Chief Executive’s review

New technologies and new products are creating opportunities to build stronger relationships with our customers as they strive to develop more highly engineered solutions for a low carbon world.

In closing last year’s statement, I wrote that “Against a background of expected improvements in global economies, the Group should make significant progress in 2010. Our balance sheet strength and excellent market positions give the Board confidence in a strong and sustained GKN recovery.”

I am pleased to be able to report that the Group’s performance in the year has fully underscored that statement. A strong set of financial results, together with the excellent progress made in the continued development of our market leading businesses, provide a solid platform for continued above-market growth, improving profitability and strong cash generation.

Our markets and divisional performance

The recovery in global automotive production which started in the second half of 2009 accelerated in 2010 with demand stronger than we had anticipated. Global production reached 75 million units in the year, which is now higher than 2007 pre-recession levels and compares with 60 million vehicles in 2009. The geographical distribution of this production is now however significantly different, with demand in Western Europe, North America and Japan still down around 20% on 2007, whilst China’s output has doubled and we have experienced strong growth in Brazil and India.

GKN’s global positioning, together with our exposure to the high performing European premium brands, has enabled us to take full advantage and revenues in Driveline and Powder Metallurgy increased by 38% in the year. The benefits of the significant restructuring programme launched at the end of 2008 also contributed to a very strong bounce back in profitability, and trading profits for these two divisions reached £223 million, which compares with £3 million in 2009.

Last June we launched a new division – GKN Land Systems, which brought together the OffHighway business with our AutoStructures operations and the Aftermarket business of GKN Driveline. This new division will focus on better exploiting GKN’s competencies in markets we already serve, such as agriculture, mining, construction, defence and rail, and also build positions in new industrial sectors. In the first half of 2010 we saw the start of recovery in the global heavy construction and mining equipment markets together with improving agricultural equipment demand in North America and by the final quarter the beginnings of the recovery in the European agricultural machinery market. Land Systems performance also benefited from 2009 restructuring actions and, on revenues of £699 million (up £106 million), the division turned a small prior year loss into a trading profit of £37 million.

In aerospace, notwithstanding the very negative impact of the recession on the airline industry, large commercial aircraft production has fallen only slightly and is already starting its recovery, with output for both wide bodied and narrow bodied aircraft expected to increase in 2012. GKN’s defence activities (47% of Aerospace revenues) are almost entirely associated with US Government programmes, and in 2010 the production rundown of the F-22 fighter aircraft commenced and schedule reductions on the C-17 transporter were implemented. Growth in new programme revenues was not able to compensate and as a result GKN’s Aerospace revenues were down around 2% and profits reduced by £7 million to £162 million.

Group performance

Overall GKN Group sales were up 22% to £5.4 billion and trading profit more than doubled to £411 million.

Group cash flow has again been strong, with particular emphasis on working capital control where, notwithstanding rapidly increasing production activity, inventory turns continued to improve. As a result net debt reduced from £300 million to £151 million.

The final actions in the Group restructuring programme were launched in the second half, and will conclude early in 2011. This will bring to an end a period of extensive strategic and recessionary-driven restructuring which commenced in 2004.

Building the future

It’s been extremely encouraging to see the continued success of all four divisions in winning new business and launching new products.

In Driveline, recent high levels of new driveshaft business have led to the launch of an expansion programme in India, China and North America which will add approximately 60% to available capacity in those markets over the next few years. Demand for new trans axle and electronic torque control products has also been encouraging, and we have secured new hybrid electric vehicle transmission programmes in Japan and North America to add to the hybrid rear axle product that will be available on the Peugeot 3008 HYbrid4 system in 2011.

Powder Metallurgy continues to benefit from demands on auto manufacturers to implement new technologies to improve fuel efficiency and reduce emissions. Variable valve timing in engines, dual clutch transmissions and lightweight, high performance pumps, transmissions and differentials, together with soft magnetic components in electric motors and alternators, are examples of a whole range of new applications secured by Powder Metallurgy which will support strong revenue growth in the coming years.

Our strategy in Land Systems will take some time to evolve, although we are already seeing the benefits in our order books of providing an outlet for GKN driveline technology in offhighway markets. A constant velocity jointed driveshaft has been developed for agricultural tractors, improving mobility, comfort and speed of operation, and a GKN torque sensing product which links with the tractor GPS now enables much more efficient land fertilisation. Land Systems has also developed a hydro split gearbox which allows continued and automatic variation of power to combine harvesters, optimising performance irrespective of the crop being harvested.

Aerospace has continued to secure extensions to existing programmes, such as a further multi-year contract for F-18 fighters, and to win additional work packages on new ones, including A350 XWB, the Joint Strike Fighter and Boeing 747-8 and 787. Major multi-year contracts were secured with all three main engine manufacturers which will provide over $1 billion of revenues to GKN. New programme activity has made excellent progress, with our first composite major assembly on the Sikorsky CH-53K heavy lift helicopter being delivered, as was our first complete composite fuselage for the HondaJet and in December we started production of the first Airbus A350 wing spars in our new purpose-built facility in Filton, UK. We were pleased also that our joint venture with Rolls-Royce, initially covering development of composite fan blades, has now been extended to include front fan casings.

Right across GKN new technologies and new products are creating opportunities to build stronger relationships with our customers as they strive to develop more highly engineered solutions for a low carbon world.


The outlook for our major markets is positive although some uncertainty remains, particularly around macro-economic conditions.

Against this background, Driveline and Powder Metallurgy are expected to show further good improvement in 2011. The conclusion of Driveline's restructuring actions will also provide some additional benefits to operating performance.

Aerospace sales are expected to be broadly flat as second half increases in revenue from civil aircraft offset reduced military sales. The ramp up of a number of new aircraft programmes and further increases in civil volumes should return Aerospace to its strong growth trend in 2012.

Land Systems performance should continue to improve, benefiting particularly from the expected increase in European agricultural equipment markets, which represent around a quarter of Land Systems sales.

Free cash flow is again expected to be positive, giving a further reduction in net debt for the year.

In summary, GKN expects 2011 to be a year of good progress for the Group. As end markets continue to improve, the strength of our market positions and order books leaves GKN well placed for a period of sustained growth, margin expansion and strong free cash flow generation.

Enduring Values

As GKN employees we are bound together by shared values, common ways of working and a continued drive for excellence in everything we do.

In closing my report, I once again want to pay tribute to GKN’s employees for their commitment, talent and enterprise, which has not only enabled the Company to weather the worst global recession of our time, but has also built an exceptional platform for GKN to continue to develop and grow.

I congratulate and thank everyone who has crossed the GKN threshold in 2010 for their contribution to a year of exceptional progress.

Sir Kevin Smith
Chief Executive