Chief Executive’s review. “GKN made good progress in 2011, achieving above-market growth and with further development of our market-leading businesses including two important acquisitions.” Nigel Stein, Chief Executive.
Building on a successful platform.

I am delighted and honoured to have succeeded Sir Kevin Smith as Chief Executive. GKN is a great company with an excellent team of committed people; I am confident that together we can build on the platform he has developed and continue the Group’s success.

In 2011 we posted strong growth and delivered a good financial performance. All four of our divisions reported at or near record profits. We made good progress on the strategic front with two important acquisitions and we delivered continuous improvement in our operations – strong order wins, across-the-board quality improvements and continued development of new technology products.

However, that positive progress was overshadowed by the very tragic events in our Hoeganaes Gallatin plant in Tennessee, USA, where, in two separate and unrelated accidents, five colleagues lost their lives. These events have left a deep scar on the whole Group and a permanent and sad loss to the families of five of our colleagues and friends. Following the explosion in May 2011 the Gallatin site was immediately shut down and a comprehensive safety review of the entire facility undertaken. It was only brought back into operation when we were absolutely sure that all activities were safe.

GKN has previously had a very strong safety record and the health and safety of our employees remains our number one priority. We are applying the lessons learned from Gallatin across the Group to ensure that similar accidents will not happen again. We report on this more fully in the health and safety section of the sustainability report.

Our markets and divisional performance

The recovery in global automotive production continued throughout 2011, although natural disasters in Japan and Thailand temporarily restricted output. Global automotive production increased 3% to 76.9 million units. GKN’s global footprint, together with our excellent exposure to the high-performing European premium brands, enabled us to take full advantage of the market with underlying sales in GKN Driveline and GKN Powder Metallurgy increasing by 10% and 13% and underlying profits increasing by 12% and 36% respectively.

In GKN Aerospace, production increases on civil aircraft, such as the Airbus A320 and A330, and the continuing ramp-up in the production schedules of new platforms, such as the A380 and Boeing 787, more than balanced the decline in older military programmes such as the F-22 fighter aircraft and C-17 transporter. Therefore, underlying sales in this year increased 4% with underlying profits up 4%.

Although defence budgets continue to be under pressure, some 70% of US military contracts are long-term or multi-year agreements. In addition, GKN’s position in the civil market gives us confidence of good growth ahead.

GKN Land Systems continued to benefit from the growth of global heavy construction, mining and agricultural equipment markets and this led to a 21% underlying increase in sales and an 84% increase in underlying profit.

Group performance

GKN made good progress in 2011, achieving above-market growth and with further development of our market-leading businesses including new plant openings and two important acquisitions – Getrag Driveline Products in GKN Driveline, and Stromag Holding in GKN Land Systems.

Overall Group sales were up 13% to £6.1 billion and trading profit increased 18% to £487 million before a £19 million one-off charge relating to the temporary plant closure at Gallatin, USA. Cash flow has again been strong and net debt ended the year at £538 million, £57 million lower than 2010, before the £444 million cash cost of new acquisitions.

Building the future

Despite the recession and on-going macroeconomic uncertainties, we have continued to invest in our businesses, winning new orders, launching new products and expanding our global footprint.

In GKN Driveline, the sideshaft expansion programme is on track, with the first phase of our latest Chinese plant in Changchun having opened in June and the next phase already underway. When completed, this will create a capacity for two million sideshafts. In India, a precision forging facility in Oragadam near Chennai has opened and a new sideshaft plant in Pune is also under construction.

We continue to see strong growth in products for use in four-wheel and all-wheel drive (4WD/AWD) vehicles. AWD is the fastest growing segment in automotive driveline and the acquisition of Getrag Driveline Products, which provides strong operating positions in Europe and North America, makes GKN Driveline the global leader in AWD systems and components.

GKN Driveline is also building another market-leading position in the emerging eDrive component and systems market. We have hybrid axle, and electric and hybrid transmissions in production launch for customers in Japan, Europe and North America, together with 20 on-going development and technology programmes across a broad range of customers in Asia and Europe.

GKN Powder Metallurgy continues to benefit from increasing trends in industrial and automotive markets to improve fuel efficiency and reduce emissions, which drive demand for components such as variable valve timing in engines, high-performance gear sets in automatic transmissions and differential gears.

GKN Aerospace has continued to secure extensions to existing programmes and to win additional work packages on new ones, winning around US$3.5 billion of new business during the year. Despite pressure on US defence budgets, major multi-year contracts were secured on a number of US programmes both for US use and also for sales to other countries.

Good progress on new programmes was made with the first A350 wing spars being delivered to Airbus in an extremely tight timescale. The Filton facility, UK, won new work packages with Bombardier and Dassault and our US business expanded its workscope with Boeing on the 787 and 747-8.

In GKN Land Systems, the acquisition of Stromag broadened our industrial power management applications into areas such as renewable energy and cranes, and provides GKN with excellent technology and products that can be exploited in other markets.

All these activities provide a strong platform for growth that will enable us to deliver sustainable shareholder value. This requires a balanced approach: a balance between growth, which GKN is demonstrating, between margin on sales, where we have moved into our target range, and between return on invested capital. In business, there is always tension between these three; we will be looking to steer our businesses on balanced paths to maximise Group earnings per share, dividends and long-term shareholder value.

In closing, I want to pay tribute to GKN’s employees for their commitment and their enterprise in building an exceptional platform for GKN to continue to develop and grow. I would also like to add my appreciation to that of the Chairman in thanking Kevin for his contribution over the past nine years as Chief Executive.

Outlook

Overall, the Group’s broad exposure to global markets, strong customer positions and a healthy order book means that it should make further progress in 2012, with the added benefit of a full year contribution from the recent acquisitions.

Nigel Stein
Chief Executive