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TIDMAQ57 TIDM31OL
RNS Number : 4309B
GKN Holdings PLC
16 April 2012
GKN Holdings plc
2011 Annual Report
This announcement is made in connection with GKN Holdings plc's 6.75% Bonds due 2019 and 7% Bonds due 2012. The shares of GKN Holdings plc are not listed; the Company is a wholly owned subsidiary of GKN plc, the ultimate holding company of the GKN Group.
GKN Holdings plc has today published its 2011 Annual Report on the GKN plc website. The document can be viewed at or downloaded from www.gkn.com/investorrelations.
A copy of the 2011 Annual Report has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do.
In compliance with DTR 6.3.5, a description of the Company's principal risks and uncertainties and a responsibility statement are set out below. A condensed set of financial statements are also appended. The 2011 full year results announcement issued by GKN plc on 28 February 2012 included an indication of important events that occurred during the year for the Group. The announcement can be viewed at or downloaded from www.gkn.com/investorrelations.
PRINCIPAL RISKS AND UNCERTAINTIES
The Company's risk management process includes an assessment of the likelihood and potential impact of a range of events to determine the overall risk level and to identify actions necessary to mitigate their impact. As a finance, investment and holding company within the GKN plc Group, aside from holding the Group's external term loans, its dealings are almost exclusively with intra Group transactions. No significant risks and uncertainties have been identified other than those stated below. In addition, market and customer related risk and manufacturing and operational risk which could have a material impact on the future performance of the Company's subsidiaries and cause the financial results of those subsidiaries to differ materially from expected and historical performance are given in the annual report of GKN plc for 2011. Additional risks not currently known or which are regarded as immaterial could also affect future performance.
Financial risk management
The Company's activities form an integral part of the Group's strategy with regard to financial instruments. The Group's objectives, policies and strategies with regard to financial instruments are disclosed in the annual report and accounts of GKN plc. However, a summary of the key matters applicable to the Company are summarised below.
The Group co-ordinates all treasury activities through a central function whose purpose is to manage the financial risks of the Group as described below and to secure short and long term funding at the minimum cost to the Group. The central treasury function operates within a framework of clearly defined GKN plc Board approved policies and procedures and is not permitted to make use of financial instruments or other derivatives other than to hedge identified exposures. Speculative use of such instruments or derivatives is not permitted, and none has occurred during the year.
The Group is exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates. In the normal course of business, the Group also faces risks that are either non-financial or non-quantifiable, including country and credit risk. As an investment and holding company within the Group, the Company seeks to manage each of these risks as follows:
Currency risk
The Group has transactional currency exposures arising from sales or purchases by operating subsidiaries in currencies other than the subsidiaries' functional currency, the most significant being the US dollar and the euro. Under the Group's foreign exchange policy, transaction exposures are hedged, once they are known, mainly through the use of forward foreign exchange contracts.
Credit risk
The Group is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, which include trade debtors. Credit risk relating to financial institutions is mitigated by the Group's policy of only selecting counterparties with a strong investment graded long term credit rating, normally at least A- or equivalent, and assigning financial limits to individual counterparties.
Interest rate and liquidity risk
The Company funds its operations through a mixture of retained earnings and borrowing facilities and has sought to minimise its exposure to an upward change in interest rates by using fixed rate debt instruments.
The borrowing facilities in the main relate to capital market borrowings which consist of GBP350 million 6.75% bonds maturing in 2019 and GBP176 million 7.0% bonds maturing in 2012.
Pension risk
GKN Holdings plc is the principal employer for the UK defined benefit pension scheme which was in deficit by GBP259 million as at 31 December 2011. Deterioration in asset values, changes to real long term interest rates or the strengthening of longevity assumptions could lead to a further increase in the deficit or give rise to additional funding requirements. The Group's pension deficit is recorded in the consolidated financial statements of GKN plc and no deficit is recorded in these company accounts.
DIRECTORS' RESPONSIBILITY STATEMENT
Directors:
Mrs J M Felton
Mr W C Seeger
Mr N M Stein
Each of the Directors as at the date of this report, whose names are set out above, confirm that to the best of their knowledge:
-- the Group financial statements, prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
-- the Directors' report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
GKN Holdings plc condensed financial statements
Consolidated Income Statement For the year ended 31 December 2011 ------------------------------------------------------------------------ Notes 2011 2010 GBPm GBPm ------------------------------------------------ ------ ------ ------ Sales 2 5,746 5,084 ------------------------------------------------ ------ ------ ------ Trading profit 419 368 Restructuring and impairment charges - (39) Change in value of derivative and other financial instruments (31) 12 Amortisation of non-operating intangible assets arising on business combinations (22) (19) UK Pension scheme curtailment - 68 Gains and losses on changes in Group structure 8 (4) ----------------------------------------------- ------ ------ ------ Operating profit 3 374 386 Share of post-tax earnings of joint ventures 13 38 35 Interest payable (47) (46) Interest receivable 5 6 Other net financing charges (19) (35) ----------------------------------------------- ------ ------ ------ Net financing costs 5 (61) (75) Profit before taxation 351 346 Taxation 6 (55) (30) ------------------------------------------------ ------ ------ ------ Profit after taxation for the year 296 316 ------------------------------------------------ ------ ------ ------ Profit attributable to other non-controlling interests 6 5 Profit attributable to the Pension partnership 21 15 ------------------------------------------------ ------ ------ ------ Profit attributable to non-controlling interests 27 20 Profit attributable to equity shareholders 269 296 296 316 ------------------------------------------------ ------ ------ ------ Consolidated Statement of Comprehensive Income For the year ended 31 December 2011 -------------------------------------------------------------------------------------------------------------------------- Notes 2011 2010 GBPm GBPm ----------------------------------------------------------------- ----------------- -------- -------------------------- Profit after taxation for the year 296 316 Other comprehensive income Currency variations Subsidiaries Arising in year (31) 42 Reclassified in year 4 (4) (1) Joint ventures Arising in year 13 3 9 Reclassified in year 4 (2) - Derivative financial instruments Transactional hedging 20 Arising in year (1) 1 Reclassified in year - - Actuarial gains and losses on post-employment obligations Subsidiaries 25 (277) (24) Joint ventures 13 - - Taxation 6 56 58 ----------------------------------------------------------------- ----------------- -------- -------------------------- (256) 85 ----------------------------------------------------------------- ----------------- -------- -------------------------- Total comprehensive income for the year 40 401 ----------------------------------------------------------------- ----------------- -------- -------------------------- Total comprehensive income for the year attributable to: Equity shareholders 13 378 --------------------------------------------------------------- ----------------- -------- -------------------------- Other non-controlling interests 6 8 Pension partnership 21 15 --------------------------------------------------------------- ----------------- -------- -------------------------- Non-controlling interests 27 23 --------------------------------------------------------------- ----------------- -------- -------------------------- 40 401 ----------------------------------------------------------------- ----------------- -------- -------------------------- Consolidated Statement of Changes in Equity For the year ended 31 December 2011 -------------------------------------------------------------------------------------------------------------------------- Non-controlling Other reserves interests --------------------------- ----------------- Share Share- Pension Share premium Retained Exchange Hedging Other holders' partner- Total capital account earnings reserve reserve reserves equity ship Other equity Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm -------------------- ----- ------- ------- -------- -------- ------- -------- -------- --------- ------ ------- At 1 January 2011 362 301 2,683 388 (196) (133) 3,405 346 28 3,779 Total comprehensive income/(expense) - - 46 (32) (1) - 13 21 6 40 Share-based payments 10 - - 6 - - - 6 - - 6 Distribution from Pension partnership to UK Pension scheme 25 - - - - - - - (23) - (23) Purchase of shares in parent undertaking by Employee Share Ownership Plan Trust - - (5) - - - (5) - - (5) Dividends paid to equity shareholders 8 - - - - - - - - - - Dividends paid to non-controlling interests - - - - - - - - (6) (6) At 31 December 2011 362 301 2,730 356 (197) (133) 3,419 344 28 3,791 -------------------- ----- ------- ------- -------- -------- ------- -------- -------- --------- ------ ------- At 1 January 2010 362 301 2,412 343 (197) (95) 3,126 - 24 3,150 Total comprehensive income/(expense) - - 332 45 1 - 378 15 8 401 Investment in Pension partnership by UK Pension scheme 25 - - - - - - - 331 - 331 Purchase of non-controlling interests - - (2) - - - (2) - (3) (5) Share-based payments 10 - - 3 - - - 3 - - 3 Transfers - - 38 - - (38) - - - - Dividends paid to equity shareholders 8 - - (100) - - - (100) - - (100) Dividends paid to non-controlling interests - - - - - - - - (1) (1) -------------------- ----- ------- ------- -------- -------- ------- -------- -------- --------- ------ ------- At 31 December 2010 362 301 2,683 388 (196) (133) 3,405 346 28 3,779 -------------------- ----- ------- ------- -------- -------- ------- -------- -------- --------- ------ ------- Other reserves include accumulated reserves where distribution has been restricted due to legal or fiscal requirements and accumulated adjustments in respect of piecemeal acquisitions. Consolidated Balance Sheet At 31 December 2011 ------------------------------------------------------------------ Notes 2011 2010 GBPm GBPm -------------------------------------- ------ -------- -------- Assets Non-current assets Goodwill 11 534 350 Other intangible assets 11 424 200 Property, plant and equipment 12 1,812 1,651 Investments in joint ventures 13 147 143 Other receivables and investments 14 37 23 Derivative financial instruments 20 21 19 Deferred tax assets 6 224 171 3,199 2,557 -------------------------------------- ------ -------- -------- Current assets Inventories 15 749 637 Trade and other receivables 16 962 762 Amount receivable from parent undertaking 2,176 2,100 Current tax assets 6 16 10 Derivative financial instruments 20 5 13 Other financial assets 18 - 4 Cash and cash equivalents 18 156 438 -------------------------------------- ------ -------- -------- 4,064 3,964 -------------------------------------- ------ -------- -------- Total assets 7,263 6,521 -------------------------------------- ------ -------- -------- Liabilities Current liabilities Borrowings 18 (228) (61) Derivative financial instruments 20 (30) (13) Trade and other payables 17 (1,308) (1,065) Amount payable to parent undertaking (9) (8) Current tax liabilities 6 (138) (100) Provisions 21 (46) (57) (1,759) (1,304) -------------------------------------- ------ -------- -------- Non-current liabilities Borrowings 18 (466) (532) Derivative financial instruments 20 (72) (61) Deferred tax liabilities 6 (96) (63) Trade and other payables 17 (120) (108) Provisions 21 (91) (74) Post-employment obligations 25 (868) (600) -------------------------------------- ------ -------- -------- (1,713) (1,438) -------------------------------------- ------ -------- -------- Total liabilities (3,472) (2,742) -------------------------------------- ------ -------- -------- Net assets 3,791 3,779 -------------------------------------- ------ -------- -------- Shareholders' equity Share capital 22 362 362 Share premium account 301 301 Retained earnings 2,730 2,683 Other reserves 26 59 -------------------------------------- ------ -------- -------- 3,419 3,405 Non-controlling interests 372 374 -------------------------------------- ------ -------- -------- Total equity 3,791 3,779 -------------------------------------- ------ -------- -------- Consolidated Cash Flow Statement For the year ended 31 December 2011 --------------------------------------------------------------------- Notes 2011 2010 GBPm GBPm --------------------------------------------- ------ ------ ------ Cash flows from operating activities Cash generated from operations 24 425 507 Special contribution to the UK Pension scheme 25 - (331) Interest received 5 7 Interest paid (48) (53) Tax paid (48) (43) Dividends received from joint ventures 13 35 23 --------------------------------------------- ------ ------ ------ 369 110 --------------------------------------------- ------ ------ ------ Cash flows from investing activities Purchase of property, plant and equipment (236) (162) Receipt of government capital grants 1 3 Purchase of intangible assets (46) (31) Receipt of government refundable advances - 10 Proceeds from sale and realisation of fixed assets 8 5 Acquisition of subsidiaries (net of cash acquired) (450) (6) Acquisition of other investments 14 (4) - Purchase of non-controlling interests - (5) Proceeds from sale of businesses (net of cash disposed) 4 5 5 Proceeds from sale of joint venture 4 8 1 Investments in joint ventures 13 (4) (10) Investment loans and capital contributions - (3) (718) (193) --------------------------------------------- ------ ------ ------ Cash flows from financing activities Investment in Pension partnership by UK Pension scheme 25 - 331 Distribution from Pension partnership to UK Pension scheme 25 (23) - Purchase of shares in parent undertaking by Employee Share Ownership Plan Trust (5) - Proceeds from borrowing facilities 115 38 Bond buy back including buy back premium - (26) Repayment of other borrowings (10) (48) Finance lease payments - (1) Amounts placed on deposit - (4) Amounts returned from deposit 4 20 Dividends paid to shareholders 8 - (100) Dividends paid to non-controlling interests (6) (1) 75 209 --------------------------------------------- ------ ------ ------ Currency variations on cash and cash equivalents (2) 7 --------------------------------------------- ------ ------ ------ Movement in cash and cash equivalents (276) 133 Cash and cash equivalents at 1 January 421 288 Cash and cash equivalents at 31 December 24 145 421 --------------------------------------------- ------ ------ ------
Notes to the Announcement
For the year ended 31 December 2011
1 Segmental analysis The Group's reportable segments have been determined based on reports reviewed by the Executive Committee led by the Chief Executive. The operating activities of the Group are largely structured according to the markets served; automotive, aerospace and the land systems markets. Automotive is managed according to product groups; driveline and powder metallurgy. Reportable segments derive their sales from the manufacture of product. Revenue from services, inter segment trading and royalties is not significant. (a) Sales --------------------------------------------------------------------------------------- Automotive Powder Land Driveline Metallurgy Aerospace Systems Total GBPm GBPm GBPm GBPm GBPm ----------------------------- ---------- ---------- --------- ---------- --------- 2011 Subsidiaries 2,432 845 1,481 805 Joint ventures 246 - - 42 -------------------------------- ---------- ---------- --------- ---------- 2,678 845 1,481 847 5,851 -------------------------------- ---------- ---------- --------- ---------- Acquisitions Subsidiaries 117 - - 38 155 Other businesses 106 -------------------------------- ---------- ---------- --------- ---------- --------- Management sales 6,112 Less: Joint venture sales (366) -------------------------------- ---------- ---------- --------- ---------- --------- Income statement - sales 5,746 -------------------------------- ---------- ---------- --------- ---------- --------- 2010 Subsidiaries 2,180 759 1,451 664 Joint ventures 253 - - 35 -------------------------------- ---------- ---------- --------- ---------- 2,433 759 1,451 699 5,342 -------------------------------- ---------- ---------- --------- ---------- Other businesses 87 -------------------------------- ---------- ---------- --------- ---------- --------- Management sales 5,429 Businesses sold and closed - Axles 10 Less: Joint venture sales (355) -------------------------------- ---------- ---------- --------- ---------- --------- Income statement - sales 5,084 -------------------------------- ---------- ---------- --------- ---------- --------- (b) Trading profit --------------------------------------------------------------------------------------- Automotive Powder Land Driveline Metallurgy Aerospace Systems Total GBPm GBPm GBPm GBPm GBPm ----------------------------- ---------- ---------- --------- ---------- --------- 2011 Trading profit before depreciation, impairment and amortisation 255 103 208 77 Depreciation and impairment of property, plant and equipment (107) (31) (34) (13) Amortisation of operating intangible assets (3) - (5) (1) -------------------------------- ---------- ---------- --------- ---------- Trading profit - subsidiaries 145 72 169 63 Trading profit/(loss) - joint ventures 46 - (3) 5 -------------------------------- ---------- ---------- --------- ---------- 191 72 166 68 497 -------------------------------- ---------- ---------- --------- ---------- Acquisitions Trading profit - subsidiaries 7 - - 4 11 Acquisition related charges (3) - - (5) (8) -------------------------------- ---------- ---------- --------- ---------- --------- 3 Other businesses 3 Gallatin temporary plant closure (19) Corporate and unallocated costs (16) -------------------------------- ---------- ---------- --------- ---------- --------- Management trading profit 468 Less: Joint venture trading profit (49) -------------------------------- ---------- ---------- --------- ---------- --------- Income statement - trading profit 419 -------------------------------- ---------- ---------- --------- ---------- --------- 2010 Trading profit before depreciation, impairment and amortisation 238 84 209 49 Depreciation and impairment of property, plant and equipment (107) (30) (39) (15) Amortisation of operating intangible assets (3) - (6) (1) -------------------------------- ---------- ---------- --------- ---------- Trading profit - subsidiaries 128 54 164 33 Trading profit/(loss) - joint ventures 41 - (2) 4 -------------------------------- ---------- ---------- --------- ---------- 169 54 162 37 422 -------------------------------- ---------- ---------- --------- ---------- Other businesses 3 Corporate and unallocated costs (13) -------------------------------- ---------- ---------- --------- ---------- --------- Management trading profit 412 Less: Joint venture trading profit (44) -------------------------------- ---------- ---------- --------- ---------- --------- Income statement - trading profit 368 -------------------------------- ---------- ---------- --------- ---------- --------- 1 Segmental analysis (continued) (b) Trading profit (continued) No income statement items between trading profit and profit before tax are allocated to management trading profit, which is the Group's segmental measure of profit or loss. There is a net credit in Corporate of GBP2 million (2010: GBP8 million; Driveline GBP6 million and Corporate GBP2 million) within trading profit in respect of changes to retiree benefit arrangements. Gallatin temporary plant closure As a consequence of the Gallatin temporary plant closure, a Hoeganaes facility within Powder Metallurgy, following an incident on 27 May 2011, the Group has incurred a significant amount of incremental, one-off costs. The information presented in this note should be read in conjunction with page 32 of the GKN plc business review. The Group income statement for the year ended 31 December 2011 includes a net pre-tax charge of GBP19 million in relation to the Gallatin temporary plant closure. The GBP19 million, which has been charged to trading profit, represents a gross cost of GBP34 million offset by recoveries from the Group's external insurer of GBP15 million. The GBP34 million covers the cost of responding to customer obligations, GBP20 million, including premium freight and powder supply charges, rectification and corrections to the plant configuration, GBP8 million, fixed employment costs that were unabsorbed in June and July as a result of no productive activity, GBP4 million, and professional fees and other costs amounting to GBP2 million. The net GBP19 million charge attracts taxation relief of GBP4 million. The impact on cash flows from operating activities was a net outflow of GBP19 million. (c) Goodwill, fixed assets and working capital - subsidiaries only Automotive Powder Land Driveline Metallurgy Aerospace Systems Total GBPm GBPm GBPm GBPm GBPm ------------------------------ ---------- ---------- --------- ---------- ------------------ 2011 Property, plant and equipment and operating intangible assets 982 313 479 142 1,916 Working capital 77 100 56 73 306 -------------------------------------- ---------- ---------- --------- ---------- ------------------ Net operating assets 1,059 413 535 215 Goodwill and non-operating intangible assets 321 29 282 196 -------------------------------------- ---------- ---------- --------- ---------- Net investment 1,380 442 817 411 -------------------------------------- ---------- ---------- --------- ---------- 2010 Property, plant and equipment and operating intangible assets 878 307 421 110 1,716 Working capital 72 89 67 58 286 -------------------------------------- ---------- ---------- --------- ---------- ------------------ Net operating assets 950 396 488 168 Goodwill and non-operating intangible assets 81 29 296 54 -------------------------------------- ---------- ---------- --------- ---------- Net investment 1,031 425 784 222 -------------------------------------- ---------- ---------- --------- ---------- (d) Fixed asset additions, investments in joint ventures and other non-cash items Automotive Powder Land Other Driveline Metallurgy Aerospace Systems Businesses Corporate Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm ------------------- --------- ---------- ---------- --------- ---------- --------- ------- 2011 Fixed asset additions and capitalised borrowing costs property, plant and - equipment 136 44 58 18 1 - 257 intangible - assets 9 - 39 1 - - 49 Investments in associate and Joint ventures 118 - - 11 22 - 151 Other non-cash items - share-based payments 2 1 1 - - 2 6 ----- ------------ --------- ---------- ---------- --------- ---------- --------- ------- 2010 Fixed asset additions and capitalised borrowing costs property, plant and - equipment 88 26 60 8 1 - 183 intangible - assets 4 - 26 1 - - 31 Investments in Joint ventures 107 - - 12 24 - 143 Other non-cash items - share-based payments 1 - 1 - - 1 3 ----- ------------ --------- ---------- ---------- --------- ---------- --------- ------- 1 Segmental analysis (continued) (e) Country analysis United Other Total Kingdom USA Germany countries non-UK Total GBPm GBPm GBPm GBPm GBPm GBPm ------------------------------ ---------- ---------- --------- ---------- --------- ------- 2011 Management sales by origin 930 1,720 1,017 2,445 5,182 6,112 Goodwill, other intangible assets, property, plant and equipment and investments in associate and joint ventures 2,921 joint ventures 411 908 498 1,104 2,510 2,921 ----- -------------------------- ---------- ---------- --------- ---------- --------- ------- 2010 Management sales by origin 819 1,571 858 2,181 4,610 5,429 Goodwill, other intangible assets, property, plant and equipment and investments in joint ventures 355 695 354 940 1,989 2,344 ----- ------------------------------- ---------- ---------- --------- ---------- --------- ------- (f) Other sales information Subsidiary segmental sales gross of inter segment sales are; Driveline GBP2,491 million (2010: GBP2,234 million), Powder Metallurgy GBP851 million (2010: GBP765 million), Aerospace GBP1,481 million (2010: GBP1,451 million) and Land Systems GBP805 million (2010: GBP665 million). Inter segment transactions take place on an arms length basis using normal terms of business. In 2011 and 2010, no customer accounted for 10% or more of subsidiary sales or management sales. Management sales by product are: Driveline - CVJ systems 70% (2010: 77%), all-wheel drive systems 23% (2010: 18%), transaxle solutions 5% (2010: 5%) and other goods 2% (2010: nil). Powder Metallurgy - sintered components 83% (2010: 82%) and metal powders 17% (2010: 18%). Aerospace - aerostructures 64% (2010: 64%), engine components and sub-systems 28% (2010: 28%) and special products 8% (2010: 8%). Land Systems - power management devices 36% (2010: 27%), wheels and structures 37% (2010: 36%) and aftermarket 27% (2010: 37%). During the year, Driveline's product groups were reassessed to better reflect the mix of business. Amounts shown above, together with 2010 comparatives reflect the current product groups. (g) Reconciliation of segmental property, plant and equipment and operating intangible fixed assets to the balance sheet 2011 2010 GBPm GBPm --------------------------------------------------------------------------- --------- ------- Segmental analysis - property, plant and equipment and operating intangible assets 1,916 1,716 Segmental analysis - goodwill and non-operating intangible assets 828 460 Goodwill (534) (350) Other businesses 19 19 Corporate assets 7 6 ------------------------------------------------------------------------------ --------- ------- Balance sheet - property, plant and equipment and other intangible assets 2,236 1,851 ------------------------------------------------------------------------------ --------- ------- Reconciliation of segmental working capital to (h) the balance sheet 2011 2010 GBPm GBPm --------------------------------------------------------------------------- --------- ------- Segmental analysis - working capital 306 286 Other businesses 11 6 Corporate items (36) (47) Accrued net financing costs (21) (19) Restructuring provisions (10) (41) Deferred and contingent consideration (29) (27) Government refundable advances (42) (40) Balance sheet - inventories, trade and other receivables, trade and other payables and provisions 179 118 ---- ------------------------------------------------------------------------ --------- ------- 2 Operating profit The analysis of the components of operating profit is shown below: (a) Trading profit 2011 2010 GBPm GBPm -------------------------------------------------------------- -------- -------- Sales by subsidiaries 5,746 5,084 Less: Businesses sold and closed - (2010: Axles) - (10) -------------------------------------------------------------- -------- -------- 5,746 5,074 Operating costs Change in stocks of finished goods and work in progress 32 31 Raw materials and consumables (2,636) (2,157) Staff costs (note 10) (1,457) (1,346) Reorganisation costs (ii): Redundancy and other employee related amounts - (4) Impairment of plant and equipment - - Depreciation of property, plant and equipment (iii) (191) (191) Impairment of plant and equipment (1) (2) Amortisation of intangible assets (10) (10) Operating lease rentals payable: Plant and equipment (14) (13) Property (29) (32) Impairment of trade receivables (8) (7) Amortisation of government capital grants 1 1 Net exchange differences on foreign currency transactions (1) 2 Acquisition related charges (8) - Other costs (1,005) (978) -------- -------- (5,327) (4,706) -------------------------------------------------------------- -------- -------- Trading profit 419 368 -------------------------------------------------------------- -------- -------- (i) EBITDA is subsidiary trading profit before depreciation, impairment and amortisation charges included in trading profit. EBITDA in 2011 was GBP621 million (2010: GBP571 million). (ii) Reorganisation costs in 2010 reflect actions in the ordinary course of business to reduce costs, improve productivity and rationalise facilities in continuing operations. (iii) Including depreciation charged on assets held under finance leases of less than GBP1 million (2010: GBP1 million). (iv) Research and development expenditure in subsidiaries was GBP103 million (2010: GBP92 million). (v) Auditors' remuneration The analysis of auditors' remuneration is as follows: 2011 2010 GBPm GBPm ------------------------------------------------- -------- -------- Fees payable to PricewaterhouseCoopers LLP for the Company's annual financial - - statements Fees payable to PricewaterhouseCoopers LLP and their associates for other services to the Group: Audit of the Company's subsidiaries - pursuant to legislation (3.4) (3.1) ---- ------------------------------------------------- -------- -------- Total audit fees (3.4) (3.1) ------------------------------------------------- -------- -------- Other services pursuant - to legislation (0.1) (0.1) - Tax services (0.7) (0.6) - Corporate finance transaction services (0.2) - - Other services (0.1) (0.1) ---- ------------------------------------------------- -------- -------- Total non-audit fees (1.1) (0.8) ------------------------------------------------- -------- -------- Fees payable to PricewaterhouseCoopers LLP and their associates in respect of associated pension schemes: - Audit - - - Other services - - ---- ------------------------------------------- -------- -------- - - ------------------------------------------------- -------- -------- Total fees payable to PricewaterhouseCoopers LLP and their associates (4.5) (3.9) ------------------------------------------------- -------- -------- All fees payable to PricewaterhouseCoopers LLP, the Company's auditors, include amounts in respect of expenses. All fees payable to PricewaterhouseCoopers LLP have been charged to the income statement. 2 Operating profit (continued) (b) Restructuring and impairment charges in 2010 The prior year restructuring actions comprised facility and operation closures, permanent headcount reductions achieved through redundancy programmes and the structured use of short-time working arrangements, available through national or state legislation, by European, Japanese and North American subsidiaries. There have been no further restructuring charges during 2011. In the comparative year to 31 December 2010 the Group incurred charges of GBP12 million for redundancy and post-employment costs, GBP2 million for short-term working costs, wholly wages and salaries and GBP25 million for other reorganisation costs. All of these costs were incurred in subsidiaries. The segmental allocation of restructuring costs in the comparative year to 31 December 2010 was: Driveline GBP29 million, Powder Metallurgy GBP1 million, Aerospace GBP4 million and Land Systems GBP5 million. Cash outflow in respect of previous restructuring plans was GBP31 million (2010: GBP55 million). Proceeds from sale of fixed assets, put out of use as part of previous restructuring programmes, of GBP2 million were recognised in the year (2010: GBP2 million). Change in value of derivative and other financial (c) instruments 2011 2010 GBPm GBPm ----------------------------------------------------- ----- ---- Forward currency contracts (not hedge accounted) (29) (3) Embedded derivatives (3) 3 Commodity contracts (not hedge accounted) (1) - ----------------------------------------------------- ----- ---- (33) - Net gains and losses on intra-group funding Arising in year 2 12 Reclassified in year - - ---------------------------------------------------- ----- ---- 2 12 ----------------------------------------------------- (31) 12 ----------------------------------------------------- ----- ---- IAS 39 requires derivative financial instruments to be valued at the balance sheet date and any difference between that value and the intrinsic value of the instrument to be reflected in the balance sheet as an asset or liability. Any subsequent change in value is reflected in the income statement unless hedge accounting is achieved. Such movements do not affect cash flow or the economic substance of the underlying transaction. In 2011 and 2010 the Group used transactional hedge accounting in a limited number of instances. Amortisation of non-operating intangible assets (d) arising on business combinations 2011 2010 GBPm GBPm ----------------------------------------------------- ----- ---- Marketing related - - Customer related (17) (16) Technology based (5) (3) ----------------------------------------------------- ----- ---- (22) (19) ----------------------------------------------------- ----- ---- (e) Gains and losses on changes in Group structure 2011 2010 GBPm GBPm ----------------------------------------------------- ----- ---- Profits and losses on sale or closure of businesses Business sold - GKN Aerospace Engineering Services 4 - Business sold and closed - (2010: Axles) - (5) Profit on sale of joint venture 4 - Investment write up on acquisition of GKN Aerospace Services Structures Corp. - 1 ----------------------------------------------------- ----- ---- 8 (4) ----------------------------------------------------- ----- ---- On 31 March 2011 the Group sold its 49% share in a joint venture company, GKN JTEKT Limited, for cash consideration of GBP8 million. A profit on sale of GBP4 million was realised which includes GBP2 million of previous currency variations reclassified from other reserves. On 30 November 2011 the Group sold its Engineering Services division of GKN Aerospace for net cash consideration of GBP5 million. A profit on sale of GBP4 million was realised which represents previous currency variations reclassified from other reserves. On 1 September 2010 the Group concluded the sale of its European agricultural axles operations with other operations closed during the year. Sale proceeds were GBP5 million and a net loss of GBP5 million was realised representing trading losses of GBP2 million, tangible fixed asset impairment of GBP1 million, other asset write downs of GBP3 million and reclassified currency variations from other reserves of GBP1 million. 3 Net financing costs 2011 2010 GBPm GBPm ------------------------------------------- ----- ----- (a) Interest payable and fee expense Short term bank and other borrowings (10) (7) Loans repayable within five years (14) (15) Loans repayable after five years (26) (24) Bond buy back premium - (1) Government refundable advances (2) (2) Borrowing costs capitalised 6 4 Finance leases (1) (1) ------------------------------------------ ----- ----- (47) (46) ------------------------------------------- ----- ----- Interest receivable Short term investments, loans and deposits 5 6 Net interest payable and receivable (42) (40) ------------------------------------------- ----- ----- The capitalisation rate on specific funding was 5.6% (2010: 5.6%) and on general borrowings was 6.1% (2010: 6.8%). 2011 2010 GBPm GBPm ------------------------------------------- ----- ----- (b) Other net financing charges Expected return on scheme assets 153 145 Interest on post-employment obligations (170) (176) ------------------------------------------ ----- ----- Post-employment finance charges (17) (31) Unwind of discounts (2) (4) ------------------------------------------ ----- ----- (19) (35) ------------------------------------------- ----- ----- 4 Taxation (a) Tax expense 2011 2010 Analysis of charge in year GBPm GBPm ------------------------------------------- ----- ----- Current tax (charge)/credit Current year charge (92) (74) Utilisation of previously unrecognised tax losses and other assets 10 20 Net movement on provisions for uncertain tax positions (22) (27) Adjustments in respect of prior years 1 (2) ---------------------------------------------- ----- ----- (103) (83) ------------------------------------------- ----- ----- Deferred tax (charge)/credit Origination and reversal of temporary differences (26) (23) Tax on change in value of derivative financial instruments 7 (2) Other changes in unrecognised deferred tax assets 58 72 Changes in tax rates - (2) Adjustments in respect of prior years 9 8 ---------------------------------------------- ----- ----- 48 53 ------------------------------------------- ----- ----- Total tax charge for the year (55) (30) ------------------------------------------- ----- ----- Management tax rate The Group operates in many jurisdictions and is subject to tax audits which are often complex and can take several years to conclude. Therefore, the accrual for current tax includes provisions for uncertain tax positions which require estimates for each matter and the exercise of judgement in respect of the interpretation of tax laws and the likelihood of challenge to historic tax positions. Where appropriate, estimates of interest and penalties are included in these provisions. As amounts provided for in any year could differ from eventual tax liabilities, subsequent adjustments which have a material impact on the Group's tax rate and/or cash tax payments may arise. Tax payments comprise payments on account and payments on the final resolution of open items and, as a result, there can be substantial differences between the charge in the income statement and cash tax payments. With regard to deferred tax, judgement is required for the recognition of deferred tax assets, which is based on expectations for future financial performance in particular legal entities or tax groups. 2011 2010 Tax reconciliation GBPm % GBPm % -------------------------------------------- ---- ----- ---- ---- Profit before tax 351 346 Less share of post-tax earnings of joint ventures (38) (35) Profit before tax excluding joint ventures 313 311 ------------------------------------------------- ---- ----- ---- ---- Tax charge calculated at 26.5% (2010: 28%) standard UK corporate tax rate (83) (26) (87) (28) Differences between UK and overseas corporate tax rates (26) (8) 8 3 Non-deductible and non-taxable items (2) (1) (20) (6) Utilisation of previously unrecognised tax losses and other assets 10 3 20 6 Other changes in unrecognised deferred tax assets 58 19 72 23 Changes in tax rates - - (2) (1) ------------------------------------------------- ---- ----- ---- ---- 4 Taxation (continued) (a) Tax expense (continued) Tax charge on ordinary activities (43) (13) (9) (3) Net movement on provision for uncertain tax positions (22) (7) (27) (8) Other adjustments in respect of prior years 10 3 6 2 ----- Total tax charge for the year (55) (17) (30) (10) ------------------------------------------------- ---- ----- ---- ---- (b) Tax included in comprehensive income 2011 2010 GBPm GBPm -------------------------------------------------- ----- ---------- Deferred tax on post-employment obligations 30 46 Deferred tax on foreign currency gains and losses on intra-group funding 1 (3) Current tax on post-employment obligations 24 14 Current tax on foreign currency gains and losses on intra-group funding 1 1 ------------------------------------------------------- ----- ---------- 56 58 ------------------------------------------------------- ----- ---------- (c) Current tax 2011 2010 GBPm GBPm -------------------------------------------------- ----- ---------- Assets 16 10 Liabilities (138) (100) ------------------------------------------------------- ----- ---------- (122) (90) ------------------------------------------------------- ----- ---------- (d) Recognised deferred tax 2011 2010 GBPm GBPm -------------------------------------------------- ----- ---------- Deferred tax assets 224 171 Deferred tax liabilities (96) (63) ------------------------------------------------------- ----- ---------- 128 108 ------------------------------------------------------- ----- ---------- There is a net GBP48 million deferred tax credit to the income statement in the year (2010: GBP53 million) and a further deferred tax credit of GBP31 million has been recorded directly in other comprehensive income (2010: GBP46 million). Primarily these credits relate to the recognition of previous unrecognised future tax deductions in the US, the UK and Japan, based on management projections which indicate the future availability of taxable profits to absorb the deductions. The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by IAS 12) during the year are shown below: Assets Liabilities -------------------------- ------------- Post- employment Tax Fixed obligations losses Other assets Other Total GBPm GBPm GBPm GBPm GBPm GBPm ----------------------- ----------- ------ ----- ------ ----- ----- At 1 January 2011 111 120 47 (161) (9) 108 Included in the income statement - 23 12 11 2 48 Included in other comprehensive income 30 - - - 1 31 Businesses acquired - - (8) (60) - (68) Currency variations 1 4 - 4 - 9 ---------------------------- ----------- ------ ----- ------ ----- ----- At 31 December 2011 142 147 51 (206) (6) 128 ---------------------------- ----------- ------ ----- ------ ----- ----- At 1 January 2010 74 45 46 (145) (6) 14 Other movements 2 - - (2) - - Included in the income statement (11) 75 1 (12) - 53 Included in other comprehensive income 46 - - - (3) 43 Businesses acquired - - - (3) - (3) Currency variations - - - 1 - 1 ---------------------------- ----------- ------ ----- ------ ----- ----- At 31 December 2010 111 120 47 (161) (9) 108 ---------------------------- ----------- ------ ----- ------ ----- ----- Deferred tax assets totalling GBP41 million (2010: GBP39 million) have been recognised in territories where tax losses have been incurred in the year as future profitability is expected which will result in their realisation. (e) Unrecognised deferred tax assets Certain deferred tax assets have not been recognised on the basis that the Group's ability to utilise them is uncertain as shown below. 4 Taxation (continued) (e) Unrecognised deferred tax assets (continued) 2011 2010 ------------------------ ------------------------ Tax Tax value Gross Expiry value Gross Expiry GBPm GBPm period GBPm GBPm period ---------------------- ------ ----- --------- ------ ----- --------- Tax losses - with expiry: national 142 401 2012-2031 215 619 2011-2030 Tax losses - with expiry: local 20 487 2012-2031 41 480 2011-2030 Tax losses - without expiry 116 448 105 384 --------------------------- ------ ----- --------- ------ ----- --------- Total tax losses 278 1,336 361 1,483 --------------------------- ------ ----- --------- ------ ----- --------- Post-employment obligations 70 298 66 245 Other temporary differences 41 161 38 136 --------------------------- ------ ----- --------- ------ ----- --------- Total other temporary differences 111 459 104 381 --------------------------- ------ ----- --------- ------ ----- --------- Unrecognised deferred tax assets 389 1,795 465 1,864 --------------------------- ------ ----- --------- ------ ----- --------- No deferred tax is recognised on the unremitted earnings of overseas subsidiaries except where the distribution of such profits is planned. If these earnings were remitted in full, tax of GBP13 million (2010: GBP25 million) would be payable. (f) Changes in UK tax rate A reduction in the mainstream rate of UK corporation tax to 26% took effect from April 2011 which gives rise to an effective UK tax rate of 26.5% for the year. Further reductions to 22% by 2014 are expected and at the balance sheet date a reduction to 25% had been substantively enacted, so UK deferred tax is measured at 25%. Further reductions will cause a corresponding reduction in the value of UK deferred tax assets but as substantial UK deferred tax assets are currently unrecognised, no material impact on the Group effective tax rate is expected. (g) Franked investment income - litigation Since 2003, the Group has been involved in litigation with HMRC in respect of various advance corporate tax payments made and corporate tax paid on certain foreign dividends which, in its view, were levied by HMRC in breach of the Group's EU community law rights. A Court of Appeal hearing regarding payments on account took place in November 2011 and the initial judgment is favourable toward GKN retaining existing payments on accounts received, although HMRC still has a right to appeal against this decision. The main case has been appealed to the UK Supreme Court and to the European Court of Justice (for further guidance on breach of community law). The Judgements for either Court are not expected until late Summer/early Autumn 2012. The continuing complexity of the case means that it is not possible to predict the final outcome of the litigation with any reasonable degree of certainty and as a result, no contingent asset has been recognised. 5 Discontinued operations There were no discontinued operations in 2011 or 2010. 6 Dividends Dividends paid to parent undertaking in the year are nil (2010: GBP100 million) 7 Investments in joint ventures Group share of results 2011 2010 GBPm GBPm ------------------------------------------ ----- ----- Sales 366 355 Operating costs (317) (311) ------------------------------------------ ----- ----- Trading profit 49 44 Net financing costs (1) (1) ------------------------------------------ ----- ----- Profit before taxation 48 43 Taxation (8) (7) ------------------------------------------ ----- ----- Share of post-tax earnings - before exceptional and non-trading items 40 36 Amortisation of non-operating intangible assets arising on business combinations and other net financing charges, including tax of GBP1 million (2010: nil) (2) (1) Share of post-tax earnings 38 35 ------------------------------------------ ----- ----- 7 Investments in joint ventures (continued) Group share of net book amount 2011 2010 -------------------------- ----- ---------------------------------- Group Group share Provisions Net share Provisions Net of for book of for book equity impairment amount equity impairment amount GBPm GBPm GBPm GBPm GBPm GBPm ----------------- ------ ---------- ------ ----- ------ ----------------- ------- At 1 January 143 - 143 113 (1) 112 Share of post-tax earnings of joint ventures 38 - 38 35 - 35 Utilisation of provision - - - (1) 1 - Actuarial gains on post-employment obligations, including deferred tax - - - - - - Dividends paid (35) - (35) (23) - (23) Additions 4 - 4 10 - 10 Disposals (6) - (6) - - - Currency variations 3 - 3 9 - 9 ----------------- ------ ---------- ------ ----- ------ ----------------- ------- At 31 December 147 - 147 143 - 143 ----------------- ------ ---------- ------ ----- ------ ----------------- ------- 2011 2010 GBPm GBPm ---------------------------------------------------- ------ -------------------------- Non-current assets 124 117 Current assets 127 139 Current liabilities (79) (87) Non-current liabilities (25) (26) ---------------------------------------------------- ------ -------------------------- 147 143 ---------------------------------------------------- ------ -------------------------- The joint ventures have no significant contingent liabilities to which the Group is exposed and nor has the Group any significant contingent liabilities in relation to its interest in the joint ventures. The share of capital commitments of the joint ventures are shown in note 28. 8 Net borrowings (a) Analysis of net borrowings -------------------------------------------------------------------------------- Notes Current Non-current Total ---------- ---------------------------- One Two to to More Within two five than Total one five year years years years GBPm GBPm GBPm GBPm GBPm GBPm ------------------ ------ ---------- ------ ----- ------ ----- ---------- 2011 Other borrowings GBP350 million 6[3/4]% 2019 unsecured bond i - - - (347) (347) (347) GBP176 million 7% 2012 unsecured bond i (176) - - - - (176) Other secured US$ denominated loan (2) (3) (1) - (4) (6) Other long term borrowings - - (65) (48) (113) (113) Finance lease obligations iv (1) (1) (1) - (2) (3) Bank overdrafts (11) - - - - (11) Other short term bank borrowings (38) - - - - (38) Borrowings (228) (4) (67) (395) (466) (694) ------------------ ------ ---------- ------ ----- ------ ----- ---------- Bank balances and cash 150 - - - - 150 Short term bank deposits ii 6 - - - - 6 ------------------ ------ ---------- ------ ----- ------ ----- ---------- Cash and cash equivalents v 156 - - - - 156 ------------------ ------ ---------- ------ ----- ------ ----- ---------- Other financial assets - bank deposits - - - - - - ------------------ ------ ---------- ------ ----- ------ ----- ---------- Net borrowings (72) (4) (67) (395) (466) (538) ------------------ ------ ---------- ------ ----- ------ ----- ---------- 2010 Other borrowings GBP350 million 6[3/4]% 2019 unsecured bond i - - - (347) (347) (347) GBP176 million 7% 2012 unsecured bond i - (176) - - (176) (176) Other secured US$ denominated loan (1) (2) (5) - (7) (8) Other long term borrowings (6) - - - - (6) Finance lease obligations iv (1) (1) (1) - (2) (3) Bank overdrafts (17) - - - - (17) Other short term bank borrowings (36) - - - - (36) Borrowings (61) (179) (6) (347) (532) (593) ------------------ ------ ---------- ------ ----- ------ ----- ---------- Bank balances and cash 158 - - - - 158 Short term bank deposits ii 280 - - - - 280 ------------------ ------ ---------- ------ ----- ------ ----- ---------- Cash and cash equivalents v 438 - - - - 438 ------------------ ------ ---------- ------ ----- ------ ----- ---------- Other financial assets - bank deposits iii 4 - - - - 4 ------------------ ------ ---------- ------ ----- ------ ----- ---------- Net borrowings 381 (179) (6) (347) (532) (151) ------------------ ------ ---------- ------ ----- ------ ----- ---------- 8 Net borrowings (continued) (a) Analysis of net borrowings (continued) Other borrowings include: unsecured GBP350 million (2010: GBP350 million) 6[3/4]% bond maturing in 2019 less unamortised issue costs of GBP3 million (2010: GBP3 million); unsecured GBP176 million (2010: GBP176 million) 7% bond maturing in 2012 less unamortised issue costs of nil (2010: nil); and a secured term loan of GBP6 million (2010: GBP8 million) secured by way of a fixed and floating charge on certain Aerospace fixed assets. Other long term borrowings include GBP80 million drawn under the Group's European Investment Bank unsecured facility. The loan is due for repayment in five equal annual instalments of GBP16 million, commencing in June 2015 and attracts a fixed interest rate of 4.1% per annum payable annually in arrears. Also included is GBP33 million drawn from the Group's new 2016 Revolving Credit Facility of GBP445 million. The term of the facility is 5 years and attracts a variable interest rate. Notes (i) Denotes borrowings at fixed rates of interest until maturity. All other borrowings and cash and cash equivalents are at variable interest rates unless otherwise stated. (ii) The average interest rate on short term bank deposits was 0.7% (2010: 0.5%). Deposits at both 31 December 2011 and 31 December 2010 had a maturity date of less than one month. (iii) The interest rate on bank deposits in 2010 was 2% and they matured on 27 May 2011. (iv) Finance lease obligations gross of finance charges fall due as follows: GBP1 million within one year (2010: GBP1 million), GBP3 million in one to five years (2010: GBP3 million) and nil in more than five years (2010: GBP1 million). (v) GBP24 million (2010: GBP11 million) of the Group's cash and cash equivalents are held by the Group's captive insurance company to maintain solvency requirements and as collateral for Letters of Credit issued to the Group's principal external insurance providers. These funds cannot be circulated within the Group on demand. (b) Fair values ------------------------------------------------------------------------------------------------- 2011 2010 ---------------------------- -------------------------- Book Fair Book Fair value value value value GBPm GBPm GBPm GBPm --------------------------------------- ------------- ------------- ------------ ------------ Borrowings, other financial assets and cash and cash equivalents Other borrowings (642) (659) (537) (564) Finance lease obligations (3) (3) (3) (3) Bank overdrafts and other short term bank borrowings (49) (49) (53) (53) Bank balances and cash 150 150 158 158 Short term bank deposits and other bank deposits 6 6 284 284 (538) (555) (151) (178) --------------------------------------- ------------- ------------- ------------ ------------ Trade and other payables Government refundable advances (42) (39) (40) (40) Deferred and contingent consideration (29) (29) (27) (27) --------------------------------------- ------------- ------------- ------------ ------------ (71) (68) (67) (67) --------------------------------------- ------------- ------------- ------------ ------------ The following methods and assumptions were used in estimating fair values for financial instruments: Unsecured bank overdrafts, other short term bank borrowings, bank balances and cash and short term bank deposits approximate to book value due to their short maturities. For other amounts, the repayments which the Group is committed to make have been discounted at the relevant interest rates applicable at 31 December 2011. Bonds included within other borrowings have been valued using quoted closing market values. 9 Business combinations Acquisition of Getrag GKN Driveline acquired the all-wheel-drive (AWD) components businesses from Getrag KG on 30 September 2011. The Group acquired 100% of the equity of: 1) Getrag Corporation, formerly a joint venture with Dana Corporation, based in the United States; and 2) Getrag All Wheel Drive AB, formerly a joint venture with Dana Holding Corporation and Volvo Car Corporation, based in Sweden. The entities acquired are together referred to as "Getrag Driveline Products". The core business of Getrag Driveline Products is the Tier 1 supply 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. It is an excellent fit with GKN's existing range of products and technology. The operations have a product, manufacturing and customer footprint which is complementary to GKN's own geared product business, which is predominantly based in Asia. As part of the overall transaction, GKN is also acquiring an exclusive licence, principally for Europe and the Americas, to Getrag's electric drivetrain technology for use in electric and certain hybrid vehicles. The identifiable assets acquired and liabilities assumed below are provisional as the review of certain liabilities and provisions is on-going. 9 Business combinations (continued) Acquisition of Getrag (continued) GBPm -------------------------------------------------------- ------ Intangible fixed assets - customer related 75 - technology based 53 - marketing related 2 Property, plant and equipment 94 Other non-current assets 1 Cash 23 Inventories 36 Trade and other receivables 84 Trade and other payables (96) Post-employment obligations (1) Provisions (33) Deferred tax (38) Provisional goodwill 115 -------------------------------------------------------- ------ 315 -------------------------------------------------------- ------ Satisfied by: Cash 287 Repayment of loan 22 -------------------------------------------------------- ------ Total cash and cash equivalents 309 Contingent consideration 6 -------------------------------------------------------- ------ Fair value of consideration 315 -------------------------------------------------------- ------ The Group has agreed to pay the selling shareholders additional consideration of up to GBP6 million depending on Getrag Driveline Products' success in achieving future business awards in the post-acquisition period. The range of the total contingent consideration payment, based on individual contracts is nil to GBP8 million, however, there is a maximum cap of GBP6 million. The fair value of the contingent consideration at the acquisition date was GBP6 million, calculated using a discount rate equal to the incremental short term borrowing rate of 2%. There was no change in the contingent consideration balance at 31 December 2011. From the date of acquisition to the balance sheet date, Getrag Driveline Products contributed GBP117 million to sales and GBP7 million to trading profit. If the acquisition had been completed on 1 January 2011 the Group's statutory sales and trading profit for the year ended 31 December 2011 are estimated at GBP6,082 million and GBP438 million respectively. Acquisition related fees of GBP2 million incurred have all been charged to the income statement within trading profit. Goodwill (which is not tax deductible) is attributable to the value of the assembled workforce, intangible assets that do not qualify for separate recognition and expected future synergies from combination with the Group's existing Driveline business. Acquisition of Stromag GKN Land Systems acquired the entire share capital of Stromag Holding GmbH (Stromag) from former shareholders which included Equita GmbH & Co. Holding KGaA and a large number of other organisations and individuals, including management on 5 September 2011. Stromag is a market leading engineer of industrial power management components with a strong technology base and focus on providing tailored solutions for its customers. Its core products include hydraulic clutches, electro-magnetic brakes and flexible couplings serving end-markets including agricultural equipment, construction and mining machinery, renewable energy and the metal processing industry with a recognised brand. The business is headquartered in Germany and has operations in Germany, France, USA, Brazil, India and China. The identifiable assets acquired and liabilities assumed below are provisional as the review of certain liabilities and provisions remains on-going. 9 Business combinations (continued)
Acquisition of Stromag (continued)
GBPm Intangible fixed assets - customer related 51 - technology based 23 - marketing related 5 Property, plant and equipment 31 Indemnity asset 12 Cash 12 Inventories 26 Trade and other receivables 20 Trade and other payables (24) Provisions (18) Post-employment obligations (11) Deferred tax (30) Provisional goodwill 73 -------------------------------------------------------- ----- 170 -------------------------------------------------------- ----- Satisfied by: Cash 143 Repayment of loan 27 -------------------------------------------------------- ----- Fair value of total consideration, all cash and cash equivalents 170 -------------------------------------------------------- ----- From the date of acquisition to the balance sheet date, Stromag contributed GBP38 million to sales and GBP4 million to trading profit. If the acquisition had been completed on 1 January 2011 the Group's statutory sales and trading profit for the year ended 31 December 2011 are estimated at GBP5,827 million and GBP428 million respectively. Acquisition related fees of GBP2 million incurred have all been charged to the income statement within trading profit. Goodwill (which is not tax deductible) is attributable to the value of the assembled workforce, intangible assets that do not qualify for separate recognition and expected future synergies from combination with the Group's existing Land Systems business. The Group was indemnified for certain legal, environmental and warranty issues under the sale and purchase agreement. Provisions have been established under IAS 37 and a corresponding indemnity asset of GBP12 million was recorded. The indemnity asset is recorded in other receivables; non current GBP9 million, current GBP3 million. The range of outcomes for the indemnity receipt is nil to GBP12 million with payment based on contractual events. 9 Business combinations (continued) Judgements and estimates Valuation of non-operating intangibles-methodology The fair value exercise was carried out in conjunction with third party experts and considered the existence of the intangible assets relevant and attributable to the businesses. The intangible assets inherent in both Stromag and Getrag Driveline Products' customer relationships/contracts were valued using an excess earnings method. This methodology places a value on the asset as a function of (a) management's estimate of the attrition rates on the expected cash flows arising from the contracts and forecast cash flows likely to accrue from the customer base; (b) expected cash flows arising from the asset; (c) discount rates reflective of the risks inherent in the cash flows; and (d) an asset charge attributable to operating assets needed to generate the cash flows. The cash flows attributable to customer relationships include an annual attrition rate of between 5% and 10% to reflect expected decay in future revenues. An after tax discount rate of 13.0% to 14.0% was applied to the forecast cash flows. The proprietary technology and know-how has been valued using a relief from royalty methodology. The cash flow forecasts supporting this valuation reflect the future sales to be generated in conjunction with the technology. The fair value attributed to proprietary technology represents the theoretical costs avoided by both Stromag and Getrag Driveline Products from not having to pay a licence fee for the technology. The royalty rate used in the valuations was between 2.5% and 3%, based on a review of licence agreements for comparable technologies in similar industrial segments. An after tax discount rate of between 13% and 14.5% was applied to the forecast cash flows, a rate that reflects the higher inherent risk within cash flows compared to the weighted average cost of capital for the acquisitions. As part of the Getrag Driveline Products transaction the vendor signed a non-compete agreement and in respect of relevant individuals was to keep confidential all information about technology, operations, or customers obtained of the business acquired for a period of five years. Although the vendor still operates in the automotive business it has retained no activities of a similar nature to those it disposed of. The costs of recreating the specific technology and processes it disposed of would be significant. A fair value of GBP2 million was identified for the covenant not to compete. The tradename of Stromag was deemed to have measurable value as it is well recognised in its industry. It has been valued using a Relief from Royalty methodology based on projected cashflows attributable to the tradename and an assumed royalty rate (0.5%) that would be charged if the name were subject to licence within a comparable trade situation and an appropriate discount rate (15.5%) reflecting inherent risk in the project cashflows. A fair value of GBP5 million has been recognised. The valuation of all intangible assets reflects the tax benefit of amortisation, which in the context of Getrag Driveline Products has meant a benefit assessed with reference to US and Swedish tax laws and in the context of Stromag has meant a benefit assessed with reference to German tax laws. According to US and German tax law an intangible asset may be rateably amortised over 15 years regardless of its actual useful life and in Sweden the amortisation period is 5 years. As such, there is a tax benefit to an acquirer and hence values attributable to the intangible assets have been recognised. This value amounts to GBP12 million across all the intangibles recognised. Valuation of other assets and liabilities -methodology Fair value adjustments on tangible fixed assets represent a net uplift on property, plant and equipment to fair values following external third party appraisal. The uplift primarily represents the restoration of asset values fully depreciated and the current market conditions. Inventories acquired were assessed for scrap and obsolete items before being fair valued. Inventories acquired have been valued at current replacement cost for raw materials and selling price, adjusted for costs of disposal and a selling margin, for finished goods and work-in-progress. The value of the inventory uplift was GBP4 million with an adjustment for scrap and obsolete items of GBP1 million. Liabilities include an amount in respect of an onerous contract and a refundable advance. At acquisition there were forecast unavoidable costs of meeting the obligations under long term agreements which exceed the contractual economic inflow they will generate. Accordingly an onerous contract liability of GBP20 million has been recognised using a risk adjusted discount rate of 12.5%. Unavoidable costs include direct labour, material and specific engineering costs in addition to the net cost of purchasing fixed assets dedicated to the contract. A liability of GBP19 million is included on the acquisition balance sheet for a contractual requirement to repay refundable advances provided. The liability has been valued based on forecast cash flow, with the effect of discounting assessed as immaterial. 10 Cash flow reconciliations ---------------------------------------------- ----- ----- 2011 2010 Cash generated from operations GBPm GBPm ---------------------------------------------- ----- ----- Operating profit 374 386 Adjustments for: Depreciation, impairment and amortisation of fixed assets Charged to trading profit Depreciation 191 191 Impairment 1 2 Amortisation 10 10 Amortisation of non-operating intangible assets arising on business combinations 22 19 Restructuring and impairment charges - - Change in fair value of derivative and other financial instruments 31 (12) Amortisation of government capital grants (1) (1) Net profits on sale and realisation of fixed assets (3) (1) Gains and losses on changes in Group structure (8) (1) Charge for share-based payments 6 3 Movement in post-employment obligations (34) (116) Changes in amounts due from parent undertaking (75) 86 Change in inventories (60) (63) Change in receivables (109) (117) Change in payables and provisions 80 121 425 507 ---------------------------------------------- ----- ----- Movement in net debt Movement in cash and cash equivalents (276) 133 Net movement in other borrowings and deposits (109) (6) Bond buy back - 25 Finance leases - 1 Currency variations (2) (4) Movement in year (387) 149 Net debt at beginning of year (151) (300) Net debt at end of year (538) (151) ---------------------------------------------- ----- ----- Reconciliation of cash and cash equivalents Cash and cash equivalents per balance sheet 156 438 Bank overdrafts included within "current liabilities - borrowings" (11) (17) ---------------------------------------------- ----- Cash and cash equivalents per cashflow 145 421 ---------------------------------------------- ----- ----- 11 Post-employment obligations 2011 2010 Post-employment obligations as at the year end comprise: GBPm GBPm ------------------------------------------------------------------------- ---------------------- --------- Pensions - funded (443) (176) - unfunded (355) (363) Medical - funded (22) (17) - unfunded (48) (44) ----------- ----------------------------------------------------------------- ---------------------- --------- (868) (600) ------------------------------------------------------------------------------ ---------------------- --------- The Group's pension arrangements comprise various defined benefit and defined contribution schemes throughout the world. The main externally funded defined benefit pension schemes operate in the UK, US and Japan. In Europe, funds are retained within certain businesses to provide defined benefit pension benefits. In addition, in the US and UK a number of retirement plans are operated which provide certain employees with post-employment medical benefits. (a) Defined benefit schemes - measurement and assumptions Independent actuarial valuations of all major defined benefit scheme assets and liabilities were carried out at 31 December 2011. The present value of the defined benefit obligation, the related current service cost and the past service cost were measured using the projected unit credit method. Key assumptions were: UK Americas Europe ROW % % % % ------------------------------------ ----------- ---------------------- --------- ---------------------- 2011 Rate of increase in pensionable salaries 4.00 3.50 2.50 - Rate of increase in payment and deferred pensions 3.10 2.00 1.75 n/a Discount rate 4.70 4.50 4.90 1.65 Inflation assumption 3.00 2.50 1.75 n/a Rate of increases in medical costs: Initial/long term 6.0/5.4 8.5/5.0 n/a n/a ----------------------------------- ----------- ---------------------- --------- ---------------------- 2010 Rate of increase in pensionable salaries 4.35 3.50 2.50 - 2.90 Rate of increase in payment and deferred pensions 0 2.00 1.75 n/a Discount rate 5.40 5.50 5.00 1.75 Inflation assumption 3.35 2.50 1.75 0.75 Rate of increases in medical costs: Initial/long term 6.5/6.0 9.0/5.0 n/a n/a ----------------------------------- ----------- ---------------------- --------- ---------------------- The discount rates in the table above for the UK and Europe were referenced against specific iBoxx indices, whilst the Citigroup liability index was the reference point for the USA discount rate. The reference for the UK discount rate was the yield as at 31 December on the iBoxx GBP Corporate rated AA bonds with a maturity of 15 years plus. The reference for the European discount rate was the yield as at 31 December on the iBoxx Euro Corporate rated AA bonds with a maturity of 10 years plus of 4.7%, adjusted to reflect the duration of liabilities. For the USA, the discount rate referenced both the Citigroup liability index and the Merrill Lynch US corporate AA 15+ years as at 31 December 2011 of 4.4 and 4.55, respectively. The underlying mortality assumptions for the major schemes are as follows: United Kingdom Such is the size and profile of the UK scheme that data on the scheme's mortality experience is collected and reviewed annually. The key current year mortality assumptions for the scheme use S1NA (year of birth) mortality tables allowing for medium cohort projections with a minimum improvement of 1% and a +0.5 age rating for male members and a +0.7 age rating for female members consistent with the prior year. Using these assumptions a male aged 65 lives for a further 20.7 years and a female aged 65 lives for a further 23.3 years. A male aged 45 is expected to live a further 22.4 years from age 65 and a female aged 45 is expected to live a further 25.1 years from age 65. Overseas In the USA, PPA2011 tables have been used whilst in Germany the RT2005-G tables have again been used. In the USA the longevity assumption for a male aged 65 is that he lives a further 19.1 years (female 21.0 years) whilst in Germany a male aged 65 lives for a further 18.4 years (female 22.5 years). The longevity assumption for a USA male currently aged 45 is that he also lives for a further 19.1 years once attaining 65 years (female 21.0 years), with the German equivalent assumption for a male being 21.1 years (female 25.1 years). These assumptions are based solely on the prescribed tables not on actual GKN experience. Assumption sensitivity analysis The impact of a one percentage point movement in the primary assumptions on the defined benefit net obligations as at 31 December 2011 is set out below: UK Americas Europe ROW ---------------------- ---------------------- ---------------------- ---------------------- Income Income Income Income Liabilities statement Liabilities statement Liabilities statement Liabilities statement GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ------------ ----------- --------- ----------- --------- ----------- --------- ----------- --------- Discount rate +1% 366 1.8 56 (0.5) 44 - 5 (0.2) Discount rate -1% (433) 0.8 (70) 0.5 (54) (0.1) (5) 0.2 Rate of inflation +1% (342) (22.1) - - (37) (2.3) - - Rate of inflation -1% 291 20.3 - - 31 2.0 - - Rate of increase in medical costs +1% (1) (0.1) (2) (0.2) - - - - Rate of increase in medical costs -1% 1 0.1 1 0.2 - - - - ------------ ----------- --------- ----------- --------- ----------- --------- ----------- --------- 11 Post-employment obligations (continued) (b) Defined benefit schemes - reporting The amounts included in operating profit are: Trading Profit Redundancy UK Pension Employee and other scheme benefit employment curtailment expense amounts Total GBPm GBPm GBPm GBPm ------------------------------------ ------------------ ---------- ----------- ----------------- 2011 Current service cost (38) - - (38) Past service 1 - - 1 Settlement/curtailments 4 - - 4 ----------------------------------------- ------------------ ---------- ----------- ----------------- (33) - - (33) ----------------------------------------- ------------------ ---------- ----------- ----------------- 2010 Current service cost (35) - - (35) Past service 1 (1) - - Settlement/curtailments 9 - 68 77 ----------------------------------------- ------------------ ---------- ----------- ----------------- (25) (1) 68 42 ----------------------------------------- ------------------ ---------- ----------- ----------------- The amounts recognised in the balance sheet are: 2011 UK Americas Europe ROW Total 2010 GBPm GBPm GBPm GBPm GBPm GBPm ------------------------------------ -------- -------- ---------- ----------- ------- -------- Present value of unfunded obligations (13) (39) (351) - (403) (407) Present value of funded obligations (2,650) (430) (32) (46) (3,158) (2,853) Fair value of plan assets 2,391 248 31 23 2,693 2,660 Net obligations recognised in the balance sheet (272) (221) (352) (23) (868) (600) ----------------------------------------- -------- -------- ---------- ----------- ------- -------- The contribution expected to be paid by the Group during 2012 to the UK scheme is GBP29 million and to overseas schemes GBP45 million. Section (d) of this note describes the Pension partnership interest created on 31 March 2010 under which the second distribution of GBP30 million is expected to be made in the first half of 2012. Cumulative actuarial gains and losses recognised in equity are as follows: 2011 2010 GBPm GBPm --------------------------------------------------------------------------------- ------- -------- At 1 January (358) (334) Net actuarial losses in year (277) (24) -------------------------------------------------------------------------------------- ------- -------- At 31 December (635) (358) -------------------------------------------------------------------------------------- ------- -------- Post-employment obligations Movement in schemes' obligations (funded and unfunded) during the year UK Americas Europe ROW Total GBPm GBPm GBPm GBPm GBPm ---------------------------------------------- -------- ---------- ----------- ------- -------- At 1 January 2011 (2,448) (399) (369) (44) (3,260) Businesses acquired - (1) (13) - (14) Current service cost (24) (4) (6) (4) (38) Interest (129) (21) (19) (1) (170) Contributions by participants (4) - - - (4) Actuarial gains and losses (201) (55) (2) 2 (256) Benefits paid 127 17 16 3 163 Past service cost - 1 - - 1 Settlements/curtailments 16 - - 1 17 Currency variations - (7) 10 (3) - At 31 December 2011 (2,663) (469) (383) (46) (3,561) --------------------------------------------------- -------- ---------- ----------- ------- -------- At 1 January 2010 (2,440) (355) (352) (39) (3,186) Businesses acquired - - - - - Current service cost (22) (4) (6) (3) (35) Interest (135) (22) (18) (1) (176) Contributions by participants (4) - (1) - (5) Actuarial gains and losses (61) (26) (20) (2) (109) Benefits paid 129 17 17 3 166 Past service cost (1) 1 - - - Settlements/curtailments 86 - - 6 92 Currency variations - (10) 11 (8) (7) At 31 December 2010 (2,448) (399) (369) (44) (3,260) --------------------------------------------------- -------- ---------- ----------- ------- -------- 11 Post-employment obligations (continued) (b) Defined benefit schemes - reporting (continued) Movement in schemes' assets during the year UK Americas Europe ROW Total GBPm GBPm GBPm GBPm GBPm ------------------------------------ -------- -------- -------- ------- -------------------- At 1 January 2011 2,364 245 28 23 2,660 Businesses acquired - - 2 - 2 Expected return on assets 134 17 1 1 153 Actuarial gains and losses - (19) - (2) (21) Contributions by Group 23 19 - 3 45 Contributions by participants 4 - - - 4 Settlements/curtailments (13) - - - (13) Benefits paid (121) (17) - (3) (141) Currency variations - 3 - 1 4 At 31 December 2011 2,391 248 31 23 2,693 ------------------------------------ -------- -------- -------- ------- -------------------- At 1 January 2010 1,930 215 27 18 2,190 Businesses acquired - - - - - Expected return on assets 128 16 1 - 145 Actuarial gains and losses 76 10 - (1) 85 Contributions by Group 39 16 - 2 57 Special contribution 331 - - - 331 Contributions by participants 4 - 1 - 5 Settlements/curtailments (15) - - - (15) Benefits paid (129) (18) (1) (1) (149) Currency variations - 6 - 5 11 At 31 December 2010 2,364 245 28 23 2,660 ------------------------------------ -------- -------- -------- ------- -------------------- The defined benefit obligation is analysed between funded and unfunded schemes as follows: 2011 UK Americas Europe ROW Total 2010 GBPm GBPm GBPm GBPm GBPm GBPm --------------------------- ------- -------- -------- -------- ----------------- ---------- Funded (2,650) (430) (32) (46) (3,158) (2,853) Unfunded (13) (39) (351) - (403) (407) --------------------------- ------- -------- -------- -------- ----------------- ---------- (2,663) (469) (383) (46) (3,561) (3,260) --------------------------- ------- -------- -------- -------- ----------------- ---------- The fair value of the assets in the schemes and the expected rates of return were: UK Americas Europe ROW --------------------- ------------------ ----------------- -------------------- Long Long Long Long term term term term rate rate rate rate of of of of return return return return expected Value expected Value expected Value expected Value % GBPm % GBPm % GBPm % GBPm ------------- ------------ ------- -------- -------- -------- ------- -------- ---------- At 31 December 2011 Equities (inc. Hedge Funds) 7.8 696 8.9 166 - - 5.8 8 Bonds 3.9 1,182 3.0 75 - - 0.9 9 Property 6.6 97 - - - - - - Cash and net current assets 0.5 39 2.3 7 - - - - Partnership plan asset 6.1 344 - - - - - - Other assets 4.7 33 - - 4.8 31 0.9 6 ------------------ ------------ ------- -------- -------- -------- ------- -------- ---------- 2,391 248 31 23 ------------------ ------------ ------- -------- -------- -------- ------- -------- ---------- At 31 December 2010 Equities (inc. Hedge Funds) 7.8 741 8.5 171 - - 5.5 11 Bonds 5.0 1,115 3.6 69 - - 1.0 8 Property 6.6 90 - - - - - - Cash and net current assets 0.5 39 2.8 5 - - - - Partnership plan asset 6.1 346 - - - - - - Other assets 5.5 33 - - 4.8 28 1.3 4 ------------------ ------------ ------- -------- -------- -------- ------- -------- ---------- 2,364 245 28 23 ------------------ ------------ ------- -------- -------- -------- ------- -------- ---------- The expected return on plan assets is a blended average of projected long term returns for the various asset classes. Equity returns are developed based on the selection of the equity risk premium above the risk-free rate which is measured in accordance with the yield on government bonds. Bond returns are selected by reference to the yields on government and corporate debt, as appropriate to the plan's holdings of these instruments. All other asset classes returns are determined by reference to current experience. The Pension partnership interest has been valued on a discounted cash flow basis. The valuation considered separately the profiles of the originating royalty and rental income streams using the Group's current budget and forecast data with other factors considered being related expenses including taxation, timing of the distributions, exchange rates, bond yields and the Group's weighted average cost of capital. The actual return on plan assets was GBP132 million (2010: GBP230 million). 11 Post-employment obligations (continued) History of experience gains and losses UK Americas Europe ROW ------------------------------------- ------- -------- ------- ------- 2011 Experience adjustments arising on scheme assets: Amount - GBPm - (19) - (2) Percentage of scheme assets - (7.7)% - (8.7)% Experience gains/(losses) on scheme liabilities: Amount - GBPm (34) 1 4 1 Percentage of the present value of scheme liabilities (1.3)% 0.2% 1.0% 2.2% Present value of scheme liabilities - GBPm (2,663) (469) (383) (46) Fair value of scheme assets - GBPm 2,391 248 31 23 ------- -------- ------- ------- Deficit - GBPm (272) (221) (352) (23) ------------------------------------- ------- -------- ------- ------- 2010 Experience adjustments arising on scheme assets: Amount - GBPm 77 10 - (1) Percentage of scheme assets 3.3% 4.1% - (4.3%) Experience gains/(losses) on scheme liabilities: Amount - GBPm 71 (5) (1) - Percentage of the present value of scheme liabilities 2.9% (1.3%) (0.3%) - Present value of scheme liabilities - GBPm (2,448) (398) (369) (45) Fair value of scheme assets - GBPm 2,364 245 28 23 ------- -------- ------- ------- Deficit - GBPm (84) (153) (341) (22) ------------------------------------- ------- -------- ------- ------- 2009 -------------------------------------------------------------------------- Experience adjustments arising on scheme assets: Amount - GBPm 152 21 (1) - Percentage of scheme assets 7.9% 9.8% (3.7%) - Experience gains/(losses) on scheme liabilities: Amount - GBPm - 1 6 - Percentage of the present value of scheme liabilities - 0.3% 1.7% - Present value of scheme liabilities - GBPm (2,440) (355) (352) (39) Fair value of scheme assets - GBPm 1,930 215 27 18 ------- -------- ------- ------- Deficit - GBPm (510) (140) (325) (21) ------------------------------------- ------- -------- ------- ------- 2008 -------------------------------------------------------------------------- Experience adjustments arising on scheme assets: Amount - GBPm (539) (86) - (4) Percentage of scheme assets (30.6%) (43.1%) - (21.0%) Experience gains/(losses) on scheme liabilities: Amount - GBPm 7 2 (5) - Percentage of the present value of scheme liabilities 0.3% 0.5% (1.4%) - Present value of scheme liabilities - GBPm (2,043) (401) (353) (46) Fair value of scheme assets - GBPm 1,759 202 29 19 Deficit - GBPm (284) (199) (324) (27) ------------------------------------- ------- -------- ------- ------- 2007 -------------------------------------------------------------------------- Experience adjustments arising on scheme assets: Amount - GBPm 21 - (1) (1) Percentage of scheme assets 0.9% - (4.8%) (7.1%) Experience gains/(losses) on scheme liabilities: Amount - GBPm (7) 4 (3) - Percentage of the present value of scheme liabilities (0.3%) 1.6% (1.4%) - Present value of scheme liabilities - GBPm (2,264) (270) (268) (24) Fair value of scheme assets - GBPm 2,248 212 21 14 Deficit - GBPm (16) (58) (247) (10) ------------------------------------- ------- -------- ------- ------- (c) Defined contribution schemes The Group operates a number of defined contribution schemes outside the United Kingdom. The charge to the income statement in the year was GBP15 million (2010: GBP15 million). (d) Pension partnership interest On 31 March 2010 the Group agreed an asset-backed cash payment arrangement with the Trustee of the UK Pension scheme to help address the UK pension funding deficit. In connection with the arrangement certain UK freehold properties and a non-exclusive licence over the GKN trade marks, together with associated rental and royalty rights, were transferred to a limited partnership established by the Group. The partnership is controlled by and its results are consolidated by the Group. The fair value of the assets transferred was GBP535 million. On 31 March 2010, the Group made a special contribution to the UK Pension scheme of GBP331 million and on the same date the UK Pension scheme used this contribution to acquire a nominal limited interest in the partnership for its fair value of GBP331 million. The UK Pension scheme's nominal partnership interest entitles it to a distribution from the income of the partnership of GBP30 million per annum for 20 years subject to a discretion exercisable by the Group in certain circumstances. At inception the discounted value of the cash distributions was assessed at GBP331 million which was recognised as a pension plan asset and as a non-controlling interest in equity. The first distribution of GBP23 million for the period from 31 March to 31 December 2010 was made in the second quarter of 2011.
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