NEWS RELEASE
28 February 2012
GKN plc Results Announcement for the year ended 31 December 2011
Management basis
(1)
As reported
(*)
2011
£m
2010
£m
Change
%
2011
£m
2010
£m
Change
%
6,112
5,429
+13
5,746
5,084
+13
Operating profit
468
411
+14
374
385
-3
Profit before tax
417
363
+15
351
345
+2
Earnings per share
22.6p
20.7p
+9
18.0p
19.6p
-8
Dividend per share
6.0p
5.0p
+20
6.0p
5.0p
+20
Sales
(*)
Includes a net £19 million charge relating to the temporary Hoeganaes plant closure in Gallatin, USA.
Group highlights(1)
•
Group sales up £683 million (13%) to £6.1 billion, an underlying increase of 10%
•
Excluding net £19 million Gallatin charge:
• Trading profit of £487 million, up £76 million, an increase of 18%
• Group trading margin of 8.0%, up from 7.6%, and increased targets set for three divisions
•
Profit before tax of £417 million (2010: £363 million), an increase of 15%. Reported profit
before tax, £351 million (2010: £345 million)
•
Earnings per share up 9% to 22.6 pence per share (2010: 20.7 pence per share)
•
Return on average invested capital (excluding 2011 acquisitions) of 18.3% (2010: 17.0%),
reflecting higher profitability
•
Final dividend of 4.0 pence per share, giving a total for 2011 of 6.0 pence per share (2010: 5.0
pence per share), a 20% increase
•
Net debt of £538 million (2010: £151 million), reflecting £444 million for new acquisitions
“2011 was a year of good growth. GKN achieved a strong financial performance with all four
divisions at or near record profits. Each division has leading technology and market positions and
out-performed their respective markets, with a strong pipeline of new business. GKN Driveline and
GKN Land Systems were further strengthened with the two highly complementary acquisitions of
Getrag Driveline Products and Stromag.
As a result of the strong performance and reflecting our confidence in the future, the Board is
recommending a final dividend of 4.0 pence per share, making a total of 6.0 pence for 2011, an
increase of 20%.
Looking forward, GKN expects 2012 to be another year of good progress for the Group.”
Nigel Stein
Chief Executive, GKN plc
Page 1 of 37
Divisional Highlights
Sales
(£m)
GKN Driveline*
GKN Powder Metallurgy
GKN Aerospace
GKN Land Systems*
2011
2,678
845
1,481
847
2010
2,433
759
1,451
699
Underlying
sales
growth
%
10
13
4
21
Trading margin
%
2011
7.1
8.5
11.2
8.0
2010
6.9
7.1
11.2
5.3
New targets
8-10
9-11
11-13
8-11
* GKN Driveline excludes £117 million of Getrag Driveline Products sales and GKN Land Systems excludes £38 million of Stromag sales.
The table does not include Other businesses.
GKN Driveline
• GKN Driveline wins £500 million annualised new and replacement business, with strong allwheel drive (AWD) and eDrive order books
• Acquisition of Getrag Driveline Products business creates the leading global supplier of AWD
driveline products
GKN Powder Metallurgy
• New and replacement business wins exceed £100 million of annualised sales
• Trading margin improves 140bps, to 8.5%
GKN Aerospace
• GKN Aerospace wins $3.5 billion of new work
• First A350 XWB fixed trailing edge assembly delivered to Airbus
• New facility to open in South Carolina, USA to assemble the state of the art all-composite
fuselage for the HondaJet
GKN Land Systems
• Stromag Holding GmbH (Stromag) acquisition - market leading engineer of industrial power
management components
• Building a world leader in industrial power management
Outlook
Although the macroeconomic environment remains uncertain, GKN expects 2012 to be another
year of good progress for the Group.
In automotive, external forecasts suggest that global light vehicle production should grow 5% with
increases in Asia and North America but Europe down.
Against this background, GKN Driveline and GKN Powder Metallurgy are expected to show further
improvement, although the rate of market outperformance will be lower than in 2011.
In aerospace, civil aircraft production is expected to continue to grow, as both Airbus and Boeing
increase production. This should more than offset the anticipated reduction in US military aircraft
demand. Although new programmes may be subject to delays, GKN Aerospace is expected to
maintain its sales growth in 2012.
The performance of GKN Land Systems should continue to improve, benefiting particularly from
the expected on-going strength in European and North American agricultural equipment markets.
Overall, the Group’s broad exposure to global markets, strong customer positions and healthy
order books mean that GKN should make further progress in 2012, with the added benefit of a full
year contribution from the recent acquisitions.
Page 2 of 37
Notes
(1) Financial information set out in this announcement, unless otherwise stated, is presented on a
management basis as defined on page 17.
Further Enquiries
Analysts/Investors:
Guy Stainer
Investor Relations Director
GKN plc
T: +44 (0)207 463 2382
M: +44 (0)7739 778187
E: guy.stainer@gkn.com
Media:
Chris Fox
Group Communications Director
GKN plc
T: +44 (0)1527 533238
M: +44 (0)7920 540051
E: chris.fox@gkn.com
Andrew Lorenz
FTI Consulting
T: +44 (0)207 269 7113
M: +44 (0)7775 641807
There will be an analyst and investor meeting today at 9.30am at UBS, Ground Floor Presentation
Suite, 1 Finsbury Avenue, London EC2M 2PP.
A live audiocast of the presentation will be available at
http://www.gkn.com/investorrelations/Pages/Webcasts.aspx. Slides will be put onto the GKN
website approximately 15 minutes before the presentation is due to begin
http://www.gkn.com/investorrelations/GKNResults/full-year-results-2011-presentation.pdf
Questions will only be taken at the event.
A live dial in facility will be available on +44 (0) 1452 551 089, conference ID 46597821.
A replay of the conference call will be available until 12 March 2012 on +44 (0) 1452 55 00 00
Replay Access Number: 46597821#.
This announcement together with the attached financial information thereto may be downloaded
from our website. www.gkn.com/media/Pages/default.aspx .
Cautionary Statement
This announcement 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. Nothing in this document should be regarded as a
profits forecast.
Page 3 of 37
NEWS RELEASE
GKN plc Results Announcement for the year ended 31 December 2011
Group Overview
Markets
The Group operates in the global automotive, aerospace and land systems markets. In the
automotive market, GKN Driveline sells to manufacturers of passenger cars and light vehicles.
Around 75% of GKN Powder Metallurgy sales are also to the automotive market, with the balance
to other industrial customers. GKN Aerospace sells to manufacturers of military and civil aircraft,
aircraft engines and equipment. GKN Land Systems sells to producers of agricultural,
construction, mining and industrial equipment and to the automotive and commercial vehicle
sectors.
These results reflect good market outperformance in each division.
Results
Management sales increased 13% in the year ended 31 December 2011 to £6,112 million (2010:
£5,429 million). The effect of currency translation was £15 million adverse and there was a £164
million benefit from acquisitions which was partly offset by the £29 million reduction due to
disposals. Excluding these items, the underlying increase was £563 million (10%). Within this
figure, Driveline was £252 million higher, Powder Metallurgy increased by £97 million, Aerospace
was £52 million higher, while Land Systems was up £148 million.
Management trading profit increased £76 million to £487 million (2010: £411 million), excluding the
£19 million net impact from the temporary closure of Hoeganaes’ Gallatin facility in the US (£34
million cost, as previously announced, which was partially offset by £15 million of insurance
recovery). The effect of currency translational was £3 million adverse and there was a £2 million
net benefit from acquisitions. Excluding these items, the underlying increase was £77 million.
Within this figure, Driveline was £21 million higher, Powder Metallurgy increased by £19 million,
Aerospace was up by £6 million and Land Systems increased by £31 million. Excluding the
Gallatin impact, Group trading margin increased to 8.0% (2010: 7.6%), against a target range of 810%.
Return on average invested capital (ROIC) increased to 18.3%, compared with the Group target of
20% or better.
2011
Sales (£m)
Trading Profit* (£m)
Trading Margin*
ROIC
(*)
GKN
pre acq’ns
5,957
484
8.1%
18.3%
2010
Total
Acquisitions
155
3
6,112
487
8.0%
excludes the net £19 million impact from Gallatin
Page 4 of 37
5,429
411
7.6%
17.0%
Change
Headline
£
683
76
%
13
18
Underlying
£
%
563
10
77
19
Divisional Performance
Automotive
As shown in the table below, all major markets, except Japan, due to the earthquake and tsunami
in March 2011, experienced increased production relative to 2010. The strongest rates of
production growth were in North America and India.
Car and light vehicle production
(millions of units)
Europe
North America
Brazil
Japan
China
India
Others
Total – global
2011
2010
20.3
13.1
3.2
7.9
17.2
3.6
11.6
76.9
19.1
11.9
3.2
9.1
16.8
3.3
11.0
74.4
Growth
(%)
6
10
0
-13
2
9
5
3
Source: IHS Automotive
Overall, global production volumes increased 3% in 2011 to 76.9 million vehicles (2010: 74.4
million) whilst sales of cars and light commercial vehicles increased by 4%, from 72.4 million
vehicles to 75.1 million vehicles.
Demand for larger (premium) vehicles and light commercial vehicles increased strongly. The
demand for smaller vehicles, particularly in Europe, was lower as the prior year’s scrappage and
tax incentive schemes had the effect of pulling forward demand. However, vehicle production in
Europe overall benefited from a strong improvement in exports while in North America the recovery
following the recession continued.
External forecasts indicate that global production in 2012 will increase by approximately 5% to 80.7
million vehicles. Major markets that are expected to grow fastest include Japan (18%), North
America (10%), China (8%) and India (6%). Europe is expected to contract by 8%.
GKN Driveline
GKN Driveline is the world’s leading supplier of automotive driveline systems and solutions. As a
global business serving the leading vehicle manufacturers, it develops, builds and supplies an
extensive range of automotive driveline products and systems – for use in the smallest ultra lowcost car to the most sophisticated premium vehicle demanding the most complex driving dynamics.
The key financial results for the year are as follows:
2011
2010
Change
GKN
Getrag
Total
Headline
Underlying
Driveline
Driveline
£
%
£
%
Sales (£m)
2,678
117
2,795
2,433
362
15
252
10
Trading Profit* (£m)
191
4
195
169
26
15
21
12
Trading Margin
7.1%
7.0%
6.9%
ROIC
17.0%
16.0%
* Getrag Driveline Products trading profit includes acquisition related charges of £3 million
Page 5 of 37
GKN Driveline’s sales increased 15% to £2,795 million (2010: £2,433 million). The favourable
impact of currency translation was £20 million, the acquisition of Getrag Driveline Products on 30
September 2011 added £117 million, which was partly offset by £27 million lower sales resulting
from the sale of GKN Driveline’s 49% share of the Japanese driveshaft sales and distribution joint
venture GKN JTEKT Ltd (GTK), in March 2011. Underlying sales increased by £252 million (10%),
including Constant Velocity Jointed (CVJ) Systems which grew 7% and non-CVJ sales which
increased by 22%, compared with global vehicle production which was up 3%.
This market outperformance was broad based across North America, Europe, China and Japan
reflecting recent market share gains, the Group’s stronger position in premium vehicles, demand
for which continued to be strong, and GKN Driveline’s broadening product mix, particularly with
AWD systems and TransAxle solutions. In Japan, the market outperformance reflected GKN
Driveline’s exposure to companies less affected by the earthquake and the priority given to
reinstating production capability for exported vehicles. In North America, lower production from
Japanese companies experiencing component shortages was more than offset by Driveline’s
market share gains through a broader product offering, new programme wins and stronger sales to
domestic producers.
Trading profit increased to £195 million (2010: £169 million). The impact of translational currency
was £1 million positive, acquisitions (after costs and inventory fair value adjustment of £3 million)
added £4 million with underlying trading profit up by £21 million, including around £15 million
negative impact from the Japanese earthquake and tsunami, compounded by the floods in
Thailand. These affected production in Japan and overseas as component supply chains were
disrupted. Outside Japan, it was most pronounced for GKN Driveline in North America where
many of the Japanese car manufacturers cut production rates significantly in the second quarter.
Engineering costs increased to support new programmes and future growth, and some temporary
costs were incurred to raise capacity in some regions to keep pace with significant increases in
demand. Driveline’s trading margin was 7.1% (2010: 6.9%) excluding Getrag Driveline Products.
GKN Driveline’s medium term target margin range remains at 8-10%.
Capital expenditure on tangible fixed assets was £113 million (2010: £73 million), 1.0 times (2010:
0.7 times) depreciation.
Return on average invested capital, excluding the Getrag Driveline Products acquisition, was
17.0% (2010: 16.0%), reflecting the increase in profitability.
During the year, GKN Driveline opened a new CVJ systems plant in Changchun, Northern China, a
precision forge at Oragadam, near Chennai, South India, expanded production at WuHan, China
and construction began on a new CVJ systems facility in Pune, India.
Overall, GKN Driveline won £500 million annualised new and replacement business with the CVJ
Systems business winning a healthy 65% of the contracts it bid for. GKN Driveline AWD Systems
launched a power transfer unit (PTU) in China, saw good growth in propshaft production in Europe
and benefited from strong sales in North America, including the Jeep Grand Cherokee. It also won
significant new business with unique all-wheel drive disconnect technology with vehicle
manufacturers in the US, Europe and China.
In June, GKN Driveline invested £4 million in EVO Electric Ltd, a UK pioneer in axial flux motors,
and formed a joint venture, GKN EVO eDrive Systems Limited, to manufacture and sell axial flux
electric motors and drive systems for use in hybrid and all-electric vehicles.
Page 6 of 37
GKN Driveline is already a pioneer in the development and supply of eTransmissions and eAxles
for hybrid and electric vehicles. This venture will enable GKN Driveline to offer advanced axial flux
motors and generators for niche applications, adding to its existing eDrive systems portfolio and
enhancing its capability in full driveline systems. Recent new business wins in eDrive, include:
• major launch of eAxle for PSA Hybrid 4;
• new European customer for 1-speed eTransmissions and demonstration vehicle contract
for an Asian vehicle manufacturer; and
• development orders for 2-speed transmissions from European and North American vehicle
manufacturers.
On 30 September 2011, GKN Driveline completed the acquisition of Getrag Driveline Products, a
tier one supplier of geared driveline products, namely power transfer units and rear drive units for
AWD vehicles, along with final drive units for high performance rear wheel drive vehicles.
Getrag Driveline Products, with operations in the United States and Europe, has been integrated
into GKN Driveline. Getrag Driveline Products has a product, manufacturing and customer
footprint that is complementary to GKN Driveline’s own geared product business, which is
predominantly based in Asia. Combined, the businesses are now the leading global supplier of
AWD driveline products with an excellent customer base and product portfolio. AWD and Trans
Axle Solutions now represent 28% of GKN Driveline with significant further growth opportunities.
As part of the Getrag transaction, GKN Driveline also acquired an exclusive licence, principally for
Europe and the Americas, to Getrag’s electric drivetrain technology for use in electric and certain
hybrid vehicles making GKN a leading player in eDrive solutions and very well placed for growth in
the medium and long term.
GKN Powder Metallurgy
GKN Powder Metallurgy is the world’s largest manufacturer of sintered components. It comprises
GKN Sinter Metals and Hoeganaes. Hoeganaes produces the metal powder that GKN Sinter
Metals uses to manufacture precision automotive components for engines, transmissions and body
and chassis applications. It also produces a range of components for industrial and consumer
applications.
The key financial results for the year are as follows:
2011
Sales (£m)
Trading profit (£m)
Trading margin
ROIC
845
72
8.5%
16.7%
2010
759
54
7.1%
13.2%
Change
Headline
£
%
86
11
18
33
Underlying
£
%
97
13
19
36
GKN Powder Metallurgy sales were £845 million (2010: £759 million), an increase of 11%. The
negative impact of currency translation was £11 million. Sales increased in all regions as
automotive markets recovered, recent new business wins entered production and market share
gains were made. Underlying sales for GKN Sinter Metals increased by 17% in North America and
11% in Europe. Strong growth was also achieved in India, Brazil and China.
Page 7 of 37
Overall, Hoeganaes’ total tons shipped were 1% lower than in 2010 due to the temporary closure
of the Gallatin plant. Underlying sales were 7% higher, principally due to an increase in the
commodity metals surcharge passed on to customers as raw material prices increased.
Overall, GKN Powder Metallurgy reported a trading profit of £72 million (2010: £54 million),
excluding £19 million of net costs associated with the temporary plant closure at the Gallatin, US
facility which are reported outside the divisional trading performance (see below page 11). The
divisional trading margin was 8.5% (2010: 7.1%). GKN Powder Metallurgy’s medium term target
margin range has now been increased to 9-11% (from 8-10%).
Capital expenditure on tangible fixed assets was £44 million (2010: £27 million). The ratio of
capital expenditure to depreciation was 1.4 times (2010: 0.9 times). Return on average invested
capital was 16.7% (2010: 13.2%), reflecting the improvement in profitability.
Increasing trends in industrial and automotive markets to improve fuel efficiency and reduce
emissions, such as variable valve timing in engines, high performance gear sets in automatic
transmissions and differential gears, are continuing to drive the demand for products made by
powder metallurgy. During the year, more than £100 million (annualised sales) of new programme
business was awarded and 48 technical days were hosted for existing and new customers, in order
to promote powder metallurgy products and applications. New contracts include:
• one way clutch system for a Mazda transmission in Asia with unique geometries which are
only possible using powder metallurgy technology; and
• variable valve timing stator - one piece combination sprocket for VW engine.
GKN Aerospace
GKN Aerospace is a world leading global first tier supplier of airframe and engine structures,
components, assemblies, and transparencies to a wide range of aircraft and engine prime
contractors and other first tier suppliers. It operates in three main product areas: aerostructures,
engine components/sub-systems and special products.
The overall aerospace market remained positive in 2011 driven by a recovering civil aircraft market
and a generally stable defence sector. The division has increased its position in civil aerospace to
58% of sales, with defence representing 42%.
In the civil aerospace market, preliminary data indicate that passenger air traffic rose around 6% in
2011 and is projected to continue to grow at a similar pace throughout 2012. Longer term
worldwide passenger market demand is projected to grow at around 5% with worldwide cargo
traffic market growth at around 6%.
Airbus and Boeing continued to benefit from record deliveries and order backlog. Combined
deliveries reached a record 1,011 aircraft (2010: 923 aircraft) with the backlog of unfilled orders
reaching more than 8,200 aircraft. The recovery in passenger and cargo volumes has led both
companies to announce further increases in production levels of single aisle and wide bodied
aircraft.
2011 saw the introduction into service of the Boeing 787, on which GKN Aerospace has sales of
approximately $2.6 million per aircraft, and the announcement of the 737 MAX and A320neo single
aisle aircraft upgrades. Airbus is ramping up production of the A380 (GKN sales of $8.0 million per
aircraft), but announced that the first flight of the A350 would slip to 2013 (GKN sales of $2.5
million per aircraft). Airbus and Boeing estimate that between 28,000 and 32,000 new single aisle
and wide bodied aircraft will be delivered by 2030.
Page 8 of 37
World-wide defence spending remains under pressure, largely driven by cutbacks throughout
Europe and likely reductions in the US Defense Budget. It is expected that the US 2013 defence
budget submittal will be in line with 2012 spending levels. GKN’s position on key Multi-Year
programmes such as the UH-60 Blackhawk Helicopter, F/A-18 Super Hornet, F-15 Eagle and C130J Super Hercules provide a strong production base for the business despite projected defence
budget pressures.
The key financial results for the year are as follows:
2011
Sales (£m)
Trading profit (£m)
Trading margin
ROIC
1,481
166
11.2%
22.7%
2010
1,451
162
11.2%
23.3%
Change
Headline
£
30
4
%
2
2
Underlying
£
%
52
4
6
4
GKN Aerospace sales of £1,481 million were £30 million higher than the prior year (2010: £1,451
million). The impact from currency on translation of sales was £24 million negative, from prior year
acquisitions was £4 million positive, representing sales from GKN Aerospace Services Structures
Corp. of which the Group gained management control in April 2010, and from disposals was £2
million negative, representing sales from the Engineering Services division, which was sold in
November 2011. The underlying increase in sales of £52 million represented a 4% increase. This
increase reflects lower F-22 sales as the programme continued its run down and lower production
rates on the C-17, being more than offset by higher civil sales, particularly for the A320, A330 and
A380 and also the early stages of the Boeing 787.
Trading profit increased by £4 million to £166 million (2010: £162 million). The impact from
currency on translation of results was £3 million adverse and the net impact from acquisitions and
divestments was £1 million positive. The trading margin was 11.2% (2010: 11.2%). GKN
Aerospace’s medium term target margin range has now been increased to 11-13% (from 10-12%).
Capital expenditure on tangible assets in 2011 amounted to £59 million (2010: £51 million) which
represents 1.7 times depreciation (2010: 1.3 times), or 0.9 times depreciation excluding the Airbus
A350 programme. Expenditure on intangible assets, mainly initial non-recurring programme costs,
was £35 million (2010: £26 million). £57 million of the capital expenditure and non-recurring
programme costs, including £6 million of capitalised borrowing costs, relate to the A350 wing
assembly and trailing edge programme. A total of £128 million had been invested on this
programme by 31 December 2011, excluding £11 million of capitalised borrowing costs. Spending,
which has now peaked, is likely to reduce to around £33 million in 2012.
Customer advances in the GKN Aerospace businesses, which are shown in trade and other
payables in the balance sheet, amounted to £63 million (2010: £70 million).
Return on average invested capital was 22.7% (2010: 23.3%) reflecting the increased investment
in new programmes, particularly the A350.
Important milestones:
GKN Aerospace, with industry partners Airbus, AgustaWestland, Rolls-Royce, Umeco and Vestas
celebrated the opening of the UK National Composites Centre near Filton, Bristol, UK. GKN
Aerospace has been driving forward the use of composites in aviation and is expanding the
application of new automated manufacturing techniques that will enable faster and more consistent
manufacture of complex composite structures. These techniques will be critical if the industry is to
meet rising demand for new aircraft and for aircraft that offer improved performance, lower
emissions and reduced maintenance.
Page 9 of 37
GKN Aerospace signed a memorandum of understanding with Commercial Aerospace of China
(COMAC) to form a joint venture for composite structures manufacture of the horizontal tailplane
for the C919 aircraft, positioning GKN Aerospace in the infancy of the civil aircraft industry in
China.
In November, it was announced that a new 14,000 square metre aerospace facility in Orangeburg,
South Carolina, USA would be opened in 2012. The facility will house assembly operations for the
recently awarded contract for the state of the art all-composite fuselage for the HondaJet (GKN
sales of $0.5 million per aircraft).
Also in November, GKN Aerospace delivered the first section of the A350 XWB fixed trailing edge
(FTE) assembly comprising the composite port side wing spar with integrated trailing edge ribs, to
Airbus, UK. The A350 XWB program is the latest step in a journey that has seen GKN Aerospace
become a major supplier of critical wing assemblies for both the A380 and for the A400M.
GKN Aerospace was awarded around $3.5 billion of contract extensions, new programme wins
and work scope expansions during the year, including:
• new multi-year contracts for: UH-60 Blackhawk (5 years); F/A-18 Super Hornet (4 years), F15 Eagle (7 years); C-130J Super Hercules (5 years); C-17 Transporter (3 years);
• around $200 million of new customer’s business won at Filton including Bombardier CSeries ailerons and life of programme contract for Dassault mid-sized business jet wing
structure and moveable surfaces;
• new $600 million long term agreement with Pratt & Whitney to supply the forward fan case
for the Joint Strike Fighter F135 engine; and
• HondaJet composite fuselage assembly.
In January 2012, the Composite Technology and Applications Limited joint venture with Rolls
Royce opened a pre-production facility on the Isle of Wight, UK for the production of composite fan
blades for aircraft engines.
GKN Land Systems
GKN Land Systems is a global leading supplier of technology differentiated power management
solutions and services. It designs, manufactures and supplies products and services for the
agricultural, construction, mining, and industrial machinery markets. In addition, it provides global
aftermarket distribution and through-life support.
Sales in GKN Land Systems were strongly ahead of the prior year and reflected a solid
performance against a continued broad market recovery. All regions and sectors enjoyed good
growth, especially agriculture and heavy construction equipment in Europe and North America.
The key financial results for the year are as follows:
GKN Land
Systems
Sales (£m)
Trading Profit* (£m)
Trading Margin
ROIC
847
68
8.0%
29.5%
2011
Stromag
38
(1)
2010
Total
885
67
7.6%
Change
Headline
£
699
37
5.3%
15.8%
186
30
%
27
81
Underlying
£
%
21
148
84
31
* Stromag trading profit includes acquisition related charges of £5 million
Against this background, sales in the period were £885 million, 27% higher than the prior year
(2010: £699 million). There was no net impact from currency translation and excluding the £38
million of sales in Stromag, the acquisition that completed in September, the underlying increase in
sales was £148 million (21%) with all product areas and regions seeing an improvement.
Page 10 of 37
GKN Land Systems reported trading profit of £67 million (2010: £37 million). Underlying trading
profit increased by £31 million, with Stromag reducing profit by £1 million, due to acquisition costs
and inventory fair value adjustment of £5 million. The trading margin excluding Stromag was 8.0%
compared with 5.3% in 2010, reflecting the strong increase in profitability of the division. GKN
Land System’s medium term target margin range has now been increased to 8-11% (from 7-10%).
Capital expenditure on tangible fixed assets was £18 million (2010: £7 million), 1.3 times (2010: 0.5
times) depreciation.
Return on average invested capital, excluding the Stromag acquisition, increased to 29.5% (2010:
15.8%), reflecting the strong increase in profitability driven by operational process improvements.
Good progress was made in winning new business. Specific areas of success included:
• double universal joints for Dana and CNH;
• custom clutch solution for John Deere; and
• first application of auxiliary pump and high speed shafts in oil exploration.
In addition to achieving strong organic growth and new business wins, on 5 September 2011, GKN
Land Systems completed the £170 million acquisition of Stromag.
Stromag is a market leading engineer of industrial power management components. Its core
products include hydraulic clutches, electro-magnetic brakes and flexible couplings serving endmarkets including renewable energy, agricultural equipment, construction and mining machinery
and the metal processing industry. The acquisition is an important step in the implementation of
the GKN Land Systems’ strategy to build a global leader in industrial power management,
extending its capability in electro-mechanical power management components and systems. In
combination with the existing business, it provides a strong platform to accelerate growth in
existing markets, together with access to a number of new customers and industrial segments,
including renewable energy.
Other Businesses
GKN’s other businesses comprise Cylinder Liners, which is mainly a 59% owned venture in China,
manufacturing engine liners for the truck market in the US, Europe and China and a 50% share in
Emitec, which manufactures metallic substrates for catalytic converters in Germany, the US, China
and India.
Sales in the year were £106 million (2010: £87 million). Trading profit was £3 million (2010: £3
million) reflecting an improvement in the underlying business offset by the heavy investment by
NoNOx, a division of Emitec, into selective catalytic reduction systems, particularly for the truck
market.
Hoeganaes’ Gallatin plant, USA
As reported with the first half results in August 2011, the Hoeganaes Gallatin plant in the US was
temporarily closed on 27 May 2011, following an explosion which resulted in fatalities. Production
was gradually brought back during the third quarter. In total, £34 million of incremental shipping,
purchasing and plant closure and remedial works costs were recorded. £15 million has
subsequently been recovered from external insurance claims. Refer to note 2 for further details.
Corporate costs
Corporate costs, which comprise the costs of stewardship of the Group and operating charges and
credits associated with the Group’s legacy businesses, were £16 million (2010: £14 million).
Page 11 of 37
Other Financial Information
Restructuring and impairment charges
There were no Group restructuring and impairment charges during the year (2010: £39 million).
Change in value of derivative and other financial instruments
The Group enters into foreign exchange contracts to hedge much of its transactional exposure. At
31 December 2011, the net fair value of such instruments was a liability of £84 million (2010: £54
million liability). Where hedge accounting has not been applied, the change in fair value resulted in
a charge of £29 million (2010: £3 million charge). There was a £3 million charge arising from the
change in the fair value of embedded derivatives in the year (2010: £3 million credit) and a net gain
of £2 million attributable to the currency impact on Group funding balances (2010: £12 million net
gain). There was a £1 million loss on the change in the fair value of GKN Powder Metallurgy
commodity contracts (2010: nil).
Amortisation of non-operating intangible assets arising on business combinations
The charge for the amortisation of non-operating intangible assets (for example, customer
contracts, order backlogs and intellectual property rights) arising on business combinations was
£22 million (2010: £19 million). The increase relates to the impact of the acquisitions of Getrag
Driveline Products and Stromag.
Gains and losses on changes in Group structure
During the year the Group sold its 49% share in a joint venture company, GKN JTEKT Limited
realising a profit of £4 million and its Aerospace Engineering Services business realising a further
profit of £4 million. In 2010, the loss of £4 million principally related to the sale and closure of the
Axles business.
Post-tax earnings of joint ventures
In management figures, the sales and trading profits of joint ventures are included pro-rata in the
individual divisions to which they relate, although shown separately post-tax in the accounts. The
Group’s share of post-tax earnings of joint ventures in the year was £38 million (2010: £35 million).
Post-tax earnings on a management basis were £40 million (2010: £36 million), with trading profit
of £49 million (2010: £44 million). The Group’s share of the tax charge amounted to £8 million
(2010: £7 million) with an interest charge of £1 million (2010: £1 million). Underlying trading profit
increased £7 million due to strong performance in our Chinese joint ventures, up £6 million, and
improvements in Emitec (up £2 million).
Net financing costs
Net financing costs totalled £61 million (2010: £75 million) and include the non-cash charge on
post-employment benefits of £17 million (2010: £31 million) and unwind of discounts of £2 million
(2010: £4 million). Interest payable was £47 million (2010: £46 million), whilst interest receivable
was £5 million (2010: £6 million) resulting in net interest payable of £42 million (2010: £40 million).
Capitalised interest costs attributable to the Group’s A350 investment were £6 million (2010: £4
million) and interest charged on UK Government refundable advances was £2 million (2010: £2
million).
The non-cash charge on post-employment benefits arises as the expected return on scheme
assets of £153 million (2010: £145 million) was more than offset by interest on post-employment
obligations of £170 million (2010: £176 million). Details of the assumptions used in calculating
post-employment costs and income are provided in note 14.
Page 12 of 37
Profit before tax
The management profit before tax was £436 million (2010: £363 million), before the net £19 million
impact from the temporary closure of the Hoeganaes Gallatin plant, described above. The profit
before tax on a statutory basis was £351 million (2010: £345 million).
Taxation
The book tax rate on management profits of subsidiaries was 16% (2010: 11%), arising as a £60
million tax charge on management profits of subsidiaries of £377 million.
The Group’s theoretical weighted average tax rate, which assumes that book profits/losses are
taxed at the statutory tax rates in the countries in which they arise, is 31% (2010: 32%). The book
tax rate is significantly lower, largely because of the recognition of substantial deferred tax assets
(mainly in the US, UK and Japan) due to increased confidence in the Group’s ability both to access
and realise future taxable profits that absorb brought forward tax deductions, partially offset by an
increase in the Group’s provision for uncertain tax positions.
One of GKN’s core strategic tax objectives is to access brought forward tax deductions in order to
sustain a ‘cash tax’ charge on management profits at or below 20%. ‘Cash tax’ provides a proxy
for the cash cost of taxation of management profits. The cash tax charge was 13% (2010: 13%).
In the near term, the ‘cash tax’ rate is expected to continue at or below 20% due to further
utilisation of brought forward tax deductions.
The tax rate on statutory profits of subsidiaries was 14% (2010: 6%) arising as a £45 million tax
charge on statutory profits of £313 million.
Non-controlling interests
The profit attributable to non-controlling interests was £27 million (2010: £20 million) including a
£21 million (2010: £15 million) impact from the pension partnership arrangement (see note 14 for
further details).
Earnings per share
Management earnings per share was 22.6 pence (2010: 20.7 pence). On a statutory basis
earnings per share was 18.0 pence (2010: 19.6 pence). Average shares outstanding in 2011 were
1,553.1 million (see note 3 for further details).
Dividend
In view of the improving trading performance and taking into account the Group’s future prospects,
the Board has decided to recommend a final dividend of 4.0 pence per share (2010: 3.5 pence).
The total dividend for the year will, therefore, be 6.0 pence (2010: 5.0 pence), representing a
management earnings cover ratio of 3.8 times (2010: 4.1 times). The intention is to have a
progressive dividend policy based on a management earnings cover ratio of around 2.5 times. The
final dividend is payable on 21 May 2012 to shareholders on the register at 27 April 2012.
Shareholders may choose to use the Dividend Reinvestment Plan (DRIP) to reinvest the final
dividend. The closing date for receipt of new DRIP mandates is 27 April 2012.
Cash flow
Operating cash flow, which is defined as cash generated from operations of £500 million (2010:
£420 million) adjusted for capital expenditure (net of proceeds from capital grants) of £281 million
(2010: £190 million), proceeds from the disposal / realisation of fixed assets of £8 million (2010: £5
Page 13 of 37
million) and UK Government refundable advances of nil (2010: £10 million), was an inflow of £227
million (2010: £245 million).
Within operating cash flow there was an outflow of working capital and provisions of £89 million
(2010: £59 million outflow). Average working capital as a percentage of sales increased from 6.8%
in 2010, to 7.5% in 2011.
Capital expenditure (net of proceeds from capital grants) on both tangible and intangible assets
totalled £281 million (2010: £190 million), including £54 million (2010: £39 million) on the A350
programme. Of this, £235 million (2010: £159 million) was on tangible fixed assets and was 1.2
times (2010: 0.8 times) the depreciation charge. Expenditure on intangible assets, mainly initial
non-recurring costs on Aerospace programmes, totalled £46 million (2010: £31 million). The
Group invested £103 million in the year (2010: £92 million) on research and development activities
not qualifying for capitalisation.
Free cash flow
Free cash flow, which is operating cash flow including joint venture dividends and after interest,
tax, amounts paid to non-controlling interests and own shares purchased but before dividends paid
to GKN shareholders, was an inflow of £147 million (2010: £188 million), after £31 million (2010:
£55 million) of expenditure on the Group’s restructuring programmes and £19 million in relation to
the temporary plant closure at Gallatin. The year on year change reflects an improvement in
profitability more than offset by increased capital expenditure and a working capital outflow. Net
interest paid totalled £43 million (2010: £46 million) and tax paid in the year was £38 million (2010:
£33 million).
Net borrowings
At the end of the year, the Group had net borrowings of £538 million (2010: £151 million), the
increase reflecting the £444 million acquisitions of Getrag Driveline Products and Stromag. The
Group’s share of net funds in joint ventures was £2 million (2010: £17 million).
Pensions and post-employment obligations
GKN operates a number of defined benefit and defined contribution pension schemes together with
historic retiree medical arrangements across the Group. The net amount included within trading
profit of £33 million (2010: £26 million) includes the current service cost of £38 million (2010: £35
million) partly offset by credits arising from initiatives taken to reduce the Group’s post-employment
liabilities. Other net financing charges of £17 million (2010: £31 million) have reduced partly due to
the full year impact of the pension partnership arrangement and partly as a result of lower interest
on liabilities due to the 30 basis point reduction in the discount rate between 31 December 2010
and 31 December 2009.
Current service cost
UK pensions
Overseas pension
Retiree medical and
life insurance
2011
£m
(24)
(13)
2010
£m
(22)
(12)
(1)
(38)
(1)
(35)
Net amount included
within Trading Profit
2011
2010
£m
£m
(21)
(20)
(12)
(6)
(33)
Page 14 of 37
(26)
Other net financing
charges
2011
2010
£m
£m
5
(7)
(19)
(21)
(3)
(17)
(3)
(31)
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 18% of total liabilities of £2,650 million
(2010: £2,435 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.
The accounting deficit at 31 December 2011 of £259 million was £188 million higher than the
deficit at the end of 2010. December 2011 asset values were above those of end December 2010
but the valuations of liabilities at 31 December 2011 were £215 million higher. This increase
largely reflected the 70 basis point reduction in discount rate to 4.7% (£274 million) partially offset
by the £109 million positive impact from a 35 basis point reduction in the assumption for long term
inflation to 3%.
Overseas pensions
Overseas pension obligations arise mainly in the US, Germany and Japan.
Trading profit benefited from the one-time curtailment/past service credit in Japan of £1 million.
The deficit increased by £71 million to £539 million, £54 million of which was as a result of
discount rate reductions in the US and Europe by 100 and 10 basis points, respectively.
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.
The obligation in respect of all schemes at the end of the year was £70 million compared with £61
million at the end of 2010. The 100 basis point reduction in the US discount rate accounted for £7
million of the £9 million increase.
Summary
At 31 December 2011, the total deficit on post-employment obligations of the Group totalled £868
million (2010: £600 million), comprising the deficit on funded obligations of £465 million (2010:
£193 million) and unfunded obligations of £403 million (2010: £407 million).
Net assets
Net assets of £1,624 million were £63 million lower than the December 2010 year end figure of
£1,687 million. The decrease includes actuarial losses on post-employment obligations net of tax
of £223 million, adverse currency movements net of tax of £32 million and dividends paid to equity
shareholders of £85 million offset by retained profit of £306 million.
Page 15 of 37
Exchange rates
Exchange rates used for currencies most relevant to the Group’s operations are:
Average
Euro
US dollar
2011
1.15
1.60
Year End
2010
1.16
1.55
2011
1.20
1.55
2010
1.17
1.57
The approximate impact on 2011 trading profit of subsidiaries and joint ventures of a 1%
movement in the average rate would be euro - £1 million, US dollar - £2 million.
Funding and liquidity
At 31 December 2011, UK committed bank facilities were £755 million. Within this there are
committed revolving credit facilities of £675 million that include £445 million of new five year
facilities put in place in the second half of the year. The balance of UK committed facilities of £80
million is an eight-year amortising facility from the European Investment Bank (EIB). At 31
December 2011, drawings against the revolving credit facilities were £33 million and the Group
drew down in full its £80 million facility from the EIB. The EIB loan is repayable in five £16 million
instalments from 2015 and bears a fixed interest rate of 4.1%. Capital market borrowings were
£526 million at 31 December 2011 and include unsecured issues of £176 million 7% bonds
maturing in May 2012 and £350 million 6.75% bonds maturing in October 2019. The weighted
average maturity profile of the Group’s committed borrowing facilities was 4.7 years. This leaves
the Group well placed in the short term to manage sudden changes in liquidity in the financial
markets
All of the Group’s committed credit facilities have a financial covenant requiring EBITDA of
subsidiaries to be at least 3.5 times net financing costs. In addition, the new five-year revolving
credit facilities put in place in 2011 contains a financial covenant requiring net debt to be no greater
than 3 times EBITDA of subsidiaries. The covenants are tested every six months using the
previous 12 months results. For the 12 months to 31 December 2011 EBITDA was 12.9 times
greater than net interest, whilst net debt was 0.9 times EBITDA.
Financial resources and going concern
At 31 December 2011, the Group had net borrowings of £538 million. In addition, it had available,
but undrawn, committed UK borrowing facilities totalling £642 million. The next maturities of the
Group’s committed UK borrowing facilities are £176 million unsecured bond in May 2012 and £160
million revolving bank credit facilities in July 2013.
The Directors have assessed the future funding requirements of the Group and the Company and
compared them to the level of committed available borrowing facilities. The assessment included a
review of both divisional and Group financial forecasts, financial instruments and hedging
arrangements for the 19 months from the balance sheet date. Major assumptions have been
compared to external reference points such as global light vehicle volumes, build schedules from
aircraft assemblers and market forecasts from major manufacturers of agricultural and construction
machinery.
The forecasts show that the Group will have a sufficient level of headroom in the foreseeable future
and an assessment of the likelihood of breaching covenants in this period is considered to be
remote.
Having undertaken this work, the Directors are of the opinion that the Group has adequate
committed resources to fund its operations for the foreseeable future and so determine that it is
appropriate for the financial statements to be prepared on a going concern basis.
Page 16 of 37
Definitions
Financial information set out in this announcement, unless otherwise stated, is presented on a
management basis which aggregates the sales and trading profit of subsidiaries (excluding certain
subsidiary businesses sold and closed) with the Group’s share of the sales and trading profit of
joint ventures. References to trading margins are to trading profit expressed as a percentage of
sales. Management profit or loss before tax is management trading profit less net subsidiary
interest payable and receivable and the Group’s share of net interest payable and receivable and
taxation of joint ventures. These figures better reflect performance of continuing businesses.
Where appropriate, reference is made to underlying results which exclude the impact of
acquisitions/divestments as well as currency translation on the results of overseas operations.
Operating cash flow is cash generated from operations adjusted for capital expenditure,
government capital grants, proceeds from disposal of fixed assets and government refundable
advances. Free cash flow is operating cash flow including interest, tax, joint venture dividends, own
shares purchased and amounts paid to non-controlling interests, but excluding dividends paid to
GKN shareholders. Return on average invested capital (ROIC) is management trading profit as a
percentage of average total net assets of continuing subsidiaries and joint ventures deducting
current and deferred tax, net debt, post-employment obligations and derivative financial
instruments.
Page 17 of 37
APPENDICES
Page
GKN Consolidated Financial Information
Consolidated Income Statement for the year ended 31 December 2011
19
Consolidated Statement of Comprehensive Income for the year ended 31 December
2011
20
Consolidated Statement of Changes in Equity for the year ended 31 December 2011
20
Consolidated Balance Sheet at 31 December 2011
21
Consolidated Cash Flow Statement for the year ended 31 December 2011
22
Notes to the News Release
23-37
Page 18 of 37
Consolidated Income Statement
For the year ended 31 December 2011
Notes
2011
£m
2010
£m
Sales
2a
5,746
5,084
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
2b
419
(31)
367
(39)
12
(22)
8
374
(19)
68
(4)
385
38
35
(47)
5
(19)
(61)
(46)
6
(35)
(75)
351
345
(45)
306
(20)
325
6
21
27
279
306
5
15
20
305
325
18.0
17.9
19.6
19.6
4
5
14
6
Share of post-tax earnings of joint ventures
Interest payable
Interest receivable
Other net financing charges
Net financing costs
7a
7a
7b
Profit before taxation
Taxation
Profit after taxation for the year
8
Profit attributable to other non-controlling interests
Profit attributable to the Pension partnership
Profit attributable to non-controlling interests
Profit attributable to equity shareholders
Earnings per share – p
Continuing operations – basic
Continuing operations – diluted
9
Page 19 of 37
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2011
2011
£m
306
2010
£m
325
6
(31)
(4)
42
(1)
6
3
(2)
9
-
(1)
-
1
-
(277)
56
(256)
50
(24)
58
85
410
23
6
21
27
50
387
8
15
23
410
Notes
Profit after taxation for the year
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
Other comprehensive income/(expense)
Total comprehensive income for the year
Total comprehensive income for the year attributable to:
Equity shareholders
Other non-controlling interests
Pension partnership
Non-controlling interests
14
8
Consolidated Statement of Changes in Equity
For the year ended 31 December 2011
Other reserves
Notes
At 1 January 2011
Share
capital
£m
Capital
redemption
reserve
£m
Share
premium
account
£m
Retained Exchange
earnings
reserve
£m
£m
Hedging
reserve
£m
Other
reserves
£m
Shareholders’
equity
£m
Non-controlling
interests
Pension
partnership
Other
£m
£m
Total
equity
£m
159
298
9
788
388
(196)
(133)
1,313
346
Profit for the year
-
-
-
279
-
-
-
279
21
28 1,687
6
306
Other comprehensive income/(expense)
-
-
-
(223)
(32)
(1)
-
(256)
-
-
(256)
Share-based payments
-
-
-
6
-
-
-
6
-
-
6
-
-
-
-
-
-
-
-
(23)
-
(23)
-
-
-
(5)
-
-
-
(5)
-
-
(5)
-
-
-
(85)
-
-
-
(85)
-
-
(85)
(6)
(6)
Distribution from Pension
partnership to UK Pension scheme
14
Purchase of own shares by Employee
Share Ownership Plan Trust
Dividends paid to equity shareholders
10
Dividends paid to non-controlling
-
-
-
-
-
-
-
-
-
At 31 December 2011
159
298
9
760
356
(197)
(133)
1,252
344
At 1 January 2010
interests
28 1,624
457
-
9
431
343
(197)
(95)
948
-
24
972
Profit for the year
-
-
-
305
-
-
-
305
15
5
325
Other comprehensive income/(expense)
-
-
-
36
45
1
-
82
-
3
85
Investment in Pension partnership by
-
-
-
-
-
-
-
-
331
-
331
Purchase of non-controlling interests
UK Pension scheme
14
-
-
-
(2)
-
-
-
(2)
-
(3)
(5)
Share-based payments
-
-
-
3
-
-
-
3
-
-
3
(298)
298
-
38
-
-
(38)
-
-
-
-
-
-
-
(23)
-
-
-
(23)
-
-
(23)
(1)
(1)
Transfers
Dividends paid to equity shareholders
10
Dividends paid to non-controlling
interests
At 31 December 2010
-
-
-
-
-
-
-
-
-
159
298
9
788
388
(196)
(133)
1,313
346
28 1,687
Other reserves include accumulated reserves where distribution has been restricted due to legal or fiscal requirements and accumulated adjustments in
respect of piecemeal acquisitions.
Page 20 of 37
Consolidated Balance Sheet
At 31 December 2011
Notes
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
8
Current assets
Inventories
Trade and other receivables
Current tax assets
Derivative financial instruments
Other financial assets
Cash and cash equivalents
8
11
Total assets
Liabilities
Current liabilities
Borrowings
Derivative financial instruments
Trade and other payables
Current tax liabilities
Provisions
11
8
Non-current liabilities
Borrowings
Derivative financial instruments
Deferred tax liabilities
Trade and other payables
Provisions
Post-employment obligations
11
8
14
Total liabilities
Net assets
Shareholders' equity
Share capital
Capital redemption reserve
Share premium account
Retained earnings
Other reserves
Non-controlling interests
Total equity
Page 21 of 37
2011
£m
2010
£m
534
424
1,812
147
37
21
224
3,199
350
200
1,651
143
23
19
171
2,557
749
962
16
5
156
1,888
5,087
637
762
10
13
4
438
1,864
4,421
(228)
(30)
(1,308)
(138)
(46)
(1,750)
(61)
(13)
(1,065)
(100)
(57)
(1,296)
(466)
(72)
(96)
(120)
(91)
(868)
(1,713)
(3,463)
(532)
(61)
(63)
(108)
(74)
(600)
(1,438)
(2,734)
1,624
1,687
159
298
9
760
26
1,252
372
1,624
159
298
9
788
59
1,313
374
1,687
Consolidated Cash Flow Statement
For the year ended 31 December 2011
Notes
Cash flows from operating activities
Cash generated from operations
Special contribution to the UK Pension scheme
Interest received
Interest paid
Tax paid
Dividends received from joint ventures
Cash flows from investing activities
Purchase of property, plant and equipment
Receipt of government capital grants
Purchase of intangible assets
Receipt of government refundable advances
Proceeds from sale and realisation of fixed assets
Acquisition of subsidiaries (net of cash acquired)
Acquisition of other investments
Purchase of non-controlling interests
Proceeds from sale of businesses (net of cash disposed)
Proceeds from sale of joint venture
Investments in joint ventures
Investment loans and capital contributions
Cash flows from financing activities
Investment in Pension partnership by UK Pension scheme
Distribution from Pension partnership to UK Pension scheme
Purchase of own shares by Employee Share Ownership Plan
Trust
Proceeds from borrowing facilities
Bond buy back including buy back premium
Repayment of other borrowings
Finance lease payments
Amounts placed on deposit
Amounts returned from deposit
Dividends paid to shareholders
Dividends paid to non-controlling interests
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
Page 22 of 37
13
14
6
6
14
14
10
13
2011
£m
2010
£m
500
5
(48)
(38)
35
454
420
(331)
7
(53)
(33)
23
33
(236)
1
(46)
8
(450)
(4)
5
8
(4)
(718)
(162)
3
(31)
10
5
(6)
(5)
5
1
(10)
(3)
(193)
(23)
331
-
(5)
115
(10)
4
(85)
(6)
(10)
38
(26)
(48)
(1)
(4)
20
(23)
(1)
286
(2)
(276)
421
145
7
133
288
421
Notes to the News Release
For the year ended 31 December 2011
1
Basis of preparation
The financial information for the year ended 31 December 2011 contained in this News Release was
approved by the Board on 27 February 2012. This announcement does not constitute statutory accounts
of the Company within the meaning of Section 435 of the Companies Act 2006, but is derived from those
accounts, which have been prepared in accordance with International Financial Reporting Standards
(IFRS) as endorsed and adopted for use by the European Union.
This information has been prepared under the historical cost method except where other measurement
bases are required to be applied under IFRS, using all standards and interpretations required for
financial periods beginning 1 January 2011. No standards or interpretations have been adopted before
the required implementation date.
Statutory accounts for the year ended 31 December 2010 have been delivered to the Registrar of
Companies. Statutory accounts for the year ended 31 December 2011 will be delivered to the Registrar
of Companies following the Company’s Annual General Meeting.
The auditors have reported on those accounts. Their reports were not qualified, did not include a
reference to any matters to which the auditors drew attention by way of emphasis without qualifying their
report, and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.
2
Segmental analysis
The Group's reportable segments have been determined based on reports reviewed by the Executive
Committee led by the Chief Executive. The operating activities of the Group are largely structured
according to the markets served; automotive, aerospace and the land systems markets. Automotive is
managed according to product groups; driveline and powder metallurgy. Reportable segments derive
their sales from the manufacture of product. Revenue from services, inter segment trading and royalties
is not significant.
(a) Sales
Automotive
Powder
Land
Driveline Metallurgy Aerospace Systems
Total
£m
£m
£m
£m
£m
2011
2,432
845
1,481
805
Subsidiaries
246
42
Joint ventures
2,678
845
1,481
847
5,851
Acquisitions
117
38
155
Subsidiaries
106
6,112
(366)
5,746
Other businesses
Management sales
Less: Joint venture sales
Income statement – sales
2010
Subsidiaries
Joint ventures
2,180
253
2,433
Other businesses
Management sales
Businesses sold and closed – Axles
Less: Joint venture sales
Income statement – sales
Page 23 of 37
759
759
1,451
1,451
664
35
699
5,342
87
5,429
10
(355)
5,084
Notes to the News Release
For the year ended 31 December 2011
2
Segmental analysis (continued)
(b) Trading profit
Automotive
Powder
Driveline Metallurgy Aerospace
£m
£m
£m
2011
Trading profit before depreciation, impairment and
amortisation
Depreciation and impairment of property, plant and
equipment
Amortisation of operating intangible assets
Trading profit – subsidiaries
Trading profit/(loss) – joint ventures
Acquisitions
Trading profit – subsidiaries
Acquisition related charges
Land
Systems
£m
255
103
208
77
(107)
(3)
145
46
191
(31)
72
72
(34)
(5)
169
(3)
166
(13)
(1)
63
5
68
7
(3)
-
-
4
(5)
238
84
209
49
(107)
(3)
128
41
169
(30)
54
54
(39)
(6)
164
(2)
162
(15)
(1)
33
4
37
Total
£m
Other businesses
Gallatin temporary plant closure
Corporate and unallocated costs
Management trading profit
Less: Joint venture trading profit
Income statement – trading profit
2010
Trading profit before depreciation, impairment and
amortisation
Depreciation and impairment of property, plant and
equipment
Amortisation of operating intangible assets
Trading profit – subsidiaries
Trading profit/(loss) – joint ventures
Other businesses
Corporate and unallocated costs
Management trading profit
Less: Joint venture trading profit
Income statement – trading profit
497
11
(8)
3
3
(19)
(16)
468
(49)
419
422
3
(14)
411
(44)
367
No income statement items between trading profit and profit before tax are allocated to management trading profit,
which is the Group’s segmental measure of profit or loss.
There is a net credit in Corporate of £2 million (2010: £8 million; Driveline £6 million and Corporate £2 million) within
trading profit in respect of changes to retiree benefit arrangements.
Gallatin temporary plant closure
As a consequence of the temporary plant closure at Gallatin, a Hoeganaes facility within Powder Metallurgy,
following an incident on 27 May 2011, the Group has incurred a significant amount of incremental, one-off costs.
The information presented in this note should be read in conjunction with page 11.
The Group income statement for the year ended 31 December 2011 includes a net pre-tax charge of £19 million in
relation to the Gallatin temporary plant closure. The £19 million, which has been charged to trading profit, represents
a gross cost of £34 million offset by recoveries from the Group’s external insurer of £15 million. The £34 million
covers the cost of responding to customer obligations, £20 million, including premium freight and powder supply
charges, rectification and corrections to the plant configuration, £8 million, fixed employment costs that were
unabsorbed in June and July as a result of no productive activity, £4 million, and professional fees and other costs
amounting to £2 million.
The net £19 million charge attracts taxation relief of £4 million.
The impact on cash flows from operating activities was a net outflow of £19 million.
Page 24 of 37
Notes to the News Release
For the year ended 31 December 2011
3
Adjusted performance measures
(a)
Reconciliation of reported and management performance measures
Sales
As
Joint
reported ventures
£m
£m
5,746
366
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
2011
Exceptional
and nontrading Management
As
items
basis reported
£m
£m
£m
6,112
5,084
Joint
ventures
£m
355
2010
Exceptional
and nontrading Management
items
basis
£m
£m
(10)
5,429
419
49
-
468
367
44
-
411
-
-
-
-
(39)
-
39
-
(31)
-
31
-
12
-
(12)
-
(22)
-
22
-
(19)
-
19
-
-
-
-
-
68
-
(68)
-
8
374
49
(8)
45
468
(4)
385
44
4
(18)
411
Share of post-tax earnings
of joint ventures
38
(49)
2
(9)
35
(44)
1
(8)
Interest payable
Interest receivable
Other net financing charges
Net financing costs
Profit before taxation
(47)
5
(19)
(61)
351
-
19
19
66
(47)
5
(42)
417
(46)
6
(35)
(75)
345
-
35
35
18
(46)
6
(40)
363
Taxation
Profit from continuing
operations
Profit attributable to
non-controlling interests
Earnings
Earnings per share - p
(45)
-
(15)
(60)
(20)
-
(17)
(37)
306
-
51
357
325
-
1
326
(27)
279
18.0
-
21
72
4.6
(6)
351
22.6
(20)
305
19.6
-
15
16
1.1
(5)
321
20.7
Impact of Gallatin temporary plant closure
Given the significance of the Gallatin incident and related net charge in 2011 (see note 2b), the table below highlights the impact of
the temporary plant closure on trading profit and margin.
(b)
Summary by segment
Driveline
Powder Metallurgy
Aerospace
Land Systems
Other businesses (Cylinder Liners and Emitec)
Getrag (Driveline)
Stromag (Land Systems)
Corporate and unallocated costs
Gallatin temporary plant closure
Sales
£m
2,678
845
1,481
847
106
117
38
6,112
6,112
Page 25 of 37
2011
Trading
profit
£m
191
72
166
68
3
4
(1)
(16)
487
(19)
468
Margin
7.1%
8.5%
11.2%
8.0%
8.0%
7.7%
Sales
£m
2,433
759
1,451
699
87
5,429
2010
Trading
profit
£m
169
54
162
37
3
(14)
411
Margin
6.9%
7.1%
11.2%
5.3%
7.6%
Notes to the News Release
For the year ended 31 December 2011
4
Change in value of derivative and other financial instruments
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
5
2010
£m
(3)
3
-
2
2
(31)
12
12
12
2011
£m
(17)
(5)
(22)
2010
£m
(16)
(3)
(19)
2011
£m
2010
£m
4
4
8
(5)
1
(4)
Amortisation of non-operating intangible assets arising on business combinations
Marketing related
Customer related
Technology based
6
2011
£m
(29)
(3)
(1)
(33)
Gains and losses on changes in Group structure
Profits and losses on sale or closure of businesses
Business sold – GKN Aerospace Engineering Services
Business sold and closed – (2010: Axles)
Profit on sale of joint venture
Investment write up on acquisition of GKN Aerospace Services Structures Corp.
On 31 March 2011 the Group sold its 49% share in a joint venture company, GKN JTEKT Limited, for cash
consideration of £8 million. A profit on sale of £4 million was realised which includes £2 million of previous currency
variations reclassified from other reserves.
On 30 November 2011 the Group sold its Engineering Services division of GKN Aerospace for net cash
consideration of £5 million. A profit on sale of £4 million was realised which represents previous currency variations
reclassified from other reserves.
On 1 September 2010 the Group concluded the sale of its European agricultural axles operations with other
operations closed during the year. Sale proceeds were £5 million and a net loss of £5 million was realised
representing trading losses of £2 million, tangible fixed asset impairment of £1 million, other asset write downs of £3
million and reclassified currency variations from other reserves of £1 million.
7
(a)
Net financing costs
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
Page 26 of 37
2011
£m
2010
£m
(10)
(14)
(26)
(2)
6
(1)
(47)
(7)
(15)
(24)
(1)
(2)
4
(1)
(46)
5
(42)
6
(40)
Notes to the News Release
For the year ended 31 December 2011
7
(b)
8
(a)
Net financing costs (continued)
2011
£m
2010
£m
153
(170)
(17)
(2)
(19)
145
(176)
(31)
(4)
(35)
2011
£m
2010
£m
(82)
10
(22)
1
(93)
(65)
20
(27)
(1)
(73)
(26)
7
58
9
48
(45)
(23)
(2)
72
(2)
8
53
(20)
2011
£m
(97)
37
(60)
2010
£m
(84)
47
(37)
4
11
15
(45)
11
6
17
(20)
Other net financing charges
Expected return on scheme assets
Interest on post-employment obligations
Post-employment finance charges
Unwind of discounts
Taxation
Tax expense
Analysis of charge in year
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
Deferred tax (charge)/credit
Origination and reversal of temporary differences
Tax on change in value of derivative financial instruments
Other changes in unrecognised deferred tax assets
Changes in tax rates
Adjustments in respect of prior years
Total tax charge for the year
Analysed as:
Tax in respect of management profit
Current tax
Deferred tax
Tax in respect of items excluded from management profit
Current tax credit
Deferred tax credit
Total for tax charge for the year
Management tax rate
The tax charge arising on management profits of subsidiaries of £377 million (2010: £327 million) was £60 million
(2010: £37 million charge) giving an effective tax rate of 16% (2010: 11%). Details of the effective tax rate for the
Group and the underlying events and transactions affecting this are given on page 13.
Tax reconciliation
Profit before tax
Less share of post-tax earnings of joint ventures
Profit before tax excluding joint ventures
2011
£m
351
(38)
313
Tax charge calculated at 26.5% (2010: 28%) standard UK corporate tax rate
Differences between UK and overseas corporate tax rates
Non-deductible and non-taxable items
Utilisation of previously unrecognised tax losses and other assets
Other changes in unrecognised deferred tax assets
Changes in tax rates
Tax charge on ordinary activities
Net movement on provision for uncertain tax positions
Other adjustments in respect of prior years
Total tax charge for the year
(83)
(16)
(2)
10
58
(33)
(22)
10
(45)
Page 27 of 37
%
(26)
(5)
(1)
3
19
(10)
(7)
3
(14)
2010
£m
345
(35)
310
(87)
8
(11)
20
72
(2)
(27)
7
(20)
%
(28)
3
(4)
7
23
(1)
(8)
2
(6)
Notes to the News Release
For the year ended 31 December 2011
8
(b)
Taxation (continued)
Tax included in comprehensive income
Deferred tax on post-employment obligations
Deferred tax on foreign currency gains and losses on intra-group funding
Current tax on post-employment obligations
Current tax on foreign currency gains and losses on intra-group funding
(c)
2010
£m
46
(3)
14
1
58
2011
£m
16
(138)
(122)
2010
£m
10
(100)
(90)
2011
£m
224
(96)
128
2010
£m
171
(63)
108
Current tax
Assets
Liabilities
(d)
2011
£m
30
1
24
1
56
Recognised deferred tax
Deferred tax assets
Deferred tax liabilities
There is a net £48 million deferred tax credit to the income statement in the year (2010: £53 million) and a further
deferred tax credit of £31 million has been recorded directly in other comprehensive income (2010: £46 million).
Primarily these credits relate to the recognition of previous unrecognised future tax deductions in the US, the UK
and Japan, based on management projections which indicate the future availability of taxable profits to absorb the
deductions.
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:
At 1 January 2011
Included in the income statement
Included in other comprehensive income
Businesses acquired
Currency variations
At 31 December 2011
At 1 January 2010
Other movements
Included in the income statement
Included in other comprehensive income
Businesses acquired
Currency variations
At 31 December 2010
Assets
Postemployment
Tax
obligations
losses
£m
£m
111
120
23
30
1
4
142
147
74
45
2
(11)
75
46
111
120
Liabilities
Other
£m
47
12
(8)
51
46
1
47
Fixed
assets
£m
(161)
11
(60)
4
(206)
(145)
(2)
(12)
(3)
1
(161)
Other
£m
(9)
2
1
(6)
(6)
(3)
(9)
Total
£m
108
48
31
(68)
9
128
14
53
43
(3)
1
108
Deferred tax assets totalling £41 million (2010: £39 million) have been recognised in territories where tax losses
have been incurred in the year as future profitability is expected which will result in their realisation.
Page 28 of 37
Notes to the News Release
For the year ended 31 December 2011
8
(e)
Taxation (continued)
Unrecognised deferred tax assets
Certain deferred tax assets have not been recognised on the basis that the Group’s ability to utilise them is
uncertain as shown below.
Tax losses - with expiry: national
Tax losses - with expiry: local
Tax losses - without expiry
Total tax losses
Post-employment obligations
Other temporary differences
Total other temporary differences
Unrecognised deferred tax assets
Tax value
£m
142
20
120
282
70
41
111
393
2011
Gross
£m
401
487
463
1,351
298
161
459
1,810
Expiry
period
2012-2031
2012-2031
Tax value
£m
215
41
109
365
66
38
104
469
2010
Gross
£m
619
480
399
1,498
245
136
381
1,879
Expiry
period
2011-2030
2011-2030
No deferred tax is recognised on the unremitted earnings of overseas subsidiaries except where the distribution of
such profits is planned. If these earnings were remitted in full, tax of £13 million (2010: £25 million) would be
payable.
9
Earnings per share
Basic eps
Dilutive securities
Diluted eps
Earnings
£m
279
279
2011
Weighted
average
number of
shares
million
1,553.1
6.3
1,559.4
Earnings per
share
pence
18.0
(0.1)
17.9
Earnings
£m
305
305
2010
Weighted
average
number of
shares
million
1,552.6
0.7
1,553.3
Earnings per
share
pence
19.6
19.6
Management basis earnings per share, 22.6p (2010: 20.7p) are presented in note 3 and use the
weighted average number of shares consistent with basic earnings per share calculation. Management
earnings per share using the cash tax rate is 23.2p (2010: 20.4p).
10
Dividends
2010 interim dividend paid
2010 final dividend paid
2011 interim dividend paid
2011 final dividend proposed
Paid or proposed in
respect of
2011
2010
pence
pence
1.5
3.5
2.0
4.0
6.0
5.0
2012
£m
62
62
Recognised
2011
£m
54
31
85
2010
£m
23
23
The 2011 final year proposed dividend will be paid on 21 May 2012 to shareholders who are on the
register of members at close of business on 27 April 2012.
Page 29 of 37
Notes to the News Release
For the year ended 31 December 2011
11
Net borrowings
Analysis of net borrowings
2011
Other borrowings
£350 million 6¾% 2019 unsecured bond
£176 million 7% 2012 unsecured bond
Other secured US$ denominated loan
Other long term borrowings
Finance lease obligations
Bank overdrafts
Other short term bank borrowings
Borrowings
Bank balances and cash
Short term bank deposits
Cash and cash equivalents
Other financial assets – bank deposits
Net borrowings
2010
Other borrowings
£350 million 6¾% 2019 unsecured bond
£176 million 7% 2012 unsecured bond
Other secured US$ denominated loan
Other long term borrowings
Finance lease obligations
Bank overdrafts
Other short term bank borrowings
Borrowings
Bank balances and cash
Short term bank deposits
Cash and cash equivalents
Other financial assets – bank deposits
Net borrowings
Current
Within
one year
£m
One to two
years
£m
Non-current
Two to five More than
years five years
£m
£m
(176)
(2)
(1)
(11)
(38)
(228)
150
6
156
(72)
(3)
(1)
(4)
(4)
(1)
(65)
(1)
(67)
(67)
(1)
(6)
(1)
(17)
(36)
(61)
158
280
438
4
381
(176)
(2)
(1)
(179)
(179)
(5)
(1)
(6)
(6)
Total
Total
£m
£m
(347)
(48)
(395)
(395)
(347)
(4)
(113)
(2)
(466)
(466)
(347)
(176)
(6)
(113)
(3)
(11)
(38)
(694)
150
6
156
(538)
(347)
(347)
(347)
(347)
(176)
(7)
(2)
(532)
(532)
(347)
(176)
(8)
(6)
(3)
(17)
(36)
(593)
158
280
438
4
(151)
Other borrowings include: unsecured £350 million (2010: £350 million) 6¾% bond maturing in 2019 less unamortised
issue costs of £3 million (2010: £3 million); unsecured £176 million (2010: £176 million) 7% bond maturing in 2012
less unamortised issue costs of nil (2010: nil); and a secured term loan of £6 million (2010: £8 million) secured by
way of a fixed and floating charge on certain Aerospace fixed assets.
Other long term borrowings include £80 million drawn under the Group’s European Investment Bank unsecured
facility. The loan is due for repayment in five equal annual instalments of £16 million, commencing in June 2015 and
attracts a fixed interest rate of 4.1% per annum payable annually in arrears. Also included is £33 million drawn from
the Group’s new 2016 Revolving Credit Facility of £445 million. The term of the facility is 5 years and attracts a
variable interest rate.
Page 30 of 37
Notes to the News Release
For the year ended 31 December 2011
12 Business combinations
Acquisition of Getrag
GKN Driveline acquired the all-wheel-drive (AWD) components businesses from Getrag KG on 30
September 2011. The Group acquired 100% of the equity of:
1) Getrag Corporation, formerly a joint venture with Dana Corporation, based in the United States; and
2) Getrag All Wheel Drive AB, formerly a joint venture with Dana Holding Corporation and Volvo Car
Corporation, based in Sweden.
The entities acquired are together referred to as “Getrag Driveline Products”.
The core business of Getrag Driveline Products is the Tier 1 supply of geared driveline products, namely
Power Transfer Units and Rear Drive Units for AWD vehicles, along with Final Drive Units for high
performance rear wheel drive vehicles. It is an excellent fit with GKN’s existing range of products and
technology. The operations have a product, manufacturing and customer footprint which is complementary
to GKN’s own geared product business, which is predominantly based in Asia.
As part of the overall transaction, GKN is also acquiring an exclusive licence, principally for Europe and
the Americas, to Getrag’s electric drivetrain technology for use in electric and certain hybrid vehicles.
The identifiable assets acquired and liabilities assumed below are provisional as the review of certain
liabilities and provisions is on-going.
£m
Intangible fixed assets
- customer related
- technology based
- marketing related
Property, plant and equipment
Other non-current assets
Cash
Inventories
Trade and other receivables
Trade and other payables
Post-employment obligations
Provisions
Deferred tax
Provisional goodwill
75
53
2
94
1
23
36
84
(96)
(1)
(33)
(38)
115
315
Satisfied by:
Cash
Repayment of loan
Total cash and cash equivalents
Contingent consideration
Fair value of consideration
287
22
309
6
315
The Group has agreed to pay the selling shareholders additional consideration of up to £6 million
depending on Getrag Driveline Products’ success in achieving future business awards in the postacquisition period. The range of the total contingent consideration payment, based on individual contracts
is nil to £8 million, however, there is a maximum cap of £6 million. The fair value of the contingent
consideration at the acquisition date was £6 million, calculated using a discount rate equal to the
incremental short term borrowing rate of 2%. There was no change in the contingent consideration
balance at 31 December 2011.
From the date of acquisition to the balance sheet date, Getrag Driveline Products contributed £117 million
to sales and £7 million to trading profit. If the acquisition had been completed on 1 January 2011 the
Group’s statutory sales and trading profit for the year ended 31 December 2011 are estimated at £6,082
million and £438 million respectively.
Page 31 of 37
Notes to the News Release
For the year ended 31 December 2011
12 Business combinations (continued)
Acquisition of Stromag
GKN Land Systems acquired the entire share capital of Stromag Holding GmbH (Stromag) from former
shareholders which included Equita GmbH & Co. Holding KGaA and a large number of other organisations
and individuals, including management on 5 September 2011.
Stromag is a market leading engineer of industrial power management components with a strong
technology base and focus on providing tailored solutions for its customers. Its core products include
hydraulic clutches, electro-magnetic brakes and flexible couplings serving end-markets including
agricultural equipment, construction and mining machinery, renewable energy and the metal processing
industry with a recognised brand. The business is headquartered in Germany and has operations in
Germany, France, USA, Brazil, India and China.
The identifiable assets acquired and liabilities assumed below are provisional as the review of certain
liabilities and provisions remains on-going.
£m
Intangible fixed assets
- customer related
- technology based
- marketing related
Property, plant and equipment
Indemnity asset
Cash
Inventories
Trade and other receivables
Trade and other payables
Provisions
Post-employment obligations
Deferred tax
Provisional goodwill
51
23
5
31
12
12
26
20
(24)
(18)
(11)
(30)
73
170
Satisfied by:
Cash
Repayment of loan
Fair value of total consideration, all cash and cash equivalents
143
27
170
From the date of acquisition to the balance sheet date, Stromag contributed £38 million to sales and
£4 million to trading profit. If the acquisition had been completed on 1 January 2011 the Group’s statutory
sales and trading profit for the year ended 31 December 2011 are estimated at £5,827 million and £428
million respectively.
Page 32 of 37
Notes to the News Release
For the year ended 31 December 2011
13
Cash flow reconciliations
Cash generated from operations
Operating profit
Adjustments for:
Depreciation, impairment and amortisation of fixed assets
Charged to trading profit
Depreciation
Impairment
Amortisation
Amortisation of non-operating intangible assets arising on business combinations
Restructuring and impairment charges
Change in fair value of derivative and other financial instruments
Amortisation of government capital grants
Net profits on sale and realisation of fixed assets
Gains and losses on changes in Group structure
Charge for share-based payments
Movement in post-employment obligations
Change in inventories
Change in receivables
Change in payables and provisions
Movement in net debt
Movement in cash and cash equivalents
Net movement in other borrowings and deposits
Bond buy back
Finance leases
Currency variations
Movement in year
Net debt at beginning of year
Net debt at end of year
Reconciliation of cash and cash equivalents
Cash and cash equivalents per balance sheet
Bank overdrafts included within "current liabilities - borrowings"
Cash and cash equivalents per cashflow
Page 33 of 37
2011
£m
374
2010
£m
385
191
1
10
22
31
(1)
(3)
(8)
6
(34)
(60)
(109)
80
500
191
2
10
19
(12)
(1)
(1)
(1)
3
(116)
(63)
(117)
121
420
(276)
(109)
(2)
(387)
(151)
(538)
133
(6)
25
1
(4)
149
(300)
(151)
156
(11)
145
438
(17)
421
Notes to the News Release
For the year ended 31 December 2011
14
Post-employment obligations
2011
£m
(443)
(355)
(22)
(48)
(868)
Post-employment obligations as at the year end comprise:
Pensions
- funded
- unfunded
Medical
- funded
- unfunded
2010
£m
(176)
(363)
(17)
(44)
(600)
The Group's pension arrangements comprise various defined benefit and defined contribution schemes throughout the world. The
main externally funded defined benefit pension schemes operate in the UK, US and Japan. In Europe, funds are retained within
certain businesses to provide defined benefit pension benefits. In addition, in the US and UK a number of retirement plans are
operated which provide certain employees with post-employment medical benefits.
(a) Defined benefit schemes - measurement and assumptions
Independent actuarial valuations of all major defined benefit scheme assets and liabilities were carried out at 31 December 2011.
The present value of the defined benefit obligation, the related current service cost and the past service cost were measured using
the projected unit credit method.
Key assumptions were:
2011
Rate of increase in pensionable salaries
Rate of increase in payment and deferred pensions
Discount rate
Inflation assumption
Rate of increases in medical costs: Initial/long term
2010
Rate of increase in pensionable salaries
Rate of increase in payment and deferred pensions
Discount rate
Inflation assumption
Rate of increases in medical costs: Initial/long term
UK
%
Americas
%
Europe
%
ROW
%
4.00
3.10
4.70
3.00
6.0/5.4
3.50
2.00
4.50
2.50
8.5/5.0
2.50
1.75
4.90
1.75
n/a
n/a
1.65
n/a
n/a
4.35
2.90
5.40
3.35
6.5/6.0
3.50
2.00
5.50
2.50
9.0/5.0
2.50
1.75
5.00
1.75
n/a
n/a
1.75
0.75
n/a
The discount rates in the table above for the UK and Europe were referenced against specific iBoxx indices, whilst the Citigroup
liability index was the reference point for the USA discount rate. The reference for the UK discount rate was the yield as at 31
December on the iBoxx GBP Corporate rated AA bonds with a maturity of 15 years plus. The reference for the European discount
rate was the yield as at 31 December on the iBoxx Euro Corporate rated AA bonds with a maturity of 10 years plus of 4.7%,
adjusted to reflect the duration of liabilities. For the USA, the discount rate referenced both the Citigroup liability index and the
Merrill Lynch US corporate AA 15+ years as at 31 December 2011 of 4.4 and 4.55, respectively.
The underlying mortality assumptions for the major schemes are as follows:
United Kingdom
Such is the size and profile of the UK scheme that data on the scheme's mortality experience is collected and reviewed annually.
The key current year mortality assumptions for the scheme use S1NA (year of birth) mortality tables allowing for medium cohort
projections with a minimum improvement of 1% and a +0.5 age rating for male members and a +0.7 age rating for female members
consistent with the prior year. Using these assumptions a male aged 65 lives for a further 20.7 years and a female aged 65 lives for
a further 23.3 years. A male aged 45 is expected to live a further 22.4 years from age 65 and a female aged 45 is expected to live a
further 25.1 years from age 65.
Overseas
In the USA, PPA2011 tables have been used whilst in Germany the RT2005-G tables have again been used. In the USA the
longevity assumption for a male aged 65 is that he lives a further 19.1 years (female 21.0 years) whilst in Germany a male aged 65
lives for a further 18.4 years (female 22.5 years). The longevity assumption for a USA male currently aged 45 is that he also lives
for a further 19.1 years once attaining 65 years (female 21.0 years), with the German equivalent assumption for a male being 21.1
years (female 25.1 years). These assumptions are based solely on the prescribed tables not on actual GKN experience.
Assumption sensitivity analysis
The impact of a one percentage point movement in the primary assumptions on the defined benefit net obligations as at 31
December 2011 is set out below:
UK
Americas
Europe
ROW
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%
Liabilities
£m
Income
statement
£m
Liabilities
£m
Income
statement
£m
Liabilities
£m
Income
statement
£m
Liabilities
£m
Income
statement
£m
366
(433)
(342)
291
(1)
1
1.8
0.8
(22.1)
20.3
(0.1)
0.1
56
(70)
(2)
1
(0.5)
0.5
(0.2)
0.2
44
(54)
(37)
31
-
(0.1)
(2.3)
2.0
-
5
(5)
-
(0.2)
0.2
-
Page 34 of 37
Notes to the News Release
For the year ended 31 December 2011
14
Post-employment obligations (continued)
(b)
Defined benefit schemes - reporting
The amounts included in operating profit are:
Trading Profit
Redundancy
Employee
and other
benefit
employment
expense
amounts
£m
£m
2011
Current service cost
Past service
Settlement/curtailments
2010
Current service cost
Past service
Settlement/curtailments
UK Pension
scheme
curtailment
£m
Total
£m
(38)
1
4
(33)
-
-
(38)
1
4
(33)
(35)
1
9
(25)
(1)
(1)
68
68
(35)
77
42
The amounts recognised in the balance sheet are:
Present value of unfunded obligations
Present value of funded obligations
Fair value of plan assets
Net obligations recognised in the balance sheet
UK Americas
£m
£m
(13)
(39)
(2,650)
(430)
2,391
248
(272)
(221)
2011
Europe
£m
(351)
(32)
31
(352)
ROW
£m
(46)
23
(23)
Total
£m
(403)
(3,158)
2,693
(868)
2010
£m
(407)
(2,853)
2,660
(600)
The contribution expected to be paid by the Group during 2012 to the UK scheme is £29 million and to overseas
schemes £45 million. Section (d) of this note describes the Pension partnership interest created on 31 March
2010 under which the second distribution of £30 million is expected to be made in the first half of 2012.
Cumulative actuarial gains and losses recognised in equity are as follows:
2011
£m
(358)
(277)
(635)
At 1 January
Net actuarial losses in year
At 31 December
2010
£m
(334)
(24)
(358)
Post-employment obligations
Movement in schemes' obligations (funded and unfunded) during the year
UK Americas
£m
£m
(2,448)
(399)
(1)
(24)
(4)
(129)
(21)
(4)
(201)
(55)
127
17
1
16
(7)
(2,663)
(469)
(2,440)
(355)
(22)
(4)
(135)
(22)
(4)
(61)
(26)
129
17
(1)
1
86
(10)
(2,448)
(399)
At 1 January 2011
Businesses acquired
Current service cost
Interest
Contributions by participants
Actuarial gains and losses
Benefits paid
Past service cost
Settlements/curtailments
Currency variations
At 31 December 2011
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
At 31 December 2010
Page 35 of 37
Europe
£m
(369)
(13)
(6)
(19)
(2)
16
10
(383)
(352)
(6)
(18)
(1)
(20)
17
11
(369)
ROW
£m
(44)
(4)
(1)
2
3
1
(3)
(46)
(39)
(3)
(1)
(2)
3
6
(8)
(44)
Total
£m
(3,260)
(14)
(38)
(170)
(4)
(256)
163
1
17
(3,561)
(3,186)
(35)
(176)
(5)
(109)
166
92
(7)
(3,260)
Notes to the News Release
For the year ended 31 December 2011
14
(b)
Post-employment obligations (continued)
Defined benefit schemes – reporting (continued)
Movement in schemes' assets during the year
UK Americas
£m
£m
2,364
245
134
17
(19)
23
19
4
(13)
(121)
(17)
3
2,391
248
1,930
215
128
16
76
10
39
16
331
4
(15)
(129)
(18)
6
2,364
245
At 1 January 2011
Businesses acquired
Expected return on assets
Actuarial gains and losses
Contributions by Group
Contributions by participants
Settlements/curtailments
Benefits paid
Currency variations
At 31 December 2011
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
At 31 December 2010
Europe
£m
28
2
1
31
27
1
1
(1)
28
ROW
£m
23
1
(2)
3
(3)
1
23
18
(1)
2
(1)
5
23
Total
£m
2,660
2
153
(21)
45
4
(13)
(141)
4
2,693
2,190
145
85
57
331
5
(15)
(149)
11
2,660
Total
£m
(3,158)
(403)
(3,561)
2010
£m
(2,853)
(407)
(3,260)
The defined benefit obligation is analysed between funded and unfunded schemes as follows:
Funded
Unfunded
UK Americas
£m
£m
(2,650)
(430)
(13)
(39)
(2,663)
(469)
2011
Europe
£m
(32)
(351)
(383)
ROW
£m
(46)
(46)
The fair value of the assets in the schemes and the expected rates of return were:
UK
Americas
Europe
ROW
Long term
Long term
Long term
Long term
rate of
rate of
rate of
rate of
return
return
return
return
expected
Value expected
Value expected
Value expected
%
£m
%
£m
%
£m
%
At 31 December 2011
7.8
696
8.9
166
5.8
Equities (inc. Hedge Funds)
3.9
1,182
3.0
75
0.9
Bonds
6.6
97
Property
0.5
39
2.3
7
Cash and net current assets
6.1
344
Partnership plan asset
4.7
33
4.8
31
0.9
Other assets
2,391
248
31
At 31 December 2010
Equities (inc. Hedge Funds)
7.8
741
8.5
171
5.5
Bonds
5.0
1,115
3.6
69
1.0
Property
6.6
90
Cash and net current assets
0.5
39
2.8
5
Partnership plan asset
6.1
346
Other assets
5.5
33
4.8
28
1.3
2,364
245
28
Value
£m
8
9
6
23
11
8
4
23
The expected return on plan assets is a blended average of projected long term returns for the various asset
classes. Equity returns are developed based on the selection of the equity risk premium above the risk-free rate
which is measured in accordance with the yield on government bonds. Bond returns are selected by reference to
the yields on government and corporate debt, as appropriate to the plan's holdings of these instruments. All other
asset classes returns are determined by reference to current experience.
The Pension partnership interest has been valued on a discounted cash flow basis. The valuation considered
separately the profiles of the originating royalty and rental income streams using the Group’s current budget and
forecast data with other factors considered being related expenses including taxation, timing of the distributions,
exchange rates, bond yields and the Group’s weighted average cost of capital.
The actual return on plan assets was £132 million (2010: £230 million).
Page 36 of 37
Notes to the News Release
For the year ended 31 December 2011
14
Post-employment obligations (continued)
(c)
Defined contribution schemes
The Group operates a number of defined contribution schemes outside the United Kingdom. The
charge to the income statement in the year was £15 million (2010: £15 million).
(d)
Pension partnership interest
On 31 March 2010 the Group agreed an asset-backed cash payment arrangement with the Trustee of
the UK Pension scheme to help address the UK pension funding deficit. In connection with the
arrangement certain UK freehold properties and a non-exclusive licence over the GKN trademarks,
together with associated rental and royalty rights, were transferred to a limited partnership established
by the Group. The partnership is controlled by and its results are consolidated by the Group. The fair
value of the assets transferred was £535 million. On 31 March 2010, the Group made a special
contribution to the UK Pension scheme of £331 million and on the same date the UK Pension scheme
used this contribution to acquire a nominal limited interest in the partnership for its fair value of £331
million. The UK Pension scheme’s nominal partnership interest entitles it to a distribution from the
income of the partnership of £30 million per annum for 20 years subject to a discretion exercisable by
the Group in certain circumstances. At inception the discounted value of the cash distributions was
assessed at £331 million which was recognised as a pension plan asset and as a non-controlling
interest in equity. The first distribution of £23 million for the period from 31 March to 31 December
2010 was made in the second quarter of 2011.
15
Post balance sheet events
On 27 January 2012 the Group announced the dissolution of its Driveline joint arrangements with
JTEKT Corporation (`JTEKT`) in Rayong, Thailand. On the same date the Group acquired the
remaining shares in a non-controlling interest, GKN Driveline JTEKT Manufacturing Limited. Following
the dissolution, GKN now owns 100% of GKN Driveline JTEKT Manufacturing Limited. The Group
paid JTEKT net consideration of approximately £8 million, with further deferred consideration of £1
million contingent upon certain specified future business awards.
Page 37 of 37