
128
–
–
140
1
(8)
(69)
127
171
Profit for the period
99
101
198
Total recognised income for the period
30
228
369
Total recognised income for the period attributable to:
Equity shareholders
Minority interests
28
2
226
2
365
4
30
228
369
Net (losses)/profits not recognised in the Income Statement
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10 GKN plc Half Year Report 2008
CONSOLIDATED BALANCE SHEET
AT 30 JUNE 2008
Unaudited
Notes
30 June
2008
31 December
2007
£m
30 June
2007
Restated
£m
285
134
1,519
96
24
69
271
133
1,354
93
17
60
280
136
1,462
100
22
56
2,127
1,928
2,056
597
706
1
24
246
513
647
–
46
206
552
571
2
25
282
1,574
1,412
1,432
–
4
–
3,701
3,344
3,488
2
Assets
Non-current assets
Intangible assets
– goodwill
– other
Property, plant and equipment
Investments in joint ventures
Other receivables and investments including loans to joint ventures
Deferred tax assets
11
Current assets
Inventories
Trade and other receivables
Current tax assets
Derivative financial instruments
Cash and cash equivalents
Assets held for sale
Total assets
Liabilities
Current liabilities
Borrowings
Derivative financial instruments
Trade and other payables
Current tax liabilities
Provisions
£m
(80)
(59)
(943)
(110)
(37)
(54)
(12)
(811)
(94)
(53)
(92)
(30)
(837)
(104)
(45)
(1,229)
(1,024)
(1,108)
(695)
(81)
(32)
(50)
(726)
(72)
(31)
(56)
(696)
(75)
(31)
(51)
(450)
(355)
(331)
(1,308)
(1,240)
(1,184)
(2,537)
(2,264)
(2,292)
1,164
1,080
1,196
Shareholders’ equity
Ordinary share capital
Share premium account
Retained earnings
372
29
774
372
27
758
372
29
834
Other reserves
(33)
(95)
(58)
Non-current liabilities
Borrowings
Deferred tax liabilities
Trade and other payables
Provisions
9
Post-employment obligations
Total liabilities
Net assets
Total shareholders’ equity
Minority interests — equity
10
Total equity
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Proof 3
1,142
1,062
1,177
22
18
19
1,164
1,080
1,196
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11 GKN plc Half Year Report 2008
CONSOLIDATED CASH FLOW STATEMENT
FOR THE HALF YEAR ENDED 30 JUNE 2008
Unaudited
First
half
2008
£m
Cash flows from operating activities
Cash generated from operations (note a)
Interest received
Interest paid
Tax paid
Dividends received from joint ventures
Cash flows from investing activities
Purchase of property, plant and equipment and intangible assets
Proceeds from sale of property, plant and equipment
Acquisitions of subsidiaries (net of cash acquired)
Investment loans and capital contributions
Cash flows from financing activities
Net proceeds from issue of ordinary share capital
Net proceeds from borrowings
Finance lease payments
Repayment of borrowings
Dividends paid to shareholders
Dividends paid to minority interests
Currency variations on cash and cash equivalents
First
half
2007
£m
Full
year
2007
£m
159
3
(33)
(14)
20
98
4
(29)
(14)
3
299
16
(60)
(28)
13
135
62
240
(101)
2
(2)
1
(89)
7
(70)
2
(192)
21
(71)
7
(100)
(150)
(235)
–
3
5
10
–
(6)
(65)
–
2
(1)
(1)
(61)
–
13
(1)
(17)
(91)
(1)
(61)
(58)
(92)
6
1
9
Movement in cash and cash equivalents (note b)
Cash and cash equivalents at 1 January
(20)
250
(145)
328
(78)
328
Cash and cash equivalents at end of period (note c)
230
183
250
Cash inflows from government capital grants of less than £1 million (first half 2007 – £1 million, full year 2007 – £nil) have been offset against purchases of
property, plant and equipment and intangible assets.
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12 GKN plc Half Year Report 2008
CONSOLIDATED CASH FLOW STATEMENT — NOTES
FOR THE HALF YEAR ENDED 30 JUNE 2008
Note a: Cash generated from operations
Unaudited
Cash generated from operations
Operating profit
Adjustments for:
Amortisation of non-operating intangible assets arising on business combinations
Changes in fair value of derivative financial instruments
Tangible fixed asset impairments/reversals
Depreciation and amortisation
Amortisation of capital grants
Net profits on sale of fixed assets
Charge for share-based payments
Movement in post-employment obligations
Changes in working capital and provisions
First
half
2008
£m
First
half
2007
£m
Full
year
2007
£m
133
113
221
5
4
1
85
(1)
(1)
2
(6)
(63)
3
1
(1)
74
(2)
(1)
2
(4)
(87)
8
10
(9)
151
(2)
(8)
6
(29)
(49)
159
98
299
First
half
2007
£m
Full
year
2007
£m
Note b: Movement in net debt
Unaudited
First
half
2008
£m
Net movement in cash and cash equivalents
Net movement in borrowings
Currency variations on borrowings
Finance leases
Subsidiaries acquired and sold
(20)
(4)
1
–
–
(145)
(5)
1
1
–
(78)
4
(7)
1
–
(23)
(148)
(80)
Net debt at beginning of period
(506)
(426)
(426)
Net debt at end of period
(529)
(574)
(506)
Movement in period
Note c: Reconciliation of cash and cash equivalents
Unaudited
30 June
2008
£m
30 June
2007
£m
31 December
2007
£m
Cash and cash equivalents per balance sheet
Bank overdrafts included within ‘Current liabilities – Borrowings’
246
(16)
206
(23)
282
(32)
Cash and cash equivalents per cash flow
230
183
250
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13 GKN plc Half Year Report 2008
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS
FOR THE HALF YEAR ENDED 30 JUNE 2008
1 Segmental analysis
The Group is managed by type of business. Segmental information is provided having regard to the nature of the goods and services provided and the
markets served.
FOR THE HALF YEAR ENDED 30 JUNE 2008 (UNAUDITED)
Automotive
Driveline
£m
Other
Automotive
£m
Powder
Metallurgy
£m
OffHighway
£m
Aerospace
£m
1,142
280
Corporate
£m
Total
£m
2,270
48
333
467
–
EBITDA
Depreciation and impairment charges
Amortisation of intangible assets
116
(44)
(1)
–
(2)
–
27
(16)
–
31
(6)
–
63
(13)
(3)
(6)
–
–
231
(81)
(4)
Trading profit/(loss)
Restructuring
Amortisation of business combination
non-operating intangibles
Changes in fair value of derivative
financial instruments
71
(4)
(2)
–
11
–
25
–
47
–
(6)
–
146
(4)
(1)
–
–
(1)
(3)
–
(5)
1
1
1
(1)
(6)
–
(4)
Operating profit/(loss)
67
(1)
12
23
38
(6)
133
8
4
–
–
–
–
12
45
2
–
–
18
–
5
–
15
4
–
–
83
6
1
–
–
–
–
1
2
Driveline
£m
Other
Automotive
£m
Powder
Metallurgy
£m
OffHighway
£m
Aerospace
£m
Corporate
£m
Total
£m
Sales
969
57
309
219
377
–
1,931
EBITDA
Depreciation and impairment charges
Amortisation of intangible assets
110
(38)
(1)
2
(2)
–
30
(15)
–
24
(5)
–
51
(10)
(3)
(6)
–
–
211
(70)
(4)
Trading profit/(loss)
Restructuring
Other impairments
Amortisation of business combination
non-operating intangibles
Profits and losses on sale or closures of businesses
Changes in fair value of derivative
financial instruments
71
(9)
–
–
–
1
15
(5)
–
19
–
–
38
–
–
(6)
–
–
137
(14)
1
–
–
–
(7)
–
–
(1)
–
(2)
–
–
–
(3)
(7)
(1)
–
–
–
–
–
(1)
Operating profit/(loss)
61
(6)
10
18
36
(6)
113
7
5
–
–
–
–
12
39
1
1
–
15
–
4
–
12
8
–
–
71
9
1
–
–
–
–
1
2
Sales
Share of post-tax earnings of joint ventures
Other segment items
Fixed asset additions
Property, plant and equipment
Intangible assets
Other non-cash expenses
(share-based payments)
FOR THE HALF YEAR ENDED 30 JUNE 2007 (UNAUDITED)
Automotive
Share of post-tax earnings of joint ventures
Other segment items
Fixed asset additions
Property, plant and equipment
Intangible assets
Other non–cash expenses
(share-based payments)
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14 GKN plc Half Year Report 2008
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE HALF YEAR ENDED 30 JUNE 2008
1 Segmental analysis continued
FOR THE YEAR ENDED 31 DECEMBER 2007
Automotive
Driveline
£m
Other
Automotive
£m
Powder
Metallurgy
£m
OffHighway
£m
Aerospace
£m
Corporate
£m
Total
£m
1,922
109
602
416
820
–
3,869
Sales
EBITDA
Depreciation and impairment charges
Amortisation of intangible assets
227
(75)
(3)
2
(5)
–
58
(28)
(1)
39
(10)
–
112
(24)
(5)
(10)
–
–
428
(142)
(9)
Trading profit/(loss)
Restructuring
Other impairments
Amortisation of business combination
non-operating intangibles
Profits and losses on sale or closures of businesses
Changes in fair value of derivative
financial instruments
149
(19)
–
(3)
–
2
29
(14)
–
29
–
–
83
–
–
(10)
–
–
277
(33)
2
(1)
–
–
(7)
–
–
(2)
–
(5)
–
–
–
(8)
(7)
(1)
(1)
(1)
(2)
(5)
–
(10)
Operating profit/(loss)
128
(9)
14
25
73
(10)
221
14
10
–
–
–
–
24
94
3
2
–
38
–
11
1
28
16
1
–
174
20
2
–
1
–
1
2
6
Share of post-tax earnings of joint ventures
Other segment items
Fixed asset additions
Property, plant and equipment
Intangible assets
Other non-cash expenses
(share-based payments)
All business segments shown above are continuing. EBITDA is earnings before interest, tax, depreciation and amortisation.
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15 GKN plc Half Year Report 2008
2 Basis of preparation
These half year condensed consolidated financial statements for the six months ended 30 June 2008 have been prepared in accordance with the Disclosure and
Transparency Rules of the Financial Services Authority and International Financial Reporting Standards, as adopted by the European Union, in accordance with
IAS 34 ‘Interim Financial Reporting’. These financial statements provide an update of previously reported information and should be read in conjunction with
the audited consolidated financial statements for the year ended 31 December 2007.
These financial statements, which were approved by the Board of Directors on Monday 4 August 2008, are unaudited but have been reviewed by the auditors.
The accounting policies applied in these financial statements are the same as those applied in the audited consolidated financial statements for the year ended
31 December 2007. These financial statements do not constitute statutory accounts for the purpose of s240 of the Companies Act 1985. A copy of the audited
consolidated statutory accounts for the year ended 31 December 2007 has been delivered to the Registrar of Companies and contained an unqualified auditors’
report in accordance with s235 of the Companies Act 1985 and did not contain statements made under either s237(2) or 237(3) of the Companies Act 1985.
No new standards, amendments or interpretations have been adopted in the period. Subject to European Union endorsement, the following relevant
interpretation will be adopted for the year ended 31 December 2008: IFRIC 14 ‘The limit on a defined benefit asset, minimum funding requirements and their
interaction’. This interpretation will not have a material impact on the results or financial position of the Group.
The following relevant standards, amendments and interpretations have been issued and will be adopted for periods beginning after 1 January 2009, subject to
European Union endorsement where applicable:
●
●
●
●
●
●
IFRS 8 ‘Operating Segments’
IAS 23 ‘Borrowing costs’ (revised)
IFRS 2 ‘Share-based payment’ (amendment)
IAS 1 ‘Presentation of financial statements’ (revised)
IFRS 3 ‘Business combinations’ (revised)
IAS 27 ‘Consolidated and separate financial statements’ (revised)
The Group is currently assessing the impact of the above on the presentation, results and net assets of the consolidated financial statements.
Comparative information has been presented for the six months ended 30 June 2007 and for the year ended 31 December 2007. Amendments as a result of the
finalisation of provisional fair values on acquisitions made in the twelve months to 30 June 2007 have been shown as a prior period restatement. As a
consequence of the finalisation of fair value adjustments in respect of the acquisition of the Teleflex Aerospace Manufacturing Group on 29 June 2007 and of
Liuzhou Steel Rim Factory on 16 November 2006 the consolidated balance sheet at 30 June 2007 has been restated. There have been no amendments to the
fair values disclosed in the consolidated financial statements for the year ended 31 December 2007. The impact of the restatements on previously reported
results is set out below:
First half 2007
As previously
reported
283
111
1,348
515
(812)
(100)
(6)
1,080
14.2
14.2
Intangible assets — goodwill
Intangible assets — other
Property, plant and equipment
Inventories
Trade and other payables
Provisions
Deferred tax
Net assets
Basic earnings per share (p)
Diluted earnings per share (p)
15684
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Proof 3
Restated
271
133
1,354
513
(811)
(109)
(12)
1,080
14.2
14.2
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16 GKN plc Half Year Report 2008
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE HALF YEAR ENDED 30 JUNE 2008
3 Operating profit
The analysis of the non trading components of operating profit is shown below:
3a Restructuring and impairment charges
Unaudited
First
half
2008
£m
Restructuring
Other impairments
First
half
2007
£m
Full
year
2007
£m
(4)
–
(14)
1
(33)
2
(4)
(13)
(31)
Restructuring
Restructuring charges in the first half of 2008 relate to the final actions under the Group’s strategic reorganisation. Costs charged relate mainly to reorganisation
costs, including incremental costs borne by the Group as a consequence of dedicated restructuring and transition teams and equipment relocation costs
attributable to the transfer of equipment between closing facilities and continuing operations, incremental premium freight and product homologation costs.
The costs were incurred in Driveline operations in North America and Europe.
In the first half of 2007 restructuring charges arose primarily in respect of the closure of a North American Powder Metallurgy manufacturing facility and
continuation of the Driveline strategic fixed headcount reduction programme, which primarily affected its European operations.
Restructuring cash outflow was £13 million (first half 2007 – £20 million, full year 2007 – £40 million). The 2007 cash outflow in the first half and full year was
net of a £4 million property receipt.
Other impairments
The £1 million impairment reversal recognised in the first half of 2007 (full year 2007 – £2 million) arose in relation to the Group’s UK cylinder liner manufacturing
operation. During 2007 the business disposed of fixed assets at a value greater than the theoretical net book value of the assets had they not been impaired,
consequently, a proportion of the previously recognised impairment was reversed.
3b Amortisation of non-operating intangible assets arising on business combinations
Unaudited
First
half
2008
£m
Brands/trademarks
Proprietary technology rights and know-how
Other intellectual property rights
Customer contracts and relationships and agreements not to compete
First
half
2007
£m
Full
year
2007
£m
–
(1)
(1)
(3)
–
–
(1)
(2)
–
(2)
(1)
(5)
(5)
(3)
(8)
3c Profits and losses on sale or closures of businesses
Unaudited
First
half
2008
£m
Profits and losses on closures of businesses
Trading losses of the UK cylinder liner manufacturing operation
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12/08/2008
Proof 3
–
First
half
2007
£m
(7)
Full
year
2007
£m
(7)
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17 GKN plc Half Year Report 2008
3 Operating profit continued
3d Derivative financial instruments
Unaudited
First
half
2008
£m
Forward currency and commodity contracts
Embedded derivatives
4
First
half
2007
£m
Full
year
2007
£m
(4)
–
–
(1)
(10)
–
(4)
(1)
(10)
Joint ventures
Unaudited
Group share of results of joint ventures
Sales
Operating costs and other income
Net financing costs
First
half
2008
£m
First
half
2007
£m
Full
year
2007
£m
132
(117)
–
125
(109)
–
253
(221)
–
Profit before taxation
15
16
32
Taxation
(3)
(4)
(8)
Share of post-tax earnings
12
12
24
Segmental analysis of the Group share of joint venture sales and trading profit
Sales
Driveline
Other Automotive
OffHighway
76
54
2
63
60
2
130
120
3
132
125
253
10
5
–
8
8
–
17
15
–
15
16
32
First
half
2007
£m
Full
year
2007
£m
Trading profit
Driveline
Other Automotive
OffHighway
5
Other net financing charges
Unaudited
First
half
2008
£m
Expected return on pension scheme assets
Interest on post-employment obligations
15684
12/08/2008
Proof 3
81
(82)
74
(75)
146
(149)
(1)
(1)
(3)
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18 GKN plc Half Year Report 2008
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE HALF YEAR ENDED 30 JUNE 2008
6
Taxation
Unaudited
First
half
2008
£m
First
half
2007
£m
Full
year
2007
£m
Analysis of charge in period
Current tax
Current period
Utilisation of previously unrecognised tax losses and other assets
Adjustments in respect of prior periods
Net movement on provisions for uncertain tax positions
28
(7)
(1)
(1)
18
(1)
(2)
1
38
(9)
3
4
Deferred tax
19
–
16
(18)
36
(35)
–
2
–
19
–
1
(10)
–
–
71
–
–
84
6
2
Deferred tax on changes in fair value of derivative financial instruments
Total tax charge for the period
Tax on items included in equity
Deferred tax on post-employment obligations
Deferred tax on non-qualifying assets
Deferred tax on foreign exchange provisions
Tax in respect of restructuring and impairment charges
Current tax
–
(3)
(7)
Deferred tax
–
(2)
2
–
(5)
(5)
There is a net £nil deferred tax charge in the period, as previously unrecognised deferred tax assets have been recognised, principally in the UK offsetting a
charge arising from the reversal, via use, of other deferred tax assets, again principally in the UK. The recognition of the previously unrecognised deferred tax
assets has been based on management projections which indicate an ongoing improvement in future taxable profits in the UK and other relevant territories.
The tax charge arising on profits before the non-trading components of operating profit as identified in note 3 was £19 million (first half 2007 – £3 million)
giving an effective tax rate of 16.0% (first half 2007 – 2.7%). The principal reason for the increase in effective rate is due to deferred tax. Although previously
unrecognised deferred tax assets were recognised in both first half 2007 and first half 2008, the benefit arising from this in 2008 is smaller than the 2007
benefit and has also been offset by the reversal, via use, of other recognised deferred tax assets.
There was no tax in respect of amortisation of non-operating intangible assets arising on business combinations and profits and losses on sale or closures of
businesses.
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19 GKN plc Half Year Report 2008
7 Earnings per share
Basic earnings per share
Basic earnings per share are calculated by dividing the profit attributable to equity shareholders by the weighted average number of Ordinary Shares in issue
during the period, excluding Ordinary Shares purchased by the Company and held as treasury shares.
Diluted earnings per share
Diluted earnings per share are calculated by adjusting the weighted average number of Ordinary Shares outstanding to assume conversion of all dilutive
potential Ordinary Shares. The Company has only one category of dilutive potential Ordinary Shares: share options.
The calculation is performed for the share options to determine the number of shares that could have been acquired at fair value (determined as the average
market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of
shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.
Earnings per share are computed as follows:
Unaudited
First half 2008
First half 2007
Full year 2007
Earnings
per share
p
Earnings
£m
Weighted
average
number of
shares
m
Earnings
per share
p
27.9
Earnings
£m
Weighted
average
number of
shares
m
Earnings
per share
p
Earnings
£m
Weighted
average
number of
shares
m
97
704.5
13.8
100
702.9
14.2
196
703.4
–
2.1
–
1.9
–
–
2.9
97
706.6
100
704.8
14.2
196
706.3
Basic eps:
Profit attributable to ordinary shareholders
Dilutive securities:
Dilutive potential Ordinary Shares
Diluted eps
(0.1)
13.7
(0.1)
27.8
Adjusted earnings per share
Adjusted earnings per share are stated before the non-trading components of operating profit as analysed in note 3. Adjusted earnings per share, which the
Directors consider gives a useful additional indicator of underlying performance, is calculated as follows:
Unaudited
First half 2008
Profit attributable to equity shareholders
Charges/(credits) included in operating profit:
Restructuring and impairment charges
Amortisation of non-operating intangible assets arising on
business combinations
Profits and losses on sale or closures of businesses
Changes in fair value of derivative financial instruments
Taxation on charges/(credits) included in operating profit
Adjusted earnings attributable to equity shareholders
First half 2007
Full year 2007
£m
p
£m
p
£m
p
97
13.8
100
14.2
196
27.9
4
0.6
13
1.9
31
4.4
5
–
4
–
0.6
–
0.6
–
3
7
1
(3)
0.4
1.0
0.1
(0.4)
8
7
10
(5)
1.1
1.0
1.4
(0.7)
110
15.6
121
17.2
247
35.1
Diluted adjusted earnings per share attributable to
15.6
equity shareholders
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Proof 3
17.2
35.0
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20 GKN plc Half Year Report 2008
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE HALF YEAR ENDED 30 JUNE 2008
8
Dividends
Unaudited
Equity dividends paid in the period
Previous year final: 9.2p (2007 – 8.7p) per share
Current year interim: (2007 – 4.3p) per share
First
half
2008
£m
First
half
2007
£m
Full
year
2007
£m
65
–
61
–
61
30
65
61
91
An interim dividend of 4.5p per share (2007 – 4.3p per share) has been declared by the Directors. Based on shares ranking for dividend at 30 June 2008 the
interim dividend is anticipated to absorb resources amounting to £32 million (2007 – £30 million).
9 Post-employment obligations
Actuarial assessments of the key defined benefit pension and post-employment medical plans (representing 98% of liabilities and 98% of assets) were carried
out as at 30 June 2008.
Post-employment obligations as at the period end comprise:
Unaudited
30 June
2008
£m
Pensions
Medical
– funded
– unfunded
– funded
– unfunded
30 June
2007
£m
31 December
2007
£m
(142)
(260)
(10)
(38)
(28)
(253)
(27)
(47)
(24)
(260)
(9)
(38)
(450)
(355)
(331)
Unaudited
30 June 2008
UK
£m
(122)
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Proof 3
Americas
£m
(70)
Europe
£m
(248)
ROW
£m
(10)
Total
£m
(450)
30 June
2007
£m
(355)
31 December
2007
£m
(331)
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21 GKN plc Half Year Report 2008
9 Post-employment obligations continued
Assumptions
Actuarial assessments of all the principal defined benefit retirement plans were carried out as at 30 June 2008. The major assumptions used were:
At 30 June 2008
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
At 30 June 2007
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
At 31 December 2007
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
%
4.7
3.8
6.5
3.7
3.5
2.0
6.7
2.5
2.50
1.75
6.20
1.75
2.0
n/a
2.3
1.0
8.0
4.5
9.0
5.0
n/a
n/a
n/a
n/a
4.3
3.4
5.8
3.3
3.5
2.0
6.1
2.5
2.50
1.75
5.30
1.75
2.0
n/a
2.5
1.0
8.0
4.5
10.0
5.0
n/a
n/a
n/a
n/a
4.3
3.4
5.9
3.3
3.5
2.0
6.4
2.5
2.50
1.75
5.60
1.75
2.0
n/a
2.3
1.0
8.0
4.5
9.0
5.0
n/a
n/a
n/a
n/a
No adjustments to mortality assumptions have been made in the period to those used as at 31 December 2007. The UK scheme assumption is based on PA92
(year of birth) tables adjusted by 2.5 years to reflect actual scheme experience and using medium cohort projections. In the USA CL2007 tables are used, whilst
in Germany RT2005G tables were again used.
Assumption sensitivity analysis
The impact of a one percentage point movement in the primary assumptions on the defined benefit net obligations as at 30 June 2008 is set out below:
UK
£m
256
(312)
(240)
216
Discount rate +1%
Discount rate –1%
Rate of inflation +1%
Rate of inflation –1%
15684
12/08/2008
Proof 3
Americas
£m
30
(37)
–
–
Europe
£m
31
(39)
(25)
22
ROW
£m
3
(3)
–
–
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22 GKN plc Half Year Report 2008
NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
FOR THE HALF YEAR ENDED 30 JUNE 2008
10 Changes in equity
Unaudited
At 1 January
Share issues
Transfer from income statement
Actuarial gains and losses arising on post-employment obligations, including tax
— subsidiaries
— joint ventures
Deferred tax on other items
Share-based payments
Dividends paid to shareholders
Dividends paid to minority interests
Currency variations
Changes in minority interests
Derivative financial instruments
– translational hedging
– transactional hedging
At end of period
First
half
2008
£m
First
half
2007
£m
Full
year
2007
£m
1,196
–
99
908
3
101
908
5
198
(95)
–
–
2
(65)
–
58
1
128
–
–
2
(61)
–
(12)
–
140
1
(8)
6
(91)
(1)
66
–
(32)
11
(28)
–
–
–
1,164
1,080
1,196
11 Property, plant and equipment (unaudited)
During the six months ended 30 June 2008 the Group acquired assets with a cost of £83 million (first half 2007 – £71 million). Assets acquired through business
combinations were £nil (first half 2007 – £19 million – restated). Assets with a carrying value of £1 million (first half 2007 – £6 million) were disposed of during
the six months ended 30 June 2008.
12 Related party transactions (unaudited)
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.
A Group subsidiary also provides short–term financing facilities in respect of one joint venture company. There have been no significant changes in the nature of
transactions between subsidiaries and joint ventures that have materially affected the financial statements in the period. Similarly, there has been no material
impact on the financial statements arising from changes in the aggregate compensation of key management.
13 Other financial information (unaudited)
Commitments relating to subsidiaries’ future capital expenditure at 30 June 2008 amounted to £64 million (30 June 2007 – £50 million) and the Group’s share
relating to joint ventures amounted to £nil (30 June 2007 – £nil).
204,513 Ordinary Shares were issued in the six months ended 30 June 2008 (first half 2007 – 1,627,294) which generated a cash inflow of less than £1 million
(first half 2007 – £3 million).
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23 GKN plc Half Year Report 2008
INDEPENDENT REVIEW REPORT TO GKN plc
Introduction
We have been engaged by the Company to review the condensed consolidated financial statements in the half year report for the six months ended 30 June 2008
which comprises the Consolidated Income Statement, Consolidated Statement of Recognised Income and Expense, Consolidated Balance Sheet, Consolidated
Cash Flow Statement and the related notes. We have read the other information contained in the half year report and considered whether it contains any
apparent misstatements or material inconsistencies with the information in the condensed consolidated financial statements.
Directors’ responsibilities
The half year report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half year report in
accordance with the Disclosure and Transparency Rules of the United Kingdom’s Financial Services Authority.
The accounting policies applied in the condensed consolidated financial statements are the same as those applied in the audited consolidated financial
statements for the year ended 31 December 2007. The condensed consolidated financial statements included in this half year report have been prepared in
accordance with International Accounting Standard 34, ‘Interim Financial Reporting’, as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed consolidated financial statements in the half year report based on our review.
This report, including the conclusion, has been prepared for and only for the Company for the purpose of the Disclosure and Transparency Rules of the Financial
Services Authority and for no other purpose. We do not, in producing this report, 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 review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ‘Review of Interim Financial Information
Performed by the Independent Auditor of the Entity’ issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial
information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and
consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we
do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated financial statements in the half year report for
the six months ended 30 June 2008 are not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the
European Union and the Disclosure and Transparency Rules of the United Kingdom’s Financial Services Authority.
PricewaterhouseCoopers LLP
Chartered Accountants
4 August 2008
Birmingham
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 half year report since it
was 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.
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24 GKN plc Half Year Report 2008
CONTACT DETAILS
Corporate Centre
PO Box 55
Ipsley House
Ipsley Church Lane
Redditch
Worcestershire B98 0TL
Tel: +44 (0)1527 517715
Fax: +44 (0)1527 517700
London Office
50 Pall Mall
London SW1Y 5JH
Tel: +44 (0)20 7930 2424
Fax: +44 (0)20 7930 3255
email: information @gkn.com
Website: www.gkn.com
Registered in England No. 4191106
Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Tel: 0871 384 2962
(+44 121 415 7039 from outside UK)
Fax: 0871 384 2100
(+44 1903 702424 from outside UK)
Websites: www.equiniti.com
www.shareview.co.uk
The half year results were announced on 5 August 2008. This half year
report was published on 12 August 2008.
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www.gkn.com
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