Review of performance.

GKN Aerospace.

GKN Aerospace is a world leading global first tier supplier of airframe and engine structures, components, assemblies and transparencies to a wide range of aircraft and engine prime contractors and other first tier suppliers. It operates in three main product areas: aerostructures, engine components/sub-systems and special products.

The overall aerospace market remained positive in 2011, driven by a recovering civil aircraft market and a generally stable defence sector. The division has increased its position in civil aerospace to 58% of sales, with defence representing 42%.

2011 saw the introduction into service of the Boeing 787, on which GKN Aerospace has sales of approximately $2.6 million per aircraft, and the announcement of the 737 MAX and A320neo single aisle aircraft upgrades. Airbus is ramping up production of the A380 (GKN sales of $8.0 million per aircraft), but announced that the first flight of the A350 would slip to 2013 (GKN sales of $2.5 million per aircraft). Airbus and Boeing estimate that between 28,000 and 32,000 new single aisle and wide bodied aircraft will be delivered by 2030.

Worldwide defence spending remains under pressure, largely driven by cutbacks throughout Europe and likely reductions in the US defence budget. It is expected that the US 2013 defence budget submittal will be in line with 2012 spending levels. GKN’s position on key multi-year programmes such as the UH-60 Blackhawk Helicopter, F/A-18 Super Hornet, F-15 Eagle and C-130J Super Hercules provide a strong production base for the business despite projected defence budget pressures.

Further information on trends in, and the outlook for, aerospace markets is given in our markets.

The key financial results for the year are as follows:

      Headline Underlying
  2011 2010 £ % £ %
Sales (£m) 1,481 1,451 30 2 52 4
Trading profit (£m) 166 162 4 2 6 4
Trading margin 11.2% 11.2%        
ROIC 22.7% 23.3%        

GKN Aerospace sales of £1,481 million were £30 million higher than the prior year (2010: £1,451 million). The impact from currency on translation of sales was £24 million negative, from prior year acquisitions was £4 million positive, representing sales from GKN Aerospace Services Structures Corp. of which the Group gained management control in April 2010, and from disposals was £2 million negative, representing sales from the Engineering Services division which was sold in November 2011. The underlying increase in sales of £52 million represented a 4% increase. This increase reflects lower F-22 sales as the programme continued its run down and lower production rates on the C-17 Globemaster, being more than offset by higher civil sales, particularly for the A320, A330 and A380 and also the early stages of the Boeing 787.

Trading profit increased by £4 million to £166 million (2010: £162 million). The impact from currency on translation of results was £3 million adverse and the net impact from acquisitions and divestments was £1 million positive. The trading margin was 11.2% (2010: 11.2%). GKN Aerospace’s medium term target margin range has now been increased to 11-13% (from 10-12%).

Capital expenditure on tangible assets in 2011 amounted to £59 million (2010: £51 million) which represents 1.7 times depreciation (2010: 1.3 times), or 0.9 times depreciation excluding the Airbus A350 programme. Expenditure on intangible assets, mainly initial non-recurring programme costs, was £35 million (2010: £26 million). £57 million of the capital expenditure and non-recurring programme costs, including £6 million of capitalised borrowing costs, relate to the A350 wing assembly and trailing edge programme. A total of £128 million had been invested on this programme by 31 December 2011, excluding £11 million of capitalised borrowing costs. Spending, which has now reached its peak, is likely to reduce to around £33 million in 2012.

Customer advances in the GKN Aerospace businesses, which are shown in trade and other payables in the balance sheet, amounted to £63 million (2010: £70 million).

Return on average invested capital was 22.7% (2010: 23.3%) reflecting the increased investment in new programmes, particularly the A350.

Important milestones include: