28th Feb 2008 07:02
GKN PLC28 February 2008 28 February 2008 For immediate release GKN plc 2007 Preliminary Results Announcement As reported Business performance - (note 1) see notes (1) and (2) below 2007 2006 Change 2007 2006 £m £m £m £m £m Change Sales - including share of joint ventures 4,122 3,842 7% Less share of joint ventures 253 208 22% Sales - subsidiaries 3,869 3,634 235 3,869 3,634 6% Trading profit - subsidiaries 277 251 26 277 251 10% Operating profit 221 203 18 277 251 10% Share of joint ventures (post-tax) 24 17 7 24 17 41% Net financing costs (46) (38) (8) (46) (38) (21)% Profit before tax 199 182 17 255 230 11% Profit after tax 198 177 21 249 213 17% Earnings per share - p 27.9 25.0 2.9 35.1 30.1 17% 2007 2006 Change Full year dividend per share -p 13.5 12.8 5.5% Notes (1) Comparative figures for 2006 have been re-analysed in respect of losses incurred by the UK cylinder liner business which ceased operations in September 2007. Trading results of this business are shown in the Income Statement within "Profits and losses on sale or closures of businesses". (2) Figures exclude the impact of restructuring and impairment charges, amortisation of non-operating intangible assets arising on business combinations, profits and losses on sale or closures of businesses and changes in fair value of derivative financial instruments. These figures represent underlying performance of continuing businesses. Business performance highlights(2) • Sales up 7%, Profit before tax up 11%; Earnings per Share up 17% • All four divisions deliver good revenue growth At constant currency: o Driveline sales up 6%; Powder Metallurgy up 8%; OffHighway up 20%; Aerospace up 24%. Total Group up 11% • Exceptional levels of new business o Driveshafts secure 80% of available business o $1 billion of new orders for Aerospace • Powder Metallurgy profits soften slightly - momentum to recover in 2008 • Strategic restructuring completes to plan, improving positioning in high growth markets • Dividend increase 5.5% to 13.5p reflecting the Board's continuing confidence Sir Kevin Smith, Chief Executive of GKN plc, commented: "This has been the year when GKN moved decisively into higher gear. "At constant currency rates sales revenue increased by 11%, trading profit wasup 16% and profit before tax improved by 13%. "All four divisions delivered good growth. Aerospace and OffHighway, both ofwhich benefited from recent acquisitions, were particularly strong, with salesup 24% and 20% respectively. "We have now completed our strategic restructuring, increasing the presence ofour Automotive businesses in high growth economies. A range of newtechnology-led products have also been launched with Aerospace, OffHighway andAutomotive customers. "Exceptional levels of new orders were secured: Driveshafts won 80% of allavailable new business, Aerospace won new orders worth in excess of $1 billionand the other divisions significantly strengthened their order backlog. "We were delighted to be selected by Airbus as the preferred partner for theacquisition of the wing structures plant at Filton in the UK and look forward toconcluding agreements for this transaction and significant work content on theA350 XWB by mid year. "All of this has made 2007 an exciting year for GKN and the Board's decision toraise the annual dividend by 5.5% underpins our confidence in the future." 2008 Outlook Markets and environment The outlook for our major markets remains positive despite continuinguncertainty around the global economy. Automotive production in the emerging markets of Asia, Eastern Europe and LatinAmerica is projected to experience continuing strong growth. North American andWestern European markets are set to soften leaving overall growth in globalproduction at around 3%. OffHighway and Aerospace markets are forecast to remain strong. Raw material costs are expected to remain both volatile and high, with scrapsteel costs, which have risen sharply in recent weeks, presenting a potentialheadwind for the year. Conversely, if Sterling were to remain at current levels against majorinternational currencies there would be a significant translational benefit toGroup results. GKN's businesses Against this background, the Group expects to see further solid improvement inits Automotive and Powder Metallurgy businesses and continued strong growth inOffHighway and Aerospace. Our strategic restructuring is complete, leaving Driveline and Powder Metallurgywith excellent global positioning and a stable operating footprint from which todeliver their strong order backlogs. OffHighway order books are at record levels and its end markets remain robust. Aerospace order books continue to be very strong and the full year impact of theTeleflex acquisition will support further good progress in 2008. The Filton acquisition, which will significantly strengthen our Aerospacebusiness, should complete around mid year. Overall we expect 2008 to be another year of progress and growth for GKN. Further Enquiries GKN Corporate CommunicationsTel:+44 (0)20 7463 2354 The full text of this press release together with the attached financialstatements and notes thereto may be downloaded from www.gkn.com. Measurement and reporting of performance In this review, in addition to statutory measures of profit, we have madereference to profits and earnings excluding the impact of: o strategic restructuring and impairment charges; o amortisation of non-operating intangible assets arising on business combinations; o profits and losses on the sale or closures of businesses; and o changes in the fair value of derivative financial instruments, since we believe they show more clearly the underlying trend in business performance. Trading profit is defined as operating profit before any of the above. The 2006trading profit of the Group and the Other Automotive segment has beenre-analysed and adjusted by £9 million in respect of the results of GKNSheepbridge Stokes Ltd, the UK cylinder liner business which formed asignificant part of the segment result. The closure of this operation wasannounced in January 2007 and production ceased at the end of the third quarter.Its trading results are shown as a separate component of operating profit withinthe caption 'profits and losses on sale or closures of businesses'. Sales in theyear of £22 million (2006 - £27 million) remain included in total Group sales. In the segmental analysis, comparative figures for the Driveline and OffHighwaysegments have been restated by equal and opposite amounts in respect of twobusinesses now included in OffHighway but formerly reported in Driveline, wherethe customer and product base has become increasingly focused on off-highwayapplications. Where appropriate, reference is also made to results excluding the impact ofboth 2006 and 2007 acquisitions and divestments as well as the impact ofcurrency translation on the results of overseas operations. Exchange rates used for currencies most important to the Group's operations are: Average Year End 2007 2006 2007 2006 Euro 1.46 1.47 1.36 1.48 US Dollar 2.00 1.84 1.99 1.96 The approximate impact on 2007 trading profit of subsidiaries and joint venturesof a 1% movement in the average rate would be Euro - £1.6 million, US Dollar -£0.7 million. In our internal performance reporting we aggregate our share of sales andtrading profits of joint ventures with those of subsidiaries. This isparticularly important in assessing sales and profit progress in our Drivelineand Other Automotive businesses where significant activity takes place in jointventures. Reference to these combined figures is made, where appropriate, as'management sales' and 'management trading profits'. Group activities GKN is a global engineering business serving mainly the automotive, industrial,off-highway and aerospace markets. The bulk of our sales are made to vehicle andaircraft manufacturers as well as, in Aerospace, to other major tier onesuppliers. We operate in four different business areas: Automotive activities comprise GKN Driveline and Other Automotive companieswhich supply driveshafts, geared components, torque management devices,structural and engine components and substrates for catalytic converters,largely to vehicle manufacturers in the global car and light vehicle markets. Powder Metallurgy produces powdered metal and sintered components for automotiveand other industrial customers. OffHighway mainly designs and manufactures steel wheels and driveline systemsfor the global agricultural, construction, mining and industrial machinerymarket. Aerospace activities are concentrated on the production of airframe and enginestructures, components and assemblies for both military and civil aerospacemarkets. The Group has operations in over 30 countries with 38,300 employees insubsidiary companies and a further 3,800 in joint ventures. Changes in the composition of the Group Results for the year contain a full 12 month contribution from the 2006acquisitions of Hytecomp AB (June), Rockford Powertrain (August) and LiuzhouSteel Rim Factory (November), all for OffHighway, and Stellex Aerostructures(September) for Aerospace. At the beginning of March 2006 the Group ceased its involvement in themanagement of Fujiwa Machinery Industry (Kunschan) Company Ltd (Fujiwa), anon-core subsidiary of GKN Driveline Torque Technology KK and effectivelydisposed of its 60% shareholding from that date. On 29 June 2007, Aerospace acquired the Teleflex Aerospace Manufacturing Groupof Teleflex Inc for £68 million. Group performance Management sales (subsidiaries and joint ventures) £4,122 million (2006 - £3,842million) Combined sales of subsidiaries and share of joint ventures totalled £4,122million compared with £3,842 million in 2006. Excluding the impact of currencythe increase was £395 million (11%). Excluding acquisitions and divestments aswell as currency, the increase was £277 million (7%) with benefits from soliddemand in emerging markets and Europe for Driveline, new programmes in PowderMetallurgy and Aerospace, and good growth in the Emitec joint venture. Sales of subsidiaries £3,869 million (2006 - £3,634 million) Sales of subsidiaries were £3,869 million compared with £3,634 million in 2006,an increase of £235 million (6%). Excluding the impact of currency translation,acquisitions and divestments there was an increase of £226 million (6%). In Automotive businesses, subsidiaries' sales of £2,031 million compared with£2,004 million a year earlier. Currency was £48 million adverse, and excludingthis and a £5 million negative impact for 2006 divestments, the underlyingincrease was £80 million (4%). On a management basis, including our share ofjoint ventures, sales were £2,281 million (2006 - £2,209 million) and theunderlying increase was £131 million (6%). Powder Metallurgy sales were £602 million compared with £582 million in 2006.Currency was £22 million adverse so that the underlying increase was £42 million(8%) as new programmes commenced toward the end of the year. In OffHighway, subsidiaries' sales improved to £416 million from £353 million in2006. The full year impact of 2006 acquisitions was £27 million and, excludingthese and the adverse impact of currency (£6 million), sales increased by £42million (12%) with good market conditions in both Europe and North America foragricultural and heavy construction equipment. Aerospace sales increased to £820 million from £695 million in 2006. The impactof both 2006 and 2007 acquisitions was £96 million and, excluding this andcurrency (£33 million negative), the improvement was £62 million (9%) reflectingstrong demand in both civil and military markets and a number of new programmescoming on stream. Management trading profit (subsidiaries and joint ventures) £309 million (2006restated - £272 million) The aggregated trading profit of subsidiaries and our share of joint ventureswas £309 million, an increase of £37 million (14%). The net positive impact ofcurrency, acquisitions and divestments was £11 million and excluding thesefactors the increase was £26 million (10%) reflecting the impact of higher salesin Driveline and Aerospace, essentially level underlying results in PowderMetallurgy and OffHighway as well as growth in Other Automotive joint ventures.Margin improved to 7.5% (2006 - 7.1%). Trading profit of subsidiaries £277 million (2006 restated - £251 million) Group trading profit was £277 million compared with £251 million in 2006, anincrease of £26 million (10%). The currency impact on the translation ofoverseas profits was £4 million negative. There was a net benefit of £15 millionfrom 2006 and 2007 acquisitions and divestments and excluding these factors theincrease was £15 million (6%). Automotive subsidiaries' trading profit totalled £146 million compared with £137million (restated) in 2006. There was no impact of currency and the net effectof divestments was £1 million negative. Excluding this, profits rose by £10million (7%). Driveline benefited from higher sales and fixed cost reductionswhich were partially offset by the impact of raw material costs and shortages ofspeciality steels. In Other Automotive weakening demand, cost pressures and anasset impairment charge, which was related to a reorganisation, led to anincreased loss. For Automotive as a whole, subsidiaries' margin of tradingprofit to sales was 7.2% (2006 - 6.8%). On a management basis, including ourshare of joint ventures, trading profit was £178 million (2006 restated - £158million) with the underlying increase £21 million (13%). Return on sales was7.8% (2006 - 7.2%). Powder Metallurgy profits of £29 million were £2 million lower than 2006. £1million of the reduction was due to currency, with the remainder largely aconsequence of higher raw material costs, the absence of some favourable copperand nickel commodity contracts in the powder business which had benefited 2006and operational inefficiencies in the second half of the year associated withthe final restructuring and plant closure actions. Return on sales was 4.8%compared with 5.3% in 2006. OffHighway profit improved to £29 million from £25 million in 2006 with theincrease coming from acquisitions. The benefit from higher underlying sales wasoffset by capacity related inefficiencies in the Wheels business, someunder-recovery of material price increases due to timing and, in DrivelineSystems, additional costs caused by supply chain disruption, all of whichintensified in the second half of the year. Margin was 7.0% compared with 7.1%in 2006. Aerospace profit rose to £83 million from £70 million in 2006. Currency was £3million negative while there was a £12 million benefit from 2006 and 2007acquisitions leaving an underlying improvement of £4 million (6%). Marginremained level with 2006 at 10.1% reflecting, in part, the impact of newprogrammes in the early stages of production. Corporate and unallocated costs of £10 million (2006 - £12 million) representstewardship, legacy, governance and compliance costs relating to the overallGroup rather than individual businesses, with the reduction primarily arisingfrom a non-recurring credit of £3 million relating to a legacy business. The overall margin of subsidiaries was 7.2% compared with 6.9% in 2006. Restructuring and impairment costs £31 million (2006 - £74 million) Net charges in the year relating to the strategic restructuring programmetotalled £33 million (2006 - £63 million) with £19 million (2006 - £37 million)in Driveline and £14 million (2006 - £24 million) in Powder Metallurgy. Withinthe total figure, there was a charge of £39 million in respect of redundancy andother reorganisation costs which was partially offset by a net £6 million creditfrom the reversal of charges taken in earlier years on assets brought back intouse on profitable activities. The charge for 2007 is within the total anticipated at the start of the year andcosts of some £4 million which under accounting rules cannot be accrued in 2007,will be charged in 2008. Benefits also remain in line with earlier expectations. In addition to the costs of strategic restructuring there was a £2 millioncredit (2006 - £11 million charge) from the reversal of an impairment chargetaken in prior years in respect of Other Automotive assets. Amortisation of non-operating intangible assets arising on business combinations£8 million (2006 - £3 million) In accordance with IFRS 3, the Group has recognised intangible assets arising onbusinesses acquired in 2006 and 2007. The amortisation of non-operatingintangible assets (e.g. customer contracts and relationships, trademarks,non-compete agreements and intellectual property rights) increased during theyear as a result of the full year impact of the 2006 acquisitions of Stellex andRockford and the acquisition of Teleflex in June 2007. Profits and losses on sale or closures of businesses £7 million charge (2006 -£4 million charge) The loss on closure of businesses of £7 million arose at the UK cylinder linerbusiness (Sheepbridge) which ceased trading in September. The 2006 net charge of£4 million consisted of a charge in respect of Sheepbridge trading losses of £9million, partially offset by a profit on the disposal of the Group's controllinginterest in Fujiwa. Changes in the fair value of derivative financial instruments £10 million charge(2006 - £33 million credit) The Group enters into foreign exchange contracts to hedge much of itstransactional exposure. At 1 January 2007 the net fair value of such instrumentswas an asset of £27 million and at the end of 2007 the figure was an asset of£18 million. Transactional hedge accounting has been applied to a small proportion of thesetransactions. Where transactional hedging has not been applied, the differenceof £9 million has been charged (2006 - £39 million credited) separately as acomponent of operating profit. In addition, there was a £1 million charge inrespect of commodity hedges in Powder Metallurgy (2006 - £1 million charge) withno overall change in the value of embedded derivatives (2006 - £5 millioncharge) leaving a net charge of £10 million (2006 - £33 million credit). Operating profit £221 million (2006 - £203 million) Operating profit of £221 million compared with £203 million in 2006, reflectingthe movements discussed above. Post-tax earnings of joint ventures £24 million (2006 - £17 million) There was an increase of £7 million in the Group's share of post-tax earnings ofjoint ventures. Within this figure, trading profit rose to £32 million from £21million in 2006, an increase of 52%. There was a small negative impact fromcurrency and the underlying improvement was 57% with improved profitability atDriveline's Chinese joint ventures; at Chassis Systems which benefited from bothslightly higher sales and a one off benefit from the finalisation of contractualpricing arrangements; and at Emitec, where sales again improved as a consequenceof the 2006 legislation in Germany requiring the retrofitting of particulatefilters to diesel powered vehicles. Net financing costs £46 million (2006 - £38 million) Interest payable totalled £62 million (2006 - £57 million) and arose mainly onthe £675 million of bonds and £30 million debenture in issue. This was partiallyoffset by interest receivable of £19 million (2006 - £23 million) which arose onshort-term deposits, together with the benefits of lower borrowing costs onforeign currency debt instruments used to hedge the Group's overseasinvestments. The year-on-year movement mainly reflected the full year effect ofacquisitions made in 2006 together with the second half impact of the Teleflexacquisition made on 29 June 2007. Other net financing costs were £3 million (2006 - £4 million) and related topost-employment obligations. The reduction of £1 million is the net benefitarising from higher scheme asset values which increased the expected return onscheme assets by £10 million, offset by a £9 million increase in interest onpost-employment obligations from the higher discount rate assumption. Details ofthe assumptions used in calculating post-employment costs and income areprovided in note 11 of the appendices. Profit before tax Profit before tax on a statutory basis was £199 million (2006 - £182 million).On a management basis (i.e. excluding restructuring and impairment charges,amortisation of non-operating intangible assets arising on businesscombinations, profits and losses on the sale or closures of businesses andchanges in the fair value of derivative financial instruments) the figure of£255 million was £25 million higher than the £230 million (as restated) in 2006.The post tax share of joint ventures contributed £24 million (2006 - £17million) and subsidiaries £231 million (2006 restated - £213 million). Taxation The tax charge on management profits of subsidiaries of £231 million (2006 -£213 million as restated) was £6 million (2006 - £17 million), representing a2.6% rate (2006 restated - 8.0%). The significant reduction in rate is due principally to deferred tax creditsarising on the recognition of certain previously unrecognised deferred taxassets (mainly tax losses), the utilisation of other previously unrecogniseddeferred tax assets and changes in the statutory rate of tax affecting bothcurrent and deferred tax in certain of the jurisdictions in which we operate.The impact of these beneficial factors was partly offset by an increase inprovisions for uncertain tax positions. GKN's tax strategy is aimed at creating a sustainable "cash tax" charge (whichexcludes deferred taxes, movements in provisions for uncertain tax positions andtax relating to those non-trading elements of operating profit separatelyidentified in the Income Statement) that balances the shareholders' interest ofminimising tax payments with the need to comply with the tax laws for eachcountry in which we operate. In 2007 the cash tax charge was 17% and we expectcash tax to average 20% or less for the near term as we continue to make use ofprior years' tax losses, allowances and deductions in the various countries inwhich we operate. For 2008, we now anticipate that the reported rate is again likely to besomewhat lower than the cash tax rate of 17%. For 2009 and beyond, the overallreported tax rate is likely to continue to be volatile, being influenced by thepossible further recognition of currently unrecognised deferred tax assets andthe settlement of prior year tax disputes. These unrecognised, potentialdeferred tax assets principally relate to brought forward tax losses in the UKand US which, due to the structure of the Group and the geographic mix ofprofitability, have so far not been seen as realisable for tax purposes. The total effective tax rate of subsidiaries was 0.6% (2006 - 3.0%). Discontinued operations There were no discontinued operations in the period. Minority interests The share of profit relating to minority interests was £2 million compared with£nil in 2006 and arose as businesses in emerging markets moved into profit. Earnings per share Earnings per share were 27.9p (2006 - 25.0p). Before restructuring andimpairment charges, amortisation of non-operating intangible assets arising onbusiness combinations, profits and losses on the sale or closures of businessesand changes in the fair value of derivative financial instruments, the figurewas 35.1p (2006 restated - 30.1p), an increase of 17%. Cash flow Operating cash flow, which GKN defines as cash generated from operations (£299million; 2006 - £117 million) adjusted for capital expenditure (£192 million;2006 - £230 million) and proceeds from the disposal of fixed assets (£21million; 2006 - £13 million), was an inflow of £128 million compared with a £100million outflow in 2006. Included within the 2006 figure is the £200 millioncontribution to the UK pension scheme made in April of that year. The outflow on working capital and provisions totalled £49 million (2006 - £3million) largely reflecting inventory increases in support of higher sales inthe year and, in Aerospace, projected sales in 2008. The figure also included a£9 million outflow in respect of a legacy environmental obligation (2006 - £5million) where a further £6 million is expected to be spent in 2008. Capital expenditure (on tangible and intangible assets) totalled £192 million(2006 - £230 million). Of this, £172 million (2006 - £197 million) was ontangible assets representing property, plant and equipment and was 1.2 times(2006 - 1.4 times) the charge for depreciation. The ratio of capital expenditureto depreciation is expected to reduce slightly in 2008. Expenditure on intangible assets totalled £20 million (2006 - £33 million) andmainly reflected initial non-recurring costs on Aerospace programmes which willunderpin future performance. Net interest paid totalled £44 million compared with £33 million in 2006 withthe increase largely due to a combination of the cash outflow relating tobusinesses acquired during the second half of 2006 and in 2007. Tax paid in the year was £28 million (2006 - £31 million). Dividends received from joint ventures totalled £13 million (2006 - £7 million). Free cash flow Free cash flow, which is cash flow excluding acquisitions, share buybacks andcurrency translation but including capital expenditure and dividends paid, is akey performance indicator of the Group. Free cash flow for the year was anoutflow of £23 million (2006 - £246 million) after £40 million (2006 - £57million) of expenditure on strategic restructurings. The Group's balance sheetremains strong and with profit improvement, lower restructuring spend andreduced capital expenditure it is anticipated that, from 2008 onwards, cashgeneration should improve markedly. Acquisitions and divestments The net expenditure on acquisitions and divestments in the year was £71 million(2006 - £113 million). £68 million was in respect of Teleflex with furtherpayments of £3 million in respect of 2006 acquisitions. Net borrowings At the end of the year the Group had net debt of £506 million (2006 - £426million). This included the benefit of £42 million (2006 - £33 million) fromcustomer advances in the Aerospace businesses which are shown in creditors inthe balance sheet. The Group's share of net funds in joint ventures was £14million (2006 - £3 million). Pensions and post-employment obligations GKN operates a number of defined benefit and defined contribution pensionschemes together with retiree medical arrangements across the Group. The totalcharge to trading profit in respect of current and past service costs of definedbenefit schemes and retiree medical arrangements was £19 million (2006 - £40million), whilst other net financing charges included in net financing costswere £3 million (2006 - £4 million). The decrease in the charge to trading profit mainly reflects a total of £14million past service and curtailment credit (largely related to changes toretiree medical arrangements in the USA) and a £6 million reduction in thecurrent service cost (mainly due to the increases in discount rates in the USAand Europe together with lower salary growth assumptions in the UK). Theon-going annual benefit of these changes is £2 million to trading profit with afurther £1 million benefit to financing charges. Further information includingasset, liability and mortality assumptions used is provided in note 11 of theappendices. UK pensions The UK defined benefit scheme is considered to be relatively mature since fewerthan 4,400 of its 53,400 members are currently in service. As a UK definedbenefit scheme, this is run on a funded basis with funds set aside in trust tocover future liabilities to members. A scheme specific funding valuation as atApril 2007 was completed during the year and included an agreement with theTrustees to a deficit recovery plan and a revised schedule of contributions. Theschedule of contributions does not call for any deficit funding. Following a consultation period, a number of changes to future service benefitswere introduced in the year and included a move away from a final salary basedpension to that of a pension based on each year's earnings (Career AverageRevalued Earnings). In addition, the financial impact of changes in longevityassumptions for active members is to be shared between the Company andemployees. The charge relating to the UK defined benefit scheme reflected in trading profitin respect of current and past service costs/curtailments was £17 million (2006- £20 million), whilst other net financing credits included in net financingcosts were £13 million (2006 - £12 million). The deficit at 31 December 2007 of £3 million (2006 - £174 million) wassignificantly lower than that at the end of 2006 as a result of a beneficialimpact from higher yields on long dated corporate bonds which are used todetermine the net present value of future liabilities, partly offset by changesin other assumptions including mortality. Because of the size and profile of thescheme, longevity is reviewed annually against actual experience. During theyear mortality assumptions were strengthened, the age rating to PA92 (year ofbirth) tables was improved by 0.5 of a year to 2.5 years, whilst the rate offuture improvement in longevity was strengthened to medium cohort. Overseas pensions The principal countries involved are the USA, Germany and Japan. The net charge to trading profit in respect of current and past service costs/curtailments was £13 million (2006 - £19 million), whilst other net financingcharges included in net financing costs were £12 million (2006 - £12 million). The reduction in the deficit of £30 million to £281 million (2006 - £311million) was largely a result of the lower net present value of liabilities fromincreases in discount rates partly offset by the translational impact ofcurrency. Retiree medical GKN operates retiree medical arrangements in the Americas and has a closedscheme in the UK. The credit to trading profit of £11 million (2006 - £1 million charge) aroselargely as a result of a past service credit of £12 million from changes inretiree medical arrangements in the US, whilst other net financing chargesincluded in net financing costs were £4 million (2006 - £4 million). Largely as a result of these changes, the obligation in respect of all schemesat the end of the year was £47 million compared with £76 million at the end of2006. Summary At 31 December 2007 the post-employment obligations of the Group totalled £331million (2006 - £561 million). Shareholders' equity Shareholders' equity at the end of 2007 was £1,177 million compared with £892million at the end of 2006. Proposed dividend A final dividend of 9.2p per share is proposed, payable on 14 May 2008 toshareholders on the register on 25 April 2008. Shareholders may choose to reinvest this dividend under the DividendReinvestment Plan ('DRIP'). The closing date for DRIP mandates is 29 April 2008. Together with the interim dividend of 4.3p, the total dividend for the year willbe 13.5p, an increase of 5.5% over the equivalent figure for last year. The cashcost to the Group is some £95 million. The dividend is covered 2.6 times (2006 -2.4 times) by management earnings (i.e. before the impact of restructuring andimpairment charges, amortisation of non-operating intangible assets arising onbusiness combinations, profits and losses on the sale or closures of businessesand changes in the fair value of derivative financial instruments). Using thecash tax rate for the year of 17%, the dividend would have been covered 2.3times by earnings (2006 on the same basis - 2.1 times). Operating Review by business Automotive Markets Approximately 62% of GKN's combined sales of subsidiaries and joint ventures areto the world's passenger car and light vehicle original equipment markets.Production levels in these markets are a key driver of Group performance and, inparticular, of our Automotive and Powder Metallurgy operations. The forecastcompound annual growth rate in global production for 2007 to 2011 is 3.9%,somewhat higher than the longer term trend (1990 - 2011) of 2.7%. Within this global picture, future growth is likely to vary significantly byregion with generally stable production in the mature markets of Western Europe,North America and Japan and strong increases in the emerging markets of AsiaPacific, South America and Eastern Europe. This pattern was evident in 2007. Western Europe In Western Europe (where sales to vehicle manufacturers accounted forapproximately 32% of Group sales in the year) overall production in 2007 was16.1 million compared with 15.7 million in 2006, an increase of approximately2.5%. There were increases in Italy (10%), Germany (6%), Spain (7%) and the UK(3%) somewhat offset by reductions in France (6%) and other smaller producingcountries. North America In North America (where sales to vehicle manufacturers accounted forapproximately 15% of Group sales in the year) production in 2007 was 15.0million, a reduction of 1.7% from the 15.3 million in 2006. Within the overallfigure there was again a significant change in market share with Chrysler, Fordand General Motors continuing to lose share to foreign manufacturers. Consumerpreference also continued to move from light trucks and sports utility vehicles(SUVs) to crossovers and passenger cars. Emerging markets Asia Pacific (excluding Japan where the year on year increase in production was1% to 11.2 million vehicles) showed very significant growth. In China,production of 8.1 million vehicles was 22% above 2006, while production in Indiarose by 14% to 1.9 million. In Brazil, production increased by 16.5% to 2.7 million vehicles. Market trends in 2008 Following the "credit crunch" in the second half of 2007 there is someuncertainty about market conditions in 2008, particularly in North America wheresales to the car and light vehicle market account for approximately 15% of Groupsales. The current view of Global Insight Inc., a leading economic forecaster,is for similar conditions to prevail in 2008 with Western European productionessentially flat, North America weakening by around 4.5% but with China, Indiaand Brazil growing by around 14%, 20%, and 15%, respectively. Input costs The major costs in our Automotive businesses are labour, steel (either as scrap,bar or purchased steel based components), other metals including copper, nickeland molybdenum and other materials such as grease. There has been significantvolatility in many raw material prices over the last two or three years whichhas exacerbated the pressure on margins. Our close relationships with customersand continuing emphasis on technical development and productivity improvement,together with the restructuring initiatives already noted, have enabled uslargely to mitigate these and, notwithstanding their impact, we remain committedto achieving our targeted margins. GKN Driveline GKN Driveline specialises in the manufacture of components for light vehicledrivelines (defined as the components that transfer torque between a vehicle'stransmission and its driven wheels). These include geared components (transfercases, power transfer units and final drive units), torque management devices(TMDs) and driveshafts (propshafts for longitudinal power transmission andsideshafts for lateral transmission). The Driveline segment comprises GKNDriveline Driveshafts (GKN Driveshafts), GKN Driveline Torque Technology Group(TTG) and other Driveline businesses. 2007 Highlights On a management basis GKN Driveline sales increased to £2,052 million from£1,997 million in 2006. Excluding the adverse impact of currency (£53 million)and the small effect of the 2006 divestment of Fujiwa (£5 million), theunderlying increase was £113 million (6%). Within this, subsidiaries' sales in the year totalled £1,922 million comparedwith £1,884 million in 2006. The negative impacts of currency translation and2006 divestment were £47 million and £5 million respectively so that theunderlying increase was £90 million (5%). This increase arose in GKN Driveshaftsin South America and Europe reflecting the high level of business wins over thepast two years, in TTG where there was strong demand from Japanese customers andin other Driveline businesses where market conditions were favourable. The share of joint venture sales (which are not consolidated in the Group incomestatement but are set out in note 8 of appendices also grew significantly to£130 million from £113 million in 2006, with the underlying increase £23 million(21%). This arose mainly in the Chinese companies where the organic sales growthwas 31%, ahead of the overall market. Trading profit on a management basis increased by £15 million from £151 millionto £166 million. There was no overall translational impact from currency but a£1 million negative impact from 2006 divestments. Excluding this, the increasewas £16 million (11%) and margin improved to 8.1% from 7.6%. Return on investedcapital was 18.5% (2006 - 17.2%). Subsidiaries' trading profit was £149 million compared with £138 million in2006. Excluding the impact for 2006 divestments noted above, the increase was£12 million (9%) with increases in both GKN Driveshafts and TTG as a result ofthe higher level of sales. In GKN Driveshafts, however, the profit improvementwas held back somewhat by the net impact of higher than anticipated raw materialcosts and the shortage of certain steel products which caused significantoperational inefficiencies and led to additional costs in Europe. These weremitigated somewhat by the profits arising from property rationalisation actionsand non-recurring credits arising from changes to the retiree medicalarrangements in the US. Return on sales improved from 7.3% to 7.8%. The Group's share of trading profit of joint ventures increased from £13 millionto £17 million with the underlying increase, excluding minor adverse currencyimpacts, £4 million (31%). The increase arose almost entirely in China, mainlyas a consequence of higher sales. The strategic restructuring programme announced in 2004 was effectivelycompleted and charges in the year totalled £19 million (2006 - £37 million). Afinal charge of approximately £4 million will be made in the 2008 accounts inrespect of costs which, under accounting rules, cannot be accrued in 2007. Capital expenditure on tangible assets in the year totalled £94 million (2006restated - £96 million) and was 1.3 times (2006 - 1.3 times) depreciation. Driveline spent £57 million in the year on research and development. £55 millionwas charged to profit and £2 million capitalised. This latter figure wasincurred by Torque Technology and represented investment on programmes the firstof which has gone into production early in 2008. In Driveshafts there has been continued development of CrosstrackTM andCountertrackTM technology for mature markets and low cost joints for specificapplications (such as the TATA Nano, launched in India in early 2008) inemerging markets. CountertrackTM, which is used in fixed CVJ applications, offers reduced size,weight and CO2 emissions. Firm agreements have been reached with seven vehiclemanufacturers to supply CountertrackTM joints for up to 4 million vehicles (atannualised rates) with the first of these entering production in 2008. CrosstrackTM offers improved NVH (noise, vibration and harshness)characteristics as well as lower weight, and negotiations are at an advancedstage with a leading European vehicle manufacturer. Demand for low-cost vehicles will be significant in emerging markets and we havemade considerable investment in developing a low cost driveshaft for use in suchvehicles. These are now available and are manufactured in Brazil, India andChina for use on the TATA Nano and Indica and Dacia Logan. Although sellingprices on such products tend to be somewhat lower, margins are similar to thoseon traditional designs. Sustaining its position as a global technology leader, TTG launched the firstproduction Electronic Torque Vectoring product for BMW, providing exceptionallevels of agility and driving dynamics, and a high performance lightweight FinalDrive Units (FDU) and 4WD torque control for the new Nissan GTR. Work continueswith three customers on developing active front Limited Slip Differentials andFDUs for hybrid vehicles. During the year, GKN Driveshafts won some 80% (2006 - 75%) of all available(i.e. externally sourced) CVJ driveshaft business which represents approximately60% of the total available market, i.e. including in-house manufacture. This winrate further underpins the anticipated revenue growth from 2008 onwards.Similarly, TTG extended its global footprint, winning business with customers inJapan, Asia Pacific, Europe and North America for some 1.5 million vehicle setswhich will begin to come on stream at the end of 2008. Other Automotive Our Other Automotive subsidiary activities, which are predominantly UK based,but with small facilities in the US and China, manufacture structuralcomponents, chassis and engine cylinder liners for the passenger car, sportsutility vehicle (SUV) and light vehicle and truck markets in Western Europe, theUS and China. 2007 Highlights Sales on a management basis totalled £229 million compared with £212 million in2006. Excluding Sheepbridge, which was closed during the year, the combinedsales of continuing subsidiaries and joint ventures were £207 million comparedwith £185 million in 2006 with an underlying increase of £23 million (13%). Sales of subsidiaries in the year were £109 million compared with £120 millionin 2006. Excluding Sheepbridge, sales of £87 million were £6 million (6%) below2006. The share of sales of joint ventures increased from £92 million to £120 millionwith particularly strong growth in Emitec in Germany as a result of legislationenacted in 2006 requiring the retrofitting of particulate filters to dieselpowered vehicles. Trading profit of continuing businesses on a management basis rose to £12million from £7 million in 2006 and margin improved to 5.2% from 3.3% in 2006.Within this figure, there was a loss at subsidiaries of £3 million (2006 - £1million), largely as a result of lower demand in the AutoStructures businesscoupled with the impact of a severe breakdown in pressing capacity which costsome £1 million. As a result of these capacity issues, operational activity isbeing reorganised and this has led to a non-cash asset impairment charge of £1million. The Chinese cylinder liner business was just above break even in theyear and modest improvement is expected in 2008. Return on invested capital was18.8% (2006 - 10.4%). Both joint ventures performed well and the Group's share of profits improvedfrom £8 million to £15 million. Chassis Systems Ltd benefited both from highersales and the one-time impact of the finalisation of contractual pricingarrangements. Emitec profits reflected the strong sales performance noted above. Powder Metallurgy Markets Approximately 80% of divisional sales are to automotive markets which arediscussed in detail on page 13. The balance of 20% is to a range of otherindustries, including office equipment, white goods and home and garden. Thesemarkets were generally good in 2007 and, whilst the overall economic outlook for2008 is less certain, the trend for continued penetration of powder metallurgyinto these sectors is expected to continue. Input costs The main raw material is scrap steel where prices were approximately 10% higherin 2007 than 2006. Other important input costs relate to nickel and copper(where a substantial element of our anticipated requirement is hedged),molybdenum and energy. Overall, these costs were also higher than last yearthough there was a downward trend in nickel prices in the second half. Products GKN's Powder Metallurgy business has two elements: GKN Sinter Metals whichproduces sintered components and Hoeganaes which produces metal powders. Theyare largely iron based, although growth is also being seen in the use ofaluminium and other alloys. GKN Sinter Metals GKN Sinter Metals utilises powdered metals to manufacture precision automotivecomponents for engines, transmissions, and body and chassis applications as wellas a range of components for other industrial and consumer applications. Hoeganaes Hoeganaes produces principally ferrous based metal powder, the raw material forferrous based sintered components. 2007 Highlights Sales in the year were £602 million compared with £582 million in 2006. Theimpact of currency on translation was £22 million negative so that underlyinggrowth was £42 million (8%). Half of the improvement arose in Sinter Metals in Europe where there was gooddemand from non automotive customers and a number of new automotive programmescame on stream towards the end of the year. There was also strong growth inSinter Metals in the emerging markets of South America and Asia, though from asmaller base. In North America the growth was slower with the benefit from newbusiness more than offsetting the adverse impact of reduced US automotiveproduction. The geographical mix of Sinter Metal's business thus continued thetrend away from North America towards other regions with 42% of sales being madein North America in 2007. Hoeganaes' sales improved by over 10%, with theincrease predominantly reflecting higher surcharges to customers. Trading profit in the year was £29 million compared with £31 million in 2006,with currency accounting for £1 million of the reduction. The balance was morethan accounted for by a fall in profits at Hoeganaes North America where rawmaterial costs were significantly higher than the previous year and there was anabsence of favourable copper and nickel commodity contracts which had benefitedthe second half of 2006. In Sinter, a volume-led improvement in Europe wasoffset by reductions in North America and Asia. Sinter Metals North America wasimpacted in the second half by costs associated with the introduction of newprogrammes as well as some operating inefficiencies as a consequence of thefinal stages of restructuring. Profits ended level with 2006. Sinter Metalsoperations in Asia made a small loss by comparison with a small profit in 2006,primarily due to new plant start up costs in China. Return on sales fell to 4.8% from 5.3% last year but is anticipated to improvetowards the target of 8% - 10% in 2008 as operations in North America stabilisepost restructuring and new programmes are implemented. Return on invested capital in the period was 6.9% (2006 - 7.4%) against thetarget of 12% reflecting the impact of the North American issues noted above. Net restructuring costs and asset impairments in 2007 totalled £14 million (2006- £24 million). These related to the closure in the year of plants in NorthAmerica and Germany and the run out of closures announced in earlier years. Thiscompleted the strategic restructuring and no further charges are anticipated in2008. Capital expenditure on tangible fixed assets in the period totalled £38 million(2006 - £49 million) with depreciation of £28 million (2006 - £28 million). Theratio of 1.4 times (2006 - 1.8 times) is expected to reduce again in 2008 toaround 1.2 times. Research and development activities continued to be focused on increasingdensity and improving surface finish which has led to a number of newapplications for gear components in diesel engines and transmissions. A numberof potential applications are being explored with automotive VMs which willincrease the powder metallurgy content of automatic transmissions. There were significant new business wins in the year in all regions whichtotalled approximately £115 million at annualised rates and support the targetedsales growth of 6% to 8% per annum. OffHighway Products and markets OffHighway designs and manufactures steel wheels and driveline systems for theglobal agricultural, construction and industrial machinery sectors. During 2007,approximately 63% of its sales were to the agricultural market, 23% to theconstruction equipment market and the balance to the industrial machinerymarket. Agriculture In Europe (46% of 2007 divisional sales), the overall agricultural machinerymarket continued its upward trend. In North America (14% of divisional sales), demand was strong drivenpredominantly by high crop prices as a direct result of Biofuel demands. Both markets are experiencing some of the highest commodity prices for manyyears and historically this has been directly linked to increased agriculturalequipment sales. Construction and Mining The European construction and mining machinery market (12% of divisional sales)remained solid throughout the year and continued its upward trend. In the US (9% of divisional sales), well publicised reductions in housing startsreduced demand in some areas (mainly local light construction machinery sales)but this was more than offset by exports and continued growth in demand forheavy construction equipment. Our positioning within emerging markets has increased with the acquisition in2006 of Liuzhou Wheels in China and market opportunities in 2008 look positivein this region. Industrial machinery This sector (14% of divisional sales) includes products for the materialhandling and a range of other industries. Demand in this segment in 2007 wasflat and the outlook for 2008 is for little or no change. Input costs The cost structure in OffHighway is similar to Automotive with the major costsbeing steel, energy and labour. In general, the business has been successful inmitigating fully the effect of steel price increases during a period when endmarkets for both agricultural and construction equipment have been generallyfirm, though the timing of price increases from suppliers or to customers mayhave an impact on a particular reporting period. 2007 Highlights Sales of subsidiaries in the year were £416 million compared with £353 million(restated) in 2006. There was a £6 million reduction from currency translationand a benefit of £27 million from 2006 acquisitions. The underlying increase of£42 million (12%) mainly reflected good conditions in most markets. Trading profit of subsidiaries of £29 million was £4 million above 2006. Withinthis, the Wheels business experienced capacity related inefficiencies in Europeand North America and under recovery of material costs in the period due totiming, whilst in Driveline Systems there were additional costs from supplychain disruption which intensified during the second half of the year. Liuzhou,the wheels business acquired towards the end of 2006, moved out of loss in theyear but its low level of profitability diluted divisional margins. The otherbusinesses benefited from higher sales and performed well, with a goodcontribution from Rockford, the 2006 acquisition which services construction andmining. Margins reduced to 7.0% from 7.1% in 2006 and return on invested capitalwas 17.0% compared with 16.4% in 2006. Capital expenditure on tangible fixed assets of £11 million (2006 restated - £12million) was 1.1 times (2006 - 1.3 times) depreciation. During the year, the division was successful in attracting a high level oforders and enters 2008 with order books at record levels. The 2006 acquisitions, notably Rockford, were successfully integrated and areperforming in line with or ahead of plan. The division continued its focus on research and development and the newlydeveloped Hydromech gearbox was successfully tested with a European customer andhas entered into initial production. Aerospace Products and markets GKN Aerospace is a leading supplier of airframe and engine structures,components, assemblies and engineering services to aircraft prime contractorsand other first tier suppliers and operates in three main product areas:aerostructures, propulsion systems and special products. The overall aerospace market was buoyant in 2007, with sustained strength inboth the civil and military sectors. In the civil airliner market, Airbus and Boeing delivered in aggregate 894aircraft in the year compared with 832 in 2006. At the end of the year therewere some 6,800 aircraft on order worth $750 billion at current list prices andequivalent to 6 years' production. Looking forward to 2008, order levels forcivil airliners are forecast to be below 2007 levels, although still ahead ofcurrent production rates and, with the order backlog noted above, the entry intoservice of the A380 and B787 and the launch of the A350 XWB (extra wide body)production is likely to remain high. Demand for regional and business jets was good and higher than 2006. Theregional aircraft market is forecast to remain fairly stable with a resurgencein demand for turbo prop aeroplanes. Business jets are expected to showsustained growth with new entrants in the existing market and considerableactivity in the emerging very light jet sector. The defence market was also strong in the year and US spending is likely toremain solid in the short term with fighter production stabilising at around 100per year, slowly consolidating around the Joint Strike Fighter (JSF) platform.Growth in non-US defence spending on aircraft procurement is strengthening andduring 2007 there have been additional orders for the C-130J, F-18 and F-15 allof which have significant GKN content. Within these markets, there is continuing growth in demand for lightweightmaterials and advanced composites and complex titanium structures which provideopportunities for increased passenger load and fuel efficiency. Input costs The most significant raw material costs are for composite materials, titaniumand fasteners. The use of long-term supply agreements has, to a large extent(around 70% at the end of 2007), secured both supply and price. In some casessales contracts contain arrangements for the automatic adjustment of prices ifinput costs change. 2007 Highlights GKN Aerospace sales were £820 million compared with £695 million in 2006. Theimpact of currency on translation was £33 million negative while acquisitionsadded £96 million. The underlying increase was £62 million (9%) and arose as aconsequence of the overall strong markets, in particular for regional aircraft,and a number of new programmes which entered or increased production during theyear. Trading profit of £83 million was £13 million higher than 2006. Excluding thebenefit from acquisitions of £12 million and the negative impact of currency (£3million), the underlying increase of £4 million was 6% above 2006 reflecting thebenefit of higher sales. The margin of 10.1% was the same as 2006, in line with the target margin for thebusiness, and return on invested capital was 15.3% (2006 - 15.1%). Capital expenditure on tangible assets in the year was £28 million (2006 - £30million) which represented 1.2 times (2006 - 1.4 times) depreciation. Of thisfigure £9 million was in respect of new programmes, including the B787. Capital expenditure on intangible assets (mainly non-recurring costs) totalled£16 million (2006 - £27 million) and reflected investment in a number ofimportant programmes including B787, A400M and Joint Strike Fighter. In 2007, GKN Aerospace secured a number of new programmes, including; • a system design and development contract for the Fuselage AftTransition for the Sikorsky CH-53K; • the design, development and manufacture of the B767-300 ER (extended range) blended winglet, with first deliveries commencing in the fourth quarter of 2008. The agreement covers the supply of up to 300 767-300 ER and 200 737-300/500 blended winglet shipsets; and • the development and supply of advanced titanium metal matrix composite (TMMC) thrust links for the B787. This represents the first use of TMMC in a commercial application and offers major weight savings of up to 40% over traditional material. In addition we have extended our content on a range of existing programmes wherethere is strong market demand including the F-18, F-15, C-27J and a range ofcommercial aircraft. GKN now has established positions on a wide range of programmes that showsubstantial growth over the next 10 years. In 2007, research programmes made considerable progress. Our involvement in anumber of funded programmes to develop the wing for the next generation singleaisle aircraft (including VITAL, Integrated Wing and ALCAS) has moved forwardwith speed and generated significant intellectual property. Two new programmeshave been approved to commence in 2008 - the Next Generation Composite Wing withAirbus and a potential programme with Rolls-Royce to develop a lightweightcomposite engine fan. The integration of the Stellex businesses acquired in 2006 was completed, inline with the acquisition plan, during 2007. In June 2007, GKN acquired the Teleflex Aerospace Manufacturing Group ofTeleflex Inc. The business is a leading manufacturer of complex enginecomponents for the aerospace industry and increases the division's presence incivil aerospace, giving positions on a range of established engine programmessuch as the CFM56 and GE90 as well as new programmes for the light jet marketand also the F-135 Joint Striker Fighter engine for the military market. Thebusiness has both a range of cold section products that are complementary to GKNin engine cases and fan blades, and hot section core activities in blisks,compressor airfoils and guide vanes. On 19 December 2007, GKN was selected as the preferred partner for theacquisition from Airbus of their Filton wing aerostructures site including thepotential award of design and manufacturing packages for the A350 XWB wingprogramme. The combination of Filton with our existing capability would enableus to create a globally competitive centre of excellence for the design andmanufacture of composite aircraft wing structures. Going forward into 2008, sales revenue is expected to continue to groworganically as a result of new programmes moving into production, notably theB787 and the A380, together with increased levels of development work includingthe CH-53K and the A350 XWB. Margins in the existing business are expected toimprove based on the further implementation of lean manufacturing practices andthe progression of a number of recent programmes into full production. Cautionary Statement This press release contains forward looking statements which are made in goodfaith based on the information available at the time of its approval. It isbelieved that the expectations reflected in these statements are reasonable butthey may be affected by a number of risks and uncertainties that are inherent inany forward looking statement which could cause actual results to differmaterially from those currently anticipated. APPENDICES These appendices do not form the statutory accounts of the Group. The statutoryaccounts for the year ended 31 December 2006 have been filed with the Registrarof Companies and contained an unqualified audit report. The audited results for2007 were approved by the Board on 27 February 2008 and have been agreed withthe auditors. Page number GKN Consolidated financial information Consolidated Income Statement for the year ended 31 December 2007 24 Consolidated Statement of Recognised Income and Expense 25 Consolidated Balance Sheet at 31 December 2007 26 Consolidated Cash Flow Statement for the year ended 31 December 2007 27 Note 1 - Segmental analysis 28 - 30 Notes 2 - 11 31 - 41 Consolidated Income Statement For the year ended 31 December 2007 2007 2006 Restated Notes £m £m Sales 1 3,869 3,634 Trading profit 277 251 Restructuring and impairment charges (31) (74) Amortisation of non-operating intangible assets arising on business combinations (8) (3) Profits and losses on sale or closures of businesses (7) (4) Changes in fair value of derivative financial instruments (10) 33 Operating profit 1 221 203 Share of post-tax earnings of joint ventures 8 24 17 Interest payable (62) (57) Interest receivable 19 23 Other net financing charges (3) (4)Net financing costs 4 (46) (38) Profit before taxation 199 182 Taxation 5 (1) (5) Profit after taxation for the year 198 177 Profit attributable to minority interests 2 - Profit attributable to equity shareholders 196 177 198 177 Earnings per share - p 6 Basic 27.9 25.0Diluted 27.8 24.9Dividends per share - p 7 Interim dividend per share 4.3 4.1Final dividend per share 9.2 8.7 All activities in 2007 and 2006 were from continuing operations. Consolidated Statement of Recognised Income and Expense For the year ended 31 December 2007 2007 2006 £m £m Currency variations 66 (124)Derivative financial instruments: Transactional hedging - 1 Translational hedging (28) 43 Actuarial gains on post-employment obligations including tax: Subsidiaries 140 40 Joint ventures 1 - Deferred tax on other items (8) - Net profits/(losses) not recognised in the income statement 171 (40)Profit for the year 198 177 Total recognised income for the year 369 137 Total recognised income for the year attributable to: Equity shareholders 365 138 Minority interests 4 (1) 369 137 Consolidated Balance Sheet At 31 December 2007 2007 2006 Restated Notes £m £m Assets Non-current assets Intangible assets - goodwill 280 244 - other 136 112 Property, plant and equipment 1,462 1,354 Investments in joint ventures 8 100 83 Other receivables and investments including loans to joint ventures 22 24 Deferred tax assets 9 56 114 2,056 1,931 Current assets Inventories 552 470 Trade and other receivables 571 520 Current tax assets 2 - Derivative financial instruments 25 32 Cash and cash equivalents 282 342 1,432 1,364 Total assets 3,488 3,295 Liabilities Current liabilities Borrowings (92) (39)Derivative financial instruments (30) (11)Trade and other payables (837) (743)Current tax liabilities (104) (93)Provisions (45) (66) (1,108) (952)Non-current liabilities Borrowings (696) (729)Deferred tax liabilities 9 (75) (63)Trade and other payables (31) (29)Provisions (51) (53)Post-employment obligations (331) (561) (1,184) (1,435)Total liabilities (2,292) (2,387) Net assets 1,196 908 Shareholders' equity Ordinary share capital 372 371 Share premium account 29 25 Retained earnings 834 589 Other reserves (58) (93)Total shareholders' equity 1,177 892 Minority interests - equity 19 16 Total equity 1,196 908 Consolidated Cash Flow Statement For the year ended 31 December 2007 2007 2006 Notes £m £m Cash flows from operating activities Cash generated from operations 10 299 117 Interest received 16 25 Interest paid (60) (58)Tax paid (28) (31)Dividends received from joint ventures 13 7 240 60 Cash flows from investing activities Purchase of property, plant and equipment and intangible assets (192) (230) Proceeds from sale of property, plant and equipment 21 13 Acquisition of subsidiaries (net of cash acquired) (71) (126)Proceeds from sale of subsidiaries and businesses (net of cash disposed) - 13 Investment loans and capital contributions 7 1 (235) (329) Cash flows from financing activities Net proceeds from issue of ordinary share capital 5 3 Purchase of treasury shares - (40)Net proceeds from borrowing facilities 13 48 Finance lease payments (1) (1)Repayment of borrowings (17) (14)Dividends paid to shareholders 7 (91) (88)Dividends paid to minority interests (1) (1) (92) (93) Currency variations on cash and cash equivalents 9 (7)Movement in cash and cash equivalents (78) (369)Cash and cash equivalents at 1 January 328 697 Cash and cash equivalents at 31 December 10 250 328 All cash flows arise from continuing operations. Cash inflows from governmentcapital grants of £nil (2006: £3 million) have been offset against purchases ofproperty, plant and equipment and intangible assets. For the purposes of presenting the cash flow statement the components of cashand cash equivalents are offset. A reconciliation between the cash flowstatement and balance sheet presentation is shown in note 10. Notes to the Press Release For the year ended 31 December 2007 1 Segmental analysis The Group is managed by type of business. Segmental information is provided having regard to the nature of the goods and services provided and the markets served. Primary reporting format - business segments Automotive Other Powder Corporate and For the year Notes Driveline Automotive Metallurgy OffHighway Aerospace Unallocated Total ended 31 December 2007 £m £m £m £m £m £m £m Sales 1,922 109 602 416 820 - 3,869 EBITDA 227 2 58 39 112 (10) 428 Depreciation and impairment charges (75) (5) (28) (10) (24) - (142) Amortisation of intangible assets (3) - (1) - (5) - (9) Trading profit/(loss) 149 (3) 29 29 83 (10) 277 Restructuring 2 (19) - (14) - - - (33) Other impairments 2 - 2 - - - - 2 Amortisation of business combination non-operating intangibles 3 (1) - - (2) (5) - (8) Profits and losses on sale or closures of businesses 3 - (7) - - - - (7) Changes in fair value of derivative financial instruments 3 (1) (1) (1) (2) (5) - (10) Operating profit/(loss) 128 (9) 14 25 73 (10) 221 Share of post-tax earnings of joint ventures 14 10 - - - - 24 Segment assets Goodwill 65 - 24 38 153 - 280 Investments in joint ventures 71 28 - 1 - - 100 Derivative financial instruments 6 - - - 19 - 25 Operating assets 1,280 56 531 251 620 5 2,743 Other unallocated assets: - Cash and cash equivalents - - - - - 282 282 - Current tax assets - - - - - 2 2 - Deferred tax assets - - - - - 56 56 Total assets 1,422 84 555 290 792 345 3,488 Segment liabilities Derivative financial instruments (1) (1) (1) (1) (9) (17) (30) Operating liabilities: - Post employment obligations (208) (7) (23) (45) (32) (16) (331) - Other (446) (21) (122) (115) (209) (51) (964) Other unallocated liabilities: - Borrowings - - - - - (788) (788) - Current tax liabilities - - - - - (104) (104) - Deferred tax liabilities - - - - - (75) (75) Total liabilities (655) (29) (146) (161) (250) (1,051) (2,292) Other segment items Capital expenditure - Property, plant and equipment 94 2 38 11 28 1 174 - Intangible assets 3 - - 1 16 - 20 Other non-cash expenses (share-based payments) 2 - 1 - 1 2 6 All business segments shown above are continuing. EBITDA is earnings beforeinterest, tax, depreciation and amortisation. 1 Segmental analysis (continued) Primary reporting format - business segments Automotive Other Powder Corporate and For the year Note Driveline Automotive Metallurgy OffHighway Aerospace Unallocated Total ended 31 December 2006 (Restated) £m £m £m £m £m £m £m Sales 1,884 120 582 353 695 - 3,634 EBITDA 215 4 60 34 95 (12) 396 Depreciation and impairment charges (74) (5) (28) (9) (21) - (137) Amortisation of intangible assets (3) - (1) - (4) - (8) Trading profit 138 (1) 31 25 70 (12) 251 Restructuring 2 (37) - (24) - - (2) (63) Other impairments 2 (11) - - - - - (11) Amortisation of business combination non-operating intangibles 3 (1) - - (1) (1) - (3) Profits and losses on sale or closures of businesses 3 5 (9) - - - - (4) Changes in fair value of derivative financial instruments 3 11 - (1) 2 21 - 33 Operating profit/(loss) 105 (10) 6 26 90 (14) 203 Share of post tax earnings of joint ventures 12 5 - - - - 17 Segment assets Goodwill 62 - 24 34 124 - 244 Investments in joint ventures 61 21 - 1 - - 83 Derivative financial instruments 7 - - 1 24 - 32 Operating assets 1,164 59 496 223 532 6 2,480 Other unallocated assets: - Cash and cash equivalents - - - - - 342 342 - Deferred tax assets - - - - 114 114 Total assets 1,294 80 520 259 680 462 3,295 Segment liabilities Derivative financial instruments (1) - - - (8) (2) (11) Operating liabilities: - Post employment obligations (340) (25) (33) (52) (102) (9) (561) - Other (445) (35) (115) (92) (160) (44) (891) Other unallocated liabilities: - Borrowings - - - - - (768) (768) - Current tax liabilities - - - - - (93) (93) - Deferred tax liabilities - - - - - (63) (63) Total liabilities (786) (60) (148) (144) (270) (979) (2,387) Other segment items Capital expenditure: - Property, plant and equipment 96 7 49 12 30 - 194 - Intangible assets 3 - 1 2 27 - 33 Other non-cash expenses (share-based payments) 2 - 1 - 1 1 5 All business segments shown above are continuing. Intra-group sales, which are priced on an 'arm's length' basis between segmentsand regions are not significant. The analyses of operating profit by businessincludes an allocation, based on their nature, of costs incurred centrally inthe United Kingdom, United States of America, China and Germany. Unallocatedcosts represent corporate expenses. Segment assets and liabilities comprise allnon-current and current items as per the balance sheet but exclude taxation,borrowings and cash and cash equivalents. Cash and cash equivalents andborrowings are not allocated to specific segments as these resources are managedcentrally and no business in any segment has sufficient autonomy to manage theseresources. Segment capital expenditure is the total cost incurred during theyear to acquire segment assets that are expected to be used for more than oneyear. 1 Segmental analysis (continued) Restatement of comparative data i) Double Universal Joint business transfer: With effect from 1 January 2007 the Group's Double Universal Joint activities in Italy and Uruguay have been managed within our OffHighway segment having previously been included within Driveline. Segmental analyses presented in this note represent the current period structure. Previously reported analyses have been restated. ii) Cessation of UK cylinder liner manufacturing operation: In January 2007 the Group announced its intention to cease manufacturing at its UK cylinder liner operation. This operation constitutes a major proportion of the Group's Other Automotive segment. The losses of this business have been re-analysed from trading profit to profits and losses on sale or closures of businesses. iii) Finalisation of provisional fair value adjustments in respect of an OffHighway acquisition in 2006. The impact of these restatements is shown as follows: Driveline Other Automotive OffHighway As previously Restated As previously Restated As previously Restated reported reported reported £m £m £m £m £m £m For the year ended 31 December 2006 Sales 1,906 1,884 120 120 331 353 Trading profit/ (loss) 140 138 (10) (1) 23 25 Operating profit/ (loss) 107 105 (10) (10) 24 26 Total assets 1,310 1,294 80 80 243 259 Total liabilities (796) (786) (60) (60) (134) (144) Secondary reporting format - by geographical region Sales by destination Segment assets Capital expenditure 2007 2006 2007 2006 2007 2006 £m £m £m £m £m £m Continuing operations Europe 1,773 1,664 1,411 1,307 87 112 Americas 1,595 1,512 1,315 1,153 75 83 Rest of the World 501 458 417 373 32 32 Corporate and Unallocated - - 345 462 - - 3,869 3,634 3,488 3,295 194 227 2 Restructuring and impairment charges 2007 2006 Other Other Restructuring impairments Total Restructuring impairments Total £m £m £m £m £m £m Restructuring and impairment charges Goodwill impairment - - - - (11) (11) Tangible fixed asset impairments/ reversals 7 2 9 (1) - (1) Other asset write-downs (1) - (1) (1) - (1) 6 2 8 (2) (11) (13) Redundancy costs including post-employment curtailments (16) - (16) (35) - (35) Other reorganisation costs including property surplus (23) - (23) (26) - (26) (33) 2 (31) (63) (11) (74) Restructuring During 2007 the Group continued to deploy its strategic restructuring programme, first announced in March 2004, that involves the migration of Driveline production capacity from high cost to low cost / high growth economies, actions in support of the recovery in Powder Metallurgy and the realignment and reduction of production capacity, overhead and infrastructure costs in other areas of the business. Charges recognised in the year in respect of this programme amount to £33 million (2006: £63 million) which comprises amounts in respect of asset impairments of £6 million credit (2006: £2 million charge), redundancy costs, including pension past service charges, credits and curtailments of £16 million (2006: £35 million) and other reorganisation costs of £23 million (2006: £26 million). Pension past service charges, credits and curtailments amount to a £4 million charge in 2007 (2006: £3 million). An analysis by segment and description of the charges is set out below: 2007 2006 Impairments Redundancy Reorganisation Total Total £m £m £m £m £m Driveline 5 (14) (10) (19) (37) Powder Metallurgy 1 (2) (13) (14) (24) Corporate - - - - (2) 6 (16) (23) (33) (63) Redundancy costs provided for represent charges for contractual severance and other employee related exit benefits and post-employment augmentations and curtailments. Reorganisation costs include charges for onerous lease, property and other contracts, incremental costs borne by the Group as a consequence of dedicated restructuring and transition teams and equipment relocation costs attributable to the transfer of equipment between closing facilities and continuing operations and incremental premium freight and product homologation costs. The impairment reversal in Powder Metallurgy arises from the redeployment of previously impaired plant into cash generative alternative use elsewhere in the relevant division. In Driveline the net impairment relates to the write-downs for plant deemed to be irrecoverable via future use (£3 million) being offset by a reversal (£8 million) in a specific cash generating unit where business recovery has been sufficient to support reinstatement of the asset. Restructuring actions undertaken in the year included the closure of a North American Powder Metallurgy production facility, the continuation of the strategic fixed headcount reduction programme in Driveline and the ongoing reductions in operations in Driveline plants and four Powder Metallurgy facilities. A net £2 million surplus has arisen on the disposal of a UK Powder Metallurgy facility that became surplus to operational requirements as a consequence of the restructuring. In 2006 restructuring charges arose primarily in respect of the announced closure and/ or downsizings of four Driveline facilities, Driveline strategic fixed headcount reductions and the announced closure of three Powder Metallurgy manufacturing facilities. The segmental analysis of restructuring charges is set out in note 1. Cash outflow in respect of 2007 and earlier periods' strategic restructuring actions amounted to £44 million (2006: £57 million). The disposal of the surplus property noted above generated a net £4 million cash inflow. Other impairments The £2 million impairment reversal recognised in 2007 arose in relation to the Group's UK cylinder liner manufacturing operation. The business disposed of land and buildings and plant and machinery at a value greater than the theoretical net book value of the assets had they not been impaired, consequently a proportion of the previously recognised impairment has been reversed. The 2006 full year goodwill impairment arose in Driveline. 3 Amortisation of non-operating intangible assets arising on business combinations In establishing the fair value of assets and liabilities arising on business combinations the Group identifies the fair values attributable to intangible assets. The intangible assets recognised include operating intangibles, predominantly computer software, and non-operating intangibles being the value in respect of brands and trademarks, intellectual property rights, customer contracts and relationships and proprietary technology rights and know-how. All intangibles recognised on business combinations are amortised over the expected useful economic lives. The amortisation of non-operating intangible assets is separately identified as a component of operating profit on the face of the income statement. The analysis below sets out the amortisation charge in the year by category of non-operating intangible asset. 2007 2006 £m £m Brands/trademarks - - Intellectual property rights 1 1 Customer contracts and relationships and agreements not to compete 5 1 Proprietary technology rights and know-how 2 1 8 3 Profits and losses on sale or closures of businesses 2007 2006 Restated £m £m Profits and losses on closure of businesses Trading losses of the UK cylinder liner manufacturing operation (7) (9) Profits and losses on sale of businesses Fujiwa China - 5 (7) (4) On 2 March 2006 final approval was received from the Taiwanese authorities to transfer the Group's 60% shareholding in Fujiwa to its business partner, Lioho Corporation. At this point the Group's control of and active participation in the Fujiwa business ceased. The net cash inflow arising on disposal is set out below: 2006 £m Net assets disposed 19 Minority interests (8) Cumulative translation adjustment (1) Surplus arising on disposal 5 Consideration receivable net of attributable expenses 15 In the period from 1 January 2006 to disposal Fujiwa contributed £5 million to group sales, £1 million to group trading profit and £nil to cash generated from operations. Changes in fair value of derivative financial instruments IAS 39 requires derivative financial instruments to be valued at the balance sheet date and any difference between that value and the intrinsic value of the instrument to be reflected in the balance sheet as an asset or liability. Any subsequent change in value is reflected in the Income Statement unless hedge accounting is achieved. Such movements do not affect cash flow or the economic substance of the underlying transaction. In 2007 and 2006 the Group used transactional hedge accounting in a limited number of instances. As a consequence, and to assist year on year comparison, the change in value continues to be identified as a separate element of operating profit. 4 Net financing costs 2007 2006 £m £m Interest payable and fee expense Short-term bank and other borrowings (7) (3) Loans repayable within five years (29) (5) Loans repayable after five years (25) (48) Finance leases (1) (1) (62) (57) Interest receivable Short-term investments, loans and deposits 19 23 19 23 Other net financing charges Expected return on pension scheme assets 146 136 Interest on post-employment obligations (149) (140) (3) (4) Net financing costs (46) (38) 5 Taxation 2007 2006 Analysis of charge in year £m £m Current tax Current year 38 38 Utilisation of previously unrecognised tax losses and other assets (9) (2) Adjustments in respect of prior years 3 (3) Net movement on provisions for uncertain tax positions 4 (15) 36 18 Deferred tax Origination and reversal of temporary differences (excluding post-employment obligations) 12 15 Tax in respect of post-employment obligations (3) (6) Tax on change in fair value of derivative financial instruments - 2 Utilisation of previously unrecognised tax losses and other assets (7) (7) Other changes in unrecognised deferred tax assets (28) (21) Changes in tax rates (8) - Adjustments in respect of prior years (1) 4 (35) (13) Total tax charge for the year 1 5 Overseas tax included above 18 15 Tax in respect of restructuring and impairment charges included in total charge for the year Current tax (7) (6) Deferred tax 2 (8) (5) (14) The Group is required to estimate the income tax due in each of the jurisdictions in which it operates. This requires an estimation of the current tax liability together with an assessment of the temporary differences which arise as a consequence of different accounting and tax treatments. These temporary differences result in deferred tax assets or liabilities which are measured using substantively enacted tax rates expected to apply when the temporary differences reverse. Recognition of deferred tax assets, and hence credits to the income statement is based on forecast future taxable income and therefore involves judgement regarding the future financial performance of particular legal entities or tax groups in which the deferred tax assets are recognised. The Group is subject to many different tax jurisdictions and tax rules as a consequence of its geographic spread. It is therefore subject to tax audits and tax reviews, which by their nature are often complex and can require several years to conclude. Management judgement is therefore required to determine the total provision for income tax. Amounts set aside and released in any period are based on management judgement and interpretation of country specific tax law and the likelihood of crystallisation and settlement. Tax benefits are not recognised unless it is probable that the tax positions are sustainable. However, as amounts set aside in any period could differ from actual tax liabilities incurred adjustments are required in subsequent periods which may have a material impact on the Group's income statement and/or cash tax payment. Payments in respect of tax liabilities for an accounting period comprise payments on account and payments on the final resolution of open items with tax authorities and, as a result, there can be substantial differences between the charge in the income statement and tax cash payments. Interest on provisions for uncertain tax positions is, where relevant, provided for in the tax charge. Details of the effective tax rate for the Group and the underlying events and transactions affecting this and the tax charge are given in the narrative of this Press Release on page 9. 2007 2006 Tax on items included in equity £m £m Deferred tax on post-employment obligations 84 67 Deferred tax on non-qualifying assets 6 - Deferred tax on foreign exchange provisions 2 - 2007 2006 Tax reconciliation £m % £m % Profit before tax 199 182 Less share of post-tax earnings of joint ventures (24) (17) Profit before tax excluding joint ventures 175 165 Tax calculated at 30% standard UK corporate tax rate 53 30% 49 30% Differences between UK and overseas corporate tax rates 5 2% 7 4% Non-deductible and non-taxable items (8) (4%) (1) (1%) Utilisation of previously unrecognised tax (16) (9%) (9) (5%) losses and other assets Other changes in unrecognised deferred tax (28) (16%) (21) (13%) assets Changes in tax rates (8) (4%) - - Deferred tax (credit)/charge in respect of post-employment obligations (3) (1%) (6) (4%) Current year tax (credit)/charge on ordinary activities (5) (2%) 19 11% Net movement on provision for uncertain tax positions 4 2% (15) (9%) Adjustments in respect of prior years 2 1% 1 1% Total tax charge for the year 1 1% 5 3% 6 Earnings per share Basic earnings per share Basic earnings per share are calculated by dividing the profit attributable to equity shareholders by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by the Company and held as treasury shares. Diluted earnings per share Diluted earnings per share are calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has only one category of dilutive potential ordinary shares; share options. The calculation is performed for the share options to determine the number of shares that could have been acquired at fair value (determined as the average market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options. Earnings per share are computed as follows: 2007 2006 Earnings Weighted Earnings Earnings Weighted Earnings average per average per number of share number share shares of shares £m m p £m m p Total Company Basic eps: Profit attributable to ordinary shareholders 196 703.4 27.9 177 708.8 25.0 Dilutive securities: Dilutive potential ordinary shares - 2.9 (0.1) - 2.1 (0.1) Diluted eps 196 706.3 27.8 177 710.9 24.9 Adjusted earnings per share - total Company Earnings per share before restructuring and impairment charges, amortisation of non-operating intangibles arising on business combinations, profits and losses on sale or closures of businesses and the changes in fair value of derivative financial instruments, which the Directors consider gives a useful additional indicator of underlying performance, is calculated on earnings for the year adjusted as follows: 2007 2006 (restated) £m p £m p Profit attributable to equity shareholders 196 27.9 177 25.0 Charges/(credits) included in operating profit: Restructuring and impairment charges 31 4.4 74 10.5 Amortisation of non-operating intangibles on business combinations 8 1.1 3 0.4 Profits and losses on sale or closures of businesses 7 1.0 4 0.6 Changes in fair value of derivative financial instruments 10 1.4 (33) (4.7) Taxation on charges/(credits) included in operating profit (5) (0.7) (12) (1.7) Adjusted earnings attributable to equity shareholders 247 35.1 213 30.1 Diluted adjusted earnings per share attributable to equity shareholders 35.0 30.0 7 Dividends 2007 2006 £m £m Equity dividends paid in the year Previous year final : 8.7p (2006: 8.2p) per share 61 59 Current year interim : 4.3p (2006: 4.1p) per share 30 29 In addition, the Directors are proposing a final dividend in respect of the financial year ended 31 December 2007 of 9.2p per share, at a cost of £65 million. It will be paid on 14 May 2008 to shareholders who are on the register of members at close of business on 25 April 2008. 8 Joint ventures 2007 2006 Group share of results of joint ventures £m £m Sales 253 208 Operating costs and other income (221) (187) Net financing costs - (1) Profit before taxation 32 20 Taxation (8) (3) Share of post-tax earnings 24 17 The segmental analysis of the Group's share of joint venture sales and trading profit is set out below: 2007 2006 Trading Trading Sales profit Sales profit £m £m £m £m Driveline 130 17 113 13 Other Automotive 120 15 92 8 OffHighway 3 - 3 - 253 32 208 21 2007 2006 £m £m At 1 January 83 81 Share of profits retained 11 10 Actuarial gain on post-employment obligations, including deferred tax 1 - Currency variations 5 (8) At 31 December 100 83 Group share of net assets Non-current assets 70 60 Current assets 91 81 Current liabilities (50) (42) Non-current liabilities (11) (16) 100 83 The joint ventures have no significant contingent liabilities to which the Group is exposed and nor has the Group any significant contingent liabilities in relation to its interest in the joint ventures other than bank guarantees. 9 Deferred tax Deferred tax is calculated in full on temporary differences under the liability method. 2007 2006 Amounts recognised on the balance sheet: £m £m Deferred tax assets 56 114 Deferred tax liabilities (75) (63) (19) 51 The movement on deferred tax is as shown below: 2007 2006 £m £m At 1 January 51 112 Subsidiaries acquired and sold (8) (7) (Charge)/credit for the year: Income Statement 35 13 Equity (92) (67) Currency variations (5) - At 31 December (19) 51 The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by IAS 12) during the period are shown below: Pensions Tax losses Other Total Deferred tax assets £m £m £m £m At 1 January 2007 102 20 28 150 Credited to income statement 3 27 45 75 Charged to equity (84) - - (84) Other movements - - (6) (6) Currency variations - - 2 2 At 31 December 2007 21 47 69 137 Accelerated tax depreciation Other Total Deferred tax liabilities £m £m £m At 1 January 2007 (94) (5) (99) Charged to income statement (31) (9) (40) Charged to equity (6) (2) (8) Subsidiaries acquired (2) (6) (8) Other movements - 6 6 Currency variations (7) - (7) At 31 December 2007 (140) (16) (156) Unrecognised deferred tax assets Deferred tax assets have not been recognised in relation to certain taxable losses and other temporary differences on the basis that their future economic benefit is uncertain. The gross and tax values of these unrecognised assets together with any expiry dates where relevant are shown below. The tax value of the assets has been calculated using tax rates enacted or substantially enacted at the balance sheet date. 2007 2006 Tax value Gross Tax value Gross £m £m Expiry period £m £m Expiry period Tax losses - with expiry: national 186 532 2019 to 2027 160 451 2019 to 2026 Tax losses - with expiry: local 40 813 2008 to 2027 48 877 2007 to 2026 Tax losses - without expiry 118 402 112 355 Other temporary differences 32 113 50 163 Unrecognised deferred tax assets 376 1,860 370 1,846 Included above are tax losses of £677 million with a tax value of £109 million (2006: £732 million with a tax value of £111 million) that are severely restricted for future use and management, based on the Group's current profile, believes they are unlikely to be utilised in the foreseeable future. Deferred tax assets totalling £35 million (2006: £82 million) have been recognised relating to territories where tax losses have been incurred in the year. It is anticipated that future profitability arising from restructuring and other actions will result in their realisation. No deferred tax is recognised on the unremitted earnings of overseas subsidiaries except where the distribution of such profits is planned. If the earnings were remitted in full tax of £25 million (2006: £25 million) would be payable. The UK Government announced the gradual abolition of industrial building allowances in the 2007 Budget. Since this change had not been substantively enacted at the balance sheet date, its effect is not included in the calculation of deferred tax as at 31 December 2007. The impact of this change on the Group's future tax rate is anticipated to be insignificant. 10 Cash flow reconciliations 2007 2006 Cash generated from operations £m £m Operating profit 221 203 Adjustments for: Profits and losses on sale of businesses - (5) Amortisation of non-operating intangible assets arising on business combinations 8 3 Changes in fair value of derivative financial instruments 10 (33) Tangible fixed asset impairment/reversals (9) 1 Impairment of goodwill - 11 Depreciation and amortisation 151 145 Amortisation of capital grants (2) (3) Net profits on sale of fixed assets (8) (3) Charge for share-based payments 6 5 Movement in post-employment obligations (29) (204) Changes in working capital and provisions (49) (3) 299 117 Movement in net debt 2007 2006 £m £m Net movement in cash and cash equivalents (78) (369) Net movement in borrowings 4 (36) Currency variations on borrowings (7) 34 Finance leases 1 1 Subsidiaries acquired and sold - 9 Movement in year (80) (361) Net debt at beginning of year (426) (65) Net debt at end of year (506) (426) Reconciliation of cash and cash equivalents 2007 2006 £m £m Cash and cash equivalents per balance sheet at 31 December 282 342 Bank overdrafts included within "current liabilities - borrowings" (32) (14) Cash and cash equivalents per cashflow at 31 December 250 328 11 Post-employment obligations 2007 2006 Post-employment obligations as at the year end comprise: £m £m Pensions - funded (24) (217) - unfunded (260) (268) Medical - funded (9) (28) - unfunded (38) (48) (331) (561) Pensions and medical - funded The Group's pension arrangements comprise various defined benefit and defined contribution schemes throughout the world. A number of retirement plans are operated which provide certain employees with post-employment medical benefits. Pensions In the UK, pension arrangements are made through an externally funded defined benefit scheme. In the USA and the Rest of the World there are a number of externally funded defined benefit schemes while in certain companies in Europe funds are retained within the business to provide for post-employment obligations. Defined benefit schemes - measurement and assumptions Independent actuarial valuations of all major defined benefit scheme assets and liabilities were carried out at 31 December 2007. The present value of the defined benefit obligation, the related current service cost and the past service cost were measured using the projected unit credit method. Key assumptions were: UK Americas Europe ROW % % % % 2007 Rate of increase in pensionable salaries 4.3 3.5 2.50 2.0 Rate of increase in payment and deferred pensions 3.4 2.0 1.75 n/a Discount rate 5.9 6.4 5.60 2.3 Inflation assumption 3.3 2.5 1.75 1.0 Rate of increases in medical costs: initial/long term 8.0/4.5 9.0/5.0 n/a n/a 2006 Rate of increase in pensionable salaries 4.1 3.5 2.50 2.0 Rate of increase in payment and deferred pensions 3.2 2.0 1.75 n/a Discount rate 5.1 5.9 4.70 2.5 Inflation assumption 3.1 2.5 1.75 1.0 Rate of increases in medical costs: initial/long term 8.0/4.5 10.0/5.0 n/a n/a The underlying mortality assumptions for the major schemes are as follows: United Kingdom Such is the size and profile of the UK scheme that data on the scheme's mortality experience is collected and reviewed annually. At the recent annual review the age adjustment to PA92 (year of birth) was strengthened by 0.5 to 2.5 years to reflect actual scheme experience. Mortality assumptions were strengthened further by moving to medium cohort projections. The key current year mortality assumptions for the scheme are that a male aged 65 lives for a further 19.8 years, whilst a male aged 40 is expected to live a further 21 years after retiring at 65. The impact of this change in assumptions has increased liabilities by £75 million. Overseas In the USA, CL2007 tables were adopted in 2007 whilst in Germany the RT2005-G tables were again used. In the USA the longevity assumption for a male aged 65 is that he lives a further 18.8 years whilst in Germany for a further 17.7 years. The longevity assumption for a USA male currently aged 40 is that he also lives for a further 18.8 years once attaining 65 years, with the German equivalent assumption being 17.7 years. These assumptions are based solely on the prescribed tables not on actual GKN experience. Assumption sensitivity analysis The impact of a one percentage point movement in the primary assumptions on the defined benefit net obligations as at 31 December 2007 is set out below: UK Americas Europe ROW £m £m £m £m Discount rate +1% 282 32 31 3 Discount rate -1% (346) (40) (39) (3) Rate of inflation +1% (200) - (25) - Rate of inflation -1% 180 - 22 - Rate of increase in medical costs +1% (1) (1) n/a n/a Rate of increase in medical costs -1% 1 1 n/a n/a A one percentage point increase in the assumption on healthcare benefits would increase the total service and interest cost by £nil (2006: £1 million) and the liability by £2 million (2006: £11 million). A one percentage point decrease in the assumption on healthcare benefits would reduce liabilities by £2 million (2006: £9 million). Defined benefit schemes - reporting The amounts recognised in the income statement are: 2007 2006 Trading Profit Redundancy Restructuring Employee and other and benefit employment impairment expense amounts charges Total Total Included within operating profit £m £m £m £m £m Current service cost (32) - - (32) (38) Past service cost 12 (1) (4) 7 (2) Settlement/curtailments 2 - - 2 (3) (18) (1) (4) (23) (43) Included within net financing costs Expected return on pension scheme assets 146 136 Interest on post-employment obligations (149) (140) (3) (4) The past service credit of £7 million within trading profit (2006: £2 million charge) includes a £12 million credit from the impact of changes to retiree medical benefits in the USA, partly offset by a past service charge of £5 million (2006: £2 million charge), £4 million of which is within Restructuring and impairment charges (2006: £nil) primarily from further downsizing of a UK business in the Automotive portfolio. The 2007 settlement/curtailments credit arises from changes in pension regulations in Italy. The amounts recognised in respect of funded obligations in the balance sheet are: 31 December 2007 31 December UK Americas Europe ROW Total 2006 £m £m £m £m £m £m Present value of funded obligations (2,251) (244) (13) (20) (2,528) (2,660) Fair value of plan assets 2,248 212 21 14 2,495 2,415 Net obligation recognised in the balance sheet (3) (32) 8 (6) (33) (245) The contributions expected to be paid by the Group during 2008 to the UK schemes is £12 million and to overseas schemes £26 million. Cumulative actuarial gains and losses recognised in equity are as follows: 2007 2006 £m £m At 1 January 17 (90) Net actuarial gains in year 225 107 At 31 December 242 17 The defined benefit obligation is analysed between funded and unfunded schemes as follows: 2007 2006 £m £m Funded (2,528) (2,660) Unfunded (298) (316) (2,826) (2,976) The fair value of the assets in the schemes and the expected rates of return were: UK Americas Europe ROW Long-term Long-term Long-term Long-term rate of rate of rate of rate of return return return return expected Value expected Value expected Value expected Value % £m % £m % £m % £m At 31 December 2007 Equities 8.0 1,114 8.5 142 - - 6.2 8 Bonds 5.1 810 5.5 57 - - 1.3 4 Property 6.7 102 - - - - - - Cash/ short-term mandate 5.7 190 4.7 13 - - 1.0 1 Other assets 5.8 32 - - 5.1 21 0.9 1 2,248 212 21 14 At 31 December 2006 Equities 7.5 1,093 8.5 134 - - 7.2 7 Bonds 4.9 687 5.0 53 - - 2.0 4 Property 6.8 109 - - - - - - Cash/ short-term mandate 5.1 265 3.8 9 - - - - Other assets 5.1 33 - - 5.0 19 1.3 2 2,187 196 19 13 The expected return on plan assets is a blended average of projected long-term returns for the various asset classes. Equity returns are developed based on the selection of the equity risk premium above the risk-free rate which is measured in accordance with the yield on government bonds. Bond returns are selected by reference to the yields on government and corporate debt, as appropriate to the plan's holdings of these instruments, all other asset classes returns are determined by reference to current experience. The actual return on plan assets was £165 million (2006: £185 million). Defined contribution schemes The Group operates a number of defined contribution schemes outside the United Kingdom. The charge to the income statement in the year was £10 million (2006: £9 million). This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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