GKN Markets And Divisional Performance Accounting Essay

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It is generally accepted that the annual report is the pinnacle of cooperate communication which include the set of activities involved in managing and orchestrating all internal and external communications just for the purpose of creating favourable condition and point - of - view among stakeholders on which the company depends. The main point of the annual report is to provide a summary of exactly what and how a company has done in the past and preceding year, and to provide a partial view of the company's future. The annual report contain messages issued by a cooperate organization, body, or institute to its audiences, such as shareholders, lenders, banks, potential employees, MBA students and the general public. Organisation aim is to communicate the financial position, performance, coherence, credibility and ethic. A financial report also contains independent Auditors' report about the company.

ABOUT GKN PLC

GKN is a global engineering company serving the automotive, aerospace, agriculture, construction, mining and other industrial materials. The company operates in the United Kingdom and in the Americas. It has its headquarters in Worcestershire, the UK, and employs about 40,000 people. The company provides engineered products for light vehicles, and also provides equipment for mining, agricultural, construction and also aircrafts. The company operates in more than 30 countries including Europe, Americas and Asia pacific regions.

The company operates in four different segments, namely automotive, powder metallurgy, land systems and aerospace.

''GKN markets and divisional performance''

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

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

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

The Automotive Segment

The automotive segment comprises of GKN Driveline the world's leading supplier of automotive driveline systems and other automotive companies which supply drive shafts, geared components, torque component devices, structural components and substrates for catalytic converters. It serves various vehicle manufacturers in various parts of the world and also light vehicle markets. GKN driveline develops, builds and suppliers an extensive range of automotive drive train systems for use in the smallest ultra low - cost car to the most sophisticated premium vehicle demanding complex driving dynamics. It serves all the world biggest motor manufacturing groups. GKN is one of the world's major manufacturers of components including constant velocity joint (CVJ) systems, all - wheel drive (AWD) systems, trans- axle solution and eDrive systems.

The Powder Metallurgy Segment

The powder metallurgy segment produces powdered metal and sintered components for engines automotive and other industrial customers. It includes two elements: GKN Sinter Metals and Hoeganaes. GKN Sinter Metals uses powdered metal to manufacture precision automotive components for engines, transmission, any body and chassis applications. It also produces a range of components for industrial and consumer applications, including power tools, white goods and gardens equipment. The business operates in the Americas, Europe and Asia Pacific. Hoeganaaes produces metal powders, used in the manufacture of sintered components. It has its production plants in Germany and Romania.

The Land System Segment

The land system segment is involved with the designing, manufacturing and distribution of a wide range of products for the agriculture, construction and mining, and industrial machinery markets. This segment supplies a variety of products for off the road vehicles including power management device such as primary and secondary driveshafts, clutches and gearboxes; single and multi - piece steel and aluminium wheels; chassis system; and aftermarket parts use in a range of areas including passenger cars and commercial and agricultural vehicles.

The Aerospace Segment

The Aerospace segment is a supplier of airframe and engine structures, components, assemblies and engineering services to aircraft and engine prime contractors. This segment provides design and manufacturing capabilities in three main product areas: integrated aero structures (fuselage, wing and flight control surface assemblies and components), propulsion systems (engine and nacelle components and assemblies) and special products (transparencies and protection systems). It operates from technology, engineering and manufacturing facilities in the United State, Mexico, the United Kingdom, Germany, India and Australia.

REVIEW OF THE CURRENT ANNUAL REPORT (2011)

All figures are in million Pounds (£m)

Sales

Sales increased by 662m (12%) from 5084 to 5746 from 2010 to 2011. This was a positive news considering facts that the company had a temporary shut down in Gallatin factory due to two different explosions. The group sales also increased due to some benefits from two important acquisitions and also the introduction of new products in the market. All this progress was partly offset by currency translation adverse and some disposals. There were also some offset in the Asian part of the companies market, especially Japan due to the Earthquake and Tsunami in March 2011. The following activities in the four divisions of the company as brought about the general increment in sales and profit:

GKN DRIVELINE

GKN Driveline's sales increased 15% from 2010 to 2011, the favourable impact of currency translation was£ 20 million, and the acquisition of Getraag Driveline Products on 30 September 2011 added £117 million, this was partly offset by sales resulting from the sale of GKN Driveline's 49% share of the Japanese drive shaft sales and distribution joint venture GKN JTEKT Ltd (GTK) in March 2011 due to the earthquake and tsunami. General sales increased in Constant Velocity Jointed (CVJ) Systems which grew 7% and non - CVJ sales which increased by 22%, compared with global vehicle production which increased 3%. AWD and trans-axle solutions now represent 28% of GKN Driveline sales with significant further growth opportunities. Overall GKN Driveline won $500 million annualised new and replacement business i.e they benefited from strong sale in North America, including the Jeep Grand Cherokee also won significant new business with unique all - wheel drive.

GKN Powder Metallurgy

GKN Powder Metallurgy sales were up by 11% from £759 million in 2010 to £845 million in 2011.

Sales increased in all regions as automotive markets recovered. GKN Sinter Metals increased by 17% in North America and 11% in Europe, all though there was negative impact of currency translation and the closure of the plant in Gallatin USA plant due to the explosion in the factory lead to a 1% reduction in the tons shipped in 2011 compared to 2010.

GKN Aerospace

GKN Aerospace sales increased by £30 million in 2011 than 2010, mostly the sales of Airbus series sale and the early stage sales of Boeing 787 liner and also the positive acquisition of GKN Aerospace Service structure Corp. There was a negative impact of currency translation.

GKN Land System

GKN Land System sales in the period were £885 million, 27% higher than the prior year (2010: £699 million). There was no net impact from currency translation and excluding the £38 million of sales in Stromag, the acquisition that completed in September, the underlying increase in sales was £148 million (21%) with all product areas and regions seeing an improvement.

Operating Profit (Profit/Earnings before Interest and Tax)

Operating profit is a measure of income that tells investors how much of revenue that will eventually become available as profit for the company and her shareholders.

Operating profit at the year ending of 2010 and 2011 was 385 and 374 respectively; the company's profit was a little bit lesser than the previous year. This could be attributed to the closure of Gallatin factory in USA, and the natural disasters in Japan and the flood in Thailand.

Operating Margin

This is the ratio of operating profit to sales or turnover. A higher operating profit margin indicates a higher sales prices or low costs. Although there other factors that could be considered like inventory valuation, overhead allocation, bulk discount and sales mix. Low operating margins are not normally good news as it suggests poor performance. Although there may be other factors to be considered, relating to business activities and industry. For instance the company might be entering a new market and has to reduce its price.

Operating Profit x 100

Sales

2011 2010

374 X 100 = 6.5% 385 X 100 = 7.6%

5746 5084

The following events as lead to a great impact on operating profit this year compared to last year:

The earthquake and tsunami in Japan as lead to a lot of decrease in sales and output in the Asian region. Some factories were also affected by flood in Thailand. These affected production in Japan and overseas as component supply chains were disrupted. Outside Japan, it was most pronounced for GKN Driveline in North America where many of the Japanese car manufacturers cut production rates significantly in the second quarter. Engineering costs increased to support new programmes and future growth, and some temporary costs were incurred to raise capacity in some regions to keep pace with significant increases in demand. GKN Driveline's trading margin was 7.1% (2010: 6.9%) excluding Getrag Driveline Products. GKN Driveline's medium-term target margin range remains at 8-10%.

GKN Driveline carried out some major product development in the hybrid - market innovations, with the introduction and investment of £4 million in EVO Electrical Ltd, a UK pioneer in axial flux motors, and formed a joint venture, GKN EVO eDrive Systems Limited, to manufacture and sell axial flux electric motors and drive systems for use in hybrid and all-electric vehicles.

There was major investment in GKN Aerospace segment especially in Airbus (A350). GKN Aerospace delivered the first section of the A350 XWB fixed trailing edge (FTE) assembly comprising the composite port side wing spar with integrated trailing edge ribs, to Airbus UK. The A350 XWB programme is the latest step in a journey that has seen GKN Aerospace become a major supplier of critical wing assemblies for both the A380 and for the A400M.

The product development and support paid of for GKN Aerospace with a new contract of $3.5 billion of contract extensions, new programme wins and work scope expansions during the year which includes:

New multi-year contracts for: UH-60 Blackhawk (five years); F/A-18 Super Hornet (four years), F-15 Eagle (seven years); C-130J Super Hercules (five years); C-17 Transporter (three years);

Around $200 million of new business won at Filton, including Bombardier C-Series ailerons and life of programme contract for Dassault mid-sized business jet wing structure and moveable surfaces;

New $600 million long-term agreement with Pratt & Whitney to supply the forward fan case for the Joint Strike Fighter F135 engine; and Honda Jet composite fuselage assembly.

Capital employed: its represents the capital investment necessary for a business to function, it is not a measure of assets, but of capital investment (I.e. stocks/share and long-term liabilities.

Capital employed is also equal to Equity plus Net Borrowings.

Where Net Borrowing/debt is calculated as:

2011 2010

Non-Current loans 466 532

Current loans & overdrafts 228 61

Total Borrowings/Debt 694 593

Less: Cash & cash equivalents 421 288

Net Borrowings 273 305

Equity 1624 1687

Capital Employed 1897 1992

The capital employed in the year 2011 is lower than 2010 due to the reduction in the company's net debt, according to the Chairman (Roy Brown) in the Chairman's Statement ''We made good progress against our financial KPIs, and net debt, excluding the acquisition costs of Stromag Holding and Getrag Driveline Products, continued to reduce''. In addition the tragedy that occurred in USA which caused a temporary shut down of the factory, and also the natural disaster in Japan and Thailand caused a major set back in output productivity.

Return on Capital Employed (ROCE)

This is the most appropriate to use to find out how well the company's business is performing overall in operational terms

Return on Capital Employed (ROCE) is equal to Operating profit / Capital Employed * 100

2011 2010

ROCE 374/1897 * 100 = 19.7% 385/1992 * 100 = 19.3%

Gross Profit Margin

This is the amount of gross profit generated per a £ of sales. On an industry average a profitable company would be looking for a return in excess of 10%.

Gross Profit X 100

sales

2011 2010

419 X 100 = 7.3% 367 X 100 = 7.2%

5746 5084

Sales Per £1 Capital Employed

This is also known as Asset or Capital Turnover where it expresses the number of times the investment is the business is turned over during the sales period. It also shows how much of sales are generated from every £1 of capital employed. A low assert turnover indicates that the business is not using its assets affectively and should either try to increase the sales of the company or dispose of some of the assets. The higher the asset turnover figure, the better the utilisation of the investment. The age of most non current asset are being shown, recently acquired assets will not be generating revenues till their future dates.

Sale

Formula = Capita employed

GKN Plc

2011 2010

5746 = 3.02 5084 = 2.6

1897 1992

There was a higher return on capital employed in 2011 with ratio 3.02 compared with 2010 with 2.6.

The company's sales as increased more than the capital employed as increased over the years from 2010 to 2011.

The capital employed in the previous year (2010) has brought about some increment in sales of year 2011; as a result the return on capital employed is higher in 2011. Despite all the major set backs the company as a group encountered.

Non - Current (Fixed) Asset Turnover

This tells how well fixed asset has been used by GKN Plc.

2011 2010

5746 = 1.8 5084 = 2

3199 2557

Sales increased a little compared to the marginal increase in fixed assets over the two years, this as lead to the lower asset turnover in 2011 compared with 2010

The sales in 2011 had some major sets back due to the closure of the Gallatin plant in USA, which also affect the return on the capital invested in that plant. And also due to the natural disaster in Japan and Thailand some demands were not met, especially in North America.

There were more investments made in 2011 than 2010, with acquisition of Getrag Driveline Products on 30 September 2011 and £170 million acquisition of Stromag Products on the 5th of September 2011.

Opening of new plants like GKN Driveline opened a new CV J systems plant in Changchun, north China.

Capital expenditure on intangible assets increased in all the divisions of the company (Driveline, Powder Metallurgy, Aerospace and Land Systems) in 2011 than in 2010.

Operating Working Capital

Inventory Plus Receivables (Current) less Payables (Current)

Inventories Receivables payables working

Capital

2011 749 962 (1308) 403

2010 637 762 (1065) 334

The two major acquisitions in 2011 have had a major impact on the working capital of the company.

Inventory Turnover

Sales

Inventory

In 2011 2010

5746 = 7.7 5084 = 8

749 637

Inventory has increased relatively higher than sales increased. GKN Plc has more stocks in inventory in 2011 than they did in 2010. This is due to increase in finished goods and also lack of sales in some major sectors of the company i.e the temporary closure of the Hoeganaes Gallatin factory in the US lead to more stock in the inventory. Also the over stocking of some aircraft in GKN Aerospace sector, due to the military cut in budget and other factors.

Receivables collection

Receivables collection = receivables X 365days

(days) sales

2011 2010

962 X 365 days = 61.1 762 X 365 days = 54.7

5746 5084

Trade payables

''GKN Plc, as a holding company, did not have any amounts owing to trade creditors/ Suppliers as 31st December 2011''.According to the annual report of the company on page 72.

Cash

The cash generated by GKN Plc in 2010 and 2011 respectively are:

2011 2010

156 438

The cash flow level in 2011 has reduced a lot when compared with 2010. This is majorly due to the increase in product developments and the two major acquisitions by the company. Other factors are the repairs of the burnt factory in Gallatin in the US and other relief and charity activities in Japan and Thailand for the victims of the flood and tsunami.

The following figures show the greatest impact on the cash flow of GKN Plc:

Amount

Profit for the year 500

Purchases of property, plant and equipment (236)

Acquisition of subsidiaries (net of cash acquired) (450)

Proceeds from borrowing 115

Cash outflow from repayment of loans (10)

Gearing

To know to what extent is GKN Plc is at financial risk, we have to find the relationship between the debt and the company's equity.

Net borrowings (debt) X 100

Shareholders' funds (Equity)

2011 2010

538 X 100 = 33.1% 155 X 100 = 9.2%

1624 1687

The company is in a lesser financial risk in 2011 than 2010, the company paid off more loans in 2011 than 2010. This also means less money is available for the shareholders to share in 2011 than in 2010

Interest cover: 2011 2010

PBIT 374 = 6.1 times 385 = 5.1 times

Interest payable 61 75

The number of time interest payable was allocated from profit was higher in 2011 than in 2010. The company paid off more of its debt in 2011 more than in 2010.

Conclusion

GKN Plc as a group company performed well in 2011, with better trading profit compare with the previous year, the company was more efficient in the use of assets in 2011 compared with 2010.GKN Plc should slow down on the production sector of GKN Aerospace aircrafts, due to the uncertainties in Government policies

The company was able to win more contracts and the product developments paid off with new products in line for sales. Cash was lower in 2011 than 2010, but it was better utilized for investment such as the two major acquisitions made were positive steps by the company. Despite some short comes in the company like the explosion in Gallatin and the tsunami and flooding in Japan and Thailand respectively the company still came out strong with better progress in 2011 than 2010.

My suggestion for the company is to keep the good work on. Consigning GKN Aerospace, the company should reduce the production of some of the planes to prevent over stocking and money tied down. The company to pay off loans due soon and all interest payable not to spoil their credit worthiness and the goodwill they enjoy with their creditors.

Reference

Chevron Corporation. Annual Report. [Online] 2006. Available from: http://www.chevron.com/documents/pdf/annualreport/Chevron2006AnnualReport_full.pdf [Accessed: May 12th 2012].

http://www2.warwick.ac.uk/fac/sci/wmg/ftmsc/modules/modulelist/facs/prework/s2b_income_statement_-notes_pdf.pdf

GKN Plc. Annual Report. [online] 2011.Available from:

http://www.gkn.com/investorrelations/Documents/gkn-2011-annual-report.pdf

[Accessed: November 12th 2012].

Financial Dictionary (Investigating Answers). Available from: http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/operating-profit-2796

Acorn live. Classroom tuition and Home study products, CIMA. [Online] Available from: http://www.acornlive.com/demos/pdf/F2_Chapter_18.pdf (Accessed November 20th 2012)

Holme G, Sugden A and Gee P.INTERPRETING COMPANY REPORTS AND ACCOUNTS 9TH EDITION. Essex: Pearson Education Ltd Republished 2005. Chapter 25, page 221.

http://annualreport2011.gkn.com/financial_statements.html

http://annualreport2011.gkn.com/business_review/gkn_at_a_glance/gkn_driveline.html

http://annualreport2011.gkn.com/business_review/chief_executives_review.html

(2) Part A

Cash: cash management is a broad term that covers three major areas, collection, concentration and disbursement of cash. Collection from different sources could be customers (receivables), loan (banks, investors), from investment made and so on. The main objective of cash management is to manage the balances of a company in such a way as to maximize the availability if cash not invested in fixed asserts or held in as inventories and to do so on such a way to avoid the risk of insolvency. The major factors checked as a part of cash management in a company includes the level of liquidity (how easily assets could be converted to cash), cash balances and also short - term investment strategies of the company. In some ways cash management is the must important job in a company, if for an instance a company fails to pay an obligation when it is due because of the lack of cash, the company is insolvent. Insolvency is the primary reason firms go bankrupt. A business can make a loss a number of times but it can run out of cash only ONCE!

Managers must be aware of the impact their operational decisions have on the cash flow of their business, such operational aspects like:

capital expenditure decision

inventory levels

receivables and the timing of receipts from customers

payables and the timing of payments to suppliers

A company with high reputation of liquidity and high cash level has more chances of getting loans. It's a normal thing for companies to incur expenses on production of goods or provision of services. A business usually incurs these expenses before corresponding payments (receivables) come in from customers. Also in addition staff salaries and other expenses drain cash from most companies. All these factors make efficient cash management a priority for a company.

My role in Winning Margin business simulation.

My role in the business Winning Margin was a Treasurer/Cashier and also the Financial Manager. I was responsible for the handling, control and recording of all cash movements, whether receipts or payments. I was also responsible for the reconciliation of cash records to the actual cash position throughout the year and cash planning and advice to the board.

In the process of carrying out these tasks, some mistakes were made. Like in 2012 we spent some money ($2 million) on supplier development which wasn't invested well which later affected the company's cash balance. The 8 million spent on product development was worth it in the short run. In the process of sourcing for fund we had three options, which were to go for a loan, sale a factor and discount receivables. We sold a factory for $10million in second year and decided to rent the same factory for $2million per year, we would have gone for a loan at 10% interest rate, which would have cost us $1 million interest rate per year on 10million loan. Giving the process of the winning margin simulation, our group would have done much better with more loans, given the ease access to loan. In a real world loans aren't that easy to access, as a treasurer and financial manager a proper relationship with banks is needed.

References

http://www.inc.com/guides/finance/cashmanagement.html

MCTA'S Treasure's Manual. Available from: http://www.masscta.com/TreasurersManual/chapter11.php#_chap11_start [Accessed 20th November 2012].

Part B

Budgeting: this is a detailed financial map for a business providing forecast of revenues and expenditures, meaning, constructing model of how our business might perform finically if certain strategies, events and plans are carried out. It enables the actual financial operation of a business be measured against the forecast, like we did in the winning margin business simulation. It also establishes the cost constraint, and other constraints like political, economic, social competitors, technical, environmental and legal factors for a project, program or operation. All these are all useful in all aspects of the business simulation as well in real life operation.

In the winning margin exercise we carried out a budgeting process, which enable us to determine the investments we would carry out in the third year. How much to spend on running the company, product development, market development(new/old, home or abroad), based on our forecast of available market for contracts and our competitors activities in recent year. With budgeting we were able to determine whether to go into a new market or stay at home (US) and also whether to start developing a new product (Wolf or Tiger) or not based on the costs and the availability of market for such product. Giving the budgeting process we were able to determine our operating hours and cost, to be able to estimate how much goods and services we would be able to sell. We were able to budget for trade receivables, when they would come in and whether to discount receivables or go for a loan. Through budgeting we were able to determine how much loan we needed for the up coming year. We went for a loan in the second year based on our budget. With budgeting we wee able to estimate the cost of production including salaries and interest on loans including fixed costs.

Reference

2011 FOCUS Business Development & Training Consultancy. Session Slides (1)Budgeting and Budgetary Control.

Bayport, [online]. Available from:

http://www.bayport.co.za/client-education/managing-your-money/importance-of-budgeting/

[Accessed 22nd November 2012]

Budget Income, [online]. Available from:

http://www.budgetingincome.com/making-your-budget/21-personal-budgeting-basics/49-10-benefits-of-budgeting-your-money [Accessed 22nd November 2012]

Activity based costing: is the perfect solution for the problem of overhead allocation within organisations, in this case the winning margin business simulation. Activity based costing is simply an accounting method that identifies all activities and the costs associated with these activities; it then assigns the cost associated with the activity directly to the pricing of the output of that activity, rather than averaging the cost across all outputs (Proctor, 2009). Activity based costing eradicates the chances of overpricing or underpricing, given the firm an edge in determining more precise prices to its customers. There five steps a firm uses in setting up activity based costing system: they include:

identifying the activities a firm engage in,

determining the cost of these activities,

identifying activity centres;

selecting first-stage cost drivers;

and selecting second-stage cost drivers (Proctor, 2009).

During our operation in the winning margin simulation, we were faced with the option of developing a new product (wolf or tiger), so we carried out an activity based costing on both wolf and tiger. We realised the variable cost of producing tiger and wolf were higher than terrier at all level of production resulting to a higher cost price. Ordering raw material for wolf was up 100% when compared to terriers, takes times two of production cost to produce, but it takes the same time to produce depending on the type of machine (Mark I, II AND III) as well as terriers.

We also did an activity based cost on the market to develop in either home or abroad, based on the turnovers from past statistics. Especially for our new product (wolf) to be able to win contracts for the next business year.

At a point during the 3rd year we had to do ABC to outsource some of our terriers from another group in order to meet up with our contract demands. We needed to take the contract for delivery so our receivables can come in early next year. Instead of having to deliver the next year, which would have cost us production cost and a longer time for receivables.

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