4th Aug 2005 07:02
GKN PLC04 August 2005 4 August 2005 For immediate releaseGKN plc 2005 Interim Results Announcement ----------------- ----------------- As reported As reported excluding under IFRS items in note (1) below ------- ------- ------- ------- ------- ------- First First First First Half Half Change Half Half Change 2005 2004 2005 2004 £m £m % £m £m % ---------------------- ------- ------- ------- ------- ------- -------Continuing operations----------------------- Sales 1,859 1,777 5 1,859 1,777 5 Trading profit (1) 115 117 (2) 115 117 (2) Operating profit 72 58 24 115 117 (2) Profit before tax 60 29 107 103 88 17 Profit after tax 42 13 223 78 66 18 Earnings per share - p 5.6 1.6 250 10.5 8.8 19---- --------------------- ------- ------- ------- ------- ------- ------- ---------------------- ------- ------- ------- ------- ------- -------Total Group------------- Profit after tax 42 43 (2) 78 96 (19) Earnings per share - p 5.6 5.7 (2) 10.5 12.9 (19)---- --------------------- ------- ------- ------- ------- ------- ------- Interim dividend per ---- share - p 4.0 3.9 --------------------- ------- -------Note(1) Figures exclude the impact of restructuring and impairment charges,profits and losses on the sale of businesses and the changes in fair value offinancial instruments. Business highlights • Solid results despite challenging automotive markets • Resilient Driveline performance - headline sales up 6% • Powder Metallurgy moves back into profitability • Excellent contribution from OffHighway Systems - sales increase 12% • 10% increase in Aerospace sales - profits double • CVJ manufacturing strategy now widely deployed • Significant product and programme wins across Automotive and Aerospace Kevin Smith, Chief Executive of GKN plc, commented: "GKN has produced a solid set of first half results in turbulent automotivemarkets. Sales of continuing operations were 5% higher and subsidiaries' tradingprofit in the period reduced only slightly, by £2 million to £115 million,despite significant increases in raw material costs. "All of our major businesses made progress with particularly encouraging resultsin Driveline and Aerospace. "The restructuring programme in Driveline and other parts of the Group which wasannounced in March 2004 is well underway and on track to deliver the benefitsoriginally anticipated. "Significant product and programme wins across Automotive and Aerospace providea firm foundation for future growth." Outlook Overall, the outlook for the remainder of the year in our major markets remainsunchanged from the February and May statements. Automotive production forecasts for North America and Western Europe havesoftened slightly but demand in emerging markets remains robust with Chinaexpected to return to growth. Aerospace markets continue to be strong and the OffHighway sector also lookssteady. Global raw material prices will continue to be a major influence on theperformance of the Group's Automotive businesses. Recent decreases in steelsurcharges have been encouraging although the cost of other raw materials andenergy continues to be high. For Automotive we expect an improving level of performance allowing for theinherent seasonality in automotive production between the first and secondhalves of the year. The strategic restructuring programme will continue asplanned. Aerospace and OffHighway are expected to continue to show good levels ofperformance. Based on the Group's first half result and in light of the factors above, we seeno reason at this stage for changing our expectations for the Group's tradingperformance for the year. Further enquiries GKN Corporate CommunicationsTel: 020 7463 2354 Basis of reporting The financial statements for the period are shown on pages 14 to 34. They havebeen prepared under International Financial Reporting Standards (IFRS) andcomparative figures for the first half and full year 2004 have been re-statedaccordingly. Reconciliations of profit and net assets from UK GAAP to IFRS areshown on page 28. It should be noted that IAS 32 and IAS 39, which deal with theaccounting and disclosure for financial instruments, have been adopted from 1January 2005 and, as permitted by IFRS, comparative figures in respect offorward exchange contracts and embedded derivatives have not been re-stated inrespect of their impact. It should also be noted that IFRS requires joint ventures to be accounted for byincluding the appropriate share of their post-tax earnings in profit before taxand their sales are not reported as part of Group turnover. Therefore, wheresales and operating or trading profit figures are quoted in this report they arefor continuing subsidiaries only. In order to ensure comparability and to aid understanding in this transitionalperiod, results have been analysed to show the results of underlying tradingseparate from the impact of marking to market financial instruments, exceptionalrestructuring and impairment charges and profits and losses on the sale ofbusinesses. The main impact of IAS 39 is explained separately below. Changes in the Composition of the Group On 1 February 2005 the Group acquired the 51% of shares it did not already ownin Velcon SA de CV (Velcon), a Mexican manufacturer of constant velocity joints(CVJs), for a cash consideration of US$83 million (£44 million). Velcon hastherefore been reported as a subsidiary for 5 months of 2005 rather than as ajoint venture, as in 2004. The determination of the fair value of net assetsacquired is on-going. The provisional assessment has resulted in the inclusionof additional goodwill of £23 million in these results. There were no businesses divested during the period, though comparison with thefirst half of 2004 is affected by the sale of WalterscheidRohrverbindungstechnik (the former OffHighway Systems business) in August oflast year, the cessation of operations at Thompson Chassis (the formerAutoComponents business) during the second half of 2004 and the change in statusof Tochigi Fuji Sangyo (TFS) from an associated company to a subsidiary fromApril 2004. In the comparative period, the Group's share of the results of theAgustaWestland and Aerosystems International joint ventures are shown asdiscontinued operations following our withdrawal from these areas of operationin the second half of 2004. Group Sales Sales for the period of £1,859 million were £82 million (5%) higher than thefirst half of 2004. The impact of exchange rates on the translation of overseassales was negligible at £2 million negative while the net impact of acquisitionsand divestments was £35 million positive. Excluding these factors the underlyingincrease of £49 million was 3% above the first half of last year. Group Profit Trading profit (which we define as operating profit of subsidiaries beforerestructuring and impairment charges, profits on sale of businesses and thechanges in fair value of financial instruments, and which we consider providesthe best indicator of business performance) was £115 million compared with £117million in the first half of 2004. The impact of exchange rates on the translation of overseas profits was £1million positive and there was no net impact from changes in the portfolio ofbusinesses. The underlying performance was, therefore, 3% lower with improvementin Aerospace and OffHighway Systems businesses offset by reductions inAutomotive. The Automotive reduction was largely caused by raw material costincreases which could not be fully recovered and the adverse impact of exchangerates on transactions (approximately £5 million). These were offset to a largeextent by productivity improvements and reductions in overhead costs, includinglower depreciation charges following asset write-offs at the end of 2004. Costsof customer defaults in the period of £4 million were more than offset byone-off credits arising from the settlement of legal and other claims. Divisional performance Automotive The Group's Automotive activities are reported under three segments, Driveline,Powder Metallurgy and Other Automotive, each of which is discussed separatelybelow. Markets Globally, car and light vehicle production in the first half of 2005 was broadlylevel with the same period of 2004. Production levels in mature markets fell slightly, with North America down by 3%at 8.1 million vehicles and Western Europe 2% lower at 8.5 million. Japan,however, showed growth of 3% to 5.3 million vehicles. Within emerging markets, production in China was flat at 2.4 million vehiclesand the competitive environment became more intense with western car makerslosing market share. However, there was strong growth in Brazil (up 16% to 1.1million), South Korea (up 11% to 1.8 million) and India (up 14% to 0.7 million). In North America, Ford and General Motors lost market share and, as noted below,this impeded the recovery in Powder Metallurgy. Costs Raw material costs continued to be a major factor in the period and steelprices, which had risen sharply in 2004, started 2005 at a high level. Whilst the adverse impact in 2004 came largely from scrap steel prices andsurcharges, in early 2005 Driveline also saw annual steel and component supplycontracts increase by some £30 million a year. During the six month period toJune, this additional £15 million cost on Driveline's base contracts wascompounded by continuing high scrap prices and surcharges in all Automotivedivisions, which, together with higher prices for other raw materials such asmolybdenum, took the overall increase in Automotive raw material costs over theequivalent period of 2004 to some £31 million. Negotiations with our customers have resulted in approximately half of this costbeing recovered. In recent months, scrap prices in both the US and Europe have shown a sharpcorrection and are now at a level which, if maintained, would make steel costsoverall in the second half of 2005 slightly favourable to the second half of2004. However, this benefit seems likely to be offset by the cost of other rawmaterials which continues to be high. GKN Driveline (Trading profit £76 million, 2004 - £78 million) GKN Driveline comprises GKN Driveshafts, which is the global leader in theproduction of constant velocity jointed (CVJ) products for use in light vehicledrivelines, and Torque Systems Group, which itself comprises Torque Technology,Industrial and Distribution Services (IDS) and Speciality Vehicles. TorqueTechnology produces a wide variety of components aimed at actively managing theflow of torque to the driven wheels. The division produced resilient first half results with sales of £1,019 million,an increase of 6% over the £964 million in the same period last year. The impactof acquisitions (mainly the treatment of Velcon as a subsidiary from 1 February2005 and TFS as a subsidiary from 1 April 2004), and the effect of currency ontranslation was a net benefit of £65 million. Eliminating these two factors,sales reduced by 1% with increases in Asia Pacific and South American marketsmore than offset by reductions in Western Europe and North America. Trading profit fell by £2 million to £76 million. Excluding the impact ofacquisitions and currency translation the reduction was £9 million. This waslargely the result of higher raw material costs, the gross impact of which isestimated at £23 million between the half years. Whilst a significant proportionwas recovered from customers, the division also achieved improvements fromproductivity gains and reduced overheads. In the Torque Systems Group, actions taken to reduce overheads in Japan and theIDS business generated savings in line with expectations. There was also successin winning new business, although sales were somewhat lower mainly due to thediscontinuation of some non-core activities and reductions in the Chinesecastings business. In addition, Mitsubishi's first half problems led to somereduction in Japan. The shares of TFS were de-listed from the Tokyo StockExchange in April and we are in the process of acquiring the remaining minorityinterests. The Driveline restructuring programme announced in March 2004 continued in linewith plan. The acquisition of the entire shareholding in Velcon on 1 Februarymeant that the North American element of this programme could be commenced, andthe closure of two US plants was announced at the end of June. In Europe, we announced at the end of June that we were commencing negotiationswith the workforce on the future options for our Florange facility in France.The results of the negotiations are expected to crystallise during the secondhalf of this year. Powder Metallurgy (Trading profit £9 million, 2004 - £12 million) Powder Metallurgy produces metal powder and sintered products largely for majorautomotive and industrial equipment manufacturers. Sales in the period were £300 million compared with £311 million in the firsthalf of 2004. Excluding the impact of currency on translation the reduction was£7 million (2%). All of this reduction occurred in North America, which accountsfor over half of the total divisional revenue, where a large proportion of salesgo directly or indirectly to Ford and General Motors whose production was downby 7% and 13%, respectively, compared with the first half of 2004. SinterMetals' sales in North America in the first half at constant exchange ratesshowed a reduction of 10% from a year earlier whilst sales were 5% higher inEurope and 16% higher in Asia Pacific and South America. The expansion of ouroperations in Asia, through the construction of a new plant in India, continuesto underpin this customer diversification. Trading profit fell by £3 million by comparison with first half 2004, with thefall in US sales exacerbated by higher raw material costs, the impact of whichwas £5 million. However, operational improvements, customer pricing actions andlower fixed costs (including lower depreciation following 2004 asset write-offs)combined to partially offset these factors. Other Automotive (Trading loss £1 million, 2004 - Trading profit £7 million) Other Automotive consists of our AutoComponents business which manufacturesstructural components and engine cylinder liners, principally in the UK forpassenger car, light vehicle and heavy commercial vehicle markets in WesternEurope and North America. Sales in the half were £68 million compared with £74 million in the same periodof 2004, largely as a result of the cessation of operations of the ThompsonChassis business during the second half of 2004. The major replacement programmeis being conducted through the Chassis Systems joint venture. The reduction inprofit arose partially as a consequence of these reduced sales and, moreimportantly, the absence of end of platform life benefits which favourablyimpacted 2004. Little improvement is expected in the second half of the year asstructural issues are addressed. Work commenced during the period in establishing a low cost Chinese cylinderliner facility which will serve both existing and emerging markets. OffHighway Systems (Trading profit £13 million, 2004 - £13 million) OffHighway Systems designs and manufactures steel wheels and driveline systemsfor the global agricultural and construction industries. The favourable market conditions for both agricultural and constructionequipment continued in the period. The European agricultural market, the mostimportant for the division, was marginally higher than the first half of 2004.In the US, the agricultural machinery market saw a further 5% growth in 2005following 23% in 2004, while worldwide construction markets continue to exhibitdouble digit growth. Divisional sales in the period were £173 million, an increase of 12% over 2004.Eliminating the effect of the 2004 divestment and translational currency,however, the improvement was 21% of which approximately half arose through therecovery of steel prices with the balance from underlying growth. In addition tothe strong market conditions there were also share gains in a number of productareas. Reported trading profit of £13 million was the same as last year but if theeffect of divestment and currency translation is eliminated there was a £3million (30%) improvement. During the period a new manufacturing facility was opened in Brazil to servewhat is becoming a major agricultural market and further development in emergingmarkets is likely. GKN Aerospace (Trading profit £24 million, 2004 - £12 million) GKN Aerospace is a leader in the design and manufacture of advanced structuralcomponents, parts for propulsion systems and specialised products includingtransparencies and complex composite and metal structures for both fixed androtary wing aircraft. The military aircraft market is forecast to remain steady for both 2005 and 2006before dipping slightly in 2007. For civil markets, passenger miles flown in thefirst five months of 2005 increased by just under 9% globally over the sameperiod in 2004 and both Airbus and Boeing are forecasting year on year increasesin aircraft deliveries which total some 12%. Against this background, sales in the first half of £299 million were £26million (10%) above the same period last year. After eliminating the impact ofcurrency, the increase was 12%. This increase reflected stronger civil demand aswell as a continuation of firm military markets and the commencement ofproduction on earlier contract wins. Trading profit of £24 million was double the £12 million in the first half of2004 which had been impacted by the temporary closure of a US facility as aresult of customer programme delays and asset write-downs. Current periodperformance largely maintained the improved margin levels which were reported inthe second half of 2004 as a consequence of stronger sales, prior years'restructuring and cost reduction programmes. Major milestones for the business in the period included the extension of thework scope on the composite fan containment case for the GEnex engine,definitisation of a contract for the product definition phase of the NorthropGrumman X-47B J-UCAS and the first flight of a GKN produced canopy for the JointStrike Fighter. In June, the Advanced Composite Development Centre at Cowes,Isle of Wight was opened. The immediate goal of the Centre will be to reduce thecost of carbon fibre composite structures by a further 30% from today's values,by a combination of qualification of cheaper raw product and automatedmanufacturing methods. Restructuring costs Restructuring charges of £19 million in the half (first half 2004 - £59 million)related to the continuation of the programme announced in March 2004 to re-alignproductive capacity in GKN Driveline and reduce overheads elsewhere in the Groupand comprised £5 million asset write-downs and £14 million redundancy and otherreorganisation costs. A more detailed analysis is given in Note 4 on page 22.Estimates of the total costs and benefits of the restructuring programme remainunchanged. Changes in fair value of financial instruments The charge of £24 million in respect of the changes in fair value of financialinstruments (forward exchange contracts and embedded derivatives) reflects thechange in market value of such instruments between 1 January 2005 and 30 June2005 or at the date of maturity, if earlier. The largest element of the chargerelates to forward exchange contracts which exist solely to hedge transactionalforeign currency exposures but do not meet the very specific criteria requiredto achieve hedge accounting under IAS 39. A further analysis is shown at Note 9on page 27. Joint ventures The post-tax earnings of joint ventures in the period were £5 million comparedwith £9 million a year earlier. Part of the reduction was caused by the move ofVelcon to subsidiary status, but underlying performance was weaker in ourChinese joint ventures and Emitec. Chassis Systems, the joint ventureestablished with Dana Corporation in 2002, moved into full production in thefirst six months of 2005. Statutory operating profit Operating profit on a statutory basis was £72 million compared with £58 millionin the first half of last year. Financing costs Net financing costs totalled £17 million (first half 2004 - £38 million) andincluded financing costs of post-employment benefits of £11 million (first half2004 - £14 million). The balance of £6 million (first half 2004 - £24 million)represented the net amount of interest payable on borrowings and interestreceivable on deposits, with the reduction mainly due to interest received onthe proceeds from the sale of the Group's interest in AgustaWestland. Profit before tax Profit before tax for continuing operations on a statutory basis (which includesthe post-tax earnings of joint ventures) was £60 million (first half 2004 - £29million) although this favourable comparison is influenced by the interestbenefit from the AgustaWestland disposal proceeds. Excluding restructuring andcharges relating to the changes in fair value of derivative financialinstruments, the figure was £103 million (first half 2004 - £88 million, fullyear 2004 - £155 million). Taxation The tax charge for the period, including deferred taxation, was £18 million(first half 2004 - £16 million) and included a £2 million (first half 2004 - £6million) credit for tax relief on restructuring and impairment charges and a £5million credit (first half 2004 - nil) for tax relief in relation to IAS 39.Excluding these credits, the tax charge as a percentage of profit before tax,restructuring and impairment charges and charges relating to changes in the fairvalue of financial instruments was 25.5% compared with 27.8% in the first halfof 2004. The reduced tax rate is largely attributable to an increase in thelevel of UK profits which benefit from a low effective tax rate, although 2004benefited from one-off credits on settlement of prior period items. The underlying rate for the full year is expected to be at broadly the samelevel as the first half, although some impact may again be seen from favourablesettlements of outstanding tax matters. Discontinued operations There was no profit or loss from discontinued operations during the period (2004- profit £30 million). The 2004 figure was mainly the Group's share of thepost-tax profit of AgustaWestland (based on IFRS figures supplied by thatcompany for which audited information is not yet available) together with theshare of post-tax profits of Aerosystems International, both companies havingbeen sold in the second half of 2004. Earnings per share Statutory earnings per share (EPS) were 5.6p (first half 2004 - 5.7p). Forcontinuing businesses the comparative figure for the first half of 2004 was1.6p. Excluding restructuring and charges relating to changes in the fair value offinancial instruments, EPS were 10.5p (first half 2004 - 12.9p). For continuingbusinesses the comparative figure for the first half of 2004 was 8.8p. Thesereflect the movements in pre-tax profits and discontinued operations referred toabove. Dividends The Board has decided to pay an interim dividend of 4.0p per share, representingan increase of 2.6% over the 2004 interim dividend. The cost of this dividendwill be £29 million (first half 2004 - £28 million). The interim dividend will be paid on 30 September 2005 to shareholders on theregister at 19 August. Shareholders may choose to use the Dividend ReinvestmentPlan (DRIP) to reinvest the interim dividend. The closing date for receipt ofnew DRIP mandates is 16 September 2005. Cash Flow and borrowings Cash generated from operations was £109 million compared with £148 million inthe first half of 2004, and was after cash spent on restructuring of £13 million(first half 2004 - £8 million). The cash outflow on working capital and provisions of £65 million (first half2004 - £18 million) reflected a return to the more normal half-yearly patternfollowing an unusually strong performance in the first half of 2004. Inaddition, Driveline's restructuring programme led to slightly higher levels ofsafety stock and there was also some lengthening of credit terms, particularlyin Europe. Capital expenditure on tangible assets totalled £106 million (first half 2004 -£90 million) and was 1.5 times depreciation and amortisation (first half 2004 -1.1 times). This again reflected progress of the Driveline restructuringprogramme and the ratio is expected to remain at this level for the whole year,notwithstanding that depreciation and amortisation is likely to be some £5million higher in the second half than the first. Spending on intangible assets was £8 million (first half 2004 - £7 million) andcomprised computer software and Aerospace development costs. £37 million (first half 2004 - £22 million) was spent on business acquisitions.£44 million was in respect of Velcon (reduced to £35 million as a result of cashof £9 million in the company at the acquisition date) with a further £2 millionon buying an additional 3.2% of the share capital of TFS. £21 million (first half 2004 - nil) was spent in the purchase of the Company'sown shares which have not been cancelled but are held in treasury. The cost of the 2004 final dividend, which was paid in May 2005, was £58 million(first half 2004 - £57 million). At the end of the period there were net borrowings of £72 million compared withnet funds of £65 million at the end of 2004. Post-employment costs Post-employment costs have been accounted for under IAS 19 (revised) which hasbeen adopted early in anticipation of EU ratification. In the Income Statement, charges for post-employment costs appear in two places.The current service cost is included in trading and operating profit, whilst thenet difference between the expected return on pension scheme assets and thenotional interest on pension obligations appears under financing costs as "othernet financing charges". The assumptions underlying the calculation of thesefigures are shown in Note 7 on pages 25 and 26. For the six month period, the current service cost included in operating profitof £16 million is at the same level as 2004. Expected returns on pension scheme assets for the period of £59 million weremore than offset by the £70 million of notional interest on pension schemeliabilities and resulted in a net financing charge of £11 million. The chargefor the corresponding period in 2004 was £14 million. FundingDetails of the major Group post-employment obligations are shown in Note 7. Thegross deficit at 30 June 2005 was £921 million, a £67 million increase overDecember 2004, and is shown on the balance sheet as a non-current liability. Theincrease of £76 million in the total market value of assets was more than offsetby the £143 million increase in liabilities largely due to reductions in therates at which pension liabilities are discounted in the Americas and in the UK. Company contributions for the six months across the Group totalled £20 million,a £17 million reduction over the same period in 2004. The reduction was mainlydue to the £100 million payment to the UK scheme in December 2004. That paymentrepresented two and half years of advance funding of the deficit contributionsand therefore resulted in a £20 million benefit to the level of cashcontribution in the first half of 2005 when compared to the same period in 2004. UK SchemeThe gross deficit under IAS 19 (revised) of £459 million was marginally higherthan the 2004 December year end gross deficit of £455 million. Actual returns onpension scheme assets were £57 million higher than expected but these were morethan offset by the £60 million increase in liabilities resulting from the 30basis points reduction in the discount rate to 5%. Consideration is being given to the most appropriate future funding of thescheme in the light of the new UK pension legislation and an on-going actuarialvaluation. IAS 39 - Accounting for Financial Instruments The basis of accounting for financial instruments, including foreign exchangecontracts which hedge trading transactions, is governed by IAS 39 "FinancialInstruments: Recognition and Measurement". As noted above the Group has adoptedIAS 39 with effect from 1 January 2005. Accounting for foreign exchange contracts. The accounting for the movement in the fair value of foreign exchange contractstaken out to hedge commercial trading transactions is dependent on whether hedgeaccounting is adopted. Irrespective of whether hedge accounting is adopted ornot the Group's commercial hedging policies have not been affected. Where cash flow and net investment hedge accounting is adopted the fair value ofopen contracts, established from the differential between the contract rate andthe forward rate for that contract at the period end, is accounted for throughreserves until the underlying commercial transaction being hedged takes place(e.g. the forecast sale or purchase being hedged crystallises and an invoice israised or received). After this point the movement on the fair value of thecontract is recycled out of reserves. The financial asset or liabilityestablished when the contract was initially taken out is eliminated when thefinancial instrument is settled. When hedge accounting is not adopted the movement on the fair value of opencontracts is taken directly to the Income Statement as a charge or credit tooperating profit. The Group has not adopted hedge accounting for its transactional hedging for thefirst half year but continues to keep the matter under review. On the adoption of IAS 39 at 1 January 2005, the fair valuation of foreignexchange contracts resulted in an increase in net assets of £29 million. At 30June 2005 the net valuation of foreign exchange contracts reduced net assets by£1 million. The difference in value between the two dates of £30 million hasbeen charged to operating profit. Accounting for embedded derivatives An embedded derivative exists where a characteristic of a commercial contractcauses the cash flows of the underlying contract to vary in a manner as if aseparate derivative or financial instrument existed. IAS 39 requires certain embedded derivatives to be valued independently of thehost contract and movements in the fair value of the derivative taken to theIncome Statement. Valuation of the derivatives is made with reference to (i) thefixed contractual term of the contract and (ii) the differential between thecontract exchange rate and the forward rates over the contractual period. The Group has a small number of commercial contracts where the price is fixed ina currency other than that of the contracting parties. The most significant ofthese are Aerospace contracts denominated in US dollars. Whilst this is anextremely common occurrence and applies strictly for commercial reasons, suchcontracts nonetheless fall to have the derivative separately valued. The impactof this has been to introduce a liability of £6 million onto the Group balancesheet at 1 January 2005 which had fallen to nil by 30 June. The movement of £6million has been credited to operating profit. Investment in overseas operations The Group hedges its overseas investments using financial instruments. These areaccounted for using hedge accounting with the movement in value charged orcredited directly to reserves. Because these were in place in 2004 comparativebalance sheet figures have been re-classified accordingly. Summary In summary, the application of IAS 39 has resulted in a net charge to operatingprofit of £24 million in the six months to 30 June 2005. This element ofoperating profit is highlighted separately on the face of the Income Statementand, where appropriate, deferred tax has been applied to this charge. AdoptingIAS 39 does not require the restatement of comparatives. APPENDICES PageGKN Consolidated Financial Statements Consolidated Income Statement for the half year ended 30 June 2005 14 Consolidated Balance Sheet at 30 June 2005 15 Statement of Changes in Equity for the half year ended 30 June 2005 16 Consolidated Cash Flow Statement for the half year ended 30 June 2005 17 Notes 18-34 CONSOLIDATED INCOME STATEMENTFOR THE HALF YEAR ENDED 30 JUNE 2005------------------------- ------ ------- ------- -------- Unaudited ------------------ First half First half Full year 2005 2004 2004 Notes £m £m £m------------------------- ------ ------- ------- -------- SalesContinuing subsidiaries 1 1,859 1,777 3,481------------------------- ------- ------- -------- Trading profit 1 115 117 214Restructuring and impairmentcharges 4 (19) (59) (262)Profits on sale of businesses 4 - - 24Changes in fair value of financialinstruments 9 (24) - -------------------------- ------- ------- --------Operating profit/(loss) 72 58 (24) Post tax earnings of continuing jointventures andassociated company 1 5 9 16 ------- ------- --------Interest payable (28) (32) (69)Interest receivable 22 8 23Other net financing charges (11) (14) (29) ------- ------- --------Net financing costs 3 (17) (38) (75) ------- ------- --------Profit / (loss) before taxationfrom continuing operations 60 29 (83) Taxation 5 (18) (16) (32)----------------------------- ------- ------- --------Profit / (loss) after taxationfrom continuing operations 42 13 (115)----------------------------- ------- ------- -------- Discontinued operations Share of post tax earnings of joint ventures - 30 62Profit on disposal of joint ventures, 4 after taxation - - 825------------------------- ------- ------- -------- Profit from discontinued operations - 30 887------------------------- ------- ------- -------- ------- ------- --------Profit for the period 42 43 772------------------------- ------- ------- -------- Profit attributable to minority interests 2 1 3Profit attributable to equityshareholders 40 42 769 ------------------------- ------- ------- -------- 42 43 772 ------- ------- -------- Earnings per share - p 6Total:------------------------- ------- ------- --------Basic 5.6 5.7 105.0------------------------- ------- ------- --------Diluted 5.5 5.7 104.4------------------------- ------- ------- --------Continuing operations:------------------------- ------- ------- --------Basic 5.6 1.6 (16.1)------------------------- ------- ------- --------Diluted 5.5 1.6 (16.0)------------------------- ------- ------- -------- CONSOLIDATED BALANCE SHEETAT 30 JUNE 2005 Unaudited ------------------------- 30 June 30 June 31 December 2005 2004 2004 £m £m £m ---------- --------- ---------AssetsNon-current assetsGoodwill 247 327 208Intangible assets 44 33 44Property, plant and equipment 1,347 1,380 1,287Investment in joint ventures and other receivables 87 261 111Deferred tax assets 204 206 199 ---------- --------- --------- 1,929 2,207 1,849 ---------- --------- ---------Current assetsInventories 465 438 443Trade and other receivables 670 642 577Derivative financial instruments 29 22 1Cash and cash equivalents 727 177 860 ---------- --------- --------- 1,891 1,279 1,881 ---------- --------- --------- Total assets 3,820 3,486 3,730-------------------------- ---------- --------- --------- LiabilitiesCurrent liabilitiesTrade and other payables andprovisions (840) (895) (838)Current income tax liabilities (137) (158) (128)Borrowings (58) (47) (54)Derivative financial instruments (47) - (6) ---------- --------- --------- (1,082) (1,100) (1,026) ---------- --------- ---------Non-current liabilitiesProvisions (92) (68) (97)Deferred tax liabilities (93) (92) (84)Borrowings (741) (1,009) (741)Post-employment obligations (921) (972) (854) ---------- --------- --------- (1,847) (2,141) (1,776) ---------- --------- --------- Total liabilities (2,929) (3,241) (2,802) ---------- --------- --------- Net assets 891 245 928 ---------- --------- --------- EquityOrdinary shares and share premium 392 382 383Treasury shares (51) - (30)Retained earnings and other reserves 515 (166) 545 ---------- --------- ---------Equity interest 856 216 898Minority interests - equity 35 29 30 ---------- --------- --------- 891 245 928 ---------- --------- --------- STATEMENT OF CHANGES IN EQUITYFOR THE HALF YEAR ENDED 30 JUNE 2005 Unaudited --------------------- First Half First Half Full Year 2005 2004 2004 £m £m £m ---------- --------- ---------Shareholders' equity at start of period 898 318 318Adjustment in respect of adoption of IAS 39 (see Note 9) 20 - - -------- -------- ---------Shareholders' equity at start of period as adjusted 918 318 318 -------- -------- --------- Currency variations 39 (45) (52)Revaluation adjustments arising onchanges in status of equity accountedinvestments (2) 2 2Derivative financial instruments (seeNote 9) (12) 19 24Actuarial (loss)/gain arising onpost-employment obligations,net of deferred tax:Subsidiaries (59) (69) (50)Joint ventures - 4 (7) -------- -------- ---------Net losses not recognised in IncomeStatement (34) (89) (83)Profit attributable to equity shareholders 40 42 769 -------- -------- ---------Total recognised profit / (loss) forthe period 6 (47) 686 -------- -------- --------- Dividends (58) (57) (85)Share based payments 2 1 3Issue of ordinary shares net of costs 9 1 2Purchase of own shares into treasury (21) - (30)Cumulative currency difference realised ondisposal ofAgustaWestland NV - - 4 -------- -------- --------- (68) (55) (106) -------- -------- --------- Shareholders' equity at end of period 856 216 898 -------- -------- --------- CONSOLIDATED CASH FLOW STATEMENTFOR THE HALF YEAR ENDED 30 JUNE 2005 Unaudited ------------------ First half First half Full year 2005 2004 2004 £m £m £m ------- ------- -------Cash flow from operating activitiesCash generated from operations (note a) 109 148 193Interest received 14 1 21Interest paid (34) (38) (67)Tax paid (12) (20) (47)Dividends received from joint ventures 6 10 10 ------- ------- -------Net cash from operating activities 83 101 110 ------- ------- ------- Cash flow from investing activitiesAcquisitions of subsidiaries (37) (14) (15)Acquisitions of joint ventures - (8) (8)Proceeds from sale of property, plant and equipment 1 3 7Purchase of property, plant andequipment and intangible assets (114) (97) (197)Proceeds from sale of businesses - - 29Proceeds from sale of joint ventures - - 1,039Investment loans and capitalcontributions 2 (1) (1) ------- ------- -------Net cash used in investingactivities (148) (117) 854 ------- ------- ------- Cash flow from financing activitiesNet proceeds from issue of share capital 9 1 2Purchase of own shares intotreasury (21) - (30)Finance lease payments - - (1)Net movement in borrowings (1) 126 (127)Dividends paid to shareholders (58) (57) (86)Dividends paid to minorityinterests - (1) (1) ------- ------- -------Net cash used in financingactivities (71) 69 (243) ------- ------- ------- Currency variations on cash andcash equivalents 1 (4) (3) ------- ------- ------- Net movement in cash and cashequivalents (note b) (135) 49 718Cash and cash equivalents at 1 January 827 109 109 ------- ------- -------Cash and cash equivalents at end of period 692 158 827 ------- ------- ------- Cash and cash equivalents above includes bank overdrafts which are included withincurrent liabilities, not separately identified on the balance sheet. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTSFOR THE HALF YEAR ENDED 30 JUNE 2005 Note a: Cash generated from operations Unaudited --------------------- First half First half Full year 2005 2004 2004 £m £m £m ------- ------- -------Cash generated from operationsProfit / (loss) before tax fromcontinuing operations 60 29 (83)Adjustments for:Interest receivable (22) (8) (23)Interest payable 28 32 69Share of post tax earnings ofjoint ventures and associatedcompany (5) (9) (16)Changes in fair value of financial instruments 24 - -Profits on sale of businesses - - (24)Impairment of fixed assets 5 37 104Impairment of goodwill - 5 112Depreciation and amortisation 75 87 170Charge for share based payments 2 1 3Movement in post-employmentobligations 7 (8) (120)Changes in working capital andprovisions (65) (18) 1 -------- -------- --------- 109 148 193 -------- -------- --------- There was no cash generated from discontinued operations which were all jointventures accounted for under the equity method. Note b: Movement in net funds Unaudited --------------------- First half First half Full year 2005 2004 2004 £m £m £m -------- -------- ---------Net movement in cash and cashequivalents (135) 49 718Repayment/(proceeds) of borrowings 1 (126) 127Currency variations on borrowings (3) 5 27Subsidiaries acquired and sold - (14) (14)-------------------------------- -------- -------- ---------Movement in period (137) (86) 858Net funds at beginning of period 65 (793) (793)-------------------------------- -------- -------- ---------Net funds at end of period (72) (879) 65-------------------------------- -------- -------- --------- NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2005 1 Segmental analysis (unaudited) ------------------ ------- ------- ------- -------- ------- -------- ------ Driveline Powder Other OffHighway Aerospace Corporate & Total Metallurgy Automotive Systems Unallocated £m £m £m £m £m £m £m Sales 1,019 300 68 173 299 - 1,859 ------------------ ------- ------- ------- -------- ------- -------- ------ Trading profit 76 9 (1) 13 24 (6) 115 Restructuring and impairment charges (18) - - (1) - - (19) Changes in fair value of financial instruments (16) 1 - (1) (8) - (24) ------------------ ------- ------- ------- -------- ------- -------- ------ Operating profit 42 10 (1) 11 16 (6) 72 ------------------ ------- ------- ------- -------- ------- -------- ------ Share of net profit of joint ventures 4 - 1 - - - 5 ------------------ ------- ------- ------- -------- ------- -------- ------ FOR THE HALF YEAR ENDED 30 JUNE 2004 ------------------ ------- ------- ------- -------- ------- -------- ------ Driveline Powder Other OffHighway Aerospace Corporate & Total Metallurgy Automotive Systems Unallocated £m £m £m £m £m £m £m Sales 964 311 74 155 273 - 1,777 ------------------ ------- ------- ------- -------- ------- -------- ------ Trading profit 78 12 7 13 12 (5) 117 Restructuring and impairment charges (19) (29) - - (10) (1) (59) ------------------ ------- ------- ------- -------- ------- -------- ------ Operating profit 59 (17) 7 13 2 (6) 58 ------------------ ------- ------- ------- -------- ------- -------- ------ Share of net profit of joint ventures and associate 10 - (1) - - - 9 ------------------ ------- ------- ------- -------- ------- -------- ------ FOR THE YEAR ENDED 31 DECEMBER 2004 ------------------ ------- ------- ------- -------- ------- -------- ------ Driveline Powder Other OffHighway Aerospace Corporate & Total Metallurgy Automotive Systems Unallocated £m £m £m £m £m £m £m Sales 1,899 590 136 287 569 - 3,481 ------------------ ------- ------- ------- -------- ------- -------- ------ Trading profit 156 5 8 18 38 (11) 214 Restructuring and impairment charges (36) (206) - (6) (11) (3) (262) Profits on sale of businesses - - - 23 1 - 24 ---------------- ------- ------- ------- -------- ------- -------- ------ Operating profit 120 (201) 8 35 28 (14) (24) ------------------ ------- ------- ------- -------- ------- -------- ------ Share of net profit of joint ventures and associate 15 - 1 - - - 16 ------------------ ------- ------- ------- -------- ------- -------- ------ Intra-group sales between divisions were not material in any of the above periods. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2005 2 Basis of preparation The interim consolidated financial statements of GKN plc are for the six months ended 30 June 2005. These interim consolidated financial statements have been prepared in accordance with those IFRS standards and IFRIC interpretations issued and effective or issued and early adopted as at the time of preparing these statements (July 2005) and in respect of IAS19 issued but awaiting EU ratification. The IFRS standards and IFRIC interpretations that will be applicable at 31 December 2005, including those that will be applicable on an optional basis, are not known with certainty at the time of preparing these interim consolidated financial statements. The Group's IFRS accounting policies set out in Note 11 have been consistently applied to all the periods presented except for those relating to the classification and measurement of financial instruments. The policies applied to financial instruments for 2004 were those disclosed in the 2004 Annual Report. GKN plc's consolidated financial statements were prepared in accordance with the United Kingdom's Generally Accepted Accounting Principles (UK GAAP) until the year ended 31 December 2004. UK GAAP differs in some areas from IFRS. In preparing GKN plc's 2005 interim consolidated financial statements,Related Shares:
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