GKN sees profits halved

AUTOMOTIVE and aerospace supplier GKN has seen a halving of its full year profits as the recession bit hard into the group’s core markets.

Full year results released today show pre-tax profits for the Redditch-based group were down 51% to £83m compared with £170m in 2008.

The group said the results reflected the decline in Automotive, Powder Metallurgy and Off-Highway sales but were buoyed slightly by a strong performance in its Aerospace division, while the ongoing effects of a restructuring programme were helping to reduce costs.

Overall, sales declined 3%, while underlying sales were down 22% at £1.134bn. Trading profit fell £69m to £152m although the trading margin recovered to 6.5% in the fourth quarter.

The group’s key Automotive division, which includes its Powder Metallurgy operation, recorded a trading profit of £7m despite underlying sales being down 25%.

Aerospace fared better with sales up 48% and trading profit up 61% to £169m. There was also a strong first year contribution from operations at Filton.

The group’s Off-Highway operation struggled with sales down 43%, leading to a trading loss of £12m.

With the recession beginning to take effect, the group implemented a severe cost-cutting programme.

The group’s original restructuring plan aimed at reducing global headcount by around 5,260 people by July 2010 and this was estimated to cost between £125m to £130m.

However, as markets weakened further, the restructuring was extended. Around 3,500 jobs were shed during the year and 13 plants – including several in the West Midlands – closed.

This raised implementation levels to an estimated £141m – redundancy and reorganisation charges accounting for £108m.

A successful rights issue eased the situation somewhat, netting proceeds of £403m, smoothing operating cash flow and bringing the group’s net debt to £300m by the end of December.

Looking ahead to the rest of 2010, the group said the outlook for its main markets was “mainly positive” although there was still some uncertainty around second half demand.
 
In automotive, the group said forecasts were for an upturn in global production.

It said the end of government scrappage incentives across Western Europe may be coming to an end but this was expected to be more than offset by good growth in North America, India, Japan and Eastern Europe.  

In aerospace, the US defence market is expected to remain solid, although the F-22 will start its production rundown this year.  It said civil aircraft customers were forecast to maintain their published production schedules although, with airline profitability remaining weak, there remained some risk of further schedule cuts in the second half.  

Recent successful first flights on the Airbus A400M, Boeing 787 and Boeing 747-8 were, however, encouraging, it added.
 
Off-highway markets while badly affected last year, were showing some signs of improvement, particularly for heavy construction and mining equipment.  The expectation is for a steady, although modest, recovery in demand through the year.

Despite the poor year, the group still managed a number of new business wins, notably in areas of new technology.

It secured orders for the electric rear axles of the new PSA HYbrid 4, while there was strong interest generally in hybrid/electronic drive products.

In aerospace, the group secured composite and titanium structures business for the Airbus A350 and Joint Strike fighter.

Sir Kevin Smith, GKN chief executive, said the group had made significant progress in realigning its operations to weaker markets and preserving cash.  

“In response to the global recession we restructured the group to reduce the break-even points in Automotive, Powder Metallurgy and Off Highway by around 20% and re-positioned our Aerospace business for lower aircraft production volumes in 2009,” he said.  

“As the year progressed, automotive production improved and the benefits of the group’s restructuring plan increased.  As a result, all divisions were profitable in the fourth quarter, with the exception of Off Highway.
 
“Our focus on cash enabled us to end the year with net debt of £300m, well below our target.  Capital investment has been maintained at 0.7 times depreciation and inventory levels reduced by £130m.”

With strong operating cash flow and the successfully concluded £403m rights issue in July, he said the group had been able to repay its revolving credit facilities and buy back £124m of its outstanding bonds.  

“This significantly strengthens our capital base and reduces our interest cost going forward,” he added.
 
In outlook, he said: “Our financial strength and strong market positions mean that we are well positioned to take full advantage as markets continue to recover.”
 
No final dividend is being paid for 2009 but the group said it intended to pay an interim dividend in 2010.