Final Results

27th Feb 2007 07:03

GKN PLC27 February 2007 For immediate release GKN plc 2006 Preliminary Results Announcement As reported As reported excluding under IFRS items in note (1) belowGroup results summary 2006 2005 Change 2006 2005 Change £m £m £m £m £m Sales 3,634 3,648 (14) 3,634 3,648 - Trading profit (1) 242 229 13 242 229 6% Operating profit 203 98 105 242 229 6% Share of joint ventures 17 10 7 17 10 70% (post-tax) Net financing costs (38) (35) (3) (38) (35) 9% Profit before tax 182 73 109 221 204 8% Profit after tax 177 59 118 204 164 24% Earnings per share - p 25.0 7.7 17.3p 28.8 22.3 29% 2006 2005 Change p pDividend Proposed full year dividend 12.8 12.2 5% per share Notes (1) Figures exclude the impact of 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. Business highlights • Sales broadly level; (1)Profit before tax up 8%; (1)Earnings per share up 29% • Aerospace delivers 11% increase in sales, 30% increase in trading profit • Powder Metallurgy trading profit more than doubles; US Sinter operations return to profit • OffHighway sales up 7%; trading profit up 15% • Driveline profits lower - significant new business wins support future growth • Dividend increased by 5% to 12.8p reflecting the Board's continuing confidence Sir Kevin Smith, Chief Executive of GKN plc, commented: "Our performance in 2006 shows GKN making excellent progress with results aheadof expectations and major milestones achieved which will help secure sustainablegrowth. "Aerospace grew sales by 11%, profits by 30% and moved into double digitmargins. "US Sinter moved back into profit and overall Powder Metallurgy margins morethan doubled to above 5%. "Our confidence in the future is also being reinforced by high levels of newbusiness wins. Driveshafts won 75% by volume of all new available programmes,Sinter's new business wins were up 30% and Aerospace brought in orders worth$850 million. "Acquisitions have secured technology leadership in aerospace titaniumstructures, increased our exposure to the civil aviation sector, provided anentry into the China offhighway market and enlarged our presence in theconstruction sector. "We continue the rapid development of our business in high growth markets withthree new plants becoming operational in China and two new plants in India. "Our strategic restructuring plan launched in 2004 has now moved into its finalphase and will conclude this year. "We have entered 2007 with our four major businesses - Driveline, PowderMetallurgy, OffHighway and Aerospace - in great shape and all well positioned todrive growth." 2007 Outlook The outlook for our major markets is positive, despite some uncertainty aroundthe strength of North American automotive demand. Forecasts for the global automotive market remain mixed with overall growth in2007 production projected at 3-4%. Within this, Western European output isforecast to be broadly unchanged and North American demand is also expected tobe at a similar level to 2006, although slightly down in the first half. Goodgrowth is expected in emerging markets including China and India, whichrepresent a growing percentage of the Group's sales. OffHighway demand in North America is slightly down on last year althoughsentiment appears to be improving; European markets and the mining and heavyconstruction sectors generally are expected to be good. Aerospace markets in all sectors are expected to remain strong. Raw material input costs remain volatile, but the Group is not expecting them tomake a major impact on 2007 performance compared to 2006. Against this background, in 2007 the Group expects to see further improvement inits Automotive businesses and continuing growth in OffHighway and Aerospace.Driveline will benefit from the successful restructuring programme which shouldallow it to recover much of the ground lost in 2006. Powder Metallurgy andAerospace should see good top line growth helped by a strong backlog of bookedbusiness. Performance in our retained Other Automotive businesses should alsoimprove. The acquisitions made in 2006 are integrating well and will alsocontribute to revenue and profit growth in 2007. Overall, we expect the Group to see another year of good progress, with the highlevel of business wins in 2006 supplemented by further bolt-on acquisitionsgiving us confidence for this year and beyond. Further Enquiries GKN Corporate Communications Tel:+44 (0)20 7463 2354 This press release may be downloaded from www.gkn.com. Measurement and reporting of performance In this press release, 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 onbusiness combinations, o profits and losses on sale or closure of businesses, and o changes in the fair value of derivative financial instruments, since we believe they show more clearly the underlying trend in businessperformance. Trading profit is defined as operating profit before any of the above. The 2005trading profit of the Group and the Driveline division has been re-aligned withthe current year definition and adjusted by £1 million in respect of theamortisation of non-operating intangible assets which arose on businessesacquired in 2004 and 2005 which had not been separately identified on thegrounds of materiality when reporting the 2005 results. Where appropriate, reference is also made to results excluding the impact ofboth 2005 and 2006 acquisitions, divestments and changes in status as well asthe impact of currency translation on the results of overseas operations. Exchange rates used for currencies most important to the Group's operations are: Average Year End 2006 2005 2006 2005 Euro 1.47 1.46 1.48 1.46US Dollar 1.84 1.82 1.96 1.72 The approximate impact on trading profit of a 1% movement in the average rate isEuro - £1.1 million, US Dollar - £0.4 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 the automotive, off-highway andaerospace markets. The bulk of our sales are made to vehicle or aircraftmanufacturers or, in Aerospace, to other major tier one suppliers. We operate inthree different business areas: Automotive activities comprise GKN Driveline, Powder Metallurgy and OtherAutomotive companies which supply a variety of components, largely to vehiclemanufacturers in the global car and light vehicle markets. OffHighway designs and manufactures steel wheels and driveline systems for theglobal agricultural, construction and industrial machinery market. 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 37,000 employees insubsidiary companies and a further 3,500 in joint ventures. Changes in the composition of the Group Results for the year contain a full twelve month contribution from QDS Henschen,the OffHighway business which was acquired in November 2005, and GKN DrivelineMexico which changed in status from joint venture to subsidiary in January 2005. During 2006 OffHighway acquired Cramer Kupplung GmbH (in January) and HytecompAB in June for a total of £2 million, Rockford Powertrain Inc (Rockford) inAugust for £29 million and Liuzhou Steel Rim Factory in November for £6 million.In September, Aerospace acquired Stellex Aerostructures Corporation (Stellex)for £93 million. At the beginning of March the Group ceased its involvement in the management ofFujiwa Machinery Industry (Kunschan) Company Ltd (Fujiwa), a non-core subsidiaryof GKN Driveline Torque Technology KK, and agreed to dispose of its 60%shareholding for £15 million which was received in the year. Group performance Management sales (subsidiaries and joint ventures) £3,842 million (2005 - £3,823million) Combined sales of subsidiaries and share of joint ventures totalled £3,842million compared with £3,823 million in 2005. Excluding the impact of currency,acquisitions and divestments the increase was £38 million (1.0%) with gooddemand in Driveline's Chinese operations and strong growth in Chassis SystemsLtd and Emitec, both of which form part of our Other Automotive activities. Sales of subsidiaries £3,634 million (2005 - £3,648 million) Sales of subsidiaries were £3,634 million compared with £3,648 million in 2005,a reduction of £14 million. Excluding the impact of currency translation,acquisitions and divestments there was an increase of £2 million. In Automotive businesses, sales of £2,608 million compared with £2,711 million ayear earlier, largely reflecting the negative impact of currency (£23 million),the net impact of divestments, acquisitions and changes in status (£33 million)as well as weakness in demand during the third quarter in both North America andWestern Europe which extended into the fourth quarter in North America.Underlying sales were down by £47 million (1.8%) OffHighway sales improved to £331 million from £310 million in 2005. The impactof both 2005 and 2006 investments was £25 million and, excluding these and theadverse impact of currency (£2 million), sales were slightly lower in largelystatic agricultural markets in both Europe and North America. Aerospace sales increased to £695 million from £627 million in 2005. The impactof Stellex which was acquired in September was £21 million and, excluding thisand currency (£4 million negative), the improvement was £51 million with strongdemand in both civil and military markets and a number of new programmes comingon stream. Management trading profit (subsidiaries and joint ventures) £263 million (2005 -£243 million) The aggregated trading profit of subsidiaries and our share of joint ventureswas £263 million, an increase of £20 million (8.2%). The impact of currency,acquisitions and divestments was small and excluding these factors the increasewas £19 million (8.0%) reflecting good growth in joint venture profits as aconsequence of higher sales. Margin improved to 6.8% (2005 - 6.4%). Trading profit of subsidiaries £242 million (2005 restated - £229 million) Group trading profit was £242 million compared with £229 million in 2005, anincrease of £13 million (5.7%). The currency impact on the translation ofoverseas profits was small at £1 million negative. There was a net benefit of £2million from 2005 and 2006 acquisitions and divestments and excluding thesefactors the increase was £12 million (5.4%). Automotive companies' trading profit totalled £161 million compared with £165million in 2005. The impact of currency was nil whilst the net effect ofdivestments and changes in status was £4 million negative. Excluding thesefactors profits were flat reflecting benefits of the previously announcedstrategic restructuring actions and other continuing productivity improvementsoffset by weak trading performance and reorganisation costs in Other Automotivesubsidiaries. The margin of trading profit to sales was 6.2% (2005 - 6.1%). OffHighway profit improved to £23 million from £20 million in 2005 with all ofthe increase coming from acquisitions. Excluding these and minor currencyimpacts, profits were £1 million lower, reflecting the sales pattern notedabove. Margin was 6.9% compared with 6.5% in 2005. Aerospace profit rose to £70 million from £54 million in 2005, largely as aresult of the higher sales noted above and further productivity improvements.Margin improved to 10.1% from 8.6% in 2005. Corporate and unallocated costs of £12 million (2005 - £10 million) representstewardship, legacy, governance and compliance costs relating to the overallGroup rather than individual businesses. The overall margin of subsidiaries was 6.7% compared with 6.3% in 2005. Restructuring and impairment costs £74 million (2005 - £98 million) During the year the Group neared the end of the strategic restructuringannounced in the first quarter of 2004. This involved moving some 20% ofDriveline production capacity from high cost, low growth economies to the lowcost, high growth emerging markets of Eastern Europe, South America and AsiaPacific, together with further cost reductions and infrastructure changes inPowder Metallurgy in support of the recovery of that business and overhead costreductions elsewhere in the Group. Costs charged in the year totalled £63million (2005 - £77 million) with £37 million (2005 - £46 million) in Driveline,£24 million (2005 - £28 million) in Powder Metallurgy and £2 million (2005 - £3million) elsewhere. The announcements of the concluding actions under the programme were deferreduntil early 2007. Those announcements have now been made and will result in afinal charge to profit of approximately £37 million in 2007. This will bring thetotal cost of the programme to £277 million (including some £100 million ofimpairment charges) compared with the original estimate and the extensionannounced in December 2005 of some £260 million. The final expected benefitsfrom the total programme of some £73 million per annum are slightly above thoseoriginally envisaged. Due to the timing of these actions the full annualisedbenefit will now be realised slightly later with approximately 75% having beenachieved by the end of 2006. In addition, within our Automotive portfolio we have recognised an impairment of£11 million (2005 - £21 million) as current year performance and futureprojections were insufficient to support the carrying value of goodwill withinone of the Asia Pacific Driveline businesses. The 2005 impairment charge covereda similar goodwill write-down of £11 million, and the £10 million impairment ofthe Sheepbridge UK cylinder liner fixed asset base. Amortisation of non-operating intangible assets arising on business combinations£3 million (2005 restated - £1 million) In accordance with IFRS 3, the Group has recognised intangible assets arising onbusinesses acquired in 2005 and 2006. The amortisation of non-operatingintangible assets (e.g. customer relationships, trademarks and intellectualproperty rights) increased during the year as a result of the 2006 acquisitionsof Stellex and Rockford. Profits and losses on sale or closure of businesses £5 million (2005 - £1million) The profit on sale of businesses of £5 million (2005 - £1 million) arose fromthe disposal of the Group's controlling interest in Fujiwa for a considerationof £15 million, all of which was received in cash in the year. The 2005 profitof £1 million related to earn out profits of a prior year divestment. Changes in the fair value of derivative financial instruments £33 million credit(2005 - £33 million charge) The Group enters into foreign exchange contracts to hedge much of itstransactional exposure, including that between Group companies. At 1 January2006 the net fair value of such instruments was a liability of £14 million andat the end of 2006 the figure was an asset of £27 million. Transactional hedge accounting has been applied to a small proportion of thesetransactions in 2006 and not at all in 2005. Where transactional hedging has notbeen applied, the difference of £39 million has been credited (2005 - £43million charged) separately as a component of operating profit. This has beenpartially offset by the reduction in value of £5 million (2005 - £9 millioncredit) in embedded derivatives in Aerospace supply contracts and £1 million(2005 - £1 million credit) in commodity hedges in Powder Metallurgy leaving anet credit of £33 million (2005 - charge £33 million). Operating Profit £203 million (2005 - £98 million) Operating profit of £203 million compared with £98 million in 2005, reflectingthe movements discussed above. Post-tax earnings of joint ventures £17 million (2005 - £10 million) The increase of £7 million in the Group's share of post-tax earnings of jointventures arose largely at the pre-tax level as a consequence of improvedprofitability in Driveline's Chinese joint ventures which benefited from highermarket demand; at Chassis Systems, the joint venture established with Dana in2002, which is now running at full production; and at Emitec, where salesimproved as a consequence of the legal requirement in Germany to retrofitparticulate filters to diesel powered vehicles. Financing costs £38 million (2005 - £35 million) Interest payable totalled £57 million (2005 - £61 million) and arose mainly onthe £675 million bonds and £30 million debenture in issue. This was offsetsomewhat by interest receivable of £23 million (2005 - £48 million) which aroseon short-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 contribution of £200million to the UK pension scheme at the end of March, the increased cost ofborrowing in US dollars and the costs of second half acquisitions. Other net financing costs of £4 million (2005 - £22 million) related topost-employment benefits. The reduction of £18 million was mainly a result ofthe injection of £200 million into the UK pension scheme noted above, combinedwith a higher level of assets in the fund at the beginning of 2006. Details ofthe assumptions used in calculating post employment costs and income is providedin note 12 in the appendix to this press release. Profit before tax Total profit before tax excluding restructuring and impairment charges,amortisation of non-operating intangible assets arising on businesscombinations, profits and losses on sale or closures of businesses and changesin the fair value of derivative financial instruments of £221 million was £17million higher than the £204 million (as restated) in 2005. After includingthese items, the figure for the year was a profit of £182 million (2005 - £73million). Taxation The tax charge, on underlying profits of subsidiaries of £204 million (2005 -£194 million) (i.e. before restructuring, impairment, amortisation ofnon-operating intangible assets arising on business combinations, profits orlosses on sale or closures of businesses and changes in the fair value ofderivative financial instruments), was £17 million (2005 - £40 million)representing an 8.3% rate (2005 - 20.6%). The significant reduction in rate isdue to a deferred tax credit arising on pensions (compared with a charge in2005) combined with the benefits of recognising previously unrecognised deferredtax assets which were partly offset by a reduction in the impact of prior years'items. GKN's tax strategy is aimed at creating a sustainable cash tax charge (whichexcludes deferred taxes and movements in provisions for uncertain tax positionsand tax relating to restructuring, impairment charges and sale of businesses)that balances the shareholders' interest of minimising tax payments with theneed to comply with the tax laws for each country in which we operate. In 2006the cash tax charge was 19% and looking forward for the next two years it islikely that it will be at a similar level as we continue to make use of prioryears' tax losses, incentives and deductions in the various countries in whichwe operate. For 2007 and beyond, the reported tax rate is likely to be volatile, beinginfluenced by the possible recognition of currently unrecognised deferred taxassets and the settlement of prior year items. These unrecognised, potentialdeferred tax assets principally relate to brought forward tax losses and pensiondeductions in the UK and US which, due to the structure of the Group and thegeographic mix of profitability, have so far not been seen as realisable for taxpurposes. The total effective tax rate of subsidiaries was 3.0% (2005 - 22.2%). Discontinued operations There were no discontinued operations in the period. On 16 January 2007 the Group announced its intention to withdraw from themanufacture of cylinder liners in Europe which is carried out by GKN SheepbridgeStokes. The company accounted for approximately 80% of the 2006 Other Automotivesegment result and its closure represents the cessation of a separate major lineof business for this segment. The costs of closure together with the results tothe date the business ceases will be separately identified in the 2007 financialstatements. Minority interests Largely as a result of the sale of Fujiwa (in which there was a 40% minorityinterest) and the start up losses in the Chinese cylinder liner business (wherethere is a 41% minority interest) the share of profit relating to minorityinterests was nil compared with £4 million in 2005. Earnings per share Earnings per share were 25.0p (2005 - 7.7p). Before restructuring and impairmentcharges, amortisation of non-operating intangible assets arising on businesscombinations, profits and losses on sale or closures of businesses and changesin the fair value of derivative financial instruments, the figure was 28.8p(2005 restated - 22.3p). Cash Flow Operating cash flow, which GKN defines as cash generated from operations (£117million; 2005 - £308 million) adjusted for capital expenditure (£230 million;2005 - £229 million) and proceeds from the disposal of fixed assets (£13million; 2005 - £9 million), was £100 million outflow compared with £88 millioninflow in 2005. Included within the 2006 figure is the £200 million contributionto the UK pension scheme. The outflow on working capital and provisions totalled £3 million (2005 - £15million inflow) largely reflecting inventory increases relating to restructuringactivities. Capital expenditure (on tangible and intangible assets) totalled £230 million(2005 - £229 million). Of this, £197 million (2005 - £206 million) was ontangible assets representing property, plant and equipment and was 1.4 times(2005 - 1.5 times) the depreciation charge. This higher than normal ratiolargely reflected the final stages of investment in emerging markets under theGroup's strategic restructuring programme and is expected to reduce somewhat in2007 as this programme is completed. Expenditure on intangible assets totalled £33 million (2005 - £23 million) andmainly reflected initial non-recurring costs on Aerospace programmes followinghigh levels of business activity which will underpin future performance. Net interest paid totalled £33 million compared with £14 million in 2005 withthe increase largely due to a combination of the £200 million paid into the UKpension scheme in March 2006, the increased cost of borrowing in US dollars andthe cash outflow relating to businesses acquired in the second half of the year. Tax paid in the year was £31 million (2005 - £35 million). Dividends received from joint ventures totalled £7 million (2005 - £6 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 £246 million (2005 - £41 million) mainly due to the £200 millionadditional contribution to the UK pension scheme (2005- £nil) and £57 million(2005 - £36 million) of expenditure on strategic restructurings. The Group'sbalance sheet remains strong and with continued recovery in our businesses it isanticipated that, following completion of the restructuring in 2007, cashgeneration should improve markedly. Acquisitions and Divestments The net expenditure on acquisitions and divestments in the year was £113 million(2005 - £50 million) with the main elements relating to Rockford and Stellex. Share buyback During the year the Group completed the share buyback programme of £100 millioninitiated in October 2004, spending £40 million in purchasing 13.4 millionshares. The shares have not been cancelled and 38.7 million shares were held intreasury at 31 December 2006. Net borrowings At the end of the year the Group had net debt of £426 million (2005 - £65million). This included the benefit of £33 million (2005 - £50 million) customeradvances in the Aerospace businesses which are shown in creditors in the balancesheet. The Group's share of funds in joint ventures was £3 million (2005 - £5million borrowings). 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 £40 million (2005 - £35million), whilst other net financing charges included in net financing costswere £4 million (2005 - £22 million). The decrease in other net financing charges reflects the higher return onpension scheme assets from the increased level of assets at the start of 2006and the £200 million contribution made to the UK pension scheme. Furtherinformation including asset, liability and mortality assumptions used isprovided in note 12 in the appendix to this press release. UK pensions The UK defined benefit scheme is considered to be relatively mature since fewerthan 5,000 of its 54,700 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. Other than the £200 million contribution inMarch 2006, no further deficit payments were made in 2006. During 2007 anactuarial valuation of the scheme as at April 2007 will take place and arecovery plan for any deficit will be agreed by the Company and Trustees of thescheme once the valuation has been completed, superseding the previous scheduleof contributions. The charge relating to the UK defined benefit scheme reflected in trading profitin respect of current and past service costs was £19 million (2005 - £16million), whilst other net financing credits included in net financing costswere £12 million (2005 - £5 million charge). The deficit at £174 million (2005 - £449 million) was significantly lower thanthat at the end of 2005 as a result of the £200 million contribution notedabove, returns on higher asset values at the beginning of 2006 and thebeneficial impact from higher yields discounting future liabilities. These werepartially offset by a 20 basis point increase in inflation assumptions andstrengthening longevity assumptions. Because of the size and profile of thescheme, longevity is reviewed annually against actual experience. During theyear the assumption for the rate of future improvement in longevity wasstrengthened to beyond "short cohort". Overseas pensions The principal countries involved are the USA, Germany and Japan. The charge to trading profit in respect of current and past service costs was£19 million (2005 - £17 million), whilst other net financing charges included innet financing costs were £12 million (2005- £13 million). The reduction in the deficit of £35 million to £310 million (2005 - £345million) was largely as a result of the lower net present value of liabilitiesfrom increases in discount rates and higher than expected return on assetstogether with the favourable translation impact from the weaker US Dollar. Retiree Medical GKN operates retiree medical arrangements in the Americas and has a closedscheme in the UK. The charge to trading profit in respect of current and past service costs was £2million (2005 - £2 million), whilst other net financing charges included in netfinancing costs were £4 million (2005 - £4 million). The deficit at £76 million (2005 - £91m) was £15 million lower largely due tocurrency translation benefits and a higher discount rate. Summary In total, at 31 December 2006 the deficit was £561 million (2005 - £885 million)for the reasons stated above. Shareholders' equity Shareholders' equity at the end of 2006 was £892 million compared with £875million at the end of 2005. Proposed dividend A final dividend of 8.7p per share is proposed, payable on 9 May 2007 toshareholders on the register at 20 April 2007. Shareholders may choose to reinvest this dividend under the DividendReinvestment Plan ('DRIP'). The closing date for DRIP mandates is 24 April 2007. Together with the interim dividend of 4.1p, the total dividend for the year willbe 12.8p, an increase of 4.9% over the equivalent figure for last year. The cashcost to the Group is some £90 million. The dividend is covered 2.3 times (2005 -1.8 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 sale or closures of businesses andchanges in the fair value of derivative financial instruments). Had the 2005 taxrate of 21% applied in 2006, the dividend would have been covered 2.0 times byearnings. Operating Review by business Automotive Markets Approximately 70% of GKN's combined sales of subsidiaries and joint ventures areto the world's passenger car and light vehicle markets and production in thesemarkets is a key driver of Group performance. The global trend in productionfrom 1990 through to a forecast for the period 2007-11 depicts a compound annualgrowth rate of 2.8%. 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 2006. Western Europe In Western Europe overall production in 2006 was 15.8 million compared with 16.0million in 2005, a reduction of approximately 1%, most of which occurred in thethird quarter of the year. There were increases in Italy (16%) and Germany (2%)but those were more than offset by reductions in France (7%) and the UK (8%). North America North American production in 2006 was 15.3 million, a reduction of 2.5% from the15.7 million in 2005. Within the overall figure there was again a significantchange in market share with DaimlerChrysler, Ford and General Motors continuingto lose market share to foreign manufacturers. Emerging markets Asia Pacific (excluding Japan where the year on year increase in production was3% to 10.8 million vehicles) showed very significant growth. In China,production of 6.6 million vehicles was 26% above 2005, while production in Indiarose by 11% to 1.6 million. China now produces more vehicles than Germany, thelargest European market. In Brazil, the production increase of 2.5% was also ahead of that in the moremature markets noted above. Market trends in 2007 The current view of Global Insight Inc, a leading economic forecaster, is forsimilar conditions to prevail in 2007 with Western Europe and North Americanproduction essentially flat, a more modest increase of 15% in China andimprovements in India and Brazil at 11% and 6% respectively. 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 smaller Driveline businesses. The customer base is broad and includes virtually all major vehicle manufactureson a world wide basis. GKN Driveshafts GKN Driveshafts is the global leader in the production of constant velocityjointed (CVJ) products for use in light vehicle drivelines. The majority of CVJsare used in sideshafts for front wheel drive, rear wheel drive and four wheeldrive vehicles; CVJ sideshafts are required for every driven axle withindependent suspension. Some, but not all, longitudinal propshafts are alsofitted with CVJs. In 2006, based on internal estimates, GKN Driveshafts' businesses, including itsjoint ventures, produced approximately 40% of CVJs for the global light vehiclemarket. The market share of the next largest independent producer is estimatedto be less than half this level with around 24% of CVJs produced by VMs'(Vehicle Manufacturers) in-house operations. The strong order win rate achievedduring the year continues to underpin our market share. GKN Driveshafts manufactures CVJs and related products in 21 countries acrossall major vehicle producing regions of the world and has enjoyed considerablesuccess in developing markets, with strong market shares of some 84% in SouthAmerica and 51% in the developing Asia Pacific region (excluding Japan and SouthKorea). GKN Driveshafts is also one of the largest suppliers of premium propshafts,which we define as those propshafts with sophisticated joints, materials orother features. We estimate that in 2006 premium propshafts representedapproximately 37% of global light vehicle propshaft demand, or some 11 millionpropshaft assemblies. GKN Driveshafts' share of this segment was in the regionof 21%. Torque Technology Group TTG develops and manufactures a broad range of driveline products which deliverpower to a vehicle's wheels and manage that power to control the dynamicperformance of the vehicle. The TTG product range includes geared components and TMDs. Geared componentsinclude products enabling the distribution of power on all wheel drive/fourwheel drive (AWD/4WD) and two wheel drive (2WD) vehicles and include powertake-off units (PTUs), final drive units (FDUs) and differentials. TMDs aremechanical (passive) or electro-mechanical (active) devices that improve vehicleperformance and handling by controlling the flow of torque throughout thedriveline. Geared components, which are sold principally in the Asia Pacific region butincreasingly in the Americas and Europe, currently account for approximatelyhalf of TTG's annual sales. Our products are well positioned to benefit fromcontinued growth above overall market levels as VMs increasingly introduce new'crossover' vehicles that combine four wheel drive with car-like dynamics,comfort and improved fuel economy. We also see substantial opportunities forcontinued development of our differentials business. GKN offers a complete range of TMD solutions as both stand-alone and integrateddevices to VMs and to certain Tier One suppliers. We estimate that in 2006 GKNsupplied approximately 14% of TMDs for light vehicle applications globally.Sales volumes of our electronically controlled coupling devices (ETM and EMCD)are expected to increase progressively, building upon our established passiveproduct range which includes the Viscodrive and Super LSD product families. Other Driveline businesses Other Driveline businesses operate manufacturing plants, warehouses and servicefacilities throughout Europe and provide a comprehensive range of new andremanufactured sideshafts and other components for the passenger vehicleaftermarket. They also provide services to repair and replace heavy truck andother industrial propshafts, as well as engineering, producing and selling lowvolume, highly specialised propshafts and driveline components for nonautomotive applications such as industrial, marine, defence and all terrainvehicles. 2006 Highlights Driveline subsidiaries' sales in the year totalled £1,906 million compared with£1,993 million in 2005. The negative impacts of currency translation andacquisitions and changes in status in 2005 were both small at £17 million and £3million respectively while the divestment of Fujiwa, the Chinese non-corecasting business, in February led to a reduction of £30 million. The underlyingdecrease of £37 million (1.9%) was mainly a consequence of weak third quarterdemand in a number of major markets and lower US production in the fourthquarter. The strength of business wins over the last two years should supportthe resumption of top line growth in 2008. Against this reduction, the share of joint venture sales (which are notconsolidated in the Group Income Statement but are set out in note 8 to thispress release) was £113 million compared with £104 million in 2005, with theunderlying increase £9 million (8.7%). This arose mainly in the Chinesecompanies where revenue rose by some 26% fuelled by growth in the overallmarket. The combined underlying sales of Driveline subsidiaries and jointventures fell by £26 million (1.3%). Trading profit of subsidiaries of £140 million compared with £155 million in2005. Excluding the impact of currency, acquisitions and divestments, thereduction was £11 million (7.3%), all of which arose in the second half of theyear as a result of the sales reductions noted above and a spike in raw materialcosts. Return on sales in the year was 7.3% (2005 - 7.8%) compared with thetarget of 7% to 9%. Although limited improvement is expected in 2007, therestoration of top line growth in Driveshafts, new business wins in TTG and thebenefit of prior years' restructuring actions are expected to result in strongerimprovement in future years. The share of trading profit of joint ventures increased by £2 million, withimprovement in China offset by some reduction in Taiwan where sales fell sharplyin a weak market. Divisional profit of subsidiaries and joint ventures reducedto £153 million from £166 million in 2005, with the underlying decrease £9million (5.6%). Charges in the year in respect of the strategic restructuring programmeannounced in 2004 to move productive capacity from high cost, low growth maturemarkets, to lower cost, high growth emerging markets totalled £37 million (2005- £46 million). The final stage of the programme was announced in early 2007 andthe cost of approximately £29 million will be charged in the 2007 accounts. Capital expenditure on tangible assets in the year totalled £98 million (2005 -£115 million) and was 1.3 times (2005 - 1.5 times) depreciation. This reductionlargely reflected the phasing of spending relating to the restructuringprogramme and a further fall, to around 1.2 times, is anticipated in 2007. The division continued to invest significantly in research and development andspent £63 million (2005 - £71 million) in the year, all except £1 million ofwhich was charged to operating profit. The reduction resulted from arestructuring of the engineering development function following a regionalre-alignment and the introduction of an advanced global design software package.In GKN Driveshafts there was continued interest in the crosstrackTM andcountertrackTM CV jointed half shafts which were launched in 2005. The firstproduction contract for Chrysler commenced in the year and a number of otherprogrammes are expected to begin in 2007. In TTG there was significant progressin the development of Electronic Torque Vectoring (ETV) which enhances vehiclesafety and security by managing the application of torque to the driven wheel.ETV units will be fitted to a volume programme which will be launched in 2008, ajoint development programme has been agreed with a technology led customer and astrategic partnership has been established with a view to integrating ETV withESP (Electronic Stability Program). As noted above, TTG completed the disposal of non-core operations in China andthe closure of a facility in Japan, bringing to a close the major restructuringenvisaged when Tochigi Fuji Sangyo was acquired in 2004. The costs of theseactions have been absorbed in trading profit. Although the disposal of theChinese operation is temporarily margin dilutive, this has been more than offsetin the period by the £5 million profit on sale which is reported separately inthe Income Statement. During the year, GKN Driveshafts won some 75% of all available (i.e. externallysourced) CVJ driveshaft business which represents approximately 57% of the totalavailable market, i.e. including in-house manufacture. This win rate underpinsthe anticipated restoration of top line growth from 2008 onwards. Similarly, TTGwon new business worth £55 million at annualised rates, providing a sound basefor future growth. Powder Metallurgy Products and markets GKN's Powder Metallurgy business has two elements: GKN Sinter Metals whichproduces sintered components and GKN Hoeganaes which produces metal powders.They are largely iron based, although growth is also being seen in the use ofaluminium and other alloys. GKN Sinter Metals Although market statistics are somewhat imprecise due to the significant numberof small producers, GKN estimates that it has in the region of 16% global marketshare in the sintered product business with sales mainly to major automotive andindustrial original equipment manufacturers and first tier suppliers. Component production takes place in the Americas, Europe, South Africa and AsiaPacific with the highest sales growth rates for 2007 in the Americas and theAsia Pacific region. GKN Sinter Metals is significantly larger than any of itscompetitors and as such is well placed to drive technology leadership in productand process through the leverage of global resources. This global manufacturingfootprint continues to develop with the establishment of further operations inIndia and China to support new business secured in both local and other markets. GKN Hoeganaes GKN Hoeganaes produces principally ferrous based metal powder, the raw materialfor ferrous based sintered components. It is the largest producer of metalpowder in North America with more than 50% market share. It has also continuedits development outside the US, particularly through growth in Europe due toincreased usage by GKN's own sintering companies in this region. Approximately50% of powder produced by Hoeganaes is shipped to external customers, mainly inthe USA, and accounts for some 13% of the Powder Metallurgy division's sales. Growth in the powder metallurgy market is expected to continue, fuelledprimarily by substitution for cast or forged components. External forecasts forthe sintered component market anticipate an increase from approximately $6billion in 2005 to around $9 billion in 2015, a compound annual growth rate ofsome 4%. In addition, technology advances are expected to open up new productapplications which should lead to growth above this level. 2006 Highlights Sales in the year were £582 million compared with £588 million in 2005, with thereduction all due to the adverse impact of currency on translation. NorthAmerican sales were significantly weaker as a result of market share reductionsof major customers and, in particular, their production cut-back in the thirdand fourth quarters of the year. These reductions were fully compensated byincreased sales in Europe and the Rest of the World with new programmes comingon stream from a variety of automotive and other industrial customers. As aconsequence, the geographical balance of the division has moved with some 54% ofSinter Metals' and 48% of the total divisional sales arising outside NorthAmerica. This trend appears likely to continue, particularly as emerging marketdemand increases. Notwithstanding the flat overall sales, trading profit improved to £31 millionfrom £12 million in 2005. This was as a result of additional margin from theimproved volumes in Sinter Europe, combined with improved operating efficienciesand lower overhead costs in the US Sinter business which moved into profit inthe year following four years of losses. There was also increased profitabilityat Hoeganaes as steel scrap prices moderated somewhat compared with 2005 andfrom the benefit of some favourable copper and nickel contracts. The divisionalmargin for the year was 5.3% compared with 2.0% in 2005. We expect to seefurther progress in 2007 from sales revenue increases as a result of businesswins in earlier periods. Restructuring costs and asset impairment in 2006 totalled £24 million (2005 -£28 million), which related to the closure of three North American and one UKplant. At the same time two new plants were opened in China. One final closurehas been announced in February 2007 leading to a charge of some £8 million inthe year and this will accelerate the benefits arising from this programme. Capital expenditure on tangible fixed assets in the period totalled £49 million(2005 - £43 million) with depreciation of £28 million (2005 - £27 million). Theratio of 1.8 times (2005 - 1.6 times) was again higher than normal, as newcapacity was installed both in emerging markets and ahead of new manufacturingprogrammes in North America and Europe. A significant reduction to around 1.2times is estimated for 2007. Expenditure on research and development totalled £5 million (2005 - £6 million)with a heavy emphasis on increasing density and improving surface finish ofsintered components through advances in both material and production technology.As a consequence a number of components are under test with customers and, ifsuccessful, have the potential to open up new product segments to the business. Once again there were significant new business wins in the year in all regionswhich totalled approximately £120 million at annualised rates and support thetargeted sales growth of 6% to 8% from 2007 onwards. Other Automotive Products and markets Our Other Automotive subsidiary activities, which are predominantly UK based,but with facilities in the US and China, manufacture structural components,chassis and engine cylinder liners for the passenger car, sports utility vehicle(SUV) and light vehicle and truck markets in Western Europe and the US.Customers include vehicle manufacturers and engine makers. We also have 50%stake in Chassis Systems Ltd (CSL) which manufactures structural components forLand Rover in the UK and in Emitec which manufactures metallic substrates forcatalytic converters in Germany and the USA. 2006 Highlights Sales of subsidiaries in the year of £120 million were £10 million (7.7%) below2005, primarily reflecting lower sales in automotive and truck markets. The share of sales of joint ventures increased from £67 million to £92 millionas CSL moved into full production and Emitec benefited from higher demand inGermany. The combined sales of subsidiaries and joint ventures were £212 millioncompared with £197 million in 2005 with an underlying increase of £16 million(8.2%). There was a trading loss for the year in subsidiaries of £10 million comparedwith £2 million loss in 2005. This largely related to GKN Sheepbridge Stokes,our UK cylinder liner business, and included £3 million of redundancy andre-organisation costs as well as start-up losses in the recently formed Chinesecylinder liner operation. These were partially offset by profits of £4 millionon property disposals within the segment. Underlying trading profit in both theUK cylinder liner and structural component companies also declined, with theimpact of lower sales levels exacerbated by energy cost increases. Losses at GKN Sheepbridge Stokes remained intractable and in January 2007 theclosure of this business was announced, leading to our complete withdrawal fromcylinder liner manufacture in Europe. It is expected that closure will becompleted by September 2007 and that trading losses and closure costs will totalapproximately £10 million. The Chinese business ended the year close to break even and is expected to moveinto modest profit in 2007. Within joint ventures, trading profit showed a sharp increase from £3 million to£8 million as a consequence of the sales increases noted above. Taking jointventures and subsidiaries together, there was a trading loss of £2 million (2005- profit £1 million). OffHighway Products and markets OffHighway designs and manufactures steel wheels and driveline systems for theglobal agricultural, construction and industrial machinery sectors. During 2006,approximately 55% of its sales were to the agricultural market, 29% to theconstruction equipment market and the balance to the industrial machinerymarket. The wheels operation accounts for over 50% of divisional revenue and hasaround a 30% market share in North America and 50% in Western Europe. In powertake-off (PTO) shafts, which account for around 25% of sales, market shares are29% and 50% in those regions. Major customers include John Deere, Case New Holland and Caterpillar with alarge percentage of sales going to a wide range of component users. Agriculture In Europe (40% of divisional sales), the overall agricultural machinery marketin 2006 was essentially level with 2005, with German demand remaining strong andFrance showing the first signs of recovery. In North America (15% of divisional sales) markets softened somewhat during theyear as farm incomes fell as a consequence of lower government support andsharply higher input costs. Industry forecasts for 2007 are for stable European demand across all productgroups but some further reduction in North America driven by lower demand fortractors and combine harvesters. However, US commodity prices, in particularcorn, are relatively strong and this may support demand. Construction The European construction machinery market remained solid throughout the yearwith no sign of any major changes in the short term. In the US, demand for heavy construction equipment for mining and road buildingwas strong throughout the year. In the light construction market, however,following a good first half, second half demand declined as a result of thereduction in the US house building programme. Looking to 2007, some furtherweakening appears possible in housing related equipment with level demandelsewhere. Industrial Machinery This sector (16% of divisional sales) includes products for the materialhandling and other industries. Demand in 2006 was flat and the outlook for 2007is for little or no change. 2006 Highlights Sales in the year were £331 million compared with £310 million in 2005. Therewas a £2 million reduction from currency translation and a benefit of £25million from 2005 and 2006 acquisitions. The small underlying decrease of £2million (0.6%) mainly reflected the softer agricultural market conditions notedabove. Trading profit of £23 million was £3 million above 2005 with all of theimprovement from acquisitions. The underlying result was £1 million below lastyear reflecting a modest increase in the wheels business on slightly highersales, and a lower result in driveline systems which suffered more from declinein North American demand. Margin in the year increased to 6.9% from 6.5% in 2005. In line with its strategy, the division made a number of acquisitions during theyear. The most significant of these was Rockford which was completed on 2August. Rockford, which is US based, will give greater exposure to the world'sconstruction markets. Other small European acquisitions were Cramer (1 January),and HyteComp (1 June). In November, as part of the strategy to expand our globalfootprint, Liuzhou Wheels in China was acquired. In total, acquisitions in theyear contributed £20 million of sales and are expected to generate revenue ofapproximately £50 million in 2007. Capital expenditure on tangible fixed assets of £10 million (2005 - £10million), was 1.3 times (2005 - 1.3 times) depreciation. Top line growth is expected in 2007 from the full year impact of 2006acquisitions, a number of business wins during the year and opportunitiesprovided by greater exposure to the construction industry. Aerospace Products and markets GKN Aerospace is a global first-tier supplier of airframe and engine structures,components, assemblies and engineering services to aircraft prime contractorsand operates in three main product areas, aerostructures, propulsion systems andspecial products. At the end of 2006, the split of business was approximately50% aerostructures, 30% propulsion systems and 20% special products. Theaftermarket business spans all three and equates to approximately 15% of overallrevenues. As a leader in the design and manufacture of advanced composites, transparenciesand complex metal structures at the component and assembly level, GKN Aerospaceserves all the major airframe and engine OEMs. Products and services areprovided to both fixed wing and rotary wing manufacturers, with some 60% ofsales in the US. Following the acquisition in September of Stellex, whichbrought increased exposure to the civil market, current annualised sales areapproximately 58% to military and 42% to civil customers. The overall aerospace market was buoyant, with sustained strength in both themilitary and civil sectors. Airbus and Boeing delivered in aggregate 832aircraft in 2006, up from 668 in 2005. The civil sector is firmly into anupswing and is likely to experience strong short-term growth. Military demand islargely driven by US defence spending and is likely to remain solid. Good growthalso exists in the business aircraft, light jet and rotorcraft markets. Within these markets, there is continuing growth in demand for lightweightmaterials and advanced composites and complex titanium structures. 2006 Highlights Aerospace sales were £695 million compared with £627 million in 2005. The impactof currency on translation was £4 million negative while acquisitions added £21million. The underlying increase of £51 million was 8.2% above 2005 and arose asa consequence of the overall strong markets and a number of new programmescoming into production. Trading profit of £70 million was £16 million higher than 2005. Excluding thebenefit from acquisitions of £2 million and the negative impact of currency of£1 million, the underlying increase of £15 million was 28.3% above 2005 as aresult of higher sales and further productivity improvements. The aerostructuresbusinesses performed well, helped by strong growth in composite sales, with theengine nacelles business also showing good growth. Transparencies were alsostrong due to high demand for military spares. Margins improved to 10.1% (2005 - 8.6%) in line with the target margin for thebusiness. In September 2006 the division acquired Stellex Aerostructures, a US basedmanufacturer of complex metal structure components. The acquisition increasesour exposure to the civil aircraft market and brings with it significantpositions on the Boeing 787 and 777 as well as the Lockheed Martin F35 (JSF). Itcontributed £21 million to sales in the year. Capital expenditure on tangible assets in the year was £30 million (2005 - £32million) which represented 1.4 times (2005 - 1.5 times) depreciation. Capital expenditure on intangible assets totalled £27 million (2005 - £17million) reflecting the high level of investment in new programmes. In 2006, a number of new and incremental programmes were secured with Boeing,Northrop Grumman, Airbus, Lockheed Martin, Spirit Aerospace, Rolls Royce and theUS Air Force which will support sustained growth. On the A400M GKN Aerospace Cowes shipped the first two development sets of theadvanced technology composite primary wing spars to the wing final assembly lineat Airbus Filton. GKN's turnover on this programme, which has 177 orders fromthe partner nations plus a significant export potential, is £1 million anaircraft. Going forward into 2007 the division continues to pursue a balanced portfolioand a number of new programs are also being viewed as significant growthopportunities. The launch of the A350XWB, the naval UCAS and the CH53X are allexamples of such additional opportunities. Programme expansion is key in securing growth. During 2006, ship set values wereexpanded on a number of key strategic programmes including the Boeing B787 andLockheed Martin F35 (JSF). On the Boeing 787, with help from the Stellex acquisition, the ship set valuehas almost doubled to $1.8 million per aircraft with product participation thatincludes the ice protection system, floor structure assemblies, cabin windows,titanium structures and engine cases. Similarly on the Lockheed Martin F35(JSF), GKN Aerospace now has more than $1.8 million per aircraft derived fromairframe components, engine products and canopy. Strong positioning over a broad range of aircraft and engine programmes providesthe opportunity for solid growth in future. Cautionary Statement This press release contains forward looking statements which are made in goodfaith based on the information available to 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 2005 have been filed with the Registrarof Companies and contained an unqualified audit report. The audited results for2006 were approved by the Board on 26 February 2007 and have been agreed withthe auditors. Page numberGKN Consolidated financial information Consolidated Income Statement for the year ended 31 December 242006 Consolidated Statement of Recognised Income and Expense 25 Consolidated Balance Sheet at 31 December 2006 26 Consolidated Cash Flow Statement for the year ended 31 27December 2006 Note 1 - Segmental analysis 28-30 Notes 2-12 31-43 Consolidated Income StatementFor the year ended 31 December 2006 2006 2005 Restated * Notes £m £m Sales 1 3,634 3,648------------------------------------------------------------------------------------ Trading profit 1 242 229 Restructuring and impairment charges 2 (74) (98) Amortisation of non-operating intangible assets 3 (3) (1) arising on business combinations Profits and losses on sale or closures of businesses 3 5 1 Changes in fair value of derivative financial 3 33 (33) instruments------------------------------------------------------------------------------------Operating profit 1 203 98 Share of post-tax earnings of joint ventures 8 17 10 Interest payable (57) (61) Interest receivable 23 48 Other net financing charges (4) (22)------------------------------------------------------------------------------------Net financing costs 4 (38) (35)------------------------------------------------------------------------------------Profit before taxation 182 73 Taxation 5 (5) (14)------------------------------------------------------------------------------------Profit after taxation for the year 177 59 Profit attributable to minority interests - 4Profit attributable to equity shareholders 177 55------------------------------------------------------------------------------------ 177 59------------------------------------------------------------------------------------All activities in 2006 and 2005 were from continuingoperations Earnings per share - p 6Basic 25.0 7.7Diluted 24.9 7.6 Dividends per share - p 7Interim dividend per share 4.1 4.0Final dividend per share 8.7 8.2 * Components of Operating profit in the comparative results have been reanalysedto conform with 2006 presentation. Consolidated Statement of Recognised Income and ExpenseFor the year ended 31 December 2006 2006 2005 £m £mCurrency variations (124) 77Derivative financial instruments: Transactional hedging 1 - Translational hedging 43 (23)Unrealised loss arising on change in status of equity - (3)accounted investmentsActuarial gains/(losses) on post-employment obligationsincluding tax: Subsidiaries 40 (49) Joint ventures - (1)Deferred tax on non-qualifying assets - 1Amounts arising from the acquisition of minority interest - 4Net (losses)/profits not recognised in the income (40) 6statementProfit for the year 177 59Total recognised income for the year 137 65Adjustment in respect of the adoption of IAS 39 - 17 137 82 Total recognised income for the year attributable to: Equity shareholders 138 58 Minority shareholders (1) 7 137 65 Consolidated Balance Sheet At 31 December 2006 2006 2005 Restated* Notes £m £m Assets Non-current assets Intangible assets - goodwill 245 241 - other 111 54 Property, plant and equipment 1,354 1,364 Investments in joint ventures 8 83 81 Other receivables and investments including loans to 24 21 joint ventures Deferred tax assets 9 114 172 ------------------------------------------------------------------------------------ 1,931 1,933 ------------------------------------------------------------------------------------ Current assets Inventories 470 467 Trade and other receivables 520 566 Derivative financial instruments 32 12 Cash and cash equivalents 342 724 ------------------------------------------------------------------------------------ 1,364 1,769 ------------------------------------------------------------------------------------ Assets held for sale - 38 ------------------------------------------------------------------------------------ Total assets 3,295 3,740 ------------------------------------------------------------------------------------ Liabilities Current liabilities Borrowings (39) (47) Derivative financial instruments (11) (34) Trade and other payables (743) (795) Current income tax liabilities (93) (109) Provisions (66) (57) ------------------------------------------------------------------------------------ (952) (1,042) ------------------------------------------------------------------------------------ Liabilities associated with assets held for sale - (16) ------------------------------------------------------------------------------------ (952) (1,058) Non-current liabilities Borrowings (729) (734) Deferred tax liabilities 9 (63) (60) Trade and other payables (29) (24) Provisions (53) (78) Post-employment obligations 12 (561) (885) ------------------------------------------------------------------------------------ (1,435) (1,781) ------------------------------------------------------------------------------------ Total liabilities (2,387) (2,839) ------------------------------------------------------------------------------------ Net assets 908 901 ------------------------------------------------------------------------------------ Shareholders' equity Ordinary share capital 371 370 Share premium account 25 23 Retained earnings 589 493 Other reserves (93) (11) ------------------------------------------------------------------------------------ Total shareholders' equity 892 875 Minority interest - equity 16 26 ------------------------------------------------------------------------------------ Total equity 908 901 ------------------------------------------------------------------------------------ * Restated to reflect the 2006 presentation of Treasury shares within equity Consolidated Cash Flow StatementFor the year ended 31 December 2006 2006 2005 Notes £m £mCash flows from operating activitiesCash generated from operations 11 117 308Interest received 25 48Interest paid (58) (62)Tax paid (31) (35)Dividends received from joint ventures 7 6 60 265Cash flows from investing activitiesPurchase of property, plant and equipment and (230) (229)intangible assetsProceeds from sale of property, plant and equipment 13 9Acquisition of subsidiaries (net of cash acquired) (126) (51)Proceeds from sale of subsidiaries and businesses 13 1(net of cash disposed)Investment loans and capital contributions 1 2 (329) (268)Cash flows from financing activitiesNet proceeds from issue of ordinary share capital 3 10Purchase of treasury shares (40) (30)Net proceeds from borrowing facilities 48 8Finance lease payments (1) (3)Repayment of borrowings (14) (29)Dividends paid to shareholders 7 (88) (86)Dividends paid to minority interests (1) - (93) (130) Currency variations on cash and cash equivalents (7) 3Movement in cash and cash equivalents (369) (130)Cash and cash equivalents at 1 January 697 827Cash and cash equivalents at 31 December 11 328 697 All cash flows arise from continuing operations. Cash inflows from governmentcapital grants of £3 million (2005: £4 million) have been offset againstpurchases of property, plant and equipment and intangible assets. For the purposes of presenting the cash flow statement the components of cash andcash equivalents are offset. A reconciliation between the cash flow statement andbalance sheet presentation is shown in note 11. Notes to the Press Release For the year ended 31 December 2006 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 Powder Other Corporate & For the year ended 31 Notes Driveline Metallurgy Automotive OffHighway Aerospace Unallocated Total December 2006 £m £m £m £m £m £m £m Sales 1,906 582 120 331 695 - 3,634 ---------------------------------------------------------------------------------------------------------------- EBITDA 218 60 (5) 31 95 (12) 387 Depreciation and impairment (75) (28) (5) (8) (21) - (137) charges Amortisation of intangible (3) (1) - - (4) - (8) assets ---------------------------------------------------------------------------------------------------------------- Trading profit/(loss) 140 31 (10) 23 70 (12) 242 Restructuring 2 (37) (24) - - - (2) (63) Other impairments 2 (11) - - - - - (11) Amortisation of business 3 (1) - - (1) (1) - (3) combination non-operating intangibles Profits and losses on sale or 3 5 - - - - - 5 closures of businesses Changes in fair value of 3 11 (1) - 2 21 - 33 derivative financial instruments ---------------------------------------------------------------------------------------------------------------- Operating profit/(loss) 107 6 (10) 24 90 (14) 203 ---------------------------------------------------------------------------------------------------------------- Share of post-tax earnings of 12 - 5 - - - 17 joint ventures ---------------------------------------------------------------------------------------------------------------- Segment assets Goodwill 62 24 - 35 124 - 245 Investments in joint ventures 61 - 21 1 - - 83 Derivative financial 7 - - 1 24 - 32 instruments Operating assets 1,180 496 59 206 532 6 2,479 Other unallocated assets - Cash and cash - - - - - 342 342 equivalents - Deferred tax assets - - - - - 114 114 ---------------------------------------------------------------------------------------------------------------- Total assets 1,310 520 80 243 680 462 3,295 ---------------------------------------------------------------------------------------------------------------- Segment liabilities Derivative financial (1) - - - (8) (2) (11) instruments Operating liabilities - - Post-employment (342) (33) (25) (50) (102) (9) (561) obligations - Other (453) (115) (35) (84) (160) (44) (891) Other unallocated liabilities - Borrowings - - - - - (768) (768) - Current tax liabilities - - - - - (93) (93) - Deferred tax liabilities - - - - - (63) (63) ---------------------------------------------------------------------------------------------------------------- Total liabilities (796) (148) (60) (134) (270) (979) (2,387) ---------------------------------------------------------------------------------------------------------------- Other segment items Capital expenditure (including acquisitions) - Property, plant and 98 49 7 10 30 - 194 equipment - Intangible assets 3 1 - 2 27 - 33 Other non-cash expenses 2 1 - - 1 1 5 (share-based payments) All business segments shown above are continuing. EBITDA is earnings before interest, tax, depreciation and amortisation. 1 Segmental analysis (continued) Primary reporting format - business segments Automotive Powder Other Corporate & For the year ended Note Driveline Metallurgy Automotive OffHighway Aerospace Unallocated Total 31 December 2005 £m £m £m £m £m £m £m Sales 1,993 588 130 310 627 - 3,648 ---------------------------------------------------------------------------------------------------------------- EBITDA 237 40 5 28 80 (10) 380 Depreciation and (79) (27) (7) (8) (21) - (142) impairment charges Amortisation of (3) (1) - - (5) - (9) intangible assets ---------------------------------------------------------------------------------------------------------------- Trading profit 155 12 (2) 20 54 (10) 229 Restructuring 2 (46) (28) - (2) - (1) (77) Other impairments 2 (11) - (10) - - - (21) Amortisation of 3 (1) - - - - - (1) business combination non-operating intangibles Profits and losses 3 - - - - 1 - 1 on sale or closures of businesses Changes in fair 3 (22) 1 - (1) (11) - (33) value of derivative financial instruments ---------------------------------------------------------------------------------------------------------------- Operating profit/ 75 (15) (12) 17 44 (11) 98 (loss) ---------------------------------------------------------------------------------------------------------------- Share of post-tax 9 - 1 - - - 10 earnings of joint ventures ---------------------------------------------------------------------------------------------------------------- Segment assets Goodwill 79 27 - 25 110 - 241 Investments in joint 64 - 16 1 - - 81 ventures Derivative financial 4 1 - 1 6 - 12 instruments Operating assets 1,287 508 79 169 459 8 2,510 Other unallocated assets - Cash and cash - - - - - 724 724 equivalents - Deferred tax - - - - - 172 172 assets ---------------------------------------------------------------------------------------------------------------- Total assets 1,434 536 95 196 575 904 3,740 ---------------------------------------------------------------------------------------------------------------- Segment liabilities Derivative financial (10) - - (2) (12) (10) (34) instruments Operating liabilities - Post-employment (397) (70) (102) (75) (226) (15) (885) obligations - Other (481) (107) (41) (68) (146) (127) (970) Other unallocated liabilities - Borrowings - - - - - (781) (781) - Current tax - - - - - (109) (109) liabilities - Deferred tax - - - - - (60) (60) liabilities ---------------------------------------------------------------------------------------------------------------- Total liabilities (888) (177) (143) (145) (384) (1,102) (2,839) ---------------------------------------------------------------------------------------------------------------- Other segment items Capital expenditure (including acquisitions) - Property, plant 115 43 14 10 32 - 214 and equipment - Intangible assets 5 - - 1 17 - 23 Other non-cash - - - - - 1 1 expenses (share-based payments) All business segments shown above are continuing. Intra-group sales, which are priced on an 'arms length' basis between segment and regions are not significant. The analyses of operating profit by business includes an allocation, based on their nature, of costs incurred centrally in the United Kingdom, United States of America and Germany. Unallocated costs represent corporate expenses. Segment assets comprise all non-current and current assets as per the Balance Sheet but exclude deferred tax assets and cash and cash equivalents. Segment liabilities include trade and other payables, provisions and post-employment obligations but exclude borrowings and taxation liabilities. Cash and cash equivalents and borrowings are not allocated to specific segments as these resources are managed centrally and no business in any segment has sufficient autonomy to manage these resources. Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected to be used for more than one year. Secondary reporting format - by geographical region Sales Segment assets Capital expenditure 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m Continuing operations Europe 1,664 1,622 1,307 1,278 112 115 Americas 1,512 1,479 1,153 1,123 83 81 Rest of the World 458 547 373 435 32 41 Corporate and Unallocated - - 462 904 - - 3,634 3,648 3,295 3,740 227 237 The sales analysis in the above table is based on the location of the customer. 2 Restructuring and impairment charges 2006 2005 Other Other Restructuring Impairments Total Restructuring Impairments Total £m £m £m £m £m £m Restructuring and impairment charges Goodwill - (11) (11) - (11) (11) impairment Tangible fixed (1) - (1) (35) (10) (45) asset impairments/ reversals Other asset (1) - (1) (1) - (1) write-downs (2) (11) (13) (36) (21) (57) Redundancy costs (35) - (35) (28) - (28) including post employment curtailments Other (26) - (26) (13) - (13) reorganisation costs (63) (11) (74) (77) (21) (98) Restructuring During 2006 the Group continued to deploy its strategic reorganisation 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 £63 million (2005: £77 million) which comprises asset impairment charges of £2 million (2005: £36 million), redundancy costs, including pension past service charges and curtailment credits, of £35 million (2005: £28 million net of post-employment curtailments, £5 million) and other reorganisation costs of £26 million (2005: £13 million). Pension past service charges and curtailment credits amount to a £3 million charge in 2006. An analysis by segment and description of the charges is set out below: 2006 2005 Asset impairments Reorganisation / reversals Redundancy costs Total Total £m £m £m £m £m Driveline 3 21 13 37 46 Powder Metallurgy (1) 14 11 24 28 OffHighway - - - - 2 Corporate - - 2 2 1 2 35 26 63 77 Restructuring charges in Driveline in 2006 arise primarily from the continuation of the plant closures announced in North America and Western Europe in 2005, continued reductions in the level of fixed cost headcount primarily in European plants and initial charges recognised on the announced cessation of the Driveshaft operations in a Driveline European plant. 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 in respect of 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. Asset impairment charges are in respect of the irrecoverable value of plant and machinery not transferable to other facilities or recoverable from disposal; write-downs of property, surplus to requirements as a consequence of the restructuring, to estimated realisable value and the impairment of dedicated consumable inventories that will not be utilised by the operation in the period up to closure and or cessation of operations. Powder Metallurgy charges arise as a consequence of the Board approved closure of five plants. Charges comprise the cost of redundancies, contractual severance payments and other employee related obligations where irrevocable external announcements had been made in the year. Reorganisation costs comprise surplus property costs, incremental transition team costs and equipment relocation and maintenance charges attributable to transfers to continuing facilities. As a consequence of detailed restructuring actions taken in 2006 asset impairments recognised in 2005 have been reversed as alternative productive use has been found for certain plant and equipment not originally envisaged or anticipated. Charges in respect of the Corporate operations primarily represents onerous lease and other contract provisions recognised resulting from the announced closure of the Group's current London office and centralisation of headquarters operations in one principal facility. The cash outflow in 2006 in respect of the Group's strategic reorganisation programme amounts to £57 million (2005: £36 million). 2005 restructuring charges comprise asset impairments (£36 million); redundancy charges (£28 million) and reorganisation costs (£13 million). The analysis of 2005 restructuring by segment is set out in note 1. Other impairments In addition to impairment charges borne as a consequence of strategic reorganisation activities, an £11 million (2005: £11 million) impairment charge has arisen in 2006 relating to the write down of goodwill at a Driveline business where as a consequence of current and future trading performance and projections specific to a customer relationship sufficient doubt exists over the recoverability. The impairment review was carried out with reference to both value in use and fair value recoverabilities. The remaining £10 million impairment in 2005 related to property, plant and equipment in the UK cylinder liner business within the Other Automotive segment where, during 2005, a decision was made to transfer certain production to a new Chinese facility. This fact and continued declining profitability led to the significant impairment charge. 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. 2006 2005 £m £m Brands/trademarks - - Intellectual property rights 1 1 Customer contracts and relationships 1 - Proprietary technology rights and know-how 1 - 3 1 Profits and losses on sale or closures of businesses 2006 2005 £m £m Fujiwa China 5 - Other - 1 5 1 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: £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 to disposal Fujiwa contributed £5 million (2005: £34 million) to group sales, £1 million (2005: £4 million) to group trading profit and £nil million (2005: £5 million) to cash generated from operations. The Other profit recognised in 2005 reflects the cash receipt in respect of a contingent earnout arrangement on the 2004 disposal of an Aerospace business. Changes in the 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 2006 the Group used transactional hedge accounting in a limited number of instances. The Group did not attempt to achieve transactional hedge accounting in 2005. 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 2006 2005 £m £m Interest payable Short-term bank and other borrowings (3) (6) Other loans repayable within five years (5) (5) Loans repayable after five years (48) (49) Finance leases (1) (1) (57) (61) Interest receivable Short-term investments, loans and deposits 23 48 23 48 Other net financing charges Expected return on pension scheme assets 136 118 Interest on post-employment obligations (140) (140) (4) (22) Net financing costs (38) (35) Included above in interest receivable in 2005 are amounts earned in respect of an interest rate swaption of £1 million. This arrangement ended in 2005. 5 Taxation 2006 2005 Analysis of charge in year £m £m Current tax Current year 38 39 Utilisation of previously unrecognised tax (2) - losses and other assets Adjustments in respect of prior years (3) 6 Net movement on provisions for uncertain tax (15) (29) positions 18 16 Deferred tax Origination and reversal of temporary 9 6 differences Tax on change in fair value of derivative 2 (6) financial instruments Utilisation of previously unrecognised tax (7) - losses and other assets Other changes in unrecognised deferred tax (21) 10 assets Changes in tax rates - - Adjustments in respect of prior years 4 (12) (13) (2) Total tax charge for the year 5 14 Overseas tax included above 15 28 Tax in respect of restructuring and impairment charges included in total charge for the year Current tax (6) (8) Deferred tax (8) (12) (14) (20) 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 pages 8 and 9. 2006 2005 Tax on items included in equity £m £m Deferred tax on post-employment obligations 67 6 Deferred tax on non-qualifying assets - (1) 2006 2005 Tax reconciliation £m % £m % Profit before tax 182 73 Less share of post-tax earnings of joint (17) (10) ventures Profit before tax excluding joint ventures 165 63 Tax calculated at 30% standard UK corporate tax 49 30% 19 30% rate Differences between UK and overseas corporate tax 7 4% 2 3% rates Non-deductible and non-taxable items (1) (1%) 3 5% Utilisation of previously unrecognised tax losses (9) (5%) - - and other assets Other changes in unrecognised deferred tax assets (21) (13%) 10 16% Changes in tax rates - - - - Deferred tax (credit)/charge in respect of (6) (4%) 15 24% post-employment obligations Current year tax charge on ordinary activities 19 11% 49 78% Net movement on provision for uncertain tax (15) (9%) (29) (46%) positions Adjustments in respect of prior years 1 1% (6) (10%) Total tax charge for the year 5 3% 14 22% Earnings per share 6 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: 2006 2005 Earnings Weighted Earnings Earnings Weighted Earnings average per share average per number number share of shares of shares £m m p £m m p Total Company Basic eps: Profit attributable to equity 177 708.8 25.0 55 718.1 7.7 shareholders Dilutive securities: Dilutive potential ordinary - 2.1 (0.1) - 5.1 (0.1) shares Diluted eps 177 710.9 24.9 55 723.2 7.6 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: 2006 2005 (Restated) £m p £m p Profit attributable to equity 177 25.0 55 7.7 shareholders Charges / (credits) included in operating profit: Restructuring and 74 10.5 98 13.6 impairment charges Amortisation of non-operating intangibles on 3 0.4 1 0.1 business combinations Profits and losses on sale or (5) (0.7) (1) (0.1) closures of businesses Changes in fair value of derivative (33) (4.7) 33 4.6 financial instruments Taxation on charges/(credits) included in operating (12) (1.7) (26) (3.6) profit (note 5) Adjusted earnings attributable to 204 28.8 160 22.3 equity shareholders (£m) Diluted adjusted earnings per share attributable to 28.7 22.1 equity shareholders 7 Dividends 2006 2005 £m £m Equity dividends paid in the year Previous year final : 8.2p (2005: 8.0p) per share 59 58 Current year interim : 4.1p (2005: 4.0p) per share 29 28 In addition, the Directors are proposing a final dividend in respect of the financial year ended 31 December 2006 of 8.7p per share, £61 million. It will be paid on 9 May 2007 to shareholders who are on the register of members at close of business on 20 April 2007. 8 Joint ventures 2006 2005 Group share of results of joint ventures £m £m Sales 208 175 Operating costs and other income (187) (161) Net financing costs (1) (1) Profit before taxation 20 13 Taxation (3) (3) Share of post-tax earnings 17 10 The segmental analysis of the Group's share of joint ventures' sales and trading profit is set out below: 2006 2005 Trading Trading Sales Profit Sales Profit £m £m £m £m Driveline 113 13 104 11 Other Automotive 92 8 67 3 OffHighway 3 - 4 - 208 21 175 14 2006 2005 £m £m At 1 January 81 94 Share of profits retained 10 4 Change in status - (24) Actuarial loss on post-employment obligations, - (1) including deferred tax Currency variations (8) 8 At 31 December 83 81 Group share of net assets Non-current assets 60 67 Current assets 81 80 Current liabilities (42) (50) Non-current liabilities (16) (16) 83 81 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. 2006 2005 Amounts recognised on the balance £m £m sheet: Deferred tax assets 114 172 Deferred tax liabilities (63) (60) 51 112 Deferred tax assets and liabilities are only offset where there is an enforceable right of offset and there is an intention to settle the balances net. All of the deferred tax assets were available for offset against deferred tax liabilities and hence the net deferred tax asset at 31 December 2006 was £51 million (2005: £112 million). The movement on deferred tax is as shown below: 2006 2005 £m £m At 1 January 112 122 Adjustment in respect of adoption - (3) of IAS 39 Subsidiaries acquired and sold (7) (4) Properties sold - - (Charge)/credit for the year: Income Statement 14 2 Equity (67) (5) Currency variations (1) - At 31 December 51 112 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 2006 163 15 28 206 Credited to income statement 6 7 - 13 (Charged) to equity (67) - - (67) Subsidiaries acquired - - - - Currency variations - (2) - (2) At 31 December 2006 102 20 28 150 Accelerated tax depreciation Other Total Deferred tax liabilities £m £m £m At 1 January 2006 (86) (8) (94) (Charged) / credited to income (2) 3 1 statement Subsidiaries acquired (7) - (7) Currency variations 1 - 1 At 31 December 2006 (94) (5) (99) 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 is shown below. The tax value of the assets has been calculated using tax rates enacted or substantially enacted at the balance sheet date. 2006 2005 Tax value Gross Tax value Gross £m £m Expiry period £m £m Expiry period Tax losses - with 160 451 2019 to 2026 164 492 2019 to 2025 expiry - national Tax losses - with 48 877 2007 to 2026 51 954 2006 to 2025 expiry - local Tax losses - without 112 355 98 293 expiry Other temporary 50 163 59 172 differences Unrecognised deferred 370 1,846 372 1,911 tax assets Included above are tax losses of £732 million with a tax value of £111 million (2005: £820 million with a tax value of £127 million) that are so severely restricted for future use that management believes they are very unlikely to be utilised. Deferred tax assets totalling £82 million (2005: £123 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 (2005: £15 million) would be payable. 10 Acquisitions The Group completed 5 acquisition in 2006, all of which were accounted for using the purchase accounting method. The two primary acquisitions were Stellex Aerostructures, a specialist in the manufacture of complex metal structural components for the aerospace industry and Rockford Powertrain, a producer of high speed driveshafts operating primarily in the construction and mining industry. Other acquisitions were the Liuzhou Wheel Rim factory, Cramer Kupplung GmbH and Hytecomp AB, all of which are OffHighway businesses. The table below sets out details of the fair value of assets acquired and resulting goodwill. Stellex Rockford Other Total £m £m £m £m Intangible fixed assets 26 18 - 44 Property, plant and equipment 21 2 4 27 Inventories 19 9 3 31 Trade and other receivables 7 5 2 14 Trade and other payables (6) (6) - (12) Current and deferred tax (2) (6) - (8) Provisions and contingencies - (4) - (4) Borrowings - - (3) (3) Cash and cash equivalents 1 1 - 2 Fair value of net assets acquired 66 19 6 91 Fair value of consideration: - cash & expenses 93 28 7 128 - deferred consideration - 1 1 2 Goodwill arising on acquisition 27 10 2 39 The significant acquisitions contributed £36 million to Group sales and £5 million to Group Trading Profit with £21 million and £2 million arising in Aerospace and £15 million and £3 million in OffHighway. The contributions to 2006 results includes the £1 million unwind of fair value uplift recognised on acquired inventory at Stellex and Rockford. Both primary acquisitions were earnings accretive in the year, and generated cashflow from operations after capital expenditure of £2 million. The table below sets out the non-operating intangible assets recognised on current year acquisitions: Stellex Rockford £m £m Brands/trademarks - 3 Proprietary technological know-how 4 3 Customer contracts/relationships 22 12 26 18 11 Cash flow reconciliations 2006 2005 Restated Cash generated from operations £m £m Operating profit 203 98 Adjustments for: Profits and losses on sale or closure of (5) (1) businesses Amortisation of non-operating intangible 3 1 assets arising on business combinations Changes in fair value of derivative (33) 33 financial instruments Impairment of fixed assets 1 50 Impairment of goodwill 11 11 Depreciation and amortisation 145 146 Amortisation of capital grants (3) (2) Net profits on sale of fixed assets (3) (1) Charge for share-based payments 5 1 Movement in post-employment obligations (204) (43) Changes in working capital and provisions (3) 15 117 308 Movement in net debt 2006 2005 £m £m Net movement in cash and cash equivalents (369) (130) Net movement in borrowings (36) 21 Currency variations on borrowings 34 (23) Finance leases 1 2 Subsidiaries acquired and sold 9 - Movement in year (361) (130) Net (debt)/funds at beginning of year (65) 65 Net debt at end of year (426) (65) Reconciliation of cash and cash equivalents 2006 2005 £m £m Cash and cash equivalents per cash flow at 328 697 31 December Add: bank overdrafts included within "current liabilities 14 30 - borrowings" Less: cash and cash equivalents within - (3) "assets held for sale" Cash and cash equivalents per balance sheet 342 724 at 31 December 12 Post-employment obligations 2006 2005 Post-employment obligations as at the year end comprise: £m £m Pensions - funded (217) (514) - unfunded (268) (278) Medical - funded (28) (33) - unfunded (48) (60) (561) (885) 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. (a) Defined benefit schemes - measurement and assumptions Independent actuarial valuations of all defined benefit scheme assets and liabilities were carried out at 31 December 2006. 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 % % % % 2006 Rate of increase in pensionable salaries 4.1 3.5 2.50 2.0 Rate of increase in payment and deferred 3.2 2.0 1.75 n/a pensions 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/ 10.0/5.0 n/a n/a 4.5 2005 Rate of increase in pensionable salaries 4.3 3.5 2.5 2.0 Rate of increase in payment and deferred pensions 2.9 2.0 1.5 n/a Discount rate 4.75 5.50 4.25 2.25 Inflation assumption 2.8 2.5 1.5 1.0 Rate of increases in medical costs: initial/long term 9.5/ 10.0/5.0 n/a n/a 4.3 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. Mortality assumptions are based on PA92 (Year of Birth) tables with a +3 year age adjustment to reflect actual scheme experience. At the recent review, the rate of improvement in longevity was strengthened to a point beyond that of short cohort. The key current year mortality assumptions for the scheme are that a male aged 65 lives for a further 18.5 years, whilst a male aged 40 is expected to live a further 20 years after retiring at 65. The impact of this change in assumptions has increased the scheme deficit by £38 million. Overseas In the USA, RP-2000 tables scaled to 2006 continued to be used 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 18.1 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 18.1 years once attaining 65 years, with the German equivalent assumption being 17.7 years. These assumptions are based solely on the prescribed tables and do not reflect actual GKN experience. Assumption sensitivity analysis The impact of a one percentage point movement in the primary assumptions on the key defined benefit net obligations as at 31 December 2006 is set out below: UK Americas Europe ROW £m £m £m £m Discount rate +1% 282 36 35 2 Discount rate -1% (382) (45) (44) (2) Rate of inflation +1% 276 - 26 - Rate of inflation -1% (280) - (27) - Rate of increase in medical 2 9 - - costs +1% Rate of increase in medical (2) (7) - - costs -1% A one percentage point increase in the assumption on healthcare benefits would increase the total service and interest cost by £1 million (2005: £1 million) and the liability by £11 million (2005: £13 million). A one percent decrease in the assumption on healthcare benefits would reduce the total service and interest cost by £nil million (2005: £1 million) and the liability by £9 million (2005: £10 million). (b) Defined benefit schemes - reporting The amounts recognised in the Income Statement are: 2006 2005 £m £m Trading Profit Redundancy Restructuring Employee and other and benefit employment impairment Included within operating profit expense amounts charges Total Total Current service cost (38) - - (38) (33) Past service cost (1) (1) - (2) (4) Settlement/curtailments 1 (1) (3) (3) 15 (38) (2) (3) (43) (22) Included within net financing costs Expected return on pension scheme 136 118 assets Interest on post-employment (140) (140) obligations (4) (22) The past service cost of £2 million included in trading profit (2005: £2 million) arises primarily from early retirements in the UK together with the equalisation of benefits at a Driveline facility in Germany. The settlement/curtailment credit of £1 million arises from further structural change to retiree medical benefit arrangements in the United States, whilst the charge of £4 million largely represents the cost of downsizing two UK businesses in the Automotive portfolio. The prior year £15 million settlement/curtailment credit arose from the closure of a Driveline facility in Europe (£5 million), the exit from a multi-employer defined benefit scheme in Japan (£7 million) and the structural changes to retiree medical benefit arrangements in the United States of America (£3 million). The amounts recognised in respect of funded obligations in the balance sheet are: 31 December 2006 31 December UK Americas Europe ROW Total 2005 £m £m £m £m £m £m Present value of funded (2,361) (265) (15) (19) (2,660) (2,666) obligations Fair value of plan assets 2,187 196 19 13 2,415 2,119 Net obligation recognised in the (174) (69) 4 (6) (245) (547) balance sheet Cumulative actuarial gains and losses recognised in equity are as follows: 2006 2005 £m £m At 1 January (90) (46) Net actuarial gains/(losses) in year 107 (44) At 31 December 17 (90) The defined benefit obligation is analysed between funded and unfunded schemes as follows: 2006 2005 £m £m Funded (2,660) (2,666) Unfunded (316) (338) (2,976) (3,004) 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 2006 Equities 7.5 1,093 8.5 134 - - 7.1 7 Bonds 4.9 687 5.0 53 - - 1.9 4 Property 6.8 109 - - - - - - Cash/short-term 5.1 265 3.8 9 - - - - mandate Other assets 5.1 33 - - 5.0 19 1.3 2 2,187 196 19 13 At 31 December 2005 Equities 7.5 1,076 8.5 118 - - 5.9 6 Bonds 4.4 607 5.0 47 - - 2.5 4 Property 6.7 98 - - - - - - Cash/short-term 4.5 98 4.2 5 - - - - mandate Other assets 4.7 36 - - 4.7 20 1.0 4 1,915 170 20 14 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 £185 million (2005: £307 million). (c) Defined contribution schemes The Group operates a number of small defined contribution schemes outside the United Kingdom. The charge to Income Statement in the year was £9 million (2005: £6 million). This information is provided by RNS The company news service from the London Stock Exchange

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