Annual Report 2009 in PDF - GKN

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22 GKN plc Annual Report 2009 Review of Performance OffHighway OffHighway designs, manufactures and distributes, on a global basis, a portfolio of products for off-highway vehicles primarily in the agricultural, construction, mining and other specialty vehicle markets. It consists of three primary business streams — driveline products, wheels and aftermarket. The division has a leading global position in the supply of power take-off shafts and wheels. OffHighway sales by market Agriculture 71% Construction & Mining 17% Industrial Machinery 12% European agricultural markets weakened considerably as the year progressed, with a more pronounced decline in the second half. This was fuelled by the prevailing economic conditions, de-stocking actions within the supply chain, lower commodity prices and lack of availability of finance. Demand for US agricultural machinery was also sharply down as farm income fell as a result of lower commodity prices. In the construction equipment market, the fall-off in sales started towards the end of 2008 due to the recessionary conditions persisting in both European and US markets and extensive de-stocking by customers. The low level of housing starts in the US and Europe has continued to depress demand for light construction equipment. Demand in mining markets remained stable at the beginning of 2009 due to the longer equipment ordering cycle in this industry, but weakened thereafter. The industrial machinery sector includes products for material handling and a range of other applications. Demand in this sector weakened significantly reflecting difficult economic conditions in many markets and subsequent reductions in capital expenditure by end customers across many industries. Against this background, sales were £361 million, £192 million lower than the prior year (2008 – £553 million). Excluding the currency translation benefit of £75 million, the underlying decrease in sales was £267 million (43%) with all product areas and regions suffering a decline. The rate of deterioration increased in the second half when agricultural markets weakened, whilst construction, mining and industrial machinery market demand remained subdued and underlying second half sales were 52% lower than the comparable period in 2008. OffHighway sales by region of origin Europe 67% Americas 27% Rest of World 6% The division reported a trading loss of £12 million (2008 – trading profit of £40 million). The underlying decline was £59 million adjusted for a favourable currency translation effect of £7 million. Trading margin was (3.3)% compared with 7.2% in 2008. Although the fourth quarter trading margin was still negative at (5.4)%, this represented a notable improvement over the third quarter trading margin of (9.2)%. Return on invested capital was (5.5)% (2008 – 19%). Pictured: A Power Drive PTO drive shaft offering improved performance, safety and handling. GKN OffHighway has a leading global position in the supply of power take-off shafts. Management actions to restructure the business in response to the economic conditions were broadened and accelerated during the year. Headcount reduced by around 960, bringing the total reduction since October 2008 to 1,400. Four facilities were shut or reorganised and a fifth will be closed during the first half of 2010. Restructuring actions during the year resulted in charges of £26 million (2008 – £3 million), comprising redundancy and reorganisation costs of £16 million, goodwill and fixed asset impairments of £9 million and short-time working of £1 million. Capital expenditure on tangible fixed assets was £11 million (2008 – £14 million), 0.8 times (2008 – 1.2 times) depreciation. Despite poor end markets, good progress was made in attracting a high level of new business. Specific areas of success included new orders for Rockford driveshafts for a Liebherr articulated dump truck and a fiveyear global supply contract for small wheels to Kion. New products to GKN were large multi-piece wheels (46 inch to 63 inch) for mining equipment and a cost-saving ‘Profi-fit’ wheel design, the first customer for which was John Deere. Following an operational and strategic review, the Group has decided to exit its interest in the low technology axles market with all options being considered. These businesses recorded a trading loss of £4 million (2008 – £1 million loss).
Financial performance Corporate costs Corporate costs, which comprise the costs of stewardship of the Group and operating charges associated with the Group’s legacy businesses, were £12 million (2008 – £12 million) and included a first half legacy post-employment past service credit of £1 million and also second half legacy and project related charges amounting to £2 million. Restructuring and impairment charges Group restructuring and impairment charges of £141 million (2008 – £163 million) relate to the restructuring programme initially announced in November 2008 and updated during the course of 2009. The major elements arose within subsidiaries and represent redundancy and reorganisation costs (£108 million) and short-time working costs (£24 million). Net impairment charges amounted to £9 million and included an impairment reversal of £3 million in respect of the Jilin joint venture interest. The restructuring measures were put in place in response to significantly lower production volumes in the Automotive, Powder Metallurgy and OffHighway businesses and the general economic decline. Further restructuring charges of around £37 million, including £6 million short-time working, are expected in 2010 as facility rationalisation and closure actions are concluded. Profits and losses on sale or closures of businesses A £2 million currency surplus arose on the disposal of the Group’s investment in its GKN Driveline Jilin joint venture. Amortisation of non-operating intangibles arising on business combinations The charge for the amortisation of nonoperating intangibles (e.g. customer contracts and relationships, trademarks, non-compete agreements and intellectual property rights) arising on business combinations increased to £24 million (2008 – £10 million), primarily due to the Filton acquisition. Change in value of derivative and other financial instruments The Group enters into foreign exchange contracts to hedge much of its transactional exposure. At 1 January 2009 the net fair value of such instruments was a liability of £130 million and at the end of 2009 the figure was a liability of £43 million. Where hedge accounting has not been applied, the change in fair value between 1 January 2009 and 31 December 2009, or the date of maturity if earlier, is reflected in the income statement as a component of operating profit and has resulted in a credit of £106 million (2008 – £175 million charge). There was a £29 million charge arising from the change in the value of embedded derivatives in the year (2008 – £43 million credit) and a charge of £3 million attributable to the translational currency impact on Group funding balances (2008 – £9 million credit). There were also changes in the value of Powder Metallurgy commodity contracts of £2 million credit (2008 – £1 million charge). Operating profit Operating profit of £39 million compared with an operating loss of £86 million in 2008. Post-tax earnings of joint ventures The post-tax earnings of joint ventures in the year were £21 million (2008 – £6 million) which included an impairment reversal of £3 million (2008 – £10 million charge). Post-tax earnings on a management basis were £18 million (2008 – £16 million), with trading profit of £23 million (2008 – £20 million). The 2009 tax charge amounted to £4 million (2008 – £4 million) with an interest charge of £1 million (2008 – £nil). Underlying trading profit declined £1 million as the strong performance in our Chinese joint venture, up £8 million, was offset by underlying trading losses, down £9 million, primarily in Emitec and Chassis System. Net financing costs Net financing costs totalled £114 million (2008 – £50 million) and include the noncash charge on post-employment benefits of £49 million (2008 – £3 million). The net of interest payable and interest receivable was £64 million (2008 – £47 million) www.gkn.com and arose mainly on the bonds and bank borrowings. The £17 million increase in net interest payable mainly reflects the absence of balance sheet translation cover interest benefits and charges (£7 million) incurred when the Group bought back £124 million of its outstanding bonds. The interest income benefit of the second half rights issue proceeds is estimated at £1 million. Interest costs attributable to the Group’s A350 investment have been capitalised in 2009 amounting to £1 million. The non-cash charge on post-employment benefits arises as the expected return on scheme assets of £121 million (2008 – £163 million) was more than offset by interest on post-employment obligations of £170 million (2008 – £166 million). Details of the assumptions used in calculating postemployment costs and income are provided in note 26 to the financial statements. Profit/loss before tax The management profit before tax was £83 million (2008 – £170 million). The loss before tax on a statutory basis was £54 million compared with a £130 million loss before tax in 2008. Management profit before tax of continuing operations 2005 2006 2007 2008 2009 300 250 200 150 100 50 0 23
Page 1 and 2: Automotive Powder Metallurgy Aerosp
Page 3 and 4: The Group has operations in over 30
Page 5 and 6: Chairman’s Statement Roy Brown Ch
Page 7 and 8: terms. In December we were also abl
Page 9 and 10: Automotive GKN is the world’s lea
Page 11 and 12: Powder Metallurgy Powder Metallurgy
Page 13 and 14: OffHighway GKN OffHighway designs,
Page 15 and 16: trading profit improved further as
Page 17 and 18: GKN Driveline GKN Driveline is the
Page 19 and 20: Powder Metallurgy Powder Metallurgy
Page 21 and 22: Aerospace Aerospace is a global fir
Page 23: Capital expenditure on tangible ass
Page 27 and 28: Cash flow* from continuing operatio
Page 29 and 30: Capital structure Rights issue rais
Page 31 and 32: 2009 performance Five year record M
Page 33 and 34: Operational risks continued Risk Na
Page 35 and 36: Conducting our business with integr
Page 37 and 38: discrimination and from any form of
Page 39 and 40: economy and thereby reduce CO 2 emi
Page 41 and 42: www.gkn.com 2009 marked the 250th a
Page 43 and 44: 6 7 8 9 10 6 Richard Parry-Jones, C
Page 45 and 46: Annual General Meeting The Annual G
Page 47 and 48: Corporate Governance In accordance
Page 49 and 50: The Chairman offers major sharehold
Page 51 and 52: The Group’s systems and procedure
Page 53 and 54: The Committee receives annual confi
Page 55 and 56: Executive Directors Remuneration po
Page 57 and 58: Following shareholder approval, a n
Page 59 and 60: External appointments The Board rec
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Page 65 and 66: Statement of Directors’ Responsib
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Page 69 and 70: Consolidated Statement of Comprehen
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Page 73 and 74: Notes to the Financial Statements F
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1 Accounting policies and presentat
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2 Segmental analysis continued (c)
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3 Operating profit The analysis of
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3 Operating profit continued 2008 R
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4 Net financing costs www.gkn.com 2
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5 Taxation continued www.gkn.com 20
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5 Taxation continued www.gkn.com (f
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9 Dividends www.gkn.com Paid or pro
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11 Share-based payments www.gkn.com
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12 Goodwill and other intangible as
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12 Goodwill and other intangible as
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14 Investments in joint ventures ww
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17 Trade and other receivables www.
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19 Net borrowings continued (b) Fai
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20 Financial risk management contin
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20 Financial risk management contin
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22 Provisions www.gkn.com Legal and
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23 Share capital continued www.gkn.
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www.gkn.com 26 Post-employment obli
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26 Post-employment obligations cont
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26 Post-employment obligations cont
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Independent Auditors’ Report to t
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Notes to the Financial Statements o
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Group Financial Record www.gkn.com
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Aerospace Europe Composite Technolo
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Taxation www.gkn.com In July 2009,
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Contact Details GKN plc PO Box 55 I
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