Review of performance.

GKN Driveline.

GKN Driveline is the world’s leading supplier of automotive driveline systems and solutions. As a global business serving the leading vehicle manufacturers, it develops, builds and supplies an extensive range of automotive driveline products and systems – for use in the smallest ultra low-cost car to the most sophisticated premium vehicle demanding the most complex driving dynamics.

The key financial results for the year are as follows:

  2011 2010 Change
          Headline Underlying
  GKN
Driveline
Getrag
Driveline
Total   £ % £ %
Sales (£m) 2,678 117 2,795 2,433 362 15 252 10
Trading profit* (£m) 191 4 195 169 26 15 21 12
Trading margin 7.1%   7.0% 6.9%        
ROIC 17.0%     16.0%        

(*) Getrag Driveline Products trading profit includes acquisition-related charges of £3 million.

GKN Driveline’s sales increased 15% to £2,795 million (2010: £2,433 million). The favourable impact of currency translation was £20 million, the acquisition of Getrag Driveline Products on 30 September 2011 added £117 million, which was partly offset by £27 million lower sales resulting from the sale of GKN Driveline’s 49% share of the Japanese driveshaft sales and distribution joint venture GKN JTEKT Ltd (GTK) in March 2011. Underlying sales increased by £252 million (10%), including Constant Velocity Jointed (CVJ) Systems which grew 7% and non-CVJ sales which increased by 22%, compared with global vehicle production which increased 3%.

This market outperformance was broad based across North America, Europe, China and Japan, reflecting recent market share gains, the Group’s stronger position in premium vehicles, demand for which continued to be strong, and GKN Driveline’s broadening product mix, particularly with AWD systems and trans-axle solutions. In Japan, the market outperformance reflected GKN Driveline’s exposure to companies less affected by the earthquake and the priority given to reinstating production capability for exported vehicles. In North America, lower production from Japanese companies experiencing component shortages was more than offset by GKN Driveline’s market share gains through a broader product offering, new programme wins and stronger sales to domestic producers.

Trading profit increased to £195 million (2010: £169 million). The impact of translational currency was £1 million positive, and acquisitions (after costs and inventory fair value adjustment of £3 million) added £4 million with underlying trading profit up by £21 million, including around £15 million negative impact from the Japanese earthquake and tsunami, compounded by the floods in Thailand. These affected production in Japan and overseas as component supply chains were disrupted. Outside Japan, it was most pronounced for GKN Driveline in North America where many of the Japanese car manufacturers cut production rates significantly in the second quarter. Engineering costs increased to support new programmes and future growth, and some temporary costs were incurred to raise capacity in some regions to keep pace with significant increases in demand. GKN Driveline’s trading margin was 7.1% (2010: 6.9%) excluding Getrag Driveline Products. GKN Driveline’s medium-term target margin range remains at 8-10%.

Capital expenditure on tangible fixed assets was £113 million (2010: £73 million), 1.0 times (2010: 0.7 times) depreciation.

Return on average invested capital, excluding the Getrag Driveline Products acquisition, was 17.0% (2010: 16.0%), reflecting the increase in profitability.

During the year, GKN Driveline opened a new CVJ systems plant in Changchun, northern China, a precision forge at Oragadam, near Chennai, southern India, expanded production at WuHan, China and construction began on a new CVJ systems facility in Pune, India.

Overall, GKN Driveline won £500 million annualised new and replacement business with the CVJ Systems business winning a healthy 65% of the contracts for which it bid. GKN Driveline AWD Systems launched a power transfer unit (PTU) in China, saw good growth in propshaft production in Europe and benefited from strong sales in North America, including the Jeep Grand Cherokee. It also won significant new business with unique all-wheel drive disconnect technology with vehicle manufacturers in the US, Europe and China.

In June, GKN Driveline invested £4 million in EVO Electric Ltd, a UK pioneer in axial flux motors, and formed a joint venture, GKN EVO eDrive Systems Limited, to manufacture and sell axial flux electric motors and drive systems for use in hybrid and all-electric vehicles.

GKN Driveline is already a pioneer in the development and supply of eTransmissions and eAxles for hybrid and electric vehicles. This venture will enable GKN Driveline to offer advanced axial flux motors and generators for niche applications, adding to its existing eDrive systems portfolio and enhancing its capability in full driveline systems. Recent new business wins in eDrive include:

On 30 September 2011, GKN Driveline completed the acquisition of Getrag Driveline Products, a tier one supplier of geared driveline products, namely power transfer units and rear drive units for AWD vehicles, along with final drive units for high-performance rear wheel drive vehicles.

Getrag Driveline Products, with operations in the United States and Europe, has been integrated into GKN Driveline. Getrag Driveline Products has a product, manufacturing and customer footprint that is complementary to GKN Driveline’s own geared product business, which is predominantly based in Asia. Combined, the businesses are now the leading global supplier of AWD driveline products with an excellent customer base and product portfolio. AWD and trans-axle solutions now represent 28% of GKN Driveline sales with significant further growth opportunities.

As part of the Getrag transaction, GKN Driveline also acquired an exclusive licence, principally for Europe and the Americas, to Getrag’s electric drivetrain technology for use in electric and certain hybrid vehicles, making GKN a leading player in eDrive solutions and very well placed for growth in the medium and long term.