GKN Plc Annual Report 2006
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GKN plc Annual Report 2006 2 2006 Highlights 3 Chairman’s statement 4 Chief Executive’s statement 6 Business review 44 Board of Directors 46 Directors’ report 48 Corporate governance 52 Audit Committee report 53 Directors’ remuneration report 61 Auditors’ report (Group) 62 Group financial statements 103 Auditors’ report (Company) 104 Company financial statements 106 Five year financial record 108 Principal subsidiaries and joint ventures 110 Shareholder information 112 Subject index Business review 6 Group GKN’s stand at the ninth annual Beijing overview International Automotive Industry Exhibition, November 2006. The Group’s Strategy, presence at the Exhibition reflects the strategic importance of China to GKN’s measures and long-term growth. By 2010 China is performance expected to represent GKN’s third > largest concentration of employment in the world after the USA and Germany. Cautionary statement This annual report contains forward looking statements which are made in good faith based on the information available to the time of its approval. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ materially from those currently anticipated. 16 32 36 Operational Financing Corporate reviews and risk responsibility Automotive, Treasury management, Living the Values OffHighway liquidity and risk and Aerospace review Annual Report 2006 GKN plc 1 2006 Highlights > Excellent progress in 2006 – strong results and major milestones achieved. > Aerospace delivers an 11% increase in sales, a 30% increase in trading profit and moves into double digit margins. > Powder Metallurgy trading profit and margins more than double; US Sinter operations return to profit. > OffHighway acquisitions increase sales by 7% and trading profit by 15%. > Driveline trading profit lower – significant new business wins support future growth. > Strategic restructuring plan is in final phase and will conclude in 2007. > Dividend increased by 5% reflecting the Board’s continuing confidence in the future. Statutory basis: Sales Profit before tax Earnings per share £3,634m £182m 25.0p Management basis*: Sales Profit before tax Earnings per share Proposed full year dividend per share £3,842m £221m 28.8p 12.8p +8% +29% +5% * Sales include share of joint ventures. Profit and earnings exclude restructuring and impairment charges, amortisation of non-operating intangible assets arising on business combinations, profits and losses on the sale or closures of businesses and changes in the fair value of derivative financial instruments. 2 GKN plc Annual Report 2006 Chairman’s statement Strategic progress The Board GKN’s performance in 2006 confirms that the Group On 1 January 2006 Sir Ian Gibson succeeded Baroness is making significant progress in implementing its Hogg as Senior Independent Director. Sarah retired from strategy which is focused on the achievement of the Board at the Annual General Meeting on 12 May long-term growth and enhanced shareholder value. after more than nine years’ service. We thank her for her extremely valuable contribution during that time. Driveshaft manufacturing capacity continues to be transferred to the high growth economies of Asia On behalf of the Board, I am delighted to be able Pacific, South America and Eastern Europe. Whilst to congratulate Kevin Smith on the Knighthood we have had production facilities in Japan and China conferred upon him in the 2007 New Year Honours. for some 20 years and have achieved significant This recognises Kevin’s contribution to British industry market penetration in these countries, the scale of and is richly deserved. the current re-alignment of the Group’s manufacturing Corporate responsibility assets will take full advantage of the new world order Last year I reported that we would be introducing the in automotive production. GKN Code which is common to all parts of the Group Our Aerospace business, which now represents 29% of and sets out a clear and unambiguous framework of subsidiaries’ trading profit, increased sales in 2006 by conduct and behaviour. During 2006 we executed 11% and profits by 30%, achieving a trading margin of a major communications exercise in 25 languages 10%. Stellex Aerostructures, acquired during the year, to make our entire global workforce aware of the will increase our exposure to the US civil aircraft market. obligations which the Code demands of the Group and its individual employees. We have also transformed the contribution which Powder Metallurgy is making to the Group. Our To further support our Values, and in particular our Sinter Metals business in North America returned commitment to make a positive contribution to the to profitability in 2006 and further progress can now communities in which we operate, we have launched be expected. We also made bolt-on acquisitions in an exciting initiative which aims to raise funds across OffHighway including a wheels business in China. the Group in 2007 for charitable purposes in our local communities and in Africa. The initiative is known as GKN I am pleased to report that the Group produced a Mission Everest and involves sponsorship of the first satisfactory improvement in profitability and earnings flight over Mount Everest by powered paraglider. Further despite high energy and raw material costs and information is available in the corporate responsibility difficult conditions in some of our markets. review in this report and at www.gknmissioneverest.com. We made a £200 million payment to the UK pension Against the background of global concern over the scheme during the year and, although a deficit remains, impact of climate change, GKN strives continuously we feel confident that this issue is now substantially to improve its environmental performance. As well as behind us. preserving scarce resources and reducing levels of waste Results and emissions from our manufacturing processes, this Profit before tax on a management basis was includes the development of lighter weight components £221 million compared with £204 million in 2005. which contribute to greater fuel efficiency for both Earnings per share on the same basis rose to 28.8p automotive vehicles and aircraft. Through our joint (2005 – 22.3p) helped by a lower tax rate. Net debt venture, Emitec, we also assist vehicle manufacturers rose to £426 million at the year end (2005 – £65 million) to achieve ever more stringent emission standards due to the cost of acquisitions, restructuring charges, through the production of advanced metal substrates further share buybacks and the contribution to the UK for catalytic converters and diesel particulate filters. pension scheme. The future Dividend Enhancing shareholder value remains paramount in The Board remains committed to a progressive the development and execution of our strategy. Having dividend policy, subject always to prevailing economic almost completed the most significant restructuring conditions. We recommend that a final dividend of programme of recent years we now look forward to a 8.7p be paid on 9 May 2007 bringing the total dividend period of profitable growth. for the year to 12.8p (2005 – 12.2p). The proposed dividend is covered 2.3 times by earnings on a management basis (2005 – 1.8 times). Roy Brown Chairman Annual Report 2006 GKN plc 3 Chief Executive’s statement Improving profitability In Aerospace the acquisition of Stellex Aerostructures GKN is in good shape. The strategic actions we have created a leading position in the high growth area of taken to better position the business for sustained titanium structures manufacture. growth are now contributing strongly to improving Restructuring for growth profitability. The strategic restructuring programme we embarked Aerospace had another excellent year, increasing on two years ago is now moving to a close with the sales by 11% and profits by 30% and achieved final announcements on site reorganisation and the double digit margins we have promised. closure in Driveline and Sinter Metals having been Substantial new business was secured across a made and the actions commenced in 2007. range of programmes, growing our order book for In addition, in the light of further deterioration in UK both defence and civil customers. The market market conditions, we took the decision to close our outlook continues to be positive in both sectors. UK manufacturing facility for cylinder liners and this Overall Automotive profits also improved slightly was announced in January 2007. Liner production will despite well publicised turbulence in our major take place solely in China with some machining and markets. A significant downturn in US production finishing in North America. and a particularly weak third quarter demand in The successful completion of the Group restructuring Western Europe combined to significantly challenge plan is a major plank of our strategy to position GKN the skills of GKN plant management in both markets. for accelerated growth. Our team are executing this Our Driveline Driveshafts business found conditions most difficult of leadership challenges with great skill particularly difficult and profits were down as a result. and sensitivity, creating a very strong foundation for The foundations of the business remain solid and with the future – I am grateful to them. our restructuring programme completing in 2007, we It is the promise of that future which is now exciting are confident of achieving improved performance in the GKN team. the coming year. Technology and people Powder Metallurgy performed strongly, returning our Our technology programme is producing new US business to profitability and improving margins market leading products from all parts of the Group. in Europe. We also continued to grow revenues in The world’s first composite primary wing structure, Asia Pacific and Latin America, creating a business developed at our Cowes site, is now assembled into with a better geographic and customer mix. Powder the first A400M development aircraft at Airbus; our Metallurgy is now well set for a sustained period Alabama facility will deliver the world’s first production of growth.