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* Before goodwill amoritisation and exceptional items
** Cash flow from operating activities after capital expenditure, before interest
- GKN goes forward as global engineering group focused on
Automotive and Aerospace following demerger of Industrial Services.
- Increased sales and strong operating cash flow in challenging market
conditions.
- Automotive Driveline Division increases sales by 10% despite
downturn in North America. Nissan outsourcing and Toyoda joint
venture build presence in Japan.
- Reduced contribution from other automotive businesses.
Disappointing performance from Powder Metallurgy. Corrective
actions in place.
- Continued progress in Aerospace. US military aircraft programmes
worth $4 billion to GKN following acquisition of structures and
thermal joining businesses from Boeing.
- Creation of AgustaWestland. Strong performance as sales success
maintains £5.2 billion helicopter order book.
- Final Dividend per share 7.3p. Equivalent to annual dividend of 11.0p
on pro forma basis.
GKN was transformed in 2001 by the demerger of its Industrial Services
businesses to Brambles Industries plc which formed a dual-listed business with
Brambles Industries Limited of Australia. Following the demerger GKN moved
forward as a focused, global engineering company. This announcement refers
to the pro forma results of the continuing businesses except where otherwise
stated.
2001 sales were £4.3 billion, an increase of 5% over 2000 sales of continuing
businesses. On the same basis, operating profit before goodwill amortisation
and exceptional items was £306 million compared with £424 million, a
reduction of 28%. The favourable impact of currency translation was £59
million on sales and £7 million on operating profit.
Automotive sales increased as recent acquisitions and an unusually high
number of new programme wins offset the loss of established business arising
from lower vehicle output in the US. Profits were lower however because new
business does not initially achieve the same levels of contribution which arise
over time on established programmes. Additionally, Powder Metallurgy's
operating performance was disappointing.
Operating cash flow at £206 million was significantly ahead of last year. Net
debt at the end of 2001 was £885 million compared with £601 million at the
end of 2000 and £920 million at the half year. Interest cover was 5 times.
Marcus Beresford, Chief Executive of GKN plc, said: "No engineering group is
immune from the cyclical nature of its markets but GKN's major businesses are
world leaders and this gives us a competitive advantage in a downturn.
"Automotive Driveline Division emphasised its world leadership by delivering a
remarkably robust performance with an overall 10% increase in sales in a year
when North American automotive output fell by 10%.
"The downturn in the US automotive market and certain performance issues
heavily impacted Powder Metallurgy which had a disappointing performance for
the year as a whole. OffHighway and AutoComponents continued to deliver a
creditable performance in very depressed market conditions.
"AgustaWestland, our new joint venture, has come together extremely well
and has justified our ambitions for the business by winning a succession of
important export contracts throughout 2001.
"GKN Aerospace Services and AgustaWestland have the majority of their
business in defence markets where we made significant gains in 2001 and for
which the outlook is expected to remain positive.
"However, the downturn in the airline industry is affecting civil aerospace
activity. In October, we announced that global employment would reduce by
1,250 people and that certain civil aerospace assets would be written down.
This, together with charges relating to the demerger of Industrial Services and
consequent restructuring of the corporate centre, has led to exceptional
charges of £126 million in 2001, which arise in both continuing and
discontinued businesses.
"The outlook for automotive markets is uncertain. For the year as a whole we
expect world vehicle production to be lower than in 2001. We foresee some
improvement in defence related aerospace but civil aerospace markets are
likely to remain depressed. The restructuring actions announced in October are
underway and, together with recovery initiatives in Sinter Metals, should go
some way to mitigating further declines in our markets.
"Lower demand in most of our markets, together with the cost of the
consolidation of UK helicopter operations announced in January this year, will
adversely affect results in the first half. We expect results to improve as the
year progresses. For the longer term the underlying operational and financial
strength of our business enables us to continue to build for the future so that
we may capitalise fully on the upturn when it comes."
Automotive sales of £2,844 million were £161 million (6%) above 2000. The
favourable effect of acquisitions in the year combined with the full year effect of
2000 acquisitions and divestments and currency totalled £193 million.
Excluding these factors sales were broadly unchanged.
Operating profit before exceptional items and goodwill amortisation was £187
million compared with £308 millon in the previous year. The underlying
reduction, after eliminating the effect of both 2001 and 2000 acquisitions,
currency and certain one off credits in 2000, was 39%.
Automotive Driveline Division (ADD) delivered a robust and resilient
performance in 2001. Through its global leadership, technological strengths
and new programme wins it achieved sales of £1,781 million – a 10%
increase. Excluding the effect of currency and acquisitions, ADD still achieved
underlying sales growth of 3% in a year when North American vehicle output
fell by 10%. While demand for existing models reduced from major North
American manufacturers, the division launched a number of new programmes,
particularly in the growing sports utility vehicle (SUV) sector. Profits reduced
slightly as the lower initial contribution from new programmes was not enough
to offset the downturn in established US business.
During 2001, Toyota selected ADD as sole supplier of CVJ halfshafts for the
new Camry being marketed in Asia Pacific. ADD will supply the components
from plants in Thailand, Malaysia, Taiwan and Australia.
In the US ADD acquired Ford's in-house CVJ driveshaft production for the Ford
Taurus and Mercury Sable models produced in Chicago. GKN already supplies
CVJ driveshafts for these models assembled in Atlanta. Production is being
undertaken at GKN's existing North American facilities.
The Kaiserslautern driveline operation outsourced by General Motors in
Germany and the Tochigi operation outsourced by Nissan in Japan in 2000
were both successfully integrated and made a positive contribution to
performance.
The outsourcing by Nissan provided GKN with its first wholly owned
manufacturing presence in Japan. Also in Japan, GKN Toyoda Driveshafts Ltd,
a joint venture between GKN and Toyoda Machine Works, won significant
business from Fuji Heavy Industries (Subaru) and other domestic
manufacturers. Production began in December 2001 on a new line in Toyoda's
plant at Tadoimsaki. Annual output is expected to reach 500,000 units in 2003.
GKN's global leadership in driveline is based on CVJ halfshafts, propeller shafts
and viscous couplings. The Group is developing new driveline products and has
developed an active, electronic torque management device for vehicles under
development by two leading automotive manufacturers.
2001 was a difficult year for GKN Sinter Metals and Hoeganaes. Sales fell to
£612 million from £638 million in 2000. This was largely a result of reductions
in output by the 'Big Three' US domestic automotive manufacturers –
DaimlerChrysler, Ford and General Motors which constitute a high percentage
of GKN Sinter Metals' US demand.
In addition to the sales reduction, the operational skills in quality and delivery,
which are a characteristic of GKN's established businesses, had not yet been
fully embedded within the Sinter organisation. Significant costs were incurred in
tackling delivery and quality issues encountered as the business downsized to
meet the volume downturn.
Despite some improvement in the second quarter this was not maintained in
the second half and led to a disappointing performance for the year as a whole.
Recovery actions have been implemented which we are confident will lead to
an improved performance in the current year.
For Hoeganaes, the market downturn and increased energy costs in the US
had an adverse impact on performance. Some of this impact was offset during
the year by operational improvements which led to a better outcome in the
second half.
GKN Sinter Metals acquired Presmet Inc of Worcester, Massachusetts, USA, in
January 2001. Presmet manufactures complex steering column, engine and
transmission parts. To support future growth in Europe capacity has been
expanded at certain GKN Sinter Metals plants in Germany and Italy. The
world's largest mechanical and hydraulic compacting press was installed in a
US plant to meet growing demand for complex transmission components.
Hoeganaes opened a new blending facility in Germany as part of its
international expansion and its new production facility in the US, the world's
largest atomised powder plant, has come on line.
GKN Powder Metallurgy is the only truly global business in its sector. Looking
beyond the immediate performance difficulties and the current market
downturn GKN sees Powder Metallurgy as a future growth platform.
Despite very poor market conditions due to the impact of BSE and Foot and
Mouth Disease on the agricultural industry, OffHighway Systems increased
market share and achieved significant growth in gearbox sales following the
introduction of integrated secondary drivetrain systems for agricultural
machinery. GKN Wheels integrated new facilities in North America and Italy
and is extending its global reach through partnership arrangements with wheel
manufacturers in Asia, Eastern Europe and Latin America. AutoComponents
saw sales growth in vehicle structures through the first year of supply for the
new Ford Transit, Jaguar X-Type and Toyota Corolla. The business is using its
expertise to exploit the growing market for high integrity aluminium
components.
This 50:50 joint venture with Siemens VDO is the world leader in the design
and manufacture of metal substrates for catalytic converters. The business
achieved 10% sales growth in Germany during the year but had to respond
rapidly to a decline in demand during the final quarter. US sales were at the
same level as last year. A significant achievement in 2001 was the successful
ramp up of production and the establishment of an engine test facility in the
new factory in Thuringia in Germany.
Aerospace sales of £1,493 million compared with £1,451 million in 2000. The
year on year trend is significantly affected by the formation of AgustaWestland,
the acquisition of the St Louis facility from Boeing and currency movements.
2001 should be seen as the base year from which the restructured business
will move forward.
Similarly, the profit increase to £119 million from £116 million in 2000 is not
capable of direct comparison due both to changes in status and the inclusion in
2000 of final credits arising on defence related contracts. The AgustaWestland
joint venture made a good start and the contribution from GKN's 50% holding
was similar to the profit from Westland Helicopters as a subsidiary in 2000.
Underlying performance improved at GKN Aerospace Services. Since 1997
aerospace subsidiary sales have risen from £150 million to £630 million. GKN
Aerospace Services conducts 59% of its business in the US, the world's largest
aerospace market, and 41% in Europe. Military aircraft are an important
market and defence sales account for 60% of revenue.
The most significant event in 2001 was the completion in January of the
purchase of the Boeing Military Aircraft and Missile Systems Group's fabrication
operations in St Louis, Missouri, USA. This transaction established a strategic
relationship with the world's largest aerospace company and increased GKN's
exposure to the US defence market. The St Louis plant manufactures metal
and composite structural components primarily for the F18E/F and the C17.
The US Navy and Marine Corps are set to acquire 480 F18s and the US Air
Force more than 180 C17s. These two programmes represent future business
worth an estimated $1.9 billion to GKN.
During 2001, GKN also completed a wide ranging restructuring of its aerospace
activities which involved the closure of three manufacturing sites in the UK and
US and the divestment of a small actuation business in Germany. Operations
are now focused on seven centres of excellence in Germany, the UK and the
US. In addition some minor actions and asset write-downs were made in
anticipation of a modest down cycle in civil demand.
However, following the impact of the events of September 11th on the world
airline industry, GKN implemented a significant further reduction in its cost base
as civil aircraft manufacturers reduced or cancelled programmes. The Group
also wrote down by £50 million the carrying value of some aerospace assets
mainly in respect of the non recurring initial costs of design, development and
tooling for new programmes.
In early 2002, GKN acquired the specialist Thermal Joining Centre (TJC) in
Kent, Washington State, USA, from Boeing. The TJC produces an important
titanium assembly for the F22 fighter aircraft. The F22 programme is now
worth an estimated $1.4 billion to the Group.
With effect from 1 January 2001, GKN and Finmeccanica SpA merged their
helicopter subsidiaries into a new 50:50 joint venture, AgustaWestland. The
management team has come together well, synergies are being realized, the
order book was executed without disruption and new programmes were won.
The year end order book, plus major contracts booked in January 2002, stood
at £5.2 billion.
Denmark has ordered 14 EH101 aircraft for search and rescue and troop
transport. Portugal has ordered 12 EH101 helicopters for combat search and
rescue and fishery protection. The successes in Denmark and Portugal have
confirmed the competitiveness of the EH101. The Royal Thai Navy ordered two
Super Lynx helicopters and in January 2002 Oman ordered sixteen. A total of
62 NH90 helicopters have also been ordered by Finland, Norway, Portugal and
Sweden. AgustaWestland is a 32% partner in NH Industries which produces
the NH90.
A large opportunity for AgustaWestland is access to the US market for the
EH101 following preliminary agreement with Lockheed Martin to initiate a joint
effort to address the US Government medium-lift helicopter market with
immediate attention focused on a US Air Force combat search and rescue
requirement for approximately 130 aircraft. There are also US Navy, Marine
Corps and Coastguard programmes for which a US version of the EH101 could
be highly competitive.
As part of the UK Bowman digital military communications system,
AgustaWestland was awarded a £100 million conversion, training and support
programme. The AB139 medium twin helicopter, being developed in
collaboration with Bell Helicopter Textron, completed a successful series of flight
trials in 2001.
In January 2002 AgustaWestland announced the consolidation of UK
operations onto the Yeovil site and a reduction in the workforce. GKN's share of
the costs of this reorganisation, which are estimated to be £11 million, will be
charged to operating profit in the first half of 2002.
On 7 August the Group completed the demerger of its Industrial Services
businesses to Brambles Industries plc and the merger of these businesses with
Brambles Industries Limited of Australia. To reflect the composition of the
continuing Group, pro forma financial information has been prepared showing
the results of the Group excluding the demerged businesses for the whole of
2001, with 2000 comparatives on the same basis. Unless otherwise stated,
these are the figures referred to throughout the review.
Consolidated financial information, incorporating the results of the Industrial
Services businesses up to the date of demerger and the effects of the
transaction itself, is also attached.
The other structural change was the creation of AgustaWestland at the
beginning of the year whereby GKN and Finmeccanica each contributed the
assets of their helicopter businesses "Westland" and "Agusta" respectively, to a
new joint venture company AgustaWestland NV the shares in which are held
equally by the two parties. The transaction has been accounted for so as to
reflect its substance whereby the Group has exchanged 50% of its interest in
the liabilities of Westland for a 50% interest in the fair value of the tangible
assets of Agusta, effective from 1 January 2001.
Sales and operating profit before goodwill amortisation and exceptional items
are discussed by business in the operating review.
For the Group in total, sales were £4,337 million compared with £4,134 million
last year, an increase of £203 million (5%). After eliminating the impact of
currency, acquisitions, changes in status and specifically AgustaWestland
(where direct comparison is not possible), the underlying increase was 1.2%.
Automotive sales of £2,844 million were £161 million (6%) above last year but
the underlying figure was similar to 2000. On a reported basis Aerospace sales
of £1,493 million were flat but the underlying performance is masked by the
creation of the AgustaWestland joint venture. In Aerospace Services,
subsidiaries' sales rose to £630 million largely due to the acquisition of Boeing's
St Louis structures plant.
Total operating profit of £306 million was £118 million (28%) below 2000 with
an underlying reduction of 34%. The reduction in Automotive operating profit
was £121 million (39%) to £187 million while Aerospace showed a marginal
improvement from £116 million to £119 million. The underlying movements
were a reduction of 39% in Automotive and 2% in Aerospace though, as noted
above, in the latter case the comparison is affected by the change in status of
AgustaWestland.
There were two separate exceptional costs charged to operating profit in the
period. An anticipated £40 million charge was announced in August 2001 in
respect of a corporate centre reorganisation consequent upon the demerger, of
which £10 million was charged to continuing businesses (with a further £24
million being charged to exceptional in discontinued businesses).
In October 2001, a reorganisation was announced to reduce capacity in the
Aerospace and Automotive businesses as a result of the changed market
conditions which applied in the latter half of the year. In this respect, £88
million was charged as an exceptional charge to operating profits in 2001, £50
million in respect of write downs in Aerospace assets and £38 million for
redundancy and other costs in Aerospace and Automotive. A further £40
million is likely to be charged in 2002 to cover the remainder of this re-
organisation as it is implemented.
The cash cost of operating exceptional charges in the period was £27 million
and the cash cost in 2002 to complete all these reorganisations is estimated at
approximately £50 million.
Exceptional credits arising on the sale or closure of businesses totalled £7
million. £2 million arose within subsidiaries from the sale of Sitec GmbH
together with the withdrawal from a small Automotive Driveline joint venture.
Within associates, the Group's share of the profit made by Alvis plc on its
divestment of Avimo Group Ltd. was £5 million.
Net interest payable by subsidiaries was £59 million (2000 - £34 million). The
increase arose largely because of the £144 million of cash injected into the
AgustaWestland joint venture, the impact of the cash cost of acquisitions in the
latter half of 2000 and early in 2001 and higher working capital levels over
much of the first half of the year.
Interest was 5 times covered by Group operating profit before goodwill
amortisation and exceptionals.
Profit before tax, goodwill amortisation and exceptional items was £245 million
compared with £386 million in 2000, a decrease of 37%.
After exceptional items and goodwill amortisation, profit before tax was £107
million. This compared with the 2000 figure of £346 million.
The rate of tax as a percentage of profit before goodwill amortisation and
exceptional items reduced slightly to 25.1% from 26.2% last year largely
because of the benefit of tax planning initiatives.
The tax charge of £60million represented 56% of profit before tax due to the
level of exceptional items, a large element of which did not attract immediate
tax relief.
The underlying tax rate in 2002 and beyond is expected to show a modest,
progressive increase as a result of changes in the geographical mix of profits.
There may, however, be some favourable impact from the resolution of
outstanding tax issues.
The move to full provision for deferred tax, consequent upon the
implementation of FRS 19 in 2002, is expected to add around a further 4-6
percentage points to the charge in the Profit and Loss Account for the year but
this will have no cash impact. The prior year adjustment on adopting this policy
is estimated at £51 million in subsidiaries and a further £8 million in joint
ventures.
Earnings per share before goodwill amortisation and exceptional items fell by
36.8% to 24.7p from 39.1p a year earlier as a result of the lower operating
profits and higher interest costs referred to above.
A final dividend of 7.3p per share is proposed, payable on 17 May 2002 to
shareholders on the register at 15 March 2002.
Shareholders may choose to reinvest this dividend under the Dividend
Reinvestment Plan ("DRIP"). The closing date for DRIP mandates is 2 May
2002.
Together with the interim dividend of 7.6p for the business including the
demerged Industrial Services, total dividends paid by GKN in respect of 2001
will therefore be 14.9p.
This dividend is the first in respect of the Group following the demerger and, on
the basis that the dividends will normally be split approximately one third as an
interim and two thirds as a final dividend, the proposed dividend equates to a
total annual dividend on a pro forma basis of 11.0p for 2001.
Cash inflow from operations was £452 million compared with £335 million in
2000. Operating cash flow, which is used as a performance measure in the
financial management of the Group and which is defined as cash inflow from
operating activities after deducting all capital expenditure, was £206 million
(2000 - £89 million). There was a reduction of £167 million in working capital
or £111 million excluding the impact of exceptional costs and stock write
downs. Of this latter figure, £71 million came from debtors and £49 million
from customer advances, reflecting the focus on cash management within the
Group.
Dividends from joint ventures and associates increased to £49 million (2000 -
£14 million) largely due to dividends received from AgustaWestland.
AgustaWestland has a policy of 100% distribution of earnings unless otherwise
agreed by the shareholders.
Capital expenditure was £246 million (2000 – £246 million). This reflected
continuing high levels of investment in the Driveline and Sinter Metals
businesses in support of new production programmes, cost reduction and
productivity initiatives. This represented 149% of depreciation.
The net impact of acquisitions and divestments on the cash flow was an
outflow of £136 million (2000 - £109 million) and the net cash inflow for the
year was £29 million (2000 outflow of £95 million).
At the year end the balance sheet showed goodwill of £525 million in relation to
subsidiaries and a further £112 million within the equity value of joint ventures
and associates. In addition to normal amortisation, which takes place over
periods of up to 20 years, an impairment of £7 million was recognised in
respect of two small loss making Sinter Metals operations.
At the end of the year the Group had net borrowings of £885 million (2000 -
£601 million). These are net of customer advances of £50 million (2000 - £315
million), which are shown in short term creditors in the balance sheet. Net debt
in joint ventures totalled £58 million, most of which was in AgustaWestland.
Shareholders' equity in the consolidated Group reduced from £1,457 million at
the end of 2000 to £1,036 million at the end of 2001. There was a reduction of
£451 million as the result of the demerger of the Industrial Services businesses
and a transfer from the profit and loss account of £73 million. These were
partly offset by an increase of £110 million arising on the formation of
AgustaWestland. Other movements, mainly currency, gave rise to a net
reduction of £7 million.
The capital restructuring, which took place as part of the demerger, created
distributable reserves of £840 million in the parent company.
The implementation of FRS 17 in subsidiaries would have reduced
shareholders' funds by £169 million at the end of 2001 but would have
increased them by £4 million at the end of 2000. This volatility is a feature of
the Standard and is likely to give rise to significant movements in the future
which will be reflected in the Statement of Recognised Gains and Losses. The
impact on reported earnings is unlikely to be large though there will be some
volatility in that element which is treated as cost of finance. The cost of funding
pension obligations is not affected by FRS 17 but is driven by the longer term
view taken when computing the minimum funding requirement (MFR). For the
GKN schemes it appears unlikely that major additional funding will be required
and the present expectation is that additional cash contributions of around £10
million per annum will be required over the next 3-4 years. These are not
material to the Group.
The equity value of joint ventures will also be affected by the implementation of
FRS 17 and the corresponding adjustment at the end of 2001 would have
reduced shareholders' funds by £18 million.
Further enquiries: GKN Corporate Communications, Tel: 020 7463 2354
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