GKN may have to slash profits to pay US damages claims

GKN, the car components, aerospace and pallet hire group, yesterday warned it could have to slash its profits for last year to take into account huge damages claims from a US court action.

The group has so far resisted making a formal charge in its accounts to reflect the legal claim brought by 1,000 garage owners who run franchises for its American car exhaust business, Mieneke Discount Muffler Shops. They alleged GKN had defrauded them by making illegal commission payments to its in-house advertising agency.

Before Christmas a jury in Charlotte, North Carolina, stunned investors by recommending that GKN pay damages of up to $554m (pounds 334m), though the judge has recently indicated he may reduce the final figure by a third.

Yesterday GKN reported record annual pre-tax profits for 1996 of pounds 362.8m, up 13 per cent on 1995. However CK Chow, the new chief executive, said the court was expected to decide final damages before the accounts were signed off on 4 April. In this case the figure would have to come off the group's profits, though GKN has already pledged to appeal against the ruling.

However he played down the importance of the case. "It's not something I expected but that's the deck of cards I was dealt. Our financial resources are so strong that it has no material impact on the overall direction of the group." GKN's net cash pile doubled last year to pounds 334m.

Mr Chow, recruited from the industrial gases group BOC, also said he was exploring several expansion plans, including joint ventures or acquisitions at the Westland helicopter business. He said there were "rich opportunities" to expand the pounds 300m annual sales of Westland's aerospace components division. Aerospace profits rose from pounds 65m to pounds 85m last year.

He said GKN was also eyeing further investment opportunities in emerging markets in Asia and South America. The group spent pounds 96m last year on acquisitions and invested pounds 135m, with similar capital spending likely this year.

The strategic review under Mr Chow, which GKN said would emphasise "entrepreneurship," boosted the company's shares. They ended 18.5p higher at 974p.