GKN Business Report FY2006

Business Highlights

Financial overview

in million pounds FY2006 FY2005 Rate of change(%) Factors and Issues
Sales (continuing businesses) 3,634 3,648 (0.4) -Sales were 3,634 million compared with 3,648 million in 2005, a reduction of 14 million. Excluding the impact of currency translation, acquisitions and divestments there was an increase of 2 million.
Operating profit (continuing businesses) 203 98 107.1

-Operating profit was 203 million compared with 98 million, an increase of 105 million. The main factors of the improvement were;
(1) Trade profit was 242 million, an increase of 13 million.
(2) Restructuring and impairment cost was 74 million, a decrease of 24 million.
(3) Changes in the fair value of derivative financial instruments was 33 million, improved by 66 million compared with the last year.

Sales 2,608 2,711 (3.8)

-Sales of 2,608 million compared with 2,711 million a year earlier, largely reflecting the negative impact of currency (23 million), the net impact of divestments, acquisitions and changes in status (33 million) as well as weakness in demand during the third quarter in both North America and Western Europe which extended into the fourth quarter in North America. Underlying sales were down by 47 million (1.8%).

Operating profit 103 48 114.6

-Operating proft was 103 million, improved by 114.6% compared with 2005,due to a decrease of restructureing and impairment costs and favourable impact of currency translation . Meantime trading profits were flat with last year, reflecting benefits of continuing productivity improvements offset by weak trading performance and reorganisation costs on Other Automotive subsidiaries.

Financial overview by Division

GKN Driveline
Driveline subsidiaries' sales in the year totaled 1,906 million compared with 1,993 million in 2005, a decrease of 87 million. The negative impacts of currency translation and acquisitions and changes in status in 2005 were both small at 17 million and 3 million respectively, while the divestment of Fujiwa, the Chinese non-core casting business, led to a reduction of 30 million. The underlying decrease of 37 million (1.9%) was mainly a consequence of weak third quarter demand in a number of major markets and lower US production in the fourth quarter.
-Charges in the year in respect of the strategic restructuring program to move productive capacity from high cost, low growth mature markets, to lower cost, high growth emerging markets totaled 37 million (2005-46 million). The final stage of the program was announced in early 2007 and the cost of approximately 29 million will be charged in the 2007 accounts.

Powder Metallurgy
-Sales in the year were 582 million compared with 588 million in 2005, with the reduction all due to the adverse impact of currency on translation. North American sales were significantly weaker as a result of market share reductions of major customers and, in particular, their production cut-back in the third and fourth quarters of the year. These reductions were fully compensated by increased sales in Europe and the Rest of the World with new programs coming on stream from a variety of automotive and other industrial customers. As a consequence, the geographical balance of the division has moved with some 54% of Sinter Metals' and 48% of the total divisional sales arising outside North America. This trend appears likely to continue, particularly as emerging market demand in creases.
-Restructuring costs and asset impairment in 2006, totaled 24 million (2005 - 28 million), which related to the closure of three North American, one UK and one German plants. At the same time two new plants were opened in China. One final closure has been announced in February 2007 leading to a charge of some 8 million in the year and this will accelerate the benefits arising from this program.

Other Automotive
Sales of subsidiaries in the year of 120 million were 10 million below 2005, primarily reflecting lower sales in automotive and truck markets.
-The share of sales of joint ventures increased from 67 million to 92 million as Chassis Systems Ltd (CSL) moved into full production and Emitec, the Company's 50% joint venture with Siemens, benefited from higher demand in Germany. The combined sales of subsidiaries and joint ventures were 212 million compared with 197 million in 2005.
-Losses at GKN Sheepbridge Stokes remained intractable and in January 2007 the closure of this business was announced, leading to its complete withdrawal from cylinder liner manufacture in Europe.

Restructuring & Realignment
During 2006 the Company continued to deploy its strategic restructuring program, first announce in 2004. This involved moving some 20% of Driveline production capacity from high cost, low growth economies to the low cost, high growth emerging markets of Eastern Europe, South America and Asia Pacific, together with further cost reductions and infrastructure changes in Powder Metallurgy in support of the recovery of that business and overhead cost reductions elsewhere in the Company. Charges recognized in the year in respect of this program amount to 63 million (2005 - 77 million). An analysis by segment and description of the charges is set out below; (million pounds)

Segment 2006 2005
Redundancy Reorganization Total Total
Driveline 3 21 13 37 46
Powder Metallurgy (1) 14 11 24 28
OffHighway - - - - 2
Corporate - - 2 2 1
Total 2 35




New Subsidiary and Joint Venture
- The Company announced that as part of its global growth strategy its Sinter Metals Division is to establish a new, wholly owned operation in China. The Division will set up the new facility in Danyang. The new plant will become operational late in 2006 and during the next four years the workforce will increase from 180 to 500 as new business goes into production. (From a press release by the company on Feb. 27?ス, 2006)

-The Company opened its latest manufacturing operation in China. The new business - GKN Zhongyuan Cylinder Liner Company Limited (GKNZ) - is a joint venture between GKN, which holds 59% of the company and Henan Zhongyuan Engine Fittings Stock Company Limited which holds 41%. The new GKNZ plant, which has been established on a greenfield site in Mengzhou City, Henan Province, will produce truck engine cylinder liners. Construction of the facility began in April 2005 and early production trials were underway by the end of the year. At its full capacity, which is due on stream by the end of 2006, the site will produce 3 million cylinder liners per annum for the domestic Chinese and export truck markets and will employ in the region of 700 people. (From a press release by the company on Mar. 29)

-The outlook for the major markets of the Company is positive, despite some uncertainty around the strength of North American automotive demand. Forecasts for the global automotive market remain mixed with overall growth in 2007 production projected at 3% to 4%. Within this, Western European output is forecast to be broadly unchanged and North American demand is also expected to be at a similar level to 2006, although slightly down in the first half. Good growth is expected in emerging markets including China and India, which represent a growing percentage of the Company's sales. OffHighway demand in North America is slightly down on last year although sentiment appears to be improving; European markets and the mining and heavy construction sectors generally are expected to be good. Aerospace markets in all sectors are expected to remain strong. Against this background, in 2007 the Company expects to see further improvement in its Automotive businesses and continuing growth in OffHighway and Aerospace.


R&D Expenditure
Driveline Dvision:
-Driveline division continued to invest significantly in research and development and spend 63 million (2005 - 71 million) in the year. The reduction resulted from a restructuring of the engineering development function following a regional re-alignment and the introduction of an advanced global design software package. In GKN Driveshafts there was continued interest in the crosstrack (TM) and countetrack (TM) constant velocity jointed (CVJ) half shafts which were launched in 2005.The first production contract for Chrysler commenced in the year and a number of other programs are expected to begin in 2007. In Torque Technology Group (TTG) there was significant progress in the development of Electronic Torque Vectoring (ETV) which enhances vehicle safety and security by managing the application of torque to the driven wheel.
Powder Metallurgy:
-Expenditure on research and development totaled 5 million (2005 - 6 million) with a heavy emphasis on increasing density and improving surface finish of sintered components through advances in both material and production technology. As a consequence a number of components are under test with customers and, if successful, have the potential to open up new product segments to the business.

Product Development
- GKN Driveline announced it has developed new flexible sealing and protection 'boots' for constant velocity joints (CVJs) that significantly improve component durability and life. Made from Thermo-Plastic Elastomers (TPE), the new plunge boots are smaller and more durable than conventional rubber boots. The TPE sealing system features include : High operating temperatures up to 140 degrees Celsius; Resistance to high-velocity impacts e.g. from stones; Superior crack resistance; High-speed spin stability; High resistance to inner pressure changes. Other benefits of TPE include added protection during transportation and vehicle assembly, more consistent material quality and increased recyclability when compared to conventional rubber boots.

-GKN Driveline has begun production in the United States of a new electronic differential lock for two- and four-wheel-drive vehicles. The new product is easier for drivers to use, locks faster and responds better at higher speeds and lower temperatures than pneumatic-based differential locks and other competitive products. (From a press release by the company on Aug. 15, 2006)

- GKN Driveline's new countertrack (TM) PX propshaft technology that provides weight-savings and fuel-efficiency benefits will be added in 2007 as a running change to some versions of the Chrysler Group's 2007 model-year Dodge Ram and Dakota pickup trucks and Durango sport-utility vehicle. GKN Driveline's countertrack(TM) is the first major breakthrough in fixed, constant velocity ball-joint (CVJ) technology for the auto industry in 70 years. (From a press release by the company on Dec. 19, 2006)

Investment Activities

Capital Expenditure

in million pounds FY2006 FY2005 FY2004 FY2003
Expenditure 197




-Expenditure of 197 million pounds was on on tangible assets representing property, plant and equipment and was 1.4 times (2005 - 1.5 times) the depreciation charge. This higher than normal ratio largely reflected the final stages of investment in emerging markets under the Company's strategic restructuring program and is expected to reduce somewhat in 2007 as this program is completed.

- Breakdown of Capital Expenditure in 2006 by segments; Driveline (98 million), Powder Metallurgy (49 million), Other Automotive (7 million), OffHighway (10 million), Aerospace (30 million) and others (3 million)