EXTRA: GKN Falls As It Warns Claims, US Challenges To Hit Full Year

LONDON (Alliance News) - Shares in FTSE 100-listed engineering company GKN PLC fell Friday, ...

Alliance News 13 October, 2017 | 11:44AM
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LONDON (Alliance News) - Shares in FTSE 100-listed engineering company GKN PLC fell Friday, after it warned charges will hit its profit for the full year, and it reported a disappointing third quarter of 2017, with operational challenges and an underperformance in the US leading to lower trading margins.

The company now expects its profit for 2017 as a whole to be "slightly above" the GBP292.0 million it reported in 2016.

Shares in GKN were down 8.7% at 322.00 pence on Friday, the worst blue-chip performer by some distance.

In the third quarter of the year, GKN reported good sales growth, with its Driveline segment outperforming its market and Aerospace ending up higher in sales than the year before, despite operational challenges for the division in North America, which is expected to incur a GBP15.0 million charge.

The group's trading margin in the third quarter was lower than the same period the prior year, as a result of programme transitions and on-going challenges in the US.

In addition, GKN said it is aware of two significant external claims, one involving Aerospace and the other Driveline, for which it expects to incur a charge of GBP40.0 million in the fourth quarter of the year.

Aerospace reported lower sales in the third quarter despite a rise in military sales from the year before. GKN said its current trading was "disappointing", with a reduction in margin caused by pricing pressure, the impact of programme transitions and continued operational challenges, which is expected to continue throughout the fourth quarter.

The North America region will incur a GBP15.0 million cash charge for its facility in Alabama, USA due to revised assumptions on programme inventory and receivables balances. However, it is expected that the fourth quarter will benefit from a one-off retrospective pricing adjustment of GBP20.0 million.

Driveline continued to grow in sales ahead of global industry production rates that were up by 2.0%. External estimates say that full year global auto production will increase by 2.0% , with North America and China down in the fourth quarter and Europe experiencing robust demand. However profit continues to be hampered by additional costs of raw materials and eDrive investments. Although the US all-wheel drive business is performing well, its margin remains below the divisional average.

Driveline's full-year trading margin is expected to the same as that in 2016.

Despite a decline in US automotive production rates, the Powder Metallurgy division saw organic sales growth in the third quarter, benefiting from currency translations and acquisitions in China and Turkey. This was offset by slightly reduced reported margins as a result of higher raw material prices.

"As a result of these [claims], together with continuing operational challenges in GKN Aerospace North America, the group now expects management profit before tax for 2017 to be slightly above 2016," said the company.

When it released its interim results for the current year in July, GKN said 2017 was expected to be "another year of growth".

"GKN continues to grow well against its end markets although recent margin performance has not met our expectations. In addition, it is disappointing that we expect to have to provide for two unexpected claims which will slow our steady growth in profits," said Chief Executive Nigel Stein.

"In light of the trading performance in North American Aerospace, we are redoubling our efforts to improve our operational performance in that business, as well as developing actions to accelerate margin improvement plans across the group, including through the broader adoption of Industry 4.0. With our excellent market positions and leading-edge technologies, I am confident that the group is in a strong position and has a bright future," Stein added.

GKN will publish its full-year results on February 27.

By Dayo Laniyan; dayolaniyan@alliancenews.com

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