Final Results

28th Feb 2006 07:04

GKN PLC28 February 2006 GKN plc 2005 Preliminary Results Announcement ----------------- As reported As reported excluding --------------------- under IFRS items in note (1) below ------- ------- ------- ------- ------- ------- 2005 2004 Change 2005 2004 Change £m £m £m £m £m --------------------- ------- ------- ------- ------- ------- -------Continuing operations----------------------- Sales 3,648 3,481 167 3,648 3,481 5% Trading profit (1) 228 214 14 228 214 7% Operating profit/(loss) 98 (24) 122 228 214 7% Share of joint ventures 10 16 (6) 10 16 (38)% (post-tax) Net financing costs (2) (35) (75) 40 (35) (75) n/a Profit/(loss) before tax 73 (83) 156 203 155 31% (2) Profit/(loss) after tax 59 (115) 174 163 110 48% (2) Earnings per share - p 7.7 (16.1) 23.8 22.1 14.6 51% -------------------- ------- ------- ------- ------- ------- ------- -------------------- ------- ------- ------- ------- ------- -------Total Group------------- Profit after tax 59 772 (713) 163 172 (5)% Earnings per share - p 7.7 105.0 (97.3) 22.1 23.1 (4)% -------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- 2005 2004 Change p p % ------- ------- ------- Dividend---------- Proposed full year dividend per share 12.2 11.9 2.5 ---- -------------------- ------- ------- -------Notes(1) Figures exclude the impact of restructuring and impairment charges,profits on the sale of businesses and changes in the fair value of derivativefinancial instruments.(2) Comparison with 2004 is made difficult because of the treatment ofAgustaWestland as a discontinued activity following its disposal at the end ofNovember 2004, with a consequent benefit to the net financing costs ofcontinuing operations in 2005. Business highlights • Sales of continuing businesses up 5%; trading profit up 7% • Aerospace delivers 10% increase in sales, 42% increase in trading profit • Automotive slightly down as cost pressures offset acquisition benefits o Robust performance from Drivelineo Powder Metallurgy makes progress • OffHighway increases sales by 8% and trading profit by 11% • First major breakthrough in CVJ technology for 70 years • Strong balance sheet and benefits of restructuring provide a platform for growth Kevin Smith, Chief Executive of GKN plc, commented: "During 2005 we made rapid progress in the delivery of those strategic actionswhich are building a robust platform for GKN's future growth. "The execution of our Group restructuring programme, which is increasing ourpresence in high growth low cost economies, reached a peak of activity in 2005and will be very close to completion by the end of 2006. The performancebenefits of this programme will be considerable. "For GKN, 2005 has been characterised by a robust performance from our Drivelinebusiness, a solid recovery by Powder Metallurgy and continued strong resultsfrom both our OffHighway and Aerospace business. "Across all our businesses we launched important new products, some of whichrepresent a considerable breakthrough in product and process technology. All ofthem will help fuel GKN's future growth. "We are keen to normalise the funding position on our UK pension scheme. We havedecided therefore to make an immediate contribution of £200 million into thefund. This payment will significantly reduce both the current deficit and futureannual contributions to the scheme. "Overall the Group's balance sheet remains strong and well capable of supportingour growth ambitions". 2006 Outlook There is a broadly stable outlook for major Automotive markets whilst Aerospacemarkets look set to remain strong. In Automotive, industry forecasts for North American and Western Europeanmarkets are for little change in production volumes, although there remains somerisk of disruption to the former following recent supplier insolvencies.However, developing markets, especially in Asia Pacific, are expected to showcontinuing strong growth. Prices for steel and other automotive raw materials appear to have stabilisedalthough energy costs are still showing some increase. With its presence in emerging markets and strategic restructuring programmenearing completion, Driveline should have another solid year. Powder Metallurgyexpects to show further recovery and growth. Results for our other smallerautomotive businesses will be impacted by redundancy costs. OffHighway's agricultural markets softened slightly during 2005 but are expectedto remain around current levels throughout 2006, with continuing strong demandin construction markets. We expect our business to continue to make goodprogress. Aerospace markets will remain strong and we expect to continue to improveperformance albeit at a lower rate of growth than the exceptional rate seen in2005.Interest costs on borrowings will rise in 2006 as increases in US interest rateswill impact foreign currency borrowings by around £9 million. Overall we expect to continue the progress seen last year into 2006, with thefurther benefits of restructuring together with the strength of our order bookaccelerating growth from 2007 onwards. Further Enquiries GKN Corporate CommunicationsTel:+44 (0)20 7463 2354 The full text of the business review which will appear in the annual report andaccounts together with financial statements and selected notes is attached tothis press release which may be downloaded from www.gkn.com. 2005 Business Review Group Activities GKN is a global engineering business serving the automotive, off-highway andaerospace markets. Automotive activities comprise GKN Driveline, Powder Metallurgy and OtherAutomotive companies which supply a variety of components, largely to the globalcar and light vehicle markets. OffHighway designs and manufactures steel wheels and driveline systems for theglobal agricultural, construction and industrial machinery markets. Aerospace activities are concentrated on structural components, propulsionsystems and special components for both military and civil aerospace markets. There are operations in over thirty countries with 36,500 employees insubsidiary companies and a further 3,400 in joint ventures. A detailed review of these activities is set out below. Strategy and business objectives GKN is committed to providing long-term shareholder value by supplyingoutstanding products and services to produce growth in sales and sustainedprofitability. We aim to achieve this from: • Market leadership in our business segments through; > advanced technology, first class engineering capability and costleadership,> exceptional customer service,> global presence, and> world class manufacturing. • Focused acquisitions which meet strict rate of return criteria and add to our technology, global presence or customer base. International Financial Reporting Standards Results for the year have been reported for the first time under InternationalFinancial Reporting Standards (IFRS) as endorsed by the European Union.Comparative figures for 2004 have been restated accordingly but have not beenaudited. Reconciliations of key figures for 2004 between UK GAAP (the previousbasis of reporting) and IFRS are shown at note 8 to the financial statements. In this transitional year it is worth noting that one of the key features ofIFRS is the requirement for certain, previously unrecognised, financial assetsand liabilities to be recognised in the balance sheet at their fair value at thebalance sheet date. The change in value from one balance sheet date to the nextis reflected in the income statement unless hedge accounting is applied. Suchmovements (which have no effect on cash flow), together with significant itemssuch as major restructuring costs, asset impairments and profits on sale ofbusinesses, have been separately disclosed in the income statement as componentsof operating profit. Other features of IFRS which affect the interpretation of performance includethe reporting of the post-tax results of joint ventures as part of the Group'spre-tax profit, the exclusion of sales of joint ventures and discontinuedbusinesses from Group sales and the analysis of post-employment costs betweenoperating and finance costs. Post-employment obligations and related deferredtax assets are also fully recognised on the balance sheet. Review of Operations In this review, sales are those of continuing operations and, in addition tostatutory measures of profit, we have made reference to trading profit, profitbefore tax and earnings excluding the impact of restructuring and impairmentcharges, profits on sale of businesses and changes in the fair value ofderivative financial instruments noted above, since we believe they show moreclearly the underlying trend in performance. Where appropriate, reference is also made to results excluding the impact ofboth 2004 and 2005 acquisitions and divestments as well as the impact ofcurrency translation on the results of overseas operations. Group performance Sales of subsidiaries £3,648 million (2004 - £3,481 million)Sales of continuing subsidiaries were £3,648 million compared with £3,481million in 2004. Excluding the impact of currency translation, acquisitions anddivestments the increase was £67 million (2%). In Automotive businesses, sales of £2,711 million compared with £2,625 million ayear earlier, largely reflecting the relatively stable market conditions inEurope and North America together with some benefit from currency and changes instatus from joint venture to subsidiary OffHighway sales improved to £310 million from £287 million in 2004. Excludingdivestments made in 2004, the improvement was £38 million (14%) as a result ofmarket share gains in agricultural and construction machinery markets and pricechanges arising from raw material cost increases. Aerospace sales showed solid growth as a result of sustained military demand, animprovement in civil aircraft production and the start of some new programmesand were £627 million compared with £569 million in 2004. Trading profit (operating profit of subsidiaries before changes in the fairvalue of derivative financial instruments, restructuring and impairment chargesand profits on sale of businesses) £228 million (2004 - £214 million) Group trading profit was £228 million compared with £214 million in 2004, anincrease of £14 million (6.5%). The currency impact on the translation ofoverseas profits was small at £5 million positive. Raw material costs weresignificantly higher than in 2004 with a gross increase of approximately £54million and a net impact of some £28 million after some recovery from customers.There was a net benefit of £6 million from 2004 and 2005 acquisitions anddivestments. The charge to trading profit for depreciation, amortisation andfixed asset impairments fell by £19 million. Automotive companies' trading profit totalled £164 million compared with £169million in 2004 with the impact of raw material and energy cost increases beingsomewhat offset by productivity improvements and lower overheads, together withthe favourable impact of currency (£4 million) and changes in status ofcompanies (£9 million). Costs of customer defaults in the year of £6 millionwere compensated by various one-off credits including the settlement of legaland other claims. The margin of trading profit to sales was 6.0% (2004 - 6.4%)as a consequence of only partial recovery of cost increases in Driveline andPowder Metallurgy and the move from profit to loss in our Other Automotivebusinesses. Some benefit was seen from the previously announced strategic restructuringactions and asset write downs both through lower fixed costs and reduceddepreciation. OffHighway profit reflected the strong level of sales and rose by £2 million(11%) to £20 million. Excluding the impact of 2004 divestments and currencytranslation the increase was £5 million (33%). Margin rose to 6.5% from 6.3% in2004. Aerospace profit rose to £54 million from £38 million in 2004, largely as aconsequence of higher sales. Margin improved from 6.7% to 8.6% for the year as awhole, reaching 9.1% in the second half. Corporate and unallocated costs of £10 million (2004 - £11 million) representstewardship, governance and compliance costs relating to the overall Grouprather than individual businesses. The overall Group margin was 6.3% compared with 6.1% in 2004, slightly below theGroup's long-term target range. Restructuring and impairment costs £98 million (2004 - £262 million) During the year the Group continued the restructuring announced in the firstquarter of 2004. This involves moving some 20% of Driveline production capacityfrom high-cost, low-growth economies to the low-cost, high-growth emergingmarkets of Eastern Europe, South America and Asia Pacific, together with furthercost reductions in Powder Metallurgy in support of the recovery of that businessand overhead cost reductions elsewhere in the Group. Costs charged in the yeartotalled £77 million (2004 - £100 million) with £46 million (2004 - £36 million)in Driveline, £28 million (2004 - £44 million) in Powder Metallurgy and £3million (2004 - £20 million) elsewhere. In addition, in Automotive businesses, other impairments of £21 million arose inrespect of a move of production to low cost regions and related profitabilityissues. Profits on sale of businesses £1 million (2004 - £24 million) There were no business disposals during the year. The 2005 profit of £1 millionrelates to "earn out" profits of a prior year divestment. The profit of £24million in 2004 arose on the disposal of the Group's tube connecting business inGermany. Changes in the fair value of derivative financial instruments (£33) million(2004 - £nil) The Group enters into foreign exchange contracts to hedge much of itstransactional exposure, including that between Group companies. These have beenaccounted for under IAS 39 from 1 January 2005. As permitted by the standard,prior year figures have not been restated. At 1 January 2005 the net fair valueof such instruments was an asset of £29 million and at the end of 2005 thefigure was a liability of £13 million. Transactional hedge accounting has notbeen applied in 2005 and the difference of £43 million is charged separately asa component of operating profit. This has been partially offset by the change invalue (£9 million) in embedded derivatives in Aerospace supply contracts and £1million in commodity hedges in Powder Metallurgy leaving a net charge of £33million. Operating Profit Operating profit of £98 million compared with a loss of £24 million in 2004,reflecting the movements discussed above. Post-tax earnings of continuing joint ventures and associated company £10million (2004 - £16 million) The reduction of £6 million in the Group's share of post-tax earnings of jointventures arose largely at the pre-tax level as a consequence of the change ofstatus of Velcon SA de CV as a subsidiary following the increase in shareholdingwhich occurred on 1 February 2005, together with lower profits at Emitec (wheresales were down by 8%) and Shanghai GKN Drive Shaft Company Ltd (as marginsreduced slightly). These were partially offset by first time profits fromChassis Systems Ltd, the joint venture with Dana, as the start-up phase ended. Financing costs £35 million (2004 - £75 million) Interest payable totalled £61 million (2004 - £69 million) which arose mainly onthe £675 million bonds and £30 million debenture in issue. Offsetting this tosome extent was £48 million (2004 - £23 million) interest receivable onshort-term deposits and the benefits of lower borrowing costs on foreigncurrency debt used to hedge the Group's overseas investments. The year-on-yearmovement mainly reflected a full year's interest on the £1 billion received onthe divestment of the Group's shareholding in AgustaWestland at the end ofNovember 2004. Other net financing charges of £22 million (2004 - £29 million) relate to theGroup's funded post-employment benefit schemes and consist of interest on theschemes' liabilities partially offset by expected returns on assets. The £7million reduction in the year arose mainly as a result of the returns creditedin respect of the £100 million contribution prepayment made to the UK scheme atthe end of 2004. Profit before tax of continuing operations Total profit before tax excluding restructuring and impairment charges, profitson sale of businesses and changes in the fair value of derivative financialinstruments of £203 million was £48 million higher than the £155 million in 2004with most of the increase due to the interest received on the AgustaWestlandproceeds noted above. After including these items, the figure for the year was aprofit of £73 million (2004 - loss, £83 million) as a consequence of lowercharges for restructuring and asset impairments. Taxation The tax charge for the year was £14 million (2004 - £32 million) and comprised acharge on profit before tax of subsidiaries excluding restructuring andimpairment charges and the change in fair value of derivative financialinstruments of £40 million (2004 - £45 million) and credits on restructuring andimpairment charges of £20 million (2004 - £13 million) and on derivativefinancial instruments of £6 million (2004 - £nil). The £40 million charge expressed as a percentage of profit before tax ofsubsidiaries of £193 million was 21% compared with the 2004 percentage of 32% onthe same basis. The reduction in rate is largely the result of the settlement ofa number of outstanding issues during the second half of 2005. Excluding theeffect of any prior year items which may impact the tax charge in 2006, the 2006tax rate is expected to show a slight increase as a result of anticipatedchanges to the geographical mix of profits. The total effective tax rate was 19.2% (in 2004 there was a loss before taxcaused, in part, by the impairment of goodwill on which tax was not recoverable). Discontinued Operations There were no discontinued activities during the year. Figures for 2004reflected the post-tax trading results of AgustaWestland for 11 months to 30November and of Aerosystems International to 13 August together with the profitsmade on their divestment. Earnings per share Earnings per share from continuing operations were 7.7p (2004 - loss per share,16.1p). Before restructuring and impairment charges, profits on sale ofbusinesses and changes in the fair value of derivative financial instruments thefigure was 22.1p (2004 - 14.6p) Earnings per share for both continuing and discontinued businesses were 7.7p(2004 - 105.0p). Before restructuring and impairment charges, profits on sale ofbusinesses and changes in the fair value of derivative financial instruments thefigure was 22.1p (2004 - 23.1p). Cash Flow Operating cash flow, which GKN defines as cash generated from operations (£308million) adjusted for capital expenditure (£229 million) and proceeds from thedisposal of fixed assets (£9 million), was £88 million compared with £3 millionin 2004. The inflow on working capital and provisions totalled £15 million (2004 - £6million outflow) largely reflecting continuing tight control of both inventoryand receivables. Capital expenditure (on tangible and intangible assets) totalled £229 million(2004 - £195 million). Of this, £206 million (2004 - £180 million) was onproperty, plant and equipment and represented 150% of the depreciation charge.This higher than normal ratio largely reflected the cost of investment inemerging markets and is likely to reduce slightly in 2006 as the restructuringprogramme is completed. Thereafter it should return to a level of 1.1 to 1.2times. Expenditure on intangible assets totalled £23 million (2004 - £15 million) andreflected initial non-recurring costs on aerospace programmes and computersoftware costs. Net interest paid totalled £14 million compared with £46 million in 2004 withthe reduction a result of the 2004 AgustaWestland proceeds which were placed onshort-term deposit. Tax paid in the year was £35 million (2004 - £47 million) due to the timing ofpayments and the figure for 2006 is expected to be slightly higher. Dividends received from joint ventures totalled £6 million (2004 - £8 millionfrom continuing businesses and £2 million from discontinued). The Group monitors free cash flow, which is cash flow excluding acquisitions,share buy-backs and currency translation but including dividends paid. Free cashflow for the year was an outflow of £41 million (2004 - £167 million outflow,including £100 million pension prepayment) mainly due to the £37 million ofexpenditure on strategic and other major restructurings. The Group's balancesheet remains strong and with continued recovery in our businesses it isanticipated that following completion of the restructuring, cash generation willimprove markedly. Acquisitions and Divestments The net expenditure on acquisitions and divestments in the year was £50 million(2004 - receipts £1,045 million). £35 million (after taking account of funds inthe business at the date of acquisition) was spent on the acquisition, inFebruary 2005, of the 51% of Velcon SA de CV (renamed GKN Driveline Celaya SA)not already owned. A further £10 million was spent on the remaining 16% ofTochigi Fuji Sangyo KK (renamed GKN Driveline Torque Technology) with thebalance on a small OffHighway acquisition, offset by proceeds of £1 million froma prior year earn-out arrangement. Share buyback During the year the Group continued the share buyback programme of up to £100million initiated in October 2004 and spent £30 million in purchasing 11.9million shares. At 31 December 2005 the cumulative amount spent was £60 millionon 25.2 million shares which are held in treasury. The buyback programme will becontinued in 2006. Net borrowings/funds At the end of the year the Group had net debt of £65 million (2004 - net funds£65 million). These included the benefit of £50 million (2004 - £53 million)customer advances in the Aerospace businesses which are shown in short-termcreditors in the balance sheet. In addition, the Group's share of borrowings injoint ventures was £5 million (2004 - £2 million). Shareholders' equity Shareholders' equity at the end of 2005 was £875 million compared with £905million at the end of 2004. Proposed dividendA final dividend of 8.2p per share is proposed, payable on 17 May 2006 toshareholders on the register at 21 April 2006. Shareholders may choose to reinvest this dividend under the DividendReinvestment Plan ('DRIP'). The closing date for DRIP mandates is 28 April 2006 Together with the interim dividend of 4.0p, the total dividend for the year willbe 12.2p, an increase of 2.5% over the equivalent figure for last year. The cashcost to the Group is some £87 million. The dividend is covered 1.8 times (2004 -1.9 times) by earnings before the impact of restructuring and impairmentcharges, profits on sale of businesses and changes in the fair value ofderivative financial instruments. DIVISIONAL DEVELOPMENTS AND PERFORMANCE Automotive Markets Car and light vehicle production is a key driver of performance in ourAutomotive businesses. By comparison with 2004, production in Western Europe wasmarginally down while North America was flat. Overall Western European production of 16.2 million vehicles was down by 1.7%with reductions in Italy (12%), Spain (7%) and the UK (3%) partially offset byan increase in the larger market of Germany (3%). North American production in 2005 of 15.8 million vehicles was level with 2004.In the US, however, there continued to be a major shift in VehicleManufacturers' (VM) market shares with both General Motors and Ford losingshare, largely to the benefit of Japanese manufacturers. By contrast, there was strong growth in production in the emerging markets ofBrazil (10%) and India (8%) whilst, after a slow first half, China improved by15% for the year as a whole. Current expectations for 2006 are for a similar pattern to apply in WesternEurope and North America which are both forecast to be level with 2005.Elsewhere external forecast Brazil to fall slightly before recovering in 2007while China and India are likely to increase production over the next few years,largely to satisfy domestic demand. GKN DrivelineProducts and marketsGKN 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 devicesand driveshafts (propshafts for longitudinal power transmission and sideshaftsfor lateral transmission). The segment comprises GKN Driveline Driveshafts (GKNDriveshafts), GKN Driveline Torque Technology Group, Industrial and DistributionServices and Speciality Vehicles. 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 2005, based on internal estimates, GKN Driveshafts' businesses, including itsjoint ventures, produced over 40% of CVJs for the global light vehicle market.The market share of the next largest producer is estimated at 16% with nearly25% of CVJs produced by VMs' in-house operations. The strong order win rateachieved during 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 85% in SouthAmerica and 52% in the Asia Pacific region (excluding Japan and South Korea). 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 2005 premium propshafts representedapproximately 35% of global light vehicle propshaft demand, or some 10 millionpropshaft assemblies. GKN Driveshafts' share of this segment was in the regionof 20%. GKN Driveline Torque Technology Group (TTG) produces a wide range of drivelinecomponents aimed at managing the flow of torque to the driven wheels based onroad conditions, vehicle situation and driver intent. Torque management devices(TMDs) are mechanical (passive) or electro-mechanical (active) devices thatimprove vehicle performance and handling by controlling the flow of torquethroughout the driveline. 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 2005 GKNsupplied approximately 18% 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, including the Viscodrive and Super LSD product families. Geared components are currently approximately half of TTG's annual sales,realised through installation on many successful all wheel drive and four wheeldrive vehicles. We are also involved in many active development projects onfuture vehicle programmes and the first high volume production programme will belaunched in the US in 2006. We continue to benefit from above market growth inpower transfer units and final drive units as VMs increasingly introduce new'crossover' vehicles that combine four wheel drive with car-like dynamics,comfort and improved fuel economy. Our products are well positioned for successin these areas. Our Industrial and Distribution Services (IDS) business provides a comprehensiverange of new and remanufactured sideshafts and components for the passengervehicle aftermarket. It also provides a service to repair and replace heavytruck propshafts and also engineers and produces low volume, highly specialiseddriveline components from its remanufacturing plants, warehouses and servicefacilities throughout Europe. The Speciality Vehicle business servicesnon-automotive markets, such as marine and all-terrain, with drivelinecomponents. 2005 Highlights Driveline subsidiaries sales in the year totalled £1,993 million compared with£1,899 million in 2004. £31 million of the increase was accounted for by theimpact of currency translation while £92 million arose from the inclusion ofsales of Velcon from 1 February 2005 and a full year contribution from TFSfollowing their change in status to subsidiaries. There was a small (£3 million)reduction in respect of IDS businesses transferred to OffHighway. The underlyingdecrease of £26 million largely reflected the slightly lower demand in WesternEurope noted above and changes in model mix. Strong sales growth was seen in Driveline's joint venture operations althoughthese sales are not shown in the Group accounts. Trading profit of £154 million was £2 million (1%) below 2004. After taking intoaccount the favourable impact of currency (£4 million) and acquisitions (£12million) there was a reduction of £18 million which mainly reflected the impactof raw material (£34 million) and energy cost increases.The restructuring programme to move productive capacity from high-cost/low-growth mature markets to the low-cost/high-growth emerging markets of Asia,South America and Eastern Europe accelerated during the year. The closures oftwo US and one European plant were announced, the cost of which in the year was£29 million, whilst a new forging plant was opened in Poland and manufacturingfacilities were expanded in Slovenia, Poland, Mexico and Brazil. As a result,divisional capital expenditure on tangible assets at £115 million (2004 - £101million) was 1.6 times the depreciation charge of £74 million (2004 - £81million). It is anticipated that the ratio will reduce somewhat in 2006 andreturn to the normal level of 1.1 to 1.2 times in 2007. £71 million (2004 - £74 million) was incurred on research and development andwas charged to profit in the year. Much of this was incremental development onexisting applications but our research efforts produced the most significantadvance in CVJ design for many years and, in November, we announced details ofour Countertrack and Crosstrack technologies. These give a weight advantage aswell as the possibility of improved turning circles or increased vehiclewheelbase with the same turning circle. Their application is now attractingconsiderable interest from vehicle designers and their patented design is seenas fundamental in maintaining GKN Driveline's technological leadership. TTG continued to drive operational efficiency and reduce costs, disposing ofminor non-core subsidiaries, announcing the closure of a site and concluding avoluntary redundancy programme involving some 130 employees. At the same time,pension arrangements were changed and a multi-employer scheme exited whichsignificantly reduced the pension liability that existed when the company wasacquired. There were positive developments in the expansion of the business withsignificant wins with all major Japanese VMs, particularly new business securedwith Toyota, confirming TTG as a tier one supplier in Japan. Against this,however, the cancellation of the General Motors 361 vehicle platform, on whichGKN had been awarded the high volume TMD, was a disappointment. In-depth technology forums were held with a number of Japanese and European VMsand tier one partners to demonstrate product development and systems integrationcapabilities. These were well received and have led to a number of strategicjoint development programmes. Powder Metallurgy Products and markets GKN's Powder Metallurgy business produces metal powder and sintered productswhich are largely iron based, although growth is currently seen in the use ofaluminium and other alloys. Although market statistics are somewhat imprecise,GKN estimates that it has in the region of 16% global market share in thesintered product business with sales to major automotive and industrial originalequipment manufacturers and first tier suppliers. GKN's sintered component production takes place in the Americas, Europe and AsiaPacific with the highest growth rates in the Asia Pacific region. It issignificantly larger than its competition and as such is well placed to drivetechnology leadership in product and process through the leverage of globalresources. This global manufacturing footprint continues to develop with theestablishment of further operations in India and China to support new businesssecured in the region. Hoeganaes is the largest producer of metal powder in North America with morethan 50% market share. It has also continued its development outside the US,particularly through growth in Europe due to increased usage by GKN's ownsintering companies in this region. Hoeganaes' sales to external customersaccounted for some 50% of its shipments and just over 10% of the PowderMetallurgy division's sales. The European business, centred on a plant inRomania, continued to develop steadily, albeit from a small base. Growth in Powder Metallurgy is expected to continue, fuelled primarily bysubstitution for cast or forged components. 2005 Highlights Sales in the year of £588 million compared with £590 million in 2004. Excludingthe impact of currency translation the reduction was £7 million (1.2%). Thisreduction arose entirely in the US sintering business which was down by 8% onthe previous year, reflecting lower sales to its major customers: GeneralMotors, Ford and DaimlerChrysler. Elsewhere there was 3% growth in Europe, and15% in the Rest of the World albeit from a low base. Hoeganaes (13% of sales) inthe US also saw lower volumes as overall US powder consumption fell by 8% in2005 despite the generally flat market, primarily as a result of the change invehicle mix away from large Sports Utility Vehicles (SUVs) to passenger cars.Hoeganaes' sales value, however, was essentially flat with lower volumes largelyoffset by higher revenues from the recovery of scrap steel cost. In spite of considerable increases in raw material costs totalling some £13million, trading profit improved to £12 million from £5 million in 2004. Thisreflected operational and productivity improvements in the USA together withlower depreciation costs and some price recovery from customers. The Sinter Metals restructuring programme announced in 2004 continued during theyear and has contributed to an encouraging improvement in performance. As notedabove, plant consolidation has been extended to further accelerate recovery. In2005 we initiated discussions over the viability of our Romulus, Michigan plantwhich concluded in January 2006. Also, in January 2006 we announced the closureof the UK factory at Lichfield. North American asset impairments, primarily inrespect of Romulus, of £17 million have all been charged as restructuring in the2005 accounts together with impairments of £4 million in respect of anotherSinter facility. Costs associated with plant closures in the USA and UK,primarily redundancy, are estimated at £25 million and will be reflected in2006. In Hoeganaes, an impairment charge of £5 million was recognised in respect ofNorth American plant no longer considered viable in the light of expectedchanges in the business. Divisional capital expenditure on plant and equipment at £43 million (2004 - £54million) was high when measured against depreciation of £27 million (2004 - £40million). The former was inflated by investment in support of new business wonin 2003 and 2004, which has yet to be reflected in revenue, and the latter lowerdue to prior year asset impairments. The ratio of 1.6 times is expected toreduce somewhat in 2006. During the year there were a number of important business wins. Sinter won newbusiness worth $180 million per annum which will support a return to 5% to 8%annual growth and also developed their customer base into Japan and Korea. InHoeganaes new programmes are expected to result in increased market share inboth 2006 and, particularly, 2007. Other Automotive Products and marketsOur Other Automotive activities, which are predominantly UK-based, but withfacilities in the US and China, manufacture structural components, chassis andengine cylinder liners for the passenger car, SUV and light vehicle and truckmarkets in Western Europe and the US. 2005 Highlights Other Automotive sales by subsidiaries of £130 million were £6 million (4%)below 2004, mainly reflecting the cessation of the Thompson Chassis businessduring the second half of 2004. The major replacement programme is beingconducted through our Chassis Systems Ltd joint venture with Dana. A disappointing loss of £2 million was incurred in the year as a result of thebusiness transfers and cessation noted above and higher raw material costs. Thiscompared with a profit of £8 million in 2004 which was favourably impacted byend of platform life benefits. Late in 2005, in conjunction with a local minority partner, a low-cost Chinesecylinder liner facility, which will serve both existing and emerging markets,began production. As a consequence, and in order to re-align the UK cost base,in January 2006 we announced a redundancy programme at GKN Sheepbridge StokesLtd. The cost of this will be charged in 2006. Trading performance in 2005 andfuture projections for the UK business necessitated an impairment review whichhas led to an impairment charge of £10 million being recognised in the 2005accounts. This is included within the restructuring and impairment line in theIncome Statement. Emitec Emitec, our 50% joint venture with Siemens, manufactures metallic substrates forcatalytic converters in Germany and the USA. Their results are reported inpost-tax earnings of joint ventures. In terms of trading, 2005 sales were 8% lower than in 2004. This largely arosein Germany where customer demand fell and legislation requiring the retrofittingof particulate filter catalysts for diesel engines was delayed. This is nowexpected to be enacted in 2006 and is likely to result in growth from 2007onwards. OffHighway Products and markets OffHighway designs and manufactures steel wheels and driveline systems for theglobal agricultural, construction and industrial machinery sectors. During 2005,approximately 60% of its sales were to the agricultural market, 25% to theconstruction equipment market and 15% to the industrial machinery market. AgricultureIn Europe (48% of divisional sales), the overall agricultural machinery marketin 2005 was slightly below the previous year with increased production ofcombine harvesters and hay tools being offset by a decline in the production oftractors. In North America (12% of divisional sales) the picture was similar with overallyear-on-year demand some 3% lower as a result of production of both tractors andcombines being down from the record levels of 2004. Industry forecasts are for a slight decline in both markets in 2006. ConstructionIn 2005, global construction markets have continued to grow at the record levelsseen in the second half of 2004. This was somewhat against earlier expectationswith the dampening of demand in China being offset by continued strong growth inNorth America and Europe which account for 13% and 11% of divisional sales,respectively. Construction markets are likely to remain strong in 2006. Industrial MachineryThis sector (15% of divisional sales) includes products for the materialhandling, mining and other related industries. Demand in 2005 was higher thanthe previous year, led by increased sales of fork lift trucks and miningvehicles. The outlook for 2006 is for little change in demand. 2005 Highlights OffHighway sales of £310 million were £23 million higher than 2004 whichincluded eight months' results from a German tube connecting subsidiary whichwas sold in August 2004. Adjusting for this and the impact of currency, smallportfolio changes and minor acquisitions towards the end of 2005, sales showed a£38 million (14)% increase over the previous year as a result of significantmarket share gains and contract wins together with some benefit from therecovery of raw material cost increases. Trading profit as reported increased to £20 million (2004 - £18 million) but ona comparable company and currency basis there was an increase of £5 million(33%), reflecting both volume increases and operating efficiencies, some ofwhich were achieved through plant rationalisations in Europe and Canada. The business expanded its product portfolio in the last quarter of 2005 andJanuary 2006 with two small acquisitions, which have combined annualised salesof approximately £18 million, and has also opened new facilities in Brazil andChina. Technological improvement in rim reinforcement design for off-highwaywheels has resulted in lower cost manufacture and has also opened up new marketsin forestry equipment. Aerospace Products and markets GKN Aerospace is a global first-tier supplier of airframe structures,components, assemblies and engineering services to aircraft prime contractorsand operates in two main product areas, Aerostructures and Propulsion Systemsand Special Products. As a leader in the design and manufacture of advanced composites, transparenciesand complex metal structures at the component and assembly level we serve allthe major airframe and engine OEMs. Products and services are provided to bothfixed wing and rotary wing manufacturers, with some 60% of sales in the US.Current annual sales are approximately 65% to military and 35% to civilcustomers. The overall aerospace market showed continued signs of improvement in 2005, withsustained strength in the military sector and higher demand in the civil market.Airbus and Boeing delivered in aggregate 660 aircraft in 2005, up from 605 in2004. The civil sector is firmly into an upswing and is likely to experiencestrong short-term growth. Military demand is largely driven by US defencespending and, nothwithstanding the four yearly review of programme commitments,is likely to remain solid. GKN Aerospace has secured business on key new international programmes such asthe Airbus A400M Military Transport, the Boeing 787, the F-35 Joint StrikeFighter and the Northrop X47 Joint Unmanned Combat Air System. These successeshave been supported by GKN Aerospace's continuing strength in material,manufacturing and systems technologies. Market trends continue to indicate significant growth opportunities for GKNAerospace driven by increased use of composite materials on new platforms andengines. 2005 Highlights GKN Aerospace sales were £627 million compared with £569 million in 2004. Therewas a £3 million benefit from currency translation and excluding this theincrease was £55 million (10%). The increase was the result of strong defencesales, engineering contract work on new programmes, growth in the civil aircraftmarket and the commencement of production on earlier contract wins. Trading profit of £54 million was £16 million above 2004. Excluding the impactof currency, the increase was £15 million (39%) which reflected not only thehigher sales level but also improved operational performance, productivity andcontinued cost reduction initiatives and the absence of asset write downs whichhad impacted 2004. During the year the Advanced Composite Development Centre was opened on the Isleof Wight in the UK. The immediate goal of the Centre will be to reduce thecurrent cost of carbon fibre composite structures from today's values, through acombination of qualification of new raw products and automated manufacturingmethods and techniques. Major development milestones were successfully achieved on a number of newprogrammes including the manufacture of the first GEnx composite engine fancasing and important components for the Joint Strike Fighter. Although no newmajor aircraft programmes were launched during the year, the Division was stillable to secure additional incremental business across a range of existingprogrammes with an estimated value of over $500 million. OTHER FINANCIAL MATTERS Treasury managementGKN co-ordinates all treasury activities through a central function the purposeof which is to manage the financial risks of the Group as described below and tosecure short and long-term funding at the minimum cost to the Group. The centraltreasury function operates within a framework of clearly defined Board-approvedpolicies and procedures, including permissible funding and hedging instruments,exposure limits and a system of authorities for the approval and execution oftransactions. It operates on a cost centre basis and is not permitted to makeuse of financial instruments or other derivatives other than to hedge identifiedexposures of the Group. Speculative use of such instruments or derivatives isnot permitted. The central treasury function prepares a formal twice yearly report to theBoard, as well as formal monthly reports for the Finance Director and othersenior executives of the Group. In addition, the gross and net indebtedness ofthe Group is reported on a weekly basis to the Chief Executive and the FinanceDirector, whilst liquidity, interest rate, currency and other financial riskexposures are monitored daily. The central treasury function is subject to anannual internal and external review of controls. Funding and liquidityThe Group funds its operations through a mixture of retained earnings andborrowing facilities, including bank and capital markets borrowings and leasing.The relative proportions of equity and borrowings are governed by specificBoard-approved parameters. These are designedto preserve prudent financial ratios, including interest, dividend and cash flowcover, whilst also minimising the overall weighted average cost of capital tothe Group. All the Group's borrowing facilities are arranged by the central treasuryfunction and the funds raised are then lent to operating subsidiaries oncommercial arm's-length terms. In some cases operating subsidiaries haveexternal borrowings, but these are supervised and controlled centrally. TheGroup's objective is to maintain a balance between continuity of funding andflexibility through borrowing at a range of maturities from both capital marketsand bank sources.Bank borrowings are principally in the form of five-year committedmulti-currency bilateral revolving credit facilities with a group ofrelationship banks. There were no borrowings against these facilities as at 31December 2005. Capital markets borrowing of £705 million includes unsecured issues of £350million 6.75% bonds maturing in 2019 and £325 million 7% bonds maturing in 2012,together with £30 million debenture stock of Westland Group plc which is securedon assets of that company and certain of its subsidiaries. At the year end the Group had committed borrowing facilities of £1,087 million,of which £737 million was drawn. The weighted average maturity profile of theGroup's committed borrowings was 9.9 years. This leaves the Group well placed tofund its strategic growth plans and to withstand any sudden changes in liquidityin the financial markets. The Group also has access to significant lines of uncommitted funds which areused principally to manage day-to-day liquidity. Wherever practicable, pooling,netting or concentration techniques are employed to minimise gross debt. At the year-end the Group had £542 million on deposit in the UK mainly held inmoney market funds or with banks at maturities of three months or less. Risk managementThe Group is exposed to a variety of market risks, including the effects ofchanges in foreign currency exchange rates and interest rates. In the normalcourse of business, the Group also faces risks that are either non-financial ornon-quantifiable, including country and credit risk. The Group uses interest rate swaps, swaptions, forward rate agreements, nettingtechniques and forward exchange contracts as required to manage the primarymarket exposures associated with its underlying assets, liabilities andanticipated transactions. Counterparty credit riskThe Group is exposed to credit-related losses in the event of non-performance bycounterparties to financial instruments. Credit risk is mitigated by the Group'spolicy of only selecting counterparties with a strong investment gradedlong-term credit rating, normally at least AA- or equivalent, and assigningfinancial limits to individual counterparties. Interest rate riskThe Group operates an interest rate policy designed to optimise interest costand reduce volatility in reported earnings. This policy is achieved bymaintaining a target range of fixed and floating rate debt for discrete annualperiods, over a defined time horizon. This is achieved partly through the fixedrate character of the underlying debt instrument, and partly through the use ofstraightforward derivatives (forward rate agreements, interest rate swaps andswaptions). The Group's normal policy is to require interest rates to be fixedfor 30% to 70% of the level of underlying borrowings forecast to arise over a12-month horizon. However, this policy was suspended in December 2004 as it wasdeemed inappropriate given the absence of floating rate bank debt following thereceipt of the sale proceeds of GKN's share in AgustaWestland. Consequently, asat 31 December 2005, 89% of the Group's gross financial liabilities were atfixed rates of interest, whilst the weighted average period in respect of whichinterest has been fixed was 9.9 years. Currency riskThe Group has transactional currency exposures arising from sales or purchasesby operating subsidiaries in currencies other than the subsidiaries' functionalcurrency. Under the Group's foreign exchange policy, such transaction exposuresare hedged once they are known, mainly through the use of forward foreignexchange contracts. The Group has a significant investment in overseasoperations, particularly in continental Europe and the Americas. As a result,the sterling value of the Group's balance sheet can be affected by movements inexchange rates. The Group therefore seeks to mitigate the effect of thesetranslational currency exposures by matching the net investment in overseasoperations with borrowings denominated in their functional currencies, exceptwhere significant adverse interest differentials or other factors would renderthe cost of such hedging activity uneconomic. This is achieved by borrowingeither directly (in either the local domestic or euro-currency markets), orindirectly through the use of rolling annual forward foreign exchange contracts.Borrowings created through the use of such contracts amounted to £631 million at31 December 2005 and were denominated in US dollars (36%), euro (50%) andJapanese yen (14%). Pensions and post-employment obligationsGKN operates a number of defined benefit and defined contribution schemes acrossthe Group. The total charge to trading profit in respect of current and pastservice costs was £35 million (2004 - £32 million), whilst other net financingcharges included in net financing costs were £22 million (2004 - £29 million) . The decrease in other net financing charges reflects the higher expected returnon pension scheme assets from the increased level of assets at the start of2005. This resulted in part from the £100 million prepayment made by the Groupto the UK pension scheme in December 2004. The higher expected return waspartially offset by an increase in the notional interest charge on higherpension scheme liabilities. Further information including asset, liability andmortality assumptions used is provided in note 6 in the appendix to this pressrelease.. UK pensionsThe UK defined benefit scheme is considered to be relatively mature since only5,000 of its 56,600 members are currently in service. As a UK defined benefitscheme, this is run on a funded basis with funds set aside in trust to coverfuture liabilities to members. A £100 million prepayment towards the UK deficitwas made in December 2004. The Group has also announced its intention to make afurther one-off payment of £200 million in 2006. No further deficit payments areplanned in 2006. The charge relating to UK post-employment benefits reflected in trading profitin respect of current and past service costs was £16 million (2004 - £14million), whilst other net financing charges included in net financing costswere £5 million (2004 - £12 million). The deficit at £466 million (2004 - £455 million) was largely unchanged from theend of 2004 as the increase in asset values from higher actual returns waslargely offset by the higher net present value of liabilities from the 55 basispoint reduction in the discount rate. Overseas pensionsThe principal regions involved are the Americas, continental Europe and the Restof the World.The charge to trading profit relating to overseas post-employment obligations inrespect of current and past service costs was £19 million (2004 - £18 million),whilst other net financing charges included in net financing costs were £17million (2004 - £17 million). The increase in the deficit of £20 million to £419 million (2004 - £399 million)was largely as a result of the higher net present value of liabilities fromreductions in discount rates and revised mortality assumptions. SummaryIn total, at 31 December 2005 the deficit was £885 million (2004 - £854 million)for the reasons stated earlier. Financial resources and going concernAt 31 December 2005 the Group had net borrowings of £65 million. In addition ithad available, but undrawn, committed borrowing facilities totalling £350million. Having assessed the future funding requirements of the Group and the Company,the Directors are of the opinion that it is appropriate for the accounts to beprepared on a going concern basis. Cautionary statementThis announcement contains forward looking statements that are subject to riskfactors associated with, amongst other things, the economic and businesscircumstances occurring from time to time in the countries and sectors in whichthe Group operates. It is believed that the expectations reflected in thesestatements are reasonable but they may be affected by a wide range of variableswhich could cause actual results to differ materially from those currentlyanticipated. APPENDICES These appendices do not form the statutory accounts of the Group. The statutoryaccounts for the year ended 31 December 2004 prepared under UK GAAP have beenfiled with the Registrar of Companies and contained an unqualified audit report.The audited results for 2005 were approved by the Board on 27 February 2006 andhave been agreed with the auditors. 2004 IFRS results have not been audited. Page numberGKN Consolidated financial informationConsolidated Income Statement for the year ended 31 December 2005 21 Statement of changes in shareholders' equity 22 Consolidated Balance Sheet at December 2005 23 Consolidated Cash Flow Statement for the year ended 31 December 2005 24 Note 1 - Segmental analysis 25-26 Notes 2-8 27-35 Consolidated Income StatementFor the year ended 31 December 2005-------------------------------------------------- 2005 2004 Notes £m £m--------------------------------- ------ -------- --------- SalesContinuing subsidiaries 1 3,648 3,481--------------------------------- ------ -------- --------- Trading profit 228 214Restructuring and impairment charges 2a (98) (262)Profits on sale of businesses 2b 1 24Changes in fair value of derivative financial instruments 2c (33) ---------------------------------- ------ -------- ---------Operating profit/(loss) 1 98 (24) Share of post-tax earnings of continuing jointventuresand associated company 1 10 16----------------------------------------------------- ------ -------- ---------Interest payable (61) (69)Interest receivable 48 23Other net financing charges (22) (29)----------------------------------------------------- ------ -------- ---------Net financing costs (35) (75)----------------------------------------------------- ------ -------- ---------Profit/(loss) before taxation from continuing 73 (83)operations Taxation 3 (14) (32)----------------------------------------------------- ------ -------- ---------Profit/(loss) after taxation from continuing operations 59 (115)----------------------------------------------------- ------ -------- --------- Discontinued operationsShare of post-tax earnings of joint ventures - 62Profit on disposal of joint ventures after taxation - 825----------------------------------------------------- ------ -------- ---------Profit after taxation from discontinued operations - 887----------------------------------------------------- ------ -------- --------- Profit for the year 59 772----------------------------------------------------- ------ -------- --------- Profit attributable to minority interests 4 3Profit attributable to equity shareholders 55 769----------------------------------------------------- ------ -------- --------- 59 772----------------------------------------------------- ------ -------- --------- Earnings per share - pTotal: 4--------------------------------- ------ -------- ---------Basic 7.7 105.0--------------------------------- ------ -------- ---------Diluted 7.6 104.4--------------------------------- ------ -------- ---------Continuing operations: 4--------------------------------- ------ -------- ---------Basic 7.7 (16.1)--------------------------------- ------ -------- ---------Diluted 7.6 (16.0)--------------------------------- ------ -------- --------- Statement of changes in shareholders' equityFor the year ended 31 December 2005--------------------------------------- -------- -------- 2005 2004 £m £m----------------------------------------------------- -------- ---------Shareholders' equity at start of year 905 325Adjustment in respect of adoption of IAS 39, including tax 17 ---------------------------------------- -------- --------Shareholders' equity at start of year as adjusted 922 325--------------------------------------- -------- -------- Currency variations 74 (52)Unrealised (loss)/gain arising on change in status of equityaccounted investments (3) 2Changes in minority interests 4 -Derivative financial instruments (23) 24Deferred tax on non-qualifying assets 1 1Actuarial losses arising on post-employment obligations,including deferred tax (50) (58)----------------------------------------------------- -------- ---------Net profits/(losses) not recognised in Income Statement 3 (83)Profit attributable to equity shareholders 55 769----------------------------------------------------- -------- ---------Total recognised profit for the year 58 686----------------------------------------------------- -------- --------- Dividends (86) (85)Share based payments 1 3Issue of ordinary shares net of costs 10 2Purchase of own shares into treasury (30) (30)Cumulative currency difference realised on disposal of AgustaWestland NV - 4----------------------------------------------------- -------- --------- (105) (106)----------------------------------------------------- -------- --------- Shareholders' equity at end of year 875 905----------------------------------------------------- -------- --------- Consolidated Balance SheetAt 31 December 2005------------------------------------------------- 2005 2004 Note £m £m------------------------------------------------- ------ ------ ------- -------AssetsNon-current assetsIntangible assets - goodwill 241 208 - other 54 40Property, plant and equipment 1,364 1,286Investments in joint ventures 81 94Other receivables and investments including loans to joint ventures 21 23Deferred tax assets 172 206------------------------------------------------- ------ ------ ------- ------- 1,933 1,857------------------------------------------------- ------ ------ ------- -------Current assetsInventories 467 448Trade and other receivables 566 576Derivative financial instruments 12 1Cash and cash equivalents 724 860------------------------------------------------- ------ ------ ------- ------- 1,769 1,885------------------------------------------------- ------ ------ ------- -------Assets held for sale 38 -------------------------------------------------- ------ ------ ------- -------Total assets 3,740 3,742------------------------------------------------- ------ ------ ------- ------- LiabilitiesCurrent liabilitiesBorrowings (47) (54)Derivative financial instruments (34) (6)Trade and other payables (795) (796)Current income tax liabilities (109) (128)Provisions (57) (30)------------------------------------------------- ------ ------ ------- ------- (1,042) (1,014)------------------------------------------------- ------ ------ ------- -------Liabilities associated with assets held for sale (16) -------------------------------------------------- ------ ------ ------- ------- (1,058) (1,014)------------------------------------------------- ------ ------ ------- -------Non-current liabilitiesBorrowings (734) (741)Deferred tax liabilities (60) (84)Other payables (24) (17)Provisions (78) (97)Post-employment obligations 6 (885) (854)------------------------------------------------- ------ ------ ------- ------- (1,781) (1,793)------------------------------------------------- ------ ------ ------- -------Total liabilities (2,839) (2,807)------------------------------------------------- ------ ------ ------- ------- Net assets 901 935------------------------------------------------- ------ ------ ------- ------- Shareholders' equityOrdinary share capital 370 368Share premium account 23 15Treasury shares (60) (30)Retained earnings 553 621Other reserves (11) (69)------------------------------------------------- ------ ------ ------- -------Total shareholders' equity 875 905Minority interest - equity 26 30------------------------------------------------- ------ ------ ------- -------Total equity 901 935------------------------------------------------- ------ ------ ------- ------- Consolidated Cash Flow StatementFor the year ended 31 December 2005--------------------------------------------------- Notes 2005 2004 £m £m------------------------------------------------- ------ ------ ------- -------Cash flows from operating activitiesCash generated from operations 7 308 191Interest received 48 21Interest paid (62) (67)Tax paid (35) (47)Dividends received from joint -continuing 6 8ventures -discontinued - 2------------------------------------------------- ------ ------ ------- ------- 265 108------------------------------------------------- ------ ------ ------- -------Cash flows from investing activitiesPurchase of property, plant and equipment andintangible assets (229) (195)Proceeds from sale of property, plant and equipment 9 7Acquisition of subsidiaries (net of cash acquired) (51) (15)Acquisition of joint ventures - (8)Proceeds from sale of subsidiaries and businesses 1 29Proceeds from sale of joint ventures - discontinued - 1,039Investment loans and capital contributions 2 (1)------------------------------------------------- ------ ------ ------- ------- (268) 856------------------------------------------------- ------ ------ ------- -------Cash flows from financing activitiesNet proceeds from issue of ordinary share capital 10 2Purchase of treasury shares (30) (30)Net proceeds from issue of new loans 8 471Finance lease payments (3) (1)Repayment of borrowings (29) (598)Dividends paid to shareholders 5 (86) (86)Dividends paid to minority interests - (1)------------------------------------------------- ------ ------ ------- ------- (130) (243)------------------------------------------------- ------ ------ ------- ------- Currency variations on cash and cash equivalents 3 (3)------------------------------------------------- ------ ------ ------- -------Movement in cash and cash equivalents (130) 718Cash and cash equivalents at 1 January 827 109------------------------------------------------- ------ ------ ------- -------Cash and cash equivalents at 31 December 7 697 827------------------------------------------------- ------ ------ ------- -------Unless otherwise noted, cash flow arises from continuing operations. Cashinflows from government capital grants of £4 million (2004: £2 million) havebeen offset against purchases of property, plant and equipment and intangibleassets.For the purposes of presenting the cash flow statement the components of cashand cash equivalents are offset. A reconciliation between the cash flow andbalance sheet presentation is shown in note 7. A reconciliation of the movementsin net debt is shown in note 7. Notes to the Preliminary Announcement 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 Notes Driveline Metallurgy Automotive OffHighway Aerospace Unallocated Total ended 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 intangible assets (4) (1) - - (5) - (10) ---------------- ------ ------ ------ ------- ------- ------ ------- ------ Trading profit/ 154 12 (2) 20 54 (10) 228 (loss) Restructuring 2a (46) (28) - (2) - (1) (77) Other impairments 2a (11) - (10) - - - (21) Profits on sale of businesses 2b - - - - 1 - 1 Changes in fair value of derivative financial instruments 2c (22) 1 - (1) (11) - (33) ---------------- ------ ------ ------ ------- ------- ------ ------- ------ Operating profit /(loss) 75 (15) (12) 17 44 (11) 98 ---------------- ------ ------ ------ ------- ------- ------ ------- ------ Share of post-tax earnings of joint ventures 9 - 1 - - - 10 ---------------- ------ ------ ------ ------- ------- ------ ------- ------ Segment assets Goodwill 79 27 - 25 110 - 241 Investments in 64 - 16 1 - - 81 joint ventures Derivative 4 1 - 1 6 - 12 financial instruments Other assets 1,287 508 79 169 459 8 2,510 Unallocated assets - Cash and cash equivalents - - - - - 724 724 - Deferred tax - - - - - 172 172 ---------------- ------ ------ ------ ------- ------- ------ ------- ------ Total assets 1,434 536 95 196 575 904 3,740 ---------------- ------ ------ ------ ------- ------- ------ ------- ------ Segment liabilities Derivative financial instruments (10) - - (2) (12) (10) (34) Other liabilities (878) (177) (143) (143) (372) (142) (1,855) Unallocated liabilities - Borrowings - - - - - (781) (781) - Current tax - - - - - (109) (109) liabilities - Deferred tax - - - - - (60) (60) ---------------- ------ ------ ------ ------- ------- ------ ------- ------ Total liabilities (888) (177) (143) (145) (384) (1,102) (2,839) ---------------- ------ ------ ------ ------- ------- ------ ------- ------ Other segment items Capital expenditure (including acquisitions) - Property, plant and equipment 115 43 14 10 32 - 214 - Intangible assets 5 - - 1 17 - 23 Other non-cash expenses - - - - - 1 1 ---------------- ------ ------ ------ ------- ------- ------ ------- ------ All business segments are continuing. EBITDA is earnings before interest, tax, depreciation and amortisation. Other non-cash expenses represents the £1 million annual charge in respect of share based payments. Allocation of this charge across the segments is as follows: Driveline £0.4 million, Powder Metallurgy £0.1 million, Aerospace £0.2 million and Corporate £0.3 million. 1 Segmental analysis Primary reporting format - business segments Automotive ---------------- Powder Other Corporate& For the year Notes Driveline Metallurgy Automotive OffHighway Aerospace Unallocated Total ended 31 December 2004 £m £m £m £m £m £m £m Sales 1,899 590 136 287 569 - 3,481 ----------------- ----- ------- ------- ------- ------- ------ ------- ------ EBITDA 240 47 17 26 66 (11) 385 Depreciation and impairment charges (81) (40) (9) (8) (23) - (161) Amortisation of intangible (3) (2) - - (5) - (10) assets ----------- ----- ------- ------- ------- ------- ------ ------- ------ Trading profit 156 5 8 18 38 (11) 214 Restructuring 2a (36) (44) - (6) (11) (3) (100) Other impairments 2a - (162) - - - - (162) Profits on sale of businesses 2b - - - 23 1 - 24 Changes in fair value of derivative financial instruments 2c - - - - - - - ----------------- ----- ------- ------- ------- ------- ------ ------- ------ Operating profit/ (loss) 120 (201) 8 35 28 (14) (24) ----------------- ----- ------- ------- ------- ------- ------ ------- ------ Share of post-tax earnings of joint ventures and associate 15 - 1 - - - 16 -------------------- ------- ------- ------- ------- ------ ------- ------ ------ Segment assets Goodwill 62 24 - 23 99 - 208 Investments in joint ventures 76 - 17 1 - - 94 Derivative - - - - - 1 1 financial instruments Other assets 1,207 495 80 161 400 30 2,373 Unallocated assets - Cash and cash - - - - - 860 860 equivalents - Deferred tax - - - - - 206 206 ----------------- ----- ------- ------- ------- ------- ------ ------- ------ Total assets 1,345 519 97 185 499 1,097 3,742 ----------------- ----- ------- ------- ------- ------- ------ ------- ------ Segment liabilities Derivative - - - - - (6) (6) financial instruments Other liabilities (864) (161) (137) (146) (352) (134) (1,794) Unallocated liabilities - Borrowings - - - - - (795) (795) - Current tax - - - - - (128) (128) liabilities - Deferred tax - - - - - (84) (84) ----------------- ----- ------- ------- ------- ------- ------ ------- ------ Total (864) (161) (137) (146) (352) (1,147) (2,807) liabilities (864) (161) (137) (146) (352) (1,147) (2,807) ----------------- ----- ------- ------- ------- ------- ------ ------- ------ Other segment items Capital expenditure (including acquisitions) - Property, plant and equipment 101 54 2 10 19 1 187 - Intangible assets 5 - - 1 9 - 15 Other non-cash expenses 1 1 - - 1 - 3 ----------------- ----- ------- ------- ------- ------- ------ ------- ------ All business segments shown above are continuing. Discontinued activities in 2004 were the Group's joint venture investments in Aerospace companies which contributed £62 million of post-tax earnings of the year and a further £825 million post-tax profit on their disposal. Intra-group sales, which are priced on an 'arms length' basis between both segments 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 and USA. 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 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m ------------------------ ------ ------ ------- ------ ------- ------ Continuing operations Europe 1,622 1,615 1,278 1,282 115 115 Americas 1,479 1,345 1,123 947 81 58 Rest of the World 547 521 435 416 41 28 Corporate and Unallocated - - 904 1,097 - 1 ------------------------ ------ ------ ------- ------ ------- ------ 3,648 3,481 3,740 3,742 237 202 ------------------------ ------ ------ ------- ------ ------- ------ The sales analysis in the above table is based on the location of the customer. 2 Restructuring and impairment charges(a) 2005 2004 ------------------- ------------------ ---------------- ----- -------- ------- ----- Other Other Restructuring impairments Total Restructuring impairments Total £m £m £m £m £m £m ------------------- --------- -------- ----- -------- ------- ----- Restructuring and impairment charges Goodwill impairment - (11) (11) (10) (102) (112) Tangible fixed asset impairment (35) (10) (45) (51) (60) (111) Other asset --- write-downs (1) - (1) (2) - (2) ------------------ -------- -------- ----- -------- ------- ----- (36) (21) (57) (63) (162) (225) Redundancy costs (net of post-employment curtailments) (28) - (28) (23) - (23) Other --- reorganisation costs (13) - (13) (14) - (14) --------------- --------- -------- ----- -------- ------- ----- (77) (21) (98) (100) (162) (262) ------------------- --------- -------- ----- -------- ------- ----- Restructuring During 2005 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 and overhead costs in other areas of the business. Charges recognised in the year in respect of this programme amount to £77 million which comprises asset impairment charges of £36 million, redundancy costs of £28 million (net of post-employment curtailments, £5 million) and other reorganisation costs of £13 million. An analysis by segment and description of the charges is set out below: 2005 2004 ------------------- -------- -------- ---------- ------- ------- Asset Reorganisation Impairments Redundancy Costs Total Total £m £m £m £m £m ------------------- -------- -------- ---------- ------- ------- Driveline 10 25 11 46 36 Powder Metallurgy 26 1 1 28 44 OffHighway - 1 1 2 6 Aerospace - - - - 11 Corporate - 1 - 1 3 ------------------- -------- -------- ---------- ------- ------- 36 28 13 77 100 ------------------- -------- -------- ---------- ------- ------- Restructuring charges in Driveline in 2005 arise as a consequence of the announced closures of three manufacturing plants; two in North America and one in Western Europe and the continued reduction in the level of fixed cost headcount in plants primarily in the Driveline European operations. The costs charged as incurred or provided for in operating profit and separately identified as restructuring costs include the costs of committed and contractual severance and other employee related exit benefits; post-employment augmentations and curtailments, provisions in respect of onerous lease, property and other contracts, asset impairment charges in respect of plant and machinery not transferable to other facilities, the write down of surplus properties to their estimated realisable value and impairment of dedicated consumable inventories. Incremental costs borne by the Group as a consequence of dedicated restructuring and transition teams is also charged to restructuring. In addition, in respect of the closure of the Driveline Western European facility the costs incurred by the Group in the period from announcement to formal agreement of the Social Plan have been treated as directly attributable to the restructuring as the workforce withdrew their labour whilst on full pay resulting in the immediate curtailment of production. Customer demand in the period was satisfied by other production facilities. Powder Metallurgy charges arise as a consequence of the Board approved closure of five plants. These actions remain broadly in line with the original plans though do include an extension to the original scale and constitution of the programme. Charges comprise property and plant and equipment impairments of £26 million and the cost of redundancies where irrevocable external announcements had been made by 31 December 2005 and actions had commenced. OffHighway charges spent and provided represent plant closure and facility rationalisation costs, including onerous property lease costs. Corporate charges relate to the cost of rebasing central overheads and relate primarily to the reduction in headcount which gave rise to redundancy and pension augmentation charges. Cash outflow in 2005 in respect of the 2005 and earlier years restructuring actions amounts to £37 million (2004: £21 million). Of this amount £1 million (2004: £5 million) relates to the remaining spend on restructuring programmes commenced in earlier years and disclosed as exceptional items under UK GAAP. 2004 restructuring charges comprise asset impairments (£63 million); redundancy charges (£23 million) and reorganisation costs (£14 million). Other impairments In addition to impairment charges borne as a consequence of strategic reorganisation activities, a £21 million impairment charge has arisen in 2005 relating to the write down of goodwill, property, plant and equipment at two automotive businesses where as a consequence of current and future trading performance and projections sufficient doubt exists over the recoverability of the assets. The impairment reviews were carried out with reference to both value in use and fair value recoverabilities. The £11 million goodwill impairment charge arises as a result of the move of production to low-cost regions and performance issues. The remaining £10 million impairment to property, plant and equipment relates to a UK 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 has led to the significant impairment charge. In 2004, impairment charges were recognised in respect of the Powder Metallurgy business amounting to £162 million as a consequence of the annual impairment review. 2 Profits on sale of businesses(b) 2005 2004 £m £m --------------------------------------------------------- -------- ------- Sale of Walterscheid Rohrverbindungstechnik GmbH (TCD) - 23 Other 1 1 --------------------------------------------------------- -------- ------- 1 24 --------------------------------------------------------- -------- ------- The profit recognised in 2005 reflects the cash receipt in respect of acontingent earnout arrangement on the 2004 disposal of an Aerospace business.The primary 2004 transaction relates to the OffHighway disposal of its TCD (Tube Connecting)business to Eaton Corporation. 2 Changes in the fair value of derivative financial instruments(c) IAS 39, which has been adopted for the first time from 1 January 2005, requires derivative financial instruments to be valued at the date of the balance sheet 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 and the Group has not attempted to achieve transactional hedge accounting in 2005. As a consequence, and to assist year on year comparison, the change in value has been identified as a separate element of operating profit as set out below. 2005 2004 £m £m --------------------------------------------------------- -------- ------ Forward currency and commodity contracts (42) - Embedded derivatives 9 - --------------------------------------------------------- -------- ------ (33) - --------------------------------------------------------- -------- ------ Comparative information has not been presented in accordance with the IFRS 1 exemption governing restatement of comparative information on the adoption of IAS 39. 3 Taxation 2005 2004 Analysis of charge in year - continuing operations £m £m --------------------------------------------------------- -------- ------ Current tax Current year 51 48 Adjustments in respect of prior years (35) (35) --------------------------------------------------------- -------- ------ 16 13 Deferred tax 4 19 Tax on change in fair value of derivative financial instruments (6) - ------------------------------------- ------- -------- Total tax charge for the year 14 32 ------------------------------------- ------- -------- Overseas tax included above 28 32 ------------------------------------- ------- -------- Tax on items included in equity ------------------------------------- ------- -------- Deferred tax on post-employment obligations 6 6 Deferred tax on non-qualifying assets (1) (1) ------------------------------------- ------- -------- Tax reconciliation ------------------------------------- ------- -------- Profit/(loss) before tax 73 (83) Charges/(credits) included in operating profit Restructuring and impairment charges 98 262 Profits on sale of businesses (1) (24) Change in fair value of derivative financial instruments 33 - Share of post-tax earnings of continuing joint ventures and associated company (10) (16) ----------------------------------- ------- -------- Adjusted profit before tax 193 139 ------------------------------------- ------- -------- Tax calculated at 30% standard UK corporate tax rate 58 41 Differences between UK and overseas corporate tax rates 12 12 Non-deductible and non-taxable items 15 5 Temporary differences not giving rise to deferred tax adjustment (13) 2 Deferred tax charge in respect of post-employment obligations 15 12 ------------------------------------- ------- -------- Current year tax charge on ordinary activities 87 72 Adjustments in respect of prior years (47) (27) Tax in respect of restructuring and impairment charges (20) (13) Tax on derivative financial instruments (6) - ------------------------------------- ------- -------- Total tax charge for the year 14 32 ------------------------------------- ------- -------- Discontinued operations There were no discontinued operation in 2005. There was no tax charged in respect of the profits earned in respect of discontinued operations in 2004. 4 Earnings per share Basic earnings per share Basic earnings per share are calculated by dividing the profit attributable to equity shareholders by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by the Company and held as treasury shares. Diluted earnings per share Diluted earnings per share are calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has only one category of dilutive potential ordinary shares; share options. The calculation is performed for the share options to determine the number of shares that could have been acquired at fair value (determined as the average market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options. Earnings per share are computed as follows: ------------------- ------- ------- -------- ------- ------- ------- 2005 2004 ------- ------- -------- ------- ------- ------- Earnings Weighted Earnings Earnings Weighted Earnings Average per share Average per share number of number of shares shares £m m p £m m p ------------------- ------- ------- -------- ------- ------- ------- Total company Basic eps: Profit attributable to ordinary shareholders 55 718.1 7.7 769 732.6 105.0 Dilutive securities: Dilutive potential ordinary shares - 5.1 (0.1) - 3.7 (0.6) ------------------- ------- ------- -------- ------- ------- ------- Diluted eps 55 723.2 7.6 769 736.3 104.4 ------------------- ------- ------- -------- ------- ------- ------- Continuing operations Basic eps: Profit attributable to ordinary shareholders 55 718.1 7.7 (118) 732.6 (16.1) Dilutive securities: Dilutive potential ordinary shares - 5.1 (0.1) - 3.7 0.1 ------------------- ------- ------- -------- ------- ------- ------- Diluted eps 55 723.2 7.6 (118) 736.3 (16.0) ------------------- ------- ------- -------- ------- ------- ------- Discontinued operations Basic eps: Profit attributable to ordinary shareholders - 718.1 - 887 732.6 121.1 Dilutive securities: Dilutive potential ordinary shares - 5.1 - - 3.7 (0.6) ------------------- ------- ------- -------- ------- ------- ------- Diluted eps - 723.2 - 887 736.3 120.5 ------------------- ------- ------- -------- ------- ------- ------- Adjusted earnings per share - total company Earnings per share before restructuring and impairment charges, profits on sale 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: -------------------------------------------------- ------- -------- ------- ------- ------- ------- 2005 2004 £m p £m p ------------------- ------- -------- ------- ------- ------- ------- Profit attributable to equity shareholders 55 7.7 769 105.0 Charges / (credits) included in operating - profit: Restructuring and impairment charges 98 13.6 262 35.8 Profits on sale of businesses (continuing and discontinued) (1) (0.1) (849) (115.9) Changes in fair value of derivative financial instruments 33 4.5 - - Taxation on charges/(credits) included in operating profit (26) (3.6) (13) (1.8) ------------------------------ ------- ------- ------- ------- Adjusted earnings attributable to equity shareholders 159 22.1 169 23.1 ------------------------------ ------- ------- ------- ------- Diluted adjusted earnings per share attributable to equity shareholders 22.0 23.0 ------------------------------ ------- ------- ------- ------- 5 Dividends 2005 2004 £m £m ---- ----------------------------------- ------- -------- Equity dividends paid in the year Previous year final : 8.0p (2004: 7.8p) per share 58 57 Current year interim : 4.0p (2004: 3.9p) per share 28 28 ------------------------------------- ------- -------- In addition, the directors are proposing a final dividend in respect of the financial year ending 31 December 2005 of 8.2p per share, £59 million. It will be paid on 17 May 2006 to shareholders who are on the register of members at close of business on 21 April 2006. 6 Post-employment obligations ---------------------------------------- ------- ------- 2005 2004 Post-employment obligations comprise: £m £m ---------------------------------------- ------- ------- Pensions and health care - funded (604) (585) Pensions and health care - unfunded (281) (269) ---------------------------------------- ------- ------- (885) (854) --------------------------------------------------------------- ------- ------- Pensions and healthcare - 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 healthcare 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 Continental Europe funds are retained within the business to provide for post-employment obligations. Defined benefit schemes Independent actuarial valuations of all defined benefit scheme assets and liabilities were carried out at 31 December 2005. 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 % % % % -------------------------- -------- -------- -------- -------- 2005 Rate of increase in pensionable 4.3 3.5 2.5 2.0 salaries Rate of increase in payment and 2.9 2.0 1.5 n/a deferred pensions 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 9.5/4.3 10.0/5.0 n/a n/a -------------------------- -------- -------- -------- -------- 2004 Rate of increase in pensionable 4.3 3.5 3.0 2.0 salaries Rate of increase in payment and 2.9 2.5 1.5 n/a deferred pensions Discount rate 5.30 5.80 4.90 2.30 Inflation assumption 2.8 2.5 1.5 1.0 Rate of increases in medical costs: initial/long term 9.5/4.3 10.0/5.0 n/a n/a -------------------------- -------- -------- -------- -------- The underlying mortality assumptions for the major schemes are as follows: United Kingdom The key current year mortality assumptions for the scheme are that a male aged 65 lives for a further 18 years, whilst a male aged 40 is expected to live a further 19.5 years after retiring at 65. This assumption is based on the specific scheme experience, which has been subject to review by the Continuous Mortality Investigative Board rather than by reference to general UK mortality tables. Overseas In the USA, RP-2000 tables scaled to 2006 were adopted in the year, whilst there was also a change in Germany where the RT2005-G tables were adopted. The amounts recognised in respect of funded obligations in the balance sheet are: 31 December 2005 31 December --------------- ------ ------ ------ ------ UK Americas Europe ROW Total 2004 £m £m £m £m £m £m ---------------------- ------ ------- ------ ------ ------ -------- Present value of funded obligations (2,381) (308) (14) (20) (2,723) (2,446) Fair value of plan assets 1,915 170 20 14 2,119 1,861 ---------------------- ------ ------- ------ ------ ------ -------- Net obligation recognised in the balance sheet (466) (138) 6 (6) (604) (585) ---------------------- ------ ------- ------ ------ ------ -------- 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 December2005Equities 7.5 1,076 8.5 118 - - 5.9 6Bonds 4.4 607 5.0 47 - - 2.5 4Property 6.7 98 - - - - - -Cash/ 4.5 98 4.2 5 - - - -short-termmandateOther assets 4.7 36 - - 4.7 20 1.0 4-------------- ------- ------ ------- ------ ------- ------ ------- ------- 1,915 170 20 14-------------- ------- ------ ------- ------ ------- ------ ------- ------- At 31 December2004Equities 7.5 1,003 8.5 91 - - 5.5 7Bonds 4.9 451 5.0 36 4.9 8 2.5 4Property 6.8 83 - - - - - -Cash/short-term mandate 5.0 121 3.7 1 - - 0.8 6Other assets 5.2 39 - - 5.2 11 - --------------- ------- ------ ------- ------ ------- ------ ------- ------- 1,697 128 19 17-------------- ------- ------ ------- ------ ------- ------ ------- ------- 7 Cash flow statement reconciliations ----------------------------------------------- 2005 2004 Cash generated from operations £m £m ---------------------------------- -------- --------- Operating profit/(loss) 98 (24) Adjustments for: Profits on sale of businesses (1) (24) Fair value of derivative financial instruments 33 - Impairment of fixed assets 50 111 Impairment of goodwill 11 112 Depreciation and amortisation 147 171 Amortisation of capital grants (2) (3) Profits on sale of fixed assets (1) - Charge for share based payments 1 3 Movement in post-employment obligations (43) (149) Changes in working capital and provisions 15 (6) ---------------------------------- -------- --------- 308 191 ---------------------------------- -------- --------- ---------------------------------- -------- --------- 2005 2004 Movement in net (debt)/funds £m £m ---------------------------------- -------- --------- Net movement in cash and cash equivalents (130) 718 Net repayment of borrowings 21 127 Currency variations on borrowings (23) 27 Finance leases 2 - Subsidiaries acquired and sold - (14) ---------------------------------- -------- --------- Movement in year (130) 858 Net funds/(debt) at beginning of year 65 (793) ---------------------------------- -------- --------- Net (debt)/funds at end of year (65) 65 ---------------------------------- -------- --------- ---------------------------------- -------- --------- 2005 2004 Reconciliation of cash and cash equivalents £m £m ---------------------------------- -------- --------- Cash and cash equivalents per cash flow at 31 December 697 827 Add: bank overdrafts included within "current liabilities - borrowings" 30 33 Less: cash and cash equivalents within assets held for sale (3) - ---------------------------------- -------- --------- Cash and cash equivalents per balance sheet at 31 December 724 860 ---------------------------------- -------- --------- 8 IFRS Transition ------------------------------------------------ This is the first year the Group has presented its consolidated results under IFRS. The last audited financial statements under UK GAAP were for the year ended 31 December 2004. The date of the transition to IFRS was 1 January 2004. Set out below are the overall IFRS transition reconciliations which reconcile Profit after taxation for the full year 2004 and the net asset positions as at 1 January 2004 and 31 December 2004 between UK GAAP as reported and IFRS. The information presented is consistent with that disclosed in April 2005 apart from a minor change in respect of deferred taxation (£7 million) as at 1 January 2004. These reconciliations have not been audited. Full year 2004 £m ----------------------------------- -------- --------- Profit after taxation UK GAAP - as previously reported 580 IAS 19 - post-employment obligations: Operating profit 55 Financing cost (29) Deferred tax (12) Share based payments (3) Lower amortisation of non recurring costs 1 Amortisation of purchased intangible assets (1) Deferred tax 2 Amortisation of goodwill written back: Subsidiaries 23 Joint ventures - continuing 1 Joint ventures - discontinued 5 Impairment of goodwill (12) Adjustment to profit on sale of AgustaWestland NV: Change in share of equity following application of 57 IFRS Deferred tax on property sold 9 Cumulative currency adjustment (4) Non re-cycling of goodwill written off to reserves 100 on original acquisition ----------------------------------- -------- --------- IFRS 772 ----------------------------------- -------- --------- -------- --------- 1 January 31 December 2004 2004 £m £m ----------------------------------- -------- --------- Net assets UK GAAP - as previously reported 942 1,490 Post-employment obligations: Increase in liability under IAS 19 (678) (588) Write off of SSAP 24 prepayment (93) (198) Deferred tax relating to pension obligations 203 184 Non recurring costs written off on transition to (13) (12) IFRS Change in equity value of joint ventures: AgustaWestland NV (55) - Continuing joint ventures (1) (1) Increase in net deferred tax liability (21) (8) Goodwill amortisation written back - 23 Impairment of goodwill - (12) Other fair value adjustments - (1) Provision for dividends written back 57 58 ----------------------------------- -------- --------- IFRS 341 935 ----------------------------------- -------- --------- This information is provided by RNS The company news service from the London Stock Exchange

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