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5. GKN Automotive Limited Business Report FY ended Dec. 2018

GKN Automotive Limited Business Report FY ended Dec. 2018

Financial Overview

(in million GBP)

Chronology of attempted GKN acquisition by Dana and successful takeover by Melrose
-On January 12, 2018, GKN announced its intention to separate its aerospace and automotive businesses. On February 27, 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 is 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)

-Dana announced that it has signed definitive agreements to combine with GKN Driveline 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, while GKN shareholders will own 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)

-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, nor reflect the benefits of combining GKN Driveline and Dana. (From a press release on March 12, 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 paying its current quarterly dividend of USD 0.10 per share to the enlarged shareholder group. The Combined Group would be a 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)

-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 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 for GKN Driveline is approximately USD 1.77 billion. (From a press release on March 26, 2018)

-GKN announced that Melrose had received valid acceptances in respect of a total of 901,318,533 GKN shares, representing approximately 52.43% of the voting rights of GKN. As such, 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 acknowledged the decision by a majority of the shareholders of GKN to accept the acquisition proposal from Melrose Industries. 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 CEO. (From a press release on March 29, 2018)

Restructuring
-GKN 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 (constant velocity joints), grow (aero engines) and develop (eDrive and additive manufacturing). All segments 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
-GKN Powder Metallurgy announced a strategic collaboration with HP Inc. to deploy the HP Metal Jet into its factories to produce functional metal parts for automotive and industrial companies across the world, including Volkswagen and Wilo. The HP Metal Jet launch represents a paradigm shift in 3D printing for all markets as the new printer is up to 50 times more productive compared to other 3D printing methods, at nearly half the cost of other binder jetting systems. GKN Powder Metallurgy will be the only partner using the HP Metal Jet in the automotive and industrial markets until the machine becomes publically available in 2020. (From a press release on September 10, 2018)

Recent Developments
-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 program wins with major global automakers. In 2022, GKN forecasts that its 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. The company is also due to supply a semi-integrated electric driveline unit from 2019 for a new model launched by a premium European automaker. GKN has developed an integrated electric driveline system for a European OEM's global program that is expected to be launched in China in 2019. (From a press release on January 22, 2018)

Contracts
-GKN Driveline’s driveshaft and CVJ technologies feature in more than half of all new cars launched at the Paris Motor Show. GKN Driveline’s lightweight, efficient and refined sideshaft systems will underpin models including a hotly-anticipated sports car, three premium saloon cars, and five new SUVs. Its front and rear sideshafts also deliver power for a high-performance hatchback and an all-new luxury grand tourer. Two all-new electric cars at the Paris Motor Show will also be equipped with GKN Driveline’s front and rear sideshaft systems. (From a press release on October 2, 2018)

-GKN Driveline announced that its coaxial eAxle powers the rear wheels of the London EV Company’s (LEVC) electrified TX model. The eAxle was first launched across Volvo’s range of T8 Twin Engine plug-in hybrids, winning 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 came into force on January 1, 2018. (From a press release on February 5, 2018)

R&D Facilities

-GKN Automotive has five global technical centers located in the U.S., Germany, UK, China and Japan. GKN Powder Metallurgy has three global technical centers located in the U.S., Germany and Italy.

-In 2018, GKN Powder Metallurgy opened a new advanced engineering laboratory in the state of Michigan, U.S.

-GKN Automotive announced that its Chinese joint venture, Shanghai GKN HUAYU Driveline Systems (SDS), has officially opened a new technical center in the Kangqiao suburb that will specialize in the research and development of technologies for CVJ, AWD and eDrive systems. The opening of the center also marks 30 years since GKN established its automotive joint venture in China, as the first Tier 1 automotive supplier. The center has created more than 300 jobs, which primarily work with local customers on applications of eDrive, AWD and CVJ technologies. The center’s first project will be a Multimode eTransmission for a Chinese automaker. Within months, SDS will also open a new eDrive plant in Pinghu, Zhejiang Province, to satisfy increased customer demand. (From a press release on October 23, 2018)

R&D Structure

-GKN Automotive has approximately 2,200 engineers working in research and development, not including an additional 379 employees in its SDS joint venture.

R&D Activities

-In 2018, the GKN Automotive segment invested an additional GBP 50 million in powertrain research and development. This investment was key for the segment in winning its first fully electric drive contract with a global OEM.

-GKN Sinter Metals, part of the GKN Powder Metallurgy division, partnered with four other companies and two research institutes in studying a production process. Coordinated by Daimler AG and within the framework of the BMBF funding initiative “Photonic Process Chains”, the project partners examined the “Integration of Additive Manufacturing Processes in Automobile Series Production – AutoAdd”. They specifically focused on the metallic, additive manufacturing process developed at the Fraunhofer Institute for Laser Technology ILT in Aachen, Germany known as Laser Powder Bed Fusion (LPBF), or Selective Laser Melting (SLM). The partners focused on integrating the LPBF process chain in the automotive mass production environment to create a hybrid process chain and reduce unit costs. In addition, the project team developed promising automatable post-processing concepts, including removal of support structures, and analyzed novel scalable materials produced by GKN Powder Metallurgy. (From a press release on November 20, 2018)

Product Development

Laser metal 3D printing process developed in partnership with other organizations
-GKN Powder Metallurgy has formed partnerships with other companies to help develop a laser metal 3D printing process using its own proprietary additive manufacturing steel powder. The process, when fully developed and optimized, is expected to reduce production time by up to 70% and reduce overall production costs by up to 50%.

eTwinsterX coaxial electric axle system
-GKN announced that its all-new coaxial electric axle system, called the eTwinsterX, is now in the prototype stage, with a working example running in a demonstrator vehicle at GKN Driveline’s Wintertest engineering showcase. The eTwinsterX system was first revealed at the 2017 IAA Frankfurt Motor Show, and features an integrated e-motor, highly efficient two-speed e-transmission, and torque vectoring capability using GKN’s unique Twinster clutch pack technology. (From a press release on March 1, 2018)

SUV technology research vehicle
-GKN Driveline announced that it has begun testing a revolutionary SUV technology research vehicle, showcasing its leadership in electrified drivetrains, AWD technologies and systems integration. Based on a Mercedes-AMG GLA 45, the 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 a mechanical Twinster system on the front axle and eTwinsterX on the rear. (From a press release on February 28, 2018)

Patents
-As of December 31, 2018, the GKN Automotive segment has 1,305 and 567 pending applications.

Capital Expenditure
-In the fiscal year ended December 31, 2018, GKN Automotive had capital expenditures of GBP 198 million, while GKN Powder Metallurgy had capital expenditures of GBP 53 million.

Investments outside UK

<Italy>
-In 2018, Melrose approved additional investment into the GKN Automotive segment to improve capacity expansion at the manufacturing facility in Bruneck, Italy. Melrose has also planned investments to increase manufacturing capacity in various facilities in the U.S., Mexico, China and Japan.

<Mexico>
-The GKN Powder Metallurgy segment expects to open and begin operations at a new plant in Mexico in 2019.

<Japan>
-GKN Driveline Japan Ltd., a Japanese subsidiary of GKN Plc, has set up a new plant in Tokoname City, Aichi Prefecture on October 17. GKN Driveline Japan will relocate its Nagoya Works in Nagoya City to the new plant in the fiscal year ending in March 2020. The new plant will produce approximately 300,000 units of single system products such as AWD systems and approximately 500,000 units of gear products by 2020. The new Tokoname Plant will be a base for electric powertrain products for Japan and other Asian markets. It will produce GKN's Multimode eTransmission drive systems, hypoid gears, and other drive-related parts. The new plant is two stories high and has a site area of 46,000 square meters.The new Plant will have 300 employees once relocation is completed. GKN Driveline Japan invested GBP 25 million in 2018 for the new plant. (From an article in the Nikkan Jidosha Shimbun on October 18, 2018)