Review of Performance


  2010 2009
Sales (£m) 1,451 1,486
Trading profit (£m) 162 169
Trading margin 11.2% 11.4%

The overall aerospace market remained subdued in 2010. There was modest growth in the defence sector while large civil aircraft production was down around 6%, as the impact of the recession worked its way through the airline sector. The division has a balanced position in civil (53%) and defence (47%) programmes.

US defence spending remained robust apart from the planned reduction in sales of the F-22; production across most programmes such as F-18, F-15, C-130J and C-17 transport aircraft remained stable. 2011 production volumes for the C-17 programme have been reduced from 14 aircraft to 10. The initial production phase for the Lockheed F-35 (Joint Strike Fighter) has commenced and although volumes may now be lower in the initial years than originally planned, this aircraft remains a key part of the US defence programme with plans to build in excess of 2,500 aircraft. Although still to be formally voted into law, the US Defense Department 2011 budget plan shows around 1% growth over the next five years. In Europe, where GKN has very limited exposure, defence budgets remain under significant pressure and in Asia and the Middle East, a number of significant export programmes are being pursued by GKN’s customers.

In the civil aerospace market, Airbus and Boeing benefited from their extensive backlogs and delivered a combined total of 923 aircraft, a reduction of 6% compared with the 979 deliveries in 2009. Airbus delivered 461 aircraft (2009: 498 aircraft) and Boeing delivered 462 aircraft (2009: 481 aircraft). The recovery in passenger and cargo volumes, a significant increase in net orders and a growing backlog, have led both Airbus and Boeing to announce increases in production levels of single aisle and wide bodied aircraft from 2012.

Aerospace sales of £1,451 million were £35 million lower than the prior year (2009: £1,486 million). The impact from currency on translation of sales was £6 million positive and from acquisitions was £15 million positive, representing sales from GKN Aerospace Services Structures Corp., of which the Group gained management control in April 2010 (see note 24 to the financial statements for further details). The underlying decrease in sales of £56 million represented a 4% reduction. This decline reflects lower F-22 sales as the programme started its run down and softer military aftermarket business, particularly for rotorcraft, partly offset by higher F-18 sales. Increased sales for the Boeing 787 more than offset a decline in other civil market sales across a broad range of programmes and sectors.

Trading profit decreased by £7 million to £162 million (2009: £169 million). The impact from currency on translation of results was £1 million positive and from acquisitions was £2 million positive. The trading margin was 11.2% (2009: 11.4%).

Restructuring charges were taken amounting to £4 million (2009: £10 million).

Capital expenditure on tangible assets in 2010 amounted to £51 million (2009: £43 million) which represents 1.3 times depreciation (2009: 1.0 times). Expenditure on intangible assets, mainly initial non-recurring programme costs, was £26 million (2009: £13 million).

£39 million of the capital expenditure and non-recurring programme costs relate to the Airbus A350 wing assembly and trailing edge programme. A total of £79 million had been invested by 31 December 2010. Spending is likely to continue at around the current level in 2011 and reduce thereafter. This programme is partly funded by UK Government refundable advances, £10 million of which was received in 2010 (2009: £28 million).

Customer advances in the Aerospace businesses, which are shown in trade and other payables in the balance sheet, amounted to £70 million (2009: £66 million).

Return on average invested capital was 23.3% (2009: 24.2%) reflecting increased investment in new programmes.

GKN Aerospace secured a number of new programme wins and achieved a number of significant milestones during the year, including:

  • two new contracts for detailed parts for the inboard and outboard landing flaps for the Airbus A350 XWB;
  • a five year $300 million agreement with GE Aviation to supply a range of new and existing flight critical aluminium and titanium components for GE’s range of commercial and military engines;
  • a ten year agreement with a value of $360 million with Pratt & Whitney for high performance engine ducts for the F135 engine;
  • a $300 million ten year contract with Rolls-Royce for Trent 700 and Trent 1000 engine structures;
  • a multi-year production contract to supply lightweight titanium thrust links for the Boeing 747-8 and Boeing 787;
  • a number of transparency contracts including Airbus A350, Boeing 787 and Bombardier C Series cabin windows and cockpit windows for the Boeing 747-8;
  • delivery of its first major assembly of the Sikorsky CH-53K heavy lift helicopter which features an advanced hybrid composite, aluminium and titanium structure covered with external composite skins;
  • installation and commissioning of the first two auto fibre placement machines for production of A350 wing spars, with manufacturing of the first spar commencing at the end of 2010.

The division has an excellent position on new programmes that come into full production over the period 2012 to 2016, providing significant growth potential.