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5. GKN Plc Business Report FY ended Dec. 2017

GKN Plc Business Report FY ended Dec. 2017

Financial Overview

(in million GBP)

Factors
1) Net Sales
-The Company’s sales on statutory basis in the fiscal year ended December 31, 2017, increased by 8.9% over the previous year to GBP 9,671 million. Primary drivers of the increase in sales came from positive currency translation effects, offset by net reduction from acquisitions/divestments, principally relating to the sale of Stromag.

2)Operating Profit
-The Company had an operating profit of GBP 699 million in the fiscal year ended December 31, 2017, an increase of 108.7% over the previous year.

3)GKN Driveline sales
-In the fiscal year ended December 31, 2017, the Company’s GKN Driveline division had sales of GBP 5,308 million, an increase of 15.0% over the previous year. Organic sales growth was 9%, significantly ahead of global light vehicle production. The beneficial effect from currency translation was GBP 237 million.

-Sales by product group: CVJ Systems 65％, AWD and eDrive Systems 28％, Off-Highway Powertrain 7％
-Sales by region of origin: Europe 40％, North America 32％, China 12％, Japan 6％, South America 3％, India ２％, Other 5%
-Sales by customer: FCA 13%, VW Group 11%, Ford 10%, GM Group 8％, Renault Nissan 8％, Toyota Group 6％, Tata Group 4%, Mercedes 4%, Geely Group 4％, Other 32％

4) GKN Powder Metallurgy sales
-Sales of the GKN Powder Metallurgy division increased by 13.8% in the fiscal year ended December 31, 2017 to GBP 1,174 million. Organic sales were GBP 55 million higher, including GBP 33 million pass through to customers of higher scrap steel prices and other commodities. There was a GBP 60 million benefit from currency translation and a GBP 27 million increase from the acquisitions of a majority share of a powder manufacturer in China and a Turkish metal parts company.
-Sales by Customer: Ford ９％, GM Group 5%, Shaeffler 4%, FCA 4%, Hilite 3%, ZF Group 3%, Linamar 3%, BorgWarner 3%, Bosch 2%, Other 64%

Chronology of Talks on Acquisition of GKN Driveline by Dana/Melrose Industries

-On March 29, 2018, the Company announced that Melrose had received valid acceptances in respect of a total of 901,318,533 GKN shares, representing approximately 52.43 per cent of the voting rights of GKN and Melrose’s unsolicited offer has been declared unconditional as to acceptances. Accordingly, the Board of GKN now intends to work with Melrose to ensure the success of the enlarged company, in the interests of all stakeholders, including employees, customers and shareholders. Dana announced that it acknowledges the decision by a majority of the shareholders of GKN to accept the proposal by Melrose Industries to acquire GKN. As a consequence, it appears unlikely that its proposed combination with GKN Driveline will proceed.　"We continue to believe Dana would be the best owner and operator of GKN Driveline," said James Kamsickas, Dana president and chief executive officer. (From a press release on March 29, 2018)

-Dana announced that in support of strong investor interest in its combination with GKN Driveline, it has improved the terms of its agreed combination and will also double the size of its share repurchase program to USD 200 million. Dana has increased the cash element of consideration by USD 140 million. As a result, the total cash consideration is approximately USD 1.77 billion. (From a press release on March 26, 2018)

-Further to GKN’s announcement about the proposed combination of Dana and GKN Driveline, Dana announced that the new combined business (the“Combined Group”), in addition to being listed on the New York Stock Exchange, will hold a standard listing on the London Stock Exchange. Additionally, Dana confirmed that it expects to continue to pay its current quarterly dividend of USD 0.10 per share to the enlarged shareholder group. The Combined Group brings together two great companies, creating a U.S. and U.K. led global leader in vehicle drive systems and electric propulsion that is well suited to address the long-term demands of global customers and expected to deliver USD 235 million in synergies. (From a press release on March 19, 2018)

-The Company informed that Melrose Industries announced revised terms of its offer to acquire the entire issued and to be issued share capital of GKN, consisting of 1.69 new Melrose shares and 81 pence in cash per GKN share. The Board of GKN has unanimously rejected it, having concluded that the Revised Offer fundamentally undervalues the company and its prospects, as it does not reflect the value of GKN’s world class Aerospace business, and dose not also reflect the benefits of combining GKN Driveline and Dana. (From a press release on March 12, 2018)

-Dana announced that it has signed definitive agreements to combine with the Driveline division of GKN to create Dana, a global leader in driveline systems. The total consideration is composed of USD 1.6 billion in cash proceeds to GKN, the assumption of approximately USD 1.0 billion of pension liabilities, and 133 million new Dana shares issued to GKN's shareholders, valued at approximately USD 3.5 billion. Under terms of the agreements, Dana shareholders will own approximately 52.75% of the company with GKN shareholders owning 47.25%. The combined company will be domiciled in the UK. The transaction is expected to result in USD 235 million of annual cost synergies within three years. (From a press release on March 9, 2018)

-The Company announced that on 12 January 2018, it intended to separate its aerospace and automotive businesses. On 27 February 2018, the Company announced that it intended to complete a demerger by mid-2019. The Board confirms that it has engaged in discussions with Dana regarding a potential combination of Dana with GKN Driveline that would be effected mainly in equity. On the other hand, Dana confirmed that it is currently in discussions with GKN regarding a potential transaction involving part of GKN's business. There can be no certainty that any agreement will be reached. Dana does not intend to update the market further unless and until it is appropriate to do so or a formal agreement has been reached. (From a press release on March 2, 2018)

Contracts

-GKN Driveline announced that its coaxial eAxle powers the rear wheels of the LEVC (London EV Company)’s electrified TX model. The eAxle was launched in its first application across Volvo’s range of T8 Twin Engine plug-in hybrids, picking up an Automotive News PACE Innovation Award in 2016. Production of the electrified LEVC TX is already underway at a brand-new facility in Ansty, near Coventry. The new taxi meets stricter Transport for London licensing requirements that come into force on 1 January 2018. (From a press release on February 5, 2018)

-GKN Driveline announced that its order book for electric driveline (eDrive) technologies hit a record GBP 2 billion by the end of 2017 following a series of significant programme wins with major global automakers. In 2022, GKN forecasts that eDrive sales will reach GBP 500 million. GKN's Multimode eTransmission system is due to launch on a Chinese OEM's platform across a number of vehicle models from 2018. It is due to supply a semi-integrated electric driveline unit from 2019 for a new vehicle launched by a premium European automaker. GKN has developed an integrated electric driveline system for a European OEM's global programme that is expected to be first launched in China from next year. (From a press release on January 22, 2018)

-GKN Driveline’s new lightweight VL3 constant velocity joint (CV joint) system has launched in its second application on the all-new BMW 5 Series. The VL3 joint makes the driveline more efficient, with measurably reduced CO2 emissions - an improvement in current applications. Working to a schedule of just 18 months, GKN Driveline delivered the new benchmark in lightweight, high-performance sideshaft systems for BMW Group in the VL3 system. The diaphragm design replaces the conventional cap-and-boot solution typical for VL series joints, and instead uses a shallow, one-piece contoured cover. (From a press release on June 23, 2017)

Business Strategy

-The Company announced that a new strategy has been developed to improve significantly performance in all of GKN’s businesses. It leverages GKN’s in-depth global knowledge of the automotive and aerospace industries to drive leadership in its chosen markets. There will be three different strategies for the core product segments - improve (e.g. Constant Velocity Joints), grow (e.g. Aero Engines) and develop (e.g. eDrive and Additive Manufacturing). All will have stretching targets to be achieved through a transformation program (“Project Boost”). It is a two-year program to improve cash and profit that will incorporate all areas of the business operating system including culture. (From a press release on January 12, 2018)

Business Partnership

-The Company announed that it has signed a Memorandum of Understanding (MOU) with GE Additive, Concept Laser and Arcam AB to collaborate on additive manufacturing (AM). Under the agreement, GKN becomes a GE Additive development and production centre as well as a preferred powder supplier, while GE and its affiliated companies will supply additive machines and services to GKN. (From a press release on October 17, 2017)

Restructuring

-The Company announced that it has pulled its global Additive Manufacturing (AM) activity together into one new brand: GKN Additive. Operating from global centers of excellence in four countries, GKN Additive will act as the focal point for all AM activity in the future. GKN Additive combines advanced 3D printing technology with a strong heritage in aerospace and automotive engineering. By bringing its AM expertise together in GKN Additive, it is not only able to continue supporting existing customers in GKN core aerospace and automotive markets, but also to explore entirely new AM markets too. (From a press release on October 16, 2017)

Recent Development Outside UK

-GKN Driveline Japan Ltd. (GKN Driveline Japan) announced that it will double its annual production capacity for the "GKN Multimode eTransmission" driving system from 30,000 units to 60,000 units from around the end of 2019. The company sees growing orders for the Multimode eTransmission, which supports plug-in hybrid vehicles, from Chinese-owned automakers, where the electrification of vehicles is advancing rapidly. The company's main customer, Mitsubishi Motors Corporation, came under the control of Nissan Motor Co., Ltd., and as a result, GKN Driveline Japan will establish a system to boost its production capacity to win orders from Nissan. (From an article in the Nikkan Jidosha Shimbun on September 8, 2017)

R&D Expenditure

(in million GBP)

R&D Facilities

-The Company’s GKN Driveline division completed construction on a state-of-the-art research and development facility in Shanghai, China.

-The GKN Driveline division has four global technology centers and ten technology centers of excellence.

-GKN Powder Metallurgy has a central research and development center in Radevormwald, Germany. The center is supported by two regional facilities in the U.S., in Auburn Hills, Michigan, and Cinnaminson, New Jersey.

R&D Structure

-The Company will increase the number of engineers working on the development of its electric drive system (eDrive) by 50% to 100 by 2020. About 30% of the new engineers will be stationed in Japan, making it one of the Company's bases for electric drive technology development. The need for electric drive systems is growing globally as electric-powered vehicles are expected to gain widespread use. The Company will focus on development of eDrive Systems, which are projected to see growth in demand, as orders of these systems will promote sales of the Company's flagship constant velocity joints (CVJs). Japan has a key role in eDrive development as development of eTransmissions and other technologies take place in the country. (From an article in the Nikkan Jidosha Shimbun on March 22, 2016)

Product Development

eTwinsterX torque-vectoring electric drive system
-GKN Driveline announced that it has begun testing a revolutionary SUV technology research vehicle, which showcases its leadership in electrified drivetrains, All-Wheel Drive (AWD) and systems integration. Based on a Mercedes-AMG GLA 45, the one-off GKN Technology Demonstrator 2018 vehicle (GTD18), features mechanical and electric Twinster torque vectoring, a plug-in hybrid system and completely re-engineered control systems. GTD18 has mechanical Twinster on front axle and eTwinsterX at the rear. (From a press release on February 28, 2018)

-The Company announced that it will reveal an all-new electric axle concept, which represents the most advanced electrified driveline technology at the 67th Frankfurt International Motor Show (IAA). GKN Driveline’s new ‘eTwinsterX’ system has capabilities beyond that of any current electrified driveline. It is uniquely adaptable to any vehicle type – front-wheel drive, rear-wheel drive or all-wheel drive. The technologies within the 'eTwinsterX' system also mean that it is the first eAxle in the world that has full off-road capabilities. GKN’s new ‘eTwinsterX’ axle offers three key advantages over conventional electric drivelines. Its coaxial format is significantly smaller than systems with equivalent power outputs. It has industry-leading efficiency and torque vectoring technology, delivering significant advantages for vehicle stability, agility and safety. (From a press release on September 4, 2017)

Durable and high-performance driveline

-GKN Driveline announced that it utilized expertise from its motorsport team to develop custom solutions to meet the extreme strength, durability and performance requirements for the 2018 Jeep Grand Cherokee Trackhawk. To strengthen the Grand Cherokee’s driveline, GKN Driveline upgraded the rear halfshafts and propshaft to deliver the extreme torque required to propel a more than 5,300 pound SUV from 0-60 mph in 3.5 seconds. The aerospace-grade 300M high-strength low-alloy steel used for the Trackhawk rear halfshafts is 42% stronger than existing Grand Cherokee halfshafts. The Trackhawk’s high-performance driveline also features an upgraded rear propshaft that is 20 percent stronger than other Grand Cherokee propshafts thanks to higher strength front and rear tubes.（From a press release on October 24, 2017)

Capital Expenditure

(in million GBP)

Investments in UK

-The Company announced that it has opened a new UK innovation centre for its automotive division, which will focus on developing state-of-the-art vehicle technologies and systems. The centre, in Abingdon, Oxfordshire, will use GKN's expertise in electrified drivelines, lightweight structures, composite materials and additive manufacturing to create a range of new technologies for next-generation vehicles. For electrified systems in particular, GKN's expertise will help automakers to develop lighter, quieter and more efficient vehicles. (From a press release on October 3, 2017)

Investments outside UK

-GKN Driveline has unveiled plans to construct a new manufacturing facility in Tokoname City, Japan. The announcement follows a significant number of new business wins for GKN Driveline’s All-Wheel Drive (AWD) and eDrive systems, with the company forecasting a significant uplift in revenue from the operation over the next four years. Construction of the new facility will break ground in September 2017 and is scheduled to be complete by the middle of 2018. The new Tokoname City operation will be state-of-the-art and filled with GKN’s best practice manufacturing technology, able to deliver high quality, next-generation AWD systems and Rear Drive Modules (RDMs), featuring advanced technologies such as electronic disconnect capability and torque vectoring. Furthermore, together with GKN Driveline’s engineering capabilities, it will mean GKN Driveline is ready to support customers increased vehicle electrification requirements in Asia. (From a press release on September 7, 2017)

-GKN Driveline has announced a major expansion of its European eDrive production facility in Bruneck, Italy. GKN Driveline will boost the current 11,000 square meters floor space by more than 60%, to create an 18,000 square meters facility dedicated predominantly to eDrive production. Between 70 and 80 employees who currently work on constant velocity joint (CVJ) production will move into eDrive manufacturing. The project will be complete by 2019, which will result in Bruneck being predominantly focused on eDrive production, with 10 eDrive programmes expected to be delivered from the site. The Bruneck site’s manufacturing portfolio includes the PACE Award-winning coaxial eAxle, featured on a range of Volvo plug-in hybrids, the world’s first two-speed eAxle, equipped on the BMW i8 sports car, and all-wheel drive products such as GKN’s Electronic Torque Management systems. The site was established as a production facility in the 1960s and now employs approximately 800 people. (From a press release on June 1, 2017)