Printable Logo
Expect More
 

3. Operating profit

The analysis of the components of operating profit is shown below:

(a) Trading profit

  2008
£m
2007
£m
Sales by subsidiaries 4,376 3,869
Less: UK cylinder liner manufacturing operation (22)
  4,376 3,847
Operating costs and other income    
Change in stocks of finished goods and work in progress 18 12
Raw materials and consumables (1,737) (1,415)
Unwind of fair value inventory adjustments arising on business combinations (1)
Staff costs (note 9) (1,232) (1,100)
Reorganisation costs (note (i)):    
  Redundancy and other amounts (5) (4)
  Impairment of plant and equipment (1) (1)
Depreciation of property, plant and equipment (note (ii)) (165) (141)
Amortisation of intangible assets (10) (9)
Operating lease rentals payable:    
  Plant and equipment (12) (12)
  Property (23) (20)
Impairment of trade receivables (6) (3)
Amortisation of government grants 2 2
Net exchange differences on foreign currency transactions 3 (1)
Other costs (note (iv)) (1,007) (877)
  (4,175) (3,570)
Trading profit 201 277

(i) Reorganisation costs shown above reflect ongoing actions in the ordinary course of business to reduce costs, improve productivity and rationalise facilities in continuing operations. Costs incurred include redundancy and related post-employment obligation charges, asset write-downs and impairments and other revenues and expenditure directly attributable to the reorganisation actions. Headcount realignment activity continued at a cost of £3 million (2007 – £3 million). Rationalisation of a UK facility continued at a cost of £2 million (2007 – £2 million including a £1 million plant and equipment impairment charge).

(ii) Including depreciation charged on assets held under finance leases of £1 million (2007 – £1 million).

(iii) Research and development expenditure in subsidiaries was £90 million (2007 – £81 million).

(iv) Other costs include a £5 million credit from the release of an unutilised provision established on acquisition as a result of changed customer contract requirements in an Aerospace business and a £3 million charge in respect of abortive acquisition costs in Driveline. Property surpluses were nil (2007 – £4 million).

(v) Auditors’ remuneration
The analysis of auditors’ remuneration is as follows: 

  2008
£m
2007
£m
Fees payable to PricewaterhouseCoopers LLP for the Company’s annual financial statements (0.7) (0.6)
Fees payable to PricewaterhouseCoopers LLP and their associates for other services to the Group:    
— Audit of the Company’s subsidiaries pursuant to legislation (3.1) (2.8)
Total audit fees (3.8) (3.4)
— Other services pursuant to legislation (0.1) (0.1)
— Tax services (0.6) (0.5)
— Corporate finance transaction services
— Other services (0.1) (0.1)
Total non-audit fees (0.8) (0.7)
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 (4.6) (4.1)

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 except for those in relation to associated pension schemes, which are borne by the respective schemes.

(b) Restructuring and impairment charges 

  2008 2007
  Restructuring programmes    
  2008 plan £m 2004 plan £m Total
£m
Restructuring
2004 plan
£m 
Other impairments
£m 
Total
£m
Restructuring and impairment charges            
Goodwill impairment
Tangible fixed asset impairments/reversals (125) (2) (127) 7 2 9
Other asset write-downs (4) (4) (1) (1)
  (129) (2) (131) 6 2 8
Redundancy and employee related costs including post-employment curtailments
(16)


(16)

(16)


(16)
Other reorganisation costs including property surplus (4) (2) (6) (23) (23)
Subsidiaries (149) (4) (153) (33) 2 (31)
Impairment of joint ventures (10) (10)
Subsidiaries and joint ventures (159) (4) (163) (33) 2 (31)

Restructuring

The Group’s 2004 restructuring programme concluded in the first half of 2008, with the costs charged relating mainly to reorganisation costs (including incremental costs borne by the Group as a consequence of dedicated restructuring and transition teams) and equipment relocation costs attributable to the transfer of equipment between closing facilities and continuing operations, incremental premium freight and product homologation costs. These costs were incurred in Driveline operations in North America and Europe and were charged in the first half of 2008.

In response to the severe economic downturn in our automotive markets and in anticipation of activity reductions in both off-highway and aerospace markets, the Group commenced further restructuring in the final quarter of 2008. As a result of this planned restructuring, charges amounting to £149 million in subsidiaries and an impairment in respect of joint venture investments, £10 million, have been recognised. Cash based charges amount to £20 million. An analysis by segment and description of the 2008 restructuring plan charges is set out as follows: 

  2008 Plan
  Impairments
£m
Redundancy
£m
Reorganisation
£m
Total
£m
Driveline (25) (6) (2) (33)
Other Automotive (11) (2) (13)
Powder Metallurgy (100) (4) (2) (106)
OffHighway (3) (3)
Aerospace (3) (3)
Corporate (1) (1)
  (139) (16) (4) (159)
Subsidiaries (129) (16) (4) (149)
Joint ventures (10) (10)

The £139 million impairments reflect either planned changes and commercial actions to the structure of how our businesses satisfy customer demand or write-downs as a result of significant curtailment in the future volume expectations of certain businesses. In Powder Metallurgy impairments of £100 million include the impact on the Sinter Metals North American fixed asset base (£81 million) on the back of significant reductions in automotive volume projections and reductions to estimated realisable values of the fixed assets and inventories (£11 million) in Hoeganaes attributable to two businesses that are being exited. In Driveline impairments are attributable to the rationalisation of UK manufacturing capacity (£10 million) and write-offs of dedicated customer programme specific fixed assets arising on the programme cancellation or volume reductions (£5 million). In Aerospace the reduction of engine component production capacity in Europe as a result of transfers to the US, in agreement with specific customers, has resulted in fixed asset write-downs of £3 million. As a consequence of intractable losses, severe volume reductions and forecast cash outflows into the foreseeable future in our UK Other Automotive subsidiary business the entire production fixed asset base has been impaired (£11 million).

The Sinter North America and UK Other Automotive impairment, £81 million and £11 million respectively, were determined on a value in use basis where the pre-tax discount rates used were 10% and 12%.

Impairments recognised in respect of joint ventures reflect a change in how Driveline will satisfy customer supply in selected geographical territories. Consequently, joint venture arrangements are being unwound and the carrying value of the Group’s investment therein has been fully impaired.

Non-asset related 2008 plan charges are predominantly employee related and include short-time working costs of £2 million, redundancy charges of £14 million including £1 million attributable pension past service costs and other reorganisation costs of £4 million. Other reorganisation costs include £2 million of charges in respect of an onerous consumables supply lease that arose as a consequence of the curtailment of activity in a Powder Metallurgy site.

Redundancy costs provided represent charges for contractual severance, other employee related exit costs and post-employment augmentation where applicable. These charges have only been recognised where formal communication with the employees or relevant employee bodies had taken place before 31 December 2008. Short-time working represents payments made to employees in the period when they are away from the workplace and not engaged in any productive or non-productive activities in the plants affected, and therefore are not contributing to the business operations.

The 2007 restructuring charges of £33 million relate to the Group’s 2004 restructuring programme to facilitate geographical migration of Driveline production capacity, support recovery actions in Powder Metallurgy and the realignment and reduction of production capacity, overhead and infrastructure cost across the Group. Pension past service charges included therein amounted to £4 million in the year. Other reorganisation charges were net of a £2 million property surplus in a Powder Metallurgy business sold post-restructuring closure.

Cash outflow in respect of 2008, 2004 and earlier periods’ strategic restructuring actions amounted to £28 million (2007 – £40 million including £4 million property disposal proceeds).

Other impairments

The £2 million impairment reversal recognised in 2007 arose in relation to the Group’s UK cylinder liner manufacturing operation. The business disposed of land and buildings and plant and machinery at a value greater than the theoretical net book value of the assets had they not been impaired. Consequently, a proportion of the previously recognised impairment has been reversed.

(c) Amortisation of non-operating intangible assets arising on business combinations 

  2008
£m
2007
£m
Marketing related
Customer related (7) (5)
Technology based (3) (3)
  (10) (8)

(d) Profits and losses on sale or closures of businesses

  2008
£m
2007
£m
Profits and losses on closures of businesses    
Trading losses of the UK cylinder liner manufacturing operation (7)

(e) Change in value of derivative and other financial instruments

  2008
£m
2007
£m
Embedded derivatives 43
Forward exchange contracts (not hedge accounted) (175) (9)
Commodity contracts (not hedge accounted) (1) (1)
Net gains and losses on intra-group funding 9
  (124) (10)

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 2008 and 2007 the Group used transactional hedge accounting in a limited number of instances. As a consequence, and to assist year on year comparison, the change in value continues to be identified as a separate element of operating profit.

Back to Top