Annual Report and Accounts 2010 ENGINEERING. for the future

Transcription

1 Aual Report ad Accouts 2010 ENGINEERING for the future

2 ENGINEERING FOR THE FUTURE We believe that everythig we do well today ca be doe better tomorrow. Stadards, disciplies, systems ad processes have built a culture that ecourages us to challege everythig. This way of thikig turs the isigificat ito the sigificat; it accelerates our mometum ad delivers the products of our imagiatio. Directors report busiess review IFC 2010 performace 01 GKN at a glace 03 This is GKN 04 Chairma s statemet 06 Chief Executive s review 08 GKN strategy 09 Divisioal strategies 10 Our strategy i actio Drivelie Powder Metallurgy Aerospace Lad Systems 18 Key performace idicators 20 Review of performace 32 Risks ad ucertaities 34 Sustaiability report Directors report goverace 38 The Board 40 Corporate goverace 46 Audit Committee report 48 Remueratio report 59 Other statutory iformatio 62 Statemet of Directors resposibilities Fiacial statemets 63 Idepedet auditors report (Group) 64 Group fiacial statemets 109 Idepedet auditors report (Compay) 110 Compay fiacial statemets 113 Group fiacial record Other iformatio 114 Subsidiaries ad joit vetures 116 Shareholder iformatio 118 Subject idex 119 Cotact details Key IFC Iside Frot Cover

3 2010 PeRFORMANce Group results reflect the strog recovery i Drivelie, Powder Metallurgy ad Lad Systems, a good performace i Aerospace ad the o-goig beefits from restructurig. Sales up 22% ( 975 millio) to 5.4 billio. Tradig profit of 411 millio, up 255 millio, ad tradig margi of 7.6%. New busiess: Drivelie achieves 80% wi rate o ew driveshaft busiess ad Aerospace wis $1.5 billio of ew cotracts. Positive free cash flow of 188 millio ad et debt dow 149 millio to 151 millio. Fial divided of 3.5 pece per share, givig a total divided for 2010 of 5.0 pece per share. Retur o average ivested capital of 17% reflectig higher profitability. Statutory basis Sales 5,084m 2009: 4,223m Profit/(loss) before tax 345m 2009: (54)m Earigs/(loss) per share 19.6p 2009: (3.2)p Maagemet basis Sales 5,429m 2009: 4,454m (restated) Profit before tax 363m 2009: 87m (restated) Earigs per share 20.7p 2009: 5.7p (restated) See page 20 for details of measuremet ad reportig of performace o a maagemet basis figures have bee restated followig the decisio to exit the Axles busiess of the former OffHighway segmet.

4 01 / GKN AT A GLANce Deliverig more through techology ad iovatio Drivelie GKN Drivelie is the world s leadig supplier of automotive drivelie systems ad solutios. Products costat velocity joited systems. All-wheel drive systems icludig propshafts, coupligs ad fial drive uits. Tras axle solutios icludig ope, limited slip ad lockig differetials ad electroic torque vectorig products. edrive systems icludig electric rear axles ad electric trasmissios. Markets We supply maily to vehicle maufacturers i the global car ad light vehicle markets. Techology treds Key treds i Drivelie s markets iclude demad for improved fuel efficiecy ad icreased cocetratio o electric power as a solutio to developig sustaiable, evirometally efficiet trasport. Our respose Our products are developed with a clear focus o providig weight, space ad fuel savigs. Our edrive Systems busiess cotiues to develop iovative solutios, for use i vehicles where the primary power is electricity ad also where the primary drive is a covetioal egie with a secodary electric drive. Powder Metallurgy GKN Powder Metallurgy is the world s leadig producer of sitered compoets ad the largest producer of metal powder i North America. Products Sitered compoets for egies ad gearboxes. Sitered bearigs ad filters. Metal ijectio moulded compoets. Soft magetic materials for use i electric motors. Markets The majority of our products are for applicatios i the automotive idustry, with the balace for a wide variety of idustrial ad cosumer uses. Techology treds Treds i automotive ad idustrial markets have led to greater demad for lower emissios, higher fuel efficiecy ad lighter weight. Our respose Powder metal techology eables the flexible desig of high performace complex shapes ad the productio of compoets at, or close to, et shape, leadig to a reductio i material waste ad associated eergy cosumptio i maufacture. Demad for high precisio ad the use of ew materials has led to the developmet of compoets such as helical gears for e-steerig systems ad, i cojuctio with GKN Drivelie, siter-forged differetial gears. SALeS BY customer SALeS BY customer 6% Mitsubishi 8% Ford 8% Toyota 4% BMW 3% PSA Peugeot Citroe 15% Volkswage Group 12% Reault Nissa Group 2% ThysseKrupp Presta 2% Volkswage Group 2% Liamar 3% FiatChrysler 2% Bosch 7% Ford 6% Geeral Motors 4% ZF Group 10% FiatChrysler 26% Other 8% Geeral Motors 72% Other

5 02 / Aerospace GKN Aerospace is a first tier supplier to the global aviatio idustry ad a leader i the maufacture of highly complex composite aerostructures ad egie products. Products Itegrated aerostructures, icludig wig ad flight cotrol surface assemblies ad fuselage. Propulsio products such as fa blades, exhaust systems ad acelles. Trasparecies, icludig cockpit widows, bullet resistat glass ad coatigs. Niche techologies such as ice protectio ad oise cotrol systems. Markets We supply our products to a wide rage of aircraft ad egie prime cotractors i both military ad civil aerospace markets. Techology treds Icreasig ivestmet i, ad developmet of, lightweight structures to improve fuel efficiecy, lower emissios ad miimise the evirometal impact of aviatio. Our respose We are developig ew applicatios for composites to meet these requiremets. Productio o the A350 XWB s advaced composite rear wig spar recetly commeced at our dedicated composite facility i Filto, UK. GKN Aerospace recetly delivered the first major structural assembly for the Sikorsky ch-53k helicopter, featurig a advaced hybrid composite, alumiium ad titaium structure. Lad Systems GKN Lad Systems desigs, maufactures ad supplies a wide rage of products for the global agricultural, costructio, miig ad other idustrial markets. Products Power maagemet devices such as primary ad secodary driveshafts, clutches ad gearboxes. Sigle ad multi-piece steel ad alumiium wheels. Structures such as chassis systems. Aftermarket parts for use i a rage of areas icludig passeger cars ad commercial ad agricultural vehicles. Markets I additio to existig markets, GKN Lad Systems is the platform to leverage GKN Group capability for ew busiess opportuities i emergig high growth markets such as reewable eergy ad mass trasit solutios. Techology treds There is heighteed focus i all of our markets o improvig performace through efficiet, reliable power maagemet, icreased electrificatio ad use of lightweight structures. Our respose We are focused o developig products that meet these challeges, such as our ew Itegrated cotiuously Variable Drive System (IcVD ) for agricultural ad costructio machiery, which ca be idividually cofigured to vehicle-specific parameters to optimise performace. SALeS BY customer 3% Spirit 3% Rolls Royce 4% Geeral Electric 6% Lockheed Marti 14% Uited Techologies 18% Other 3% Bombardier 28% EADS 21% Boeig SALeS BY customer 2% Agco 2% JCB 2% Volkswage Group 2% Ford 8% Joh Deere 3% Claas 6% Tata 4% Caterpillar 6% Case New Hollad 65% Other

6 / 03 This is GKN GKN is a global egieerig group. Our techology ad products are at the heart of vehicles ad aircraft produced by the world s leadig maufacturers. GKN operates through four divisios: Drivelie, Powder Metallurgy, Aerospace ad Lad Systems. We employ approximately 40,000 people i over 30 coutries, haressig our cosiderable techology ad maufacturig resources to supply the highest quality systems, structures, compoets ad services. GKN plc Aual Report ad Accouts 2010

7 04 / CHAIRMAN S STATEMENT Our global footprit, Results combied with our leadig product positios ad strog techology ad customer base, has eabled us to take advatage of the market opportuities that arose. ad divided 2010 was a year i which the beefits of the decisive restructurig actios take durig the recessio saw us emerge much stroger as a busiess, with a lower cost base ad improved operatioal efficiecy. I the recovery that has followed, our global footprit, combied with our leadig product positios ad strog techology ad customer base, has eabled us to take advatage of the market opportuities that arose. As a result, we delivered maagemet profit before tax of 363 millio ad earigs per share of 20.7p. Our strog cash flow performace cotributed to a reductio i et debt to 151 millio, uderliig the stregth of our balace sheet. Agaist the backgroud of this strog performace ad our cofidece i the future, the Board is recommedig to shareholders a fial divided of 3.5p per share. Together with the iterim divided of 1.5p, this will brig the divided for the year to 5.0p per share. This is i lie with our progressive divided policy, desiged to alig divideds with the log term tred i earigs. We cotiue to make progress i addressig the Group s pesio liabilities. I April, we aouced a iovative asset-backed cash paymet scheme to provide 30 millio per aum to the UK pesio scheme for the ext 20 years. The combiatio of this ad other actios take to improve the fudig of the UK scheme should cotribute to a sigificat reductio i the pesio deficit oce the results of the curret trieial fudig valuatio are implemeted. Our retur to the FTSE 100 Idex i September after a absece of some six years was very pleasig. We are oe of oly two survivig members of the origial FT 30 Idex, the oldest cotiuous idex i the UK, established i Board matters 2010 has see a umber of chages i the compositio of the Board. At the AGM i May, Sir Peter Williams ad Sir Christopher Meyer retired from the Board as o-executive Directors. Sir Peter had also bee Chairma of the Remueratio Committee ad our Seior Idepedet Director. I October, Helmut Mamsch also retired from the Board as a o-executive Director. I would like to take this opportuity to thak them all for their cotributios to the Compay durig their time o the Board. We welcomed Shoaid Jemmett-Page as a ew o-executive Director i Jue. Shoaid has a strog fiacial backgroud together with extesive experiece of Asia which is a importat market for our busiesses. A recruitmet process to idetify a further o-executive Director is earig its coclusio ad a aoucemet will be made i due course. This appoitmet will agai esure that we have a appropriate balace of executive ad idepedet o-executive Directors o the Board. Oe of the Board highlights of the year was the visit to Chia i September whe Directors ot oly had the opportuity to visit Shaghai Expo, but also toured GKN s expadig operatios i Chia ad met with some of our major Chiese customers.

8 / 05 Goverace The publicatio of the ew UK Corporate Goverace Code i Jue itroduced chages that move the emphasis of the Code towards Board quality, risk ad accoutability to shareholders. Whilst the revised Code does ot apply to GKN util the 2011 fiacial year, we have goe some way to meetig certai of the ew provisios. We recetly coducted a exterally facilitated Board evaluatio which focused o those areas that will iform ad assist the Board s effectiveess i drivig the Compay forward through its ext stage of growth ad developmet. We are curretly reviewig the output from the evaluatio with a view to implemetig agreed chages as soo as practicable. Shareholders ca be assured of our cotiued commitmet to strog goverace disciplies; these ad the processes that uderpi them are described i more detail o pages 40 to 45. Sir Trevor Holdsworth Before leavig Board matters, I would like to pay tribute to Sir Trevor Holdsworth who died i September Sir Trevor had a log ad successful career with GKN culmiatig i his teure as Chairma from 1980 to 1988, a period of cosiderable chage ad ucertaity i the idustrial world. Sir Trevor helped to trasform GKN from a maufacturer predomiatly of steel, uts ad bolts, ad screws ad fasteers ito areas such as costat velocity techology for the automotive market, effectively layig the strog foudatios of the GKN of today. GKN owes him a tremedous debt. Outlook As we progress to the ext phase i our developmet, we do so as a Group much more balaced betwee earigs cotributios from our Automotive ad Aerospace busiesses ad with promisig opportuities for growth i our Lad Systems divisio. Supported by strog operatioal performace ad rapid growth i the emergig markets we serve, we look forward to the future with cofidece. Roy Brow Chairma GKN plc Aual Report ad Accouts 2010

9 06 / CHIEF EXECUTIVE S REVIEW I closig last year s statemet, I wrote that Agaist a backgroud of expected improvemets i global ecoomies, the Group should make sigificat progress i Our balace sheet stregth ad excellet market positios give the Board cofidece i a strog ad sustaied GKN recovery. New techologies ad ew products are creatig opportuities to build stroger relatioships with our customers as they strive to develop more highly egieered solutios for a low carbo world. I am pleased to be able to report that the Group s performace i the year has fully uderscored that statemet. A strog set of fiacial results, together with the excellet progress made i the cotiued developmet of our market leadig busiesses, provide a solid platform for cotiued above-market growth, improvig profitability ad strog cash geeratio. Our markets ad divisioal performace The recovery i global automotive productio which started i the secod half of 2009 accelerated i 2010 with demad stroger tha we had aticipated. Global productio reached 75 millio uits i the year, which is ow higher tha 2007 pre-recessio levels ad compares with 60 millio vehicles i The geographical distributio of this productio is ow however sigificatly differet, with demad i Wester Europe, North America ad Japa still dow aroud 20% o 2007, whilst Chia s output has doubled ad we have experieced strog growth i Brazil ad Idia. GKN s global positioig, together with our exposure to the high performig Europea premium brads, has eabled us to take full advatage ad reveues i Drivelie ad Powder Metallurgy icreased by 38% i the year. The beefits of the sigificat restructurig programme lauched at the ed of 2008 also cotributed to a very strog bouce back i profitability, ad tradig profits for these two divisios reached 223 millio, which compares with 3 millio i Last Jue we lauched a ew divisio GKN Lad Systems, which brought together the OffHighway busiess with our AutoStructures operatios ad the Aftermarket busiess of GKN Drivelie. This ew divisio will focus o better exploitig GKN s competecies i markets we already serve, such as agriculture, miig, costructio, defece ad rail, ad also build positios i ew idustrial sectors. I the first half of 2010 we saw the start of recovery i the global heavy costructio ad miig equipmet markets together with improvig agricultural equipmet demad i North America ad by the fial quarter the begiigs of the recovery i the Europea agricultural machiery market. Lad Systems performace also beefited from 2009 restructurig actios ad, o reveues of 699 millio (up 106 millio), the divisio tured a small prior year loss ito a tradig profit of 37 millio. I aerospace, otwithstadig the very egative impact of the recessio o the airlie idustry, large commercial aircraft productio has falle oly slightly ad is already startig its recovery, with output for both wide bodied ad arrow bodied aircraft expected to icrease i GKN s defece activities (47% of Aerospace reveues) are almost etirely associated with US Govermet programmes, ad i 2010 the productio rudow of the F-22 fighter aircraft commeced ad schedule reductios o the C-17 trasporter were implemeted. Growth i ew programme reveues was ot able to compesate ad as a result GKN s Aerospace reveues were dow aroud 2% ad profits reduced by 7 millio to 162 millio. Group performace Overall GKN Group sales were up 22% to 5.4 billio ad tradig profit more tha doubled to 411 millio. Group cash flow has agai bee strog, with particular emphasis o workig capital cotrol where, otwithstadig rapidly icreasig productio activity, ivetory turs cotiued to improve. As a result et debt reduced from 300 millio to 151 millio. The fial actios i the Group restructurig programme were lauched i the secod half, ad will coclude early i This will brig to a ed a period of extesive strategic ad recessioary-drive restructurig which commeced i 2004.

10 / 07 Buildig the future It s bee extremely ecouragig to see the cotiued success of all four divisios i wiig ew busiess ad lauchig ew products. I Drivelie, recet high levels of ew driveshaft busiess have led to the lauch of a expasio programme i Idia, Chia ad North America which will add approximately 60% to available capacity i those markets over the ext few years. Demad for ew tras axle ad electroic torque cotrol products has also bee ecouragig, ad we have secured ew hybrid electric vehicle trasmissio programmes i Japa ad North America to add to the hybrid rear axle product that will be available o the Peugeot 3008 HYbrid4 system i Powder Metallurgy cotiues to beefit from demads o auto maufacturers to implemet ew techologies to improve fuel efficiecy ad reduce emissios. Variable valve timig i egies, dual clutch trasmissios ad lightweight, high performace pumps, trasmissios ad differetials, together with soft magetic compoets i electric motors ad alterators, are examples of a whole rage of ew applicatios secured by Powder Metallurgy which will support strog reveue growth i the comig years. Our strategy i Lad Systems will take some time to evolve, although we are already seeig the beefits i our order books of providig a outlet for GKN drivelie techology i offhighway markets. A costat velocity joited driveshaft has bee developed for agricultural tractors, improvig mobility, comfort ad speed of operatio, ad a GKN torque sesig product which liks with the tractor GPS ow eables much more efficiet lad fertilisatio. Lad Systems has also developed a hydro split gearbox which allows cotiued ad automatic variatio of power to combie harvesters, optimisig performace irrespective of the crop beig harvested. Aerospace has cotiued to secure extesios to existig programmes, such as a further multi-year cotract for F-18 fighters, ad to wi additioal work packages o ew oes, icludig A350 XWB, the Joit Strike Fighter ad Boeig ad 787. Major multi-year cotracts were secured with all three mai egie maufacturers which will provide over $1 billio of reveues to GKN. New programme activity has made excellet progress, with our first composite major assembly o the Sikorsky CH-53K heavy lift helicopter beig delivered, as was our first complete composite fuselage for the HodaJet ad i December we started productio of the first Airbus A350 wig spars i our ew purpose-built facility i Filto, UK. We were pleased also that our joit veture with Rolls-Royce, iitially coverig developmet of composite fa blades, has ow bee exteded to iclude frot fa casigs. Right across GKN ew techologies ad ew products are creatig opportuities to build stroger relatioships with our customers as they strive to develop more highly egieered solutios for a low carbo world. Outlook The outlook for our major markets is positive although some ucertaity remais, particularly aroud macro-ecoomic coditios. Agaist this backgroud, Drivelie ad Powder Metallurgy are expected to show further good improvemet i The coclusio of Drivelie's restructurig actios will also provide some additioal beefits to operatig performace. Aerospace sales are expected to be broadly flat as secod half icreases i reveue from civil aircraft offset reduced military sales. The ramp up of a umber of ew aircraft programmes ad further icreases i civil volumes should retur Aerospace to its strog growth tred i Lad Systems performace should cotiue to improve, beefitig particularly from the expected icrease i Europea agricultural equipmet markets, which represet aroud a quarter of Lad Systems sales. Free cash flow is agai expected to be positive, givig a further reductio i et debt for the year. I summary, GKN expects 2011 to be a year of good progress for the Group. As ed markets cotiue to improve, the stregth of our market positios ad order books leaves GKN well placed for a period of sustaied growth, margi expasio ad strog free cash flow geeratio. Edurig Values As GKN employees we are boud together by shared values, commo ways of workig ad a cotiued drive for excellece i everythig we do. I closig my report, I oce agai wat to pay tribute to GKN s employees for their commitmet, talet ad eterprise, which has ot oly eabled the Compay to weather the worst global recessio of our time, but has also built a exceptioal platform for GKN to cotiue to develop ad grow. I cogratulate ad thak everyoe who has crossed the GKN threshold i 2010 for their cotributio to a year of exceptioal progress. Sir Kevi Smith Chief Executive GKN plc Aual Report ad Accouts 2010

11 08 / GKN STRATEGY We are committed to providig log term shareholder value i the form of steadily growig earigs ad divideds through the delivery of sustaied growth i sales, profitability ad cash geeratio. Our strategic objectives Market leadership Achieve the highest market share i our chose ed markets. Develop superior techology i all our busiesses. Deliver exceptioal customer service. Growth Achieve above market growth i our chose ed markets. Leverage ad exted our global footprit to icrease market share. Accelerate growth through strategic acquisitios. Operatioal excellece Develop a world class lea maufacturig eterprise. Be the employer of choice with a high performace culture, motivated people ad outstadig leaders. Achieve preferred status with our strategic customers ad suppliers. Sustaiability Develop products ad processes for the ew low carbo world. Achieve a world leadig health ad safety record. Have a positive impact o the eviromet ad the commuities i which we operate. KPIs We implemet ad moitor performace agaist strategy through key performace idicators (KPIs), both fiacial ad o-fiacial. Progress agaist these KPIs is reported regularly to the Board ad seior maagemet. I additio, certai fiacial KPIs are liked to executive remueratio. See pages 18 ad 19 for more iformatio. Risk maagemet We have a extesive risk maagemet framework desiged to idetify, assess ad mitigate sigificat busiess risks which could impact delivery of our strategic pla. Risk maagemet processes operate throughout the Group at plat, divisioal ad corporate levels ad regular reports are made to the Board ad its Committees. See pages 32 ad 33 for more iformatio. Key capabilities Superior techology, world class lea maufacturig, leveragig our global footprit, exceptioal customer service, outstadig leadership ad developmet for all are Group-wide key capabilities that uderpi the delivery of our strategy. At their heart are our Values which bid GKN together ad guide our relatioships with all our stakeholders. See pages 34 to 37 for more iformatio.

12 DIVISIONAL STRATEGIES / 09 Buildig world leaders Drivelie GKN Drivelie is the world s leadig supplier of automotive drivelie systems ad solutios. Our strategy is to exploit this market leadig presece ad the busiess strog techology ad global maufacturig footprit to: provide iovative drivelie systems ad solutios, supportig developig market treds for more fuel efficiet vehicles; ad icrease our busiess i high growth regios servig the eeds of strategic customers. Powder Metallurgy GKN Powder Metallurgy is the world s leadig producer of sitered compoets ad the largest producer of metal powder i North America. Our strategy is to exploit powder metal techology workig closely with our customers to develop desig for powder metal applicatios: to meet the rapidly developig requiremets for high efficiecy egies, advaced trasmissio applicatios ad evolvig emissios stadards; ad to expad the busiess i high growth markets, supportig customers through a global operatioal etwork. Aerospace GKN Aerospace is a first tier supplier to the global aviatio idustry ad a leader i the maufacture of highly complex composite aerostructures ad egie products. Our strategy is to build o our superior techology ad desig capabilities to grow the busiess by: exploitig our strog positios o existig programmes for ew aircraft; ad developig ew techologies for future commercial ad defece platforms. Lad Systems GKN Lad Systems desigs, maufactures ad supplies a wide rage of products for the global agricultural, costructio, miig ad other idustrial markets. Our strategy is to brig Group-wide power maagemet ad structures capabilities to existig ad ew idustrial markets thereby: ehacig customer ad market focus through superior techology based solutios to our chose sectors; ad extedig our ability to meet market eeds globally through world class operatios. GKN plc Aual Report ad Accouts 2010

13 10 / OUR STRATEGY IN ACTION Drivelie GKN Drivelie cotiues to deliver drivelie systems ad solutios to the world s premier automotive maufacturers. GKN Drivelie desigs, develops ad maufactures a broad rage of drivelie systems used i the smallest ultra-low cost car through to the most sophisticated premium vehicle With a focus o efficiecy, performace ad dyamics, GKN Drivelie is a pioeer ad leader i systems that provide space, weight ad fuel savigs with greater all-roud efficiecy Brad New Thikig Case Study edrive Systems: GKN Drivelie is pursuig globally more tha 25 differet hybrid ad electric vehicle projects i the wake of its groud-breakig electric rear axle project with Peugeot Citroë

14 / 11 GKN Drivelie has desiged a ew rage of electric drive axles both for use i pure electric vehicles ad for covertig covetioal vehicles ito hybrids. A electric drive axle was developed for use i the Peugeot 3008 HYbrid4, which comes to market i The axle allows the frot-wheel drive vehicle to have all-wheel drive performace together with hybrid fuel ecoomy ad the ability to operate i all-electric drive mode with zero emissios. I parallel with hybrids, iterest i electric cars ad vehicles with rage exteders has bee evidet at auto shows for several years, ad GKN Drivelie has developed a electric drive etrasmissio o a demostratio electric vehicle for Beijig Automotive Idustry Holdig Co Ltd as well as axles for electric car projects i Asia ad North America. GKN plc Aual Report ad Accouts 2010

15 12 / OUR STRATEGY IN ACTION Powder Metallurgy GKN Powder Metallurgy comprises GKN Siter Metals, the world s largest maufacturer of sitered compoets, ad Hoegaaes, which produces metal powder used i the maufacture of these compoets. Powder metallurgy is a eablig techology that is deliverig smaller, lighter, ad higher performig products Challegig Cocepts Case Study Siter-forged differetial gears cotiue to expad the potetial of powder metal techology Differetial gears are used to distribute torque betwee two wheels or axles ruig at differet speeds. The differetial is a critical system which operates i a icreasigly high stress, space-costraied eviromet. Siter-forged differetial gears deliver weight savigs ad cosistetly higher performace tha established gear techologies. The result is a product that reduces drivelie rotatig mass ad system size both essetial elemets for future vehicle desigs. These beefits directly traslate ito lower fuel cosumptio ad CO 2 emissios as well as improved vehicle dyamic respose.

16 / 13 GKN Powder Metallurgy provides both sophisticated raw materials ad highly egieered compoets to automotive ad idustrial markets i all major regios of the world GKN plc Aual Report ad Accouts 2010

17 14 / OUR STRATEGY IN ACTION Aerospace GKN Aerospace is oe of the world s largest idepedet first tier aerospace suppliers, providig complex, high-performace, high-value itegrated metallic ad composite assemblies for aerostructures ad egie products. GKN has sigificat participatio o almost every major civil ad military fixed ad rotary wig programme i developmet ad productio today GKN Aerospace s techology-led products are maufactured usig the latest developmets i materials processig ad advaced metallic ad composite maufacturig techologies. GKN s experiece, kowledge ad capabilities i itegrated aerostructures, propulsio systems, trasparecies ad specialist products are supported by aftermarket operatios

18 / 15 Automated fibre placemet (AFP) is oe of may techologies i which we are ivestig throughout the composite maufacturig ad assembly process, both for the A350 XWB ad for future products. Expadig Horizos Case Study GKN has ivested i a state-of-the-art automated composites desig ad maufacturig facility icorporatig productio techiques that represet the future of aerospace composites Automatio eables the efficiet productio of complex itegrated structures ad the attaimet of high productio rates demaded by our customers. The purpose-built productio facility at Filto, UK, was desiged to utilise lea maufacturig techiques ad icreased automatio i order to reduce productio time ad cost ad icrease output. It is a cetre of excellece for the desig, maufacture ad assembly of complex itegrated composite structures. GKN plc Aual Report ad Accouts 2010

19 16 / OUR STRATEGY IN ACTION Lad Systems GKN Lad Systems is a diversified maufacturer ad aftermarket service supplier to demadig global markets icludig agricultural, costructio ad miig, with a focus o power maagemet ad high performace structures Our customers operate i a wide variety of workig eviromets ad use our solutios every day to improve their equipmet, makig the ed user s daily work easier ad more efficiet A Joied Up Approach Case Study We work i close partership with our customers to esure that high performace solutios are timely ad iovative

20 / 17 GKN ad JCB have worked closely to develop ad brig to market a Itegrated Cotiuously Variable Drive System (ICVD ). The ICVD is a groud-breakig hydrostatic drive system which allows smooth drivig betwee 0-40km/h with optimal power trasmissio at all times. This cost-effective trasmissio brigs the followig advatages: high eergy efficiecy which sigificatly reduces fuel cosumptio, supportig fulfilmet of the latest emissio regulatios; high levels of comfort ad simple hadlig improvig safety; ad exteded rage ad higher speed. All of this must be delivered globally to the highest stadards. GKN plc Aual Report ad Accouts 2010

21 18 / KEY PERFORMANCE INDICATORS Fiacial KPIs (a) (b) Earigs per share (EPS) p p 16.0p p 23.5p Divided per share (b) p p p p 8.6p Method of calculatio Maagemet earigs for the Group (as set out i ote 3(a) to the fiacial statemets) divided by the weighted average umber of ordiary shares i issue (excludig treasury shares). Target To achieve absolute growth i EPS each year ad i the loger term, recogisig the ature ad cyclicality of our major markets, to achieve average aual compoud growth of at least 6% Performace Maagemet EPS i 2010 was 20.7p compared with 5.7p i This icrease is pricipally due to the sigificatly improved profitability of the Group i Method of calculatio Amout declared as payable by way of divided divided by the umber of ordiary shares i issue (excludig treasury shares). Target A progressive divided policy aligig divideds with the log term tred i maagemet earigs whilst achievig a sustaiable maagemet earigs to divided cover ratio of aroud 2.5 times Performace 2010 saw the re-commecemet of divided paymets, reflective of strog earigs ad cash performace. The divided for the year, at 5.0p, is covered 4.1 times by maagemet earigs. Sales growth (a) ,429m ,454m ,617m ,100m ,815m Tradig margis (a) % % % % 7.1% Method of calculatio Maagemet sales (c) measured both i absolute terms ad o a uderlyig basis (i.e. excludig the effects of currecy traslatio, acquisitios ad divestmets) relative to the prior year. Target To achieve growth rates at both a Group ad divisioal level (i absolute terms ad o a uderlyig basis) i excess of the growth i our major automotive, aerospace ad lad systems markets Performace Group maagemet sales (c) grew by 22% o a absolute basis ad 21% o a uderlyig basis. The correspodig figures for Drivelie were icreases of 35% ad 32% respectively, for Powder Metallurgy 48% absolute ad uderlyig, for Aerospace a absolute declie of 2% ad a uderlyig declie of 4%, ad for Lad Systems growth of 18% i absolute terms ad 20% o a uderlyig basis. Method of calculatio Maagemet tradig profit (c) as a percetage of maagemet sales (c). Target To achieve medium term tradig margis of betwee 8% ad 10% for Drivelie ad Powder Metallurgy, 7% to 10% i Lad Systems ad 10% to 12% i Aerospace, givig a overall Group tradig margi of betwee 8% ad 10% Performace The Group tradig margi i 2010 of 7.6% reflects a strog recovery i Drivelie (6.9%), Powder Metallurgy (7.1%) ad Lad Systems (5.3%), a good performace i Aerospace (11.2%) ad the beefits of the Group s restructurig activities.

22 / 19 Retur o average ivested capital (ROIC) (a) % % % % 14.4% Free cash flow before divided m m m m m Method of calculatio Ratio of maagemet tradig profit (c) to average total et assets icludig the appropriate share of joit vetures but excludig curret ad deferred tax, cash, borrowigs, post-employmet obligatios ad derivative fiacial istrumets. Target To achieve ROIC at both a Group ad divisioal level which exceeds the weighted cost of capital of the Group (12% as a pre-tax threshold ad betwee 9% ad 10% o a post-tax basis). Method of calculatio Cash flows from operatig activities (excludig special pesio cotributios) after capital expediture ad icludig fixed asset disposal proceeds, receipts of govermet capital grats ad refudable advaces ad o-cotrollig divideds. Target To geerate positive free cash flow sufficiet to cover divided paymets ad provide fudig resources to support orgaic ad acquisitive earigs growth Performace Group ROIC icreased to 17.0% i 2010 as a result of sigificatly improved profitability agaist a relatively stable asset base. Divisioal ROIC performace is as follows: Drivelie 16.0%; Powder Metallurgy 13.2%; Aerospace 23.3%; Lad Systems 15.8% Performace Free cash flow amouted to 188 millio reflectig the strog focus o operatig cash geeratio throughout 2010, icludig a cotiued strog focus o workig capital maagemet, a capital expediture reivestmet ratio at 0.8 times, receipt of govermet refudable advaces ( 10 millio), ad joit veture divideds ( 23 millio). (a) 2009 has bee restated followig the decisio to exit the Axles busiess of the former OffHighway segmet. (b) As restated i for the bous issue iheret i the July 2009 rights issue. (c) Maagemet sales ad maagemet tradig profit are defied o page 20. No-Fiacial KPIs Health ad safety performace Evirometal performace Method of calculatio Accidet frequecy rate (AFR) measured as the umber of lost time accidets per 1,000 employees ad accidet severity rate (ASR) measured as the umber of days/shifts lost due to accidets ad occupatioal ill health per 1,000 employees. Target Zero prevetable accidets Performace AFR i 2010 icreased from 2.1 to 2.7; ASR showed a slight decrease from 71 to 68. See page 36 for further iformatio. Method of calculatio Eergy cosumptio ad associated CO 2 emissios, waste geeratio, waste recycled ad water cosumptio measured o a divisioal basis per uit of productio ad agaist sales i Aerospace. Target Improved year o year performace across all KPIs Performace Performace i 2010 across all evirometal KPIs improved with a particularly good performace i regard to water cosumptio. See pages 36 ad 37 for further iformatio. GKN plc Aual Report ad Accouts 2010

23 20 / REVIEW OF PERFORMANCE I this sectio Group performace page 21 Divisioal performace page 21 Other fiacial iformatio page 27 The Group operates i the global automotive, aerospace ad lad systems markets. I the automotive market, Drivelie sells to maufacturers of passeger cars ad light vehicles. Aroud 75% of Powder Metallurgy sales are also to automotive markets, with the balace to other idustrial customers. Aerospace sells to maufacturers of military ad civil aircraft, aircraft egies ad equipmet. Lad Systems sells to producers of agricultural, costructio, miig ad idustrial equipmet ad to the automotive ad commercial vehicle sectors. Measuremet ad reportig of performace I this review, fiacial iformatio, Group ad divisioal, uless otherwise stated, is preseted o a maagemet basis which aggregates the sales ad tradig profit of subsidiaries (excludig subsidiary busiesses sold ad closed) with the Group s share of the sales ad tradig profit of joit vetures. Refereces to tradig margis are to tradig profit expressed as a percetage of sales. Maagemet profit or loss before tax is maagemet tradig profit less et subsidiary iterest payable ad receivable ad the Group s share of et iterest payable ad receivable ad taxatio of joit vetures. These figures better reflect performace of cotiuig busiesses. Where appropriate, referece is made to uderlyig results which exclude the impact of acquisitios as well as currecy traslatio o the results of overseas operatios. Operatig cash flow is cash geerated from operatios adjusted for capital expediture, govermet capital grats, proceeds from disposal of fixed assets ad govermet refudable advaces. Free cash flow is operatig cash flow icludig iterest, tax, joit veture divideds ad divideds paid to o-cotrollig iterests, but excludig divideds paid to GKN shareholders. Retur o average ivested capital is maagemet tradig profit as a percetage of total et assets of cotiuig subsidiaries ad joit vetures deductig curret ad deferred tax, et debt, post-employmet obligatios ad derivative fiacial istrumets. Comparative data has bee restated followig the aoucemet to exit the Axles operatios of the former OffHighway segmet. Comparative segmetal iformatio has bee restated followig the creatio of GKN Lad Systems, which was aouced o 16 Jue Lad Systems brought together the operatios of GKN OffHighway (excludig Axles), GKN AutoStructures ad GKN Idustrial ad Distributio Services (IDS). AutoStructures was icluded i the former Other Automotive segmet ad IDS was icluded i the Drivelie segmet. Exchage rates Exchage rates used for currecies most relevat to the Group s operatios are: Average Year Ed Euro US dollar The approximate impact o 2010 tradig profit of subsidiaries ad joit vetures of a 1% movemet i the average rate would be euro 1.0 millio, US dollar 1.6 millio.

24 / 21 Group performace restated Sales ( m) 5,429 4,454 Tradig profit ( m) Tradig margi 7.6% 3.5% MANAGEMENT SALES 1,451m Aerospace 699m Lad Systems 759m Powder Metallurgy MANAGEMENT TRADING PROFIT 162m Aerospace 37m Lad Systems 2,433m Drivelie 87m Other busiesses 169m Drivelie Maagemet sales Maagemet sales icreased 22% i the year eded 31 December 2010 to 5,429 millio (2009 restated: 4,454 millio). The effect of currecy traslatio was 35 millio favourable ad there was a 17 millio beefit from acquisitios. Excludig these items, the uderlyig icrease was 923 millio (21%). Withi this figure, Drivelie was 589 millio higher, Powder Metallurgy icreased by 247 millio, Lad Systems was 116 millio higher, while Aerospace was 56 millio lower. Maagemet tradig profit Maagemet tradig profit icreased by 255 millio to 411 millio (2009 restated: 156 millio). The currecy traslatioal beefit was 5 millio ad there was o et beefit from acquisitios. Excludig these items, the uderlyig icrease was 250 millio. Withi this figure, Drivelie was 156 millio higher, Powder Metallurgy icreased by 60 millio ad Lad Systems was 40 millio higher, all largely as a result of volume improvemets ad cost reductio beefits. Aerospace profit fell by 10 millio. Group tradig margi icreased to 7.6% (2009 restated: 3.5%). Restructurig charges Restructurig charges i the year amouted to 39 millio, icludig 2 millio of short-time workig charged i the first half ad 37 millio redudacy ad reorgaisatio charges. The total beefit of the actios to address the cost base is estimated to be 156 millio, icludig 18 millio i Cash expediture o restructurig programmes amouted to 55 millio. Millio uits 3m Other busiesses 54m Powder Metallurgy Total (icludig corporate costs) 411m GLOBAL LIGHT VEHICLE PRODUCTION MILLION UNITS Compoud Aual Growth Rate (CAGR) : 2.9% CAGR Total Source: IHS Automotive actual forecast Divisioal performace Lauch of Lad Systems O 16 Jue 2010, the Group aouced the formatio of its Lad Systems divisio which brought together the operatios of GKN OffHighway, GKN AutoStructures ad GKN Idustrial ad Distributio Services. The aim of GKN Lad Systems is to develop a fourth global leader alogside Drivelie, Powder Metallurgy ad Aerospace, buildig o existig stregths i the off-highway market ad, by applyig the leadig-edge techologies developed across the Group, capitalisig o growth opportuities i ew ad existig markets. Potetial growth opportuities exist i high speed rail, reewable eergy ad defece. Automotive markets Productio of cars ad light vehicles cotiued to improve i 2010 as markets recovered followig the recessio of late 2008 ad As show i the table below, all markets experieced productio growth, with the strogest beig North America, Idia ad Chia. Car ad light vehicle productio Growth (millios of uits) (%) Europe North America Brazil Japa Chia Idia Others Total global Source: IHS Automotive Overall, global productio volumes of cars ad light vehicles icreased 24% i 2010 to 74.6 millio vehicles (2009: 60.0 millio) whilst sales icreased by 13%, from 63.7 millio vehicles to 72.0 millio vehicles. GKN plc Aual Report ad Accouts 2010

25 22 / REVIEW OF PERFORMANCE CONTINUED EUROPE LIGHT VEHICLE PRODUCTION millio uits Q1 Q2 Q3 Q actual 2010 actual Source: IHS Automotive Demad for larger (premium) vehicles ad light commercial vehicles recovered strogly, whereas the edig of scrappage ad tax icetive schemes slowed demad for smaller vehicles, particularly i Europe. Vehicle productio i Europe ad Japa beefited from a strog reboud i exports. Exteral forecasts idicate that global productio i 2011 will icrease by approximately 5% to 78.1 millio vehicles. Major markets that are expected to grow fastest iclude Idia (20%), North America (7%) ad Chia (7%), whereas productio i Europe is expected to grow at a more modest pace of 3%. Drivelie restated Sales ( m) 2,433 1,803 Tradig profit ( m) Tradig margi 6.9% 0.6% NORTH AMERICA LIGHT VEHICLE PRODUCTION millio uits Q1 Q2 Q3 Q actual 2010 actual Source: IHS Automotive BRAZIL, INDIA & CHINA LIGHT VEHICLE PRODUCTION millio uits Q1 Q2 Q3 Q actual 2010 actual Source: IHS Automotive DRIVELINE SALES BY REGION OF ORIGIN 185m Other 209m Chia 218m Brazil 81m Idia 886m Europe Drivelie s sales icreased 35% to 2,433 millio (2009 restated: 1,803 millio) compared with global vehicle productio which icreased 24%. Excludig the favourable impact of currecy traslatio of 41 millio, uderlyig sales icreased by 589 millio (32%). This market outperformace was particularly apparet i North America, Chia ad Japa. It reflects Drivelie s global footprit, ew programme wis, a retur to more ormal vehicle segmet demad patters as govermet support schemes are progressively withdraw ad its strog positio i Europea premium vehicles. Tradig profit icreased substatially to 169 millio (2009 restated: 10 millio) reflectig higher sales ad the beefits of restructurig, partially offset by higher egieerig costs to support ew programmes ad future growth ad some temporary costs icurred to raise capacity i some regios to keep pace with sigificat icreases i demad. Curret year tradig profit icluded a 6 millio curtailmet gai arisig from chages to pesio arragemets i Japa. The impact of traslatioal currecy was 3 millio positive, with uderlyig tradig profit up by 156 millio. Drivelie tradig margi was 6.9% (2009 restated: 0.6%). Net restructurig charges were take amoutig to 29 millio (2009 restated: 79 millio), reflectig the coclusio of charges o the programme that commeced i Capital expediture o tagible fixed assets was 73 millio (2009 restated: 73 millio), 0.7 times (2009 restated: 0.7 times) depreciatio. Retur o average ivested capital was 16.0% (2009 restated: 0.9%), reflectig the icrease i profitability. Durig the year, Drivelie cotiued its good performace of ew busiess awarded; as well as cotiued stregth i our core sideshafts busiess, there were otable successes with propshaft, all-wheel drive (AWD) couplig, electroic differetial lockig ad ope differetial product lies. Drivelie s hybrid/electric drive products also wo ew cotracts i North America, Japa ad Europe. Although iitial volumes are small, these are importat programmes i positioig Drivelie for the rapidly emergig hybrid electric vehicles segmet. Drivelie also commeced productio of ope differetials i North America ad power trasfer uits (PTUs) i Chia, ad lauched a umber of iovative products desiged to help vehicle maufacturers improve vehicle hadlig performace, icludig: Direct Torque Flow techology: a ew desig solutio to coect the propshaft to the vehicle s trasmissio i a way that saves weight, assembly time, space ad cost. The first applicatio is o the Audi A8 Quattro high performace luxury saloo; Face Splie ad Twi Ball CVJ: results i smaller products, lighter weight ad tighter turig circles. This has lauched o the BMW 7 Series ad will appear o the ew BMW 5 ad 6 Series all-wheel drive vehicles later this year; 426m Japa 428m North America ElectroMagetic Couplig Device (EMCD): GKN Drivelie s AWD couplig is ow beig produced for the first time i Europe ad appears o the ew Mii Coutryma ALL4 crossover vehicle; Frot electroic limited slip differetial (elsd): a world first applicatio of EMCD techology as a frot elsd i a Japaese OEM s performace SUV; New propshaft busiess wo with Mercedes, for the first time, ad a cotract to supply a major Europea customer with 100% of their propshaft eeds, commecig i 2013.

26 / 23 POWDER METALLURGY SALES 53m GKN Siter Metals Rest of World 136m Hoegaaes As previously aouced, i order to meet productio demads from uderlyig growth i Chia, Idia ad North America, major driveshaft capacity expasio is uderway which will icrease capacity i these markets by aroud 60% over the ext four years. Drivelie also opeed a ew sideshaft plat i Turkey, a small but high growth market. Powder Metallurgy Sales ( m) Tradig profit ( m) 54 (7) Tradig margi 7.1% (1.4)% 286m GKN Siter Metals Europe 284m GKN Siter Metals Americas GKN Siter Metals sales by regio of origi POWDER METALLURGY SALES BY PRODUCT TYPE 156m Sitered compoets idustrial 136m Hoegaaes metal powder 467m Sitered compoets automotive Powder Metallurgy sales were 759 millio (2009: 512 millio), a icrease of 48%. There was o et impact from currecy traslatio. Sales icreased i all regios as automotive markets recovered ad recet ew busiess wis etered productio. Uderlyig sales for Siter Metals icreased by 43%, with strog growth achieved i North America, Europe, Idia ad Brazil. Overall, Hoegaaes total tos shipped were 46% higher tha i 2009 ad uderlyig sales were 76% higher, the differece reflectig a icrease i the commodity metals surcharge passed o to customers as raw material prices icreased. A ew powder mixig ad fiishig facility was opeed by Hoegaaes, i Chia, towards the ed of the year, to support growth i that rapidly expadig market. Powder Metallurgy reported a tradig profit of 54 millio (2009: 7 millio tradig loss) with a divisioal tradig margi of 7.1% (2009: (1.4)%). Icreasig treds i idustrial ad automotive markets to improve fuel efficiecy ad reduce emissios, such as variable valve timig i egies, high performace gear sets i automatic trasmissios ad differetial gears, are drivig the demad for products made by powder metallurgy. Durig the year approximately 100 millio (aualised sales) of ew programme busiess was awarded ad more tha 30 techical days were hosted for existig ad ew customers, i order to promote the applicability of powder metallurgy products ad applicatios. Restructurig costs i 2010 totalled 1 millio (2009: 20 millio) reflectig the coclusio of the programme. Capital expediture o tagible fixed assets was 27 millio (2009: 10 millio). The ratio of capital expediture to depreciatio was 0.9 times (2009: 0.3 times). Retur o average ivested capital was 13.2% (2009: (1.6)%), reflectig the improvemet i profitability. Aerospace Sales ( m) 1,451 1,486 Tradig profit ( m) Tradig margi 11.2% 11.4% The overall aerospace market remaied subdued i There was modest growth i the defece sector while large civil aircraft productio was dow aroud 6%, as the impact of the recessio worked its way through the airlie sector. The divisio has a balaced positio i civil (53%) ad defece (47%) programmes. US defece spedig remaied robust apart from the plaed reductio i sales of the F-22; productio across most programmes such as F-18, F-15, C-130J ad C-17 trasport aircraft remaied stable productio volumes for the C-17 programme have bee reduced from 14 aircraft to 10. The iitial productio phase for the Lockheed F-35 (Joit Strike Fighter) has commeced ad although volumes may ow be lower i the iitial years tha origially plaed, this aircraft remais a key part of the US defece programme with plas to build i excess of 2,500 aircraft. Although still to be formally voted ito law, the US Defese Departmet 2011 budget pla shows aroud 1% growth over the ext five years. I Europe, where GKN has very limited exposure, defece budgets remai uder sigificat pressure ad i Asia ad the Middle East, a umber of sigificat export programmes are beig pursued by GKN s customers. GKN plc Aual Report ad Accouts 2010