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Annual Financial Report

16th Apr 2012 16:41

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 £350 million 6.75% bonds maturing in 2019 and £176 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 £259 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
				£m	£m

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
											£m		£m
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
								Other reserves				Non-controlling interests
				Notes	Share capital £m	Share premium account £m	Retained earnings £m	Exchange reserve £m	Hedging reserve £m	Other reserves £m	Share- holders' equity £m	Pension partner- ship £m		Other £m	Total equity £m
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
		£m	£m
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
			£m	£m
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
										£m				£m				£m				£m			£m
			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
										£m				£m				£m				£m			£m
			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 £2 million (2010: £8 million; Driveline £6 million and Corporate £2 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 £19 million in relation to the Gallatin temporary plant closure. The £19 million, which has been charged to trading profit, represents a gross cost of £34 million offset by recoveries from the Group's external insurer of £15 million. The £34 million covers the cost of responding to customer obligations, £20 million, including premium freight and powder supply charges, rectification and corrections to the plant configuration, £8 million, fixed employment costs that were unabsorbed in June and July as a result of no productive activity, £4 million, and professional fees and other costs amounting to £2 million. The net £19 million charge attracts taxation relief of £4 million. The impact on cash flows from operating activities was a net outflow of £19 million.

	(c)	Goodwill, fixed assets and working capital - subsidiaries only
											Automotive
															Powder								Land
											Driveline				Metallurgy				Aerospace				Systems			Total
											£m				£m				£m				£m			£m
		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
							£m	£m				£m				£m				£m				£m			£m
		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
									£m				£m				£m				£m			£m			£m
		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
					joint ventures				411				908				498				1,104			2,510			2,921 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 £2,491 million (2010: £2,234 million), Powder Metallurgy £851 million (2010: £765 million), Aerospace £1,481 million (2010: £1,451 million) and Land Systems £805 million (2010: £665 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
																								£m			£m
				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

	(h)			Reconciliation of segmental working capital to the balance sheet

																								2011			2010
																								£m			£m
				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
					£m	£m
	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 £621 million (2010: £571 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 £1 million (2010: £1 million).

	(iv)		Research and development expenditure in subsidiaries was £103 million (2010: £92 million).

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

					2011	2010
					£m	£m
			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 £12 million for redundancy and post-employment costs, £2 million for short-term working costs, wholly wages and salaries and £25 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 £29 million, Powder Metallurgy £1 million, Aerospace £4 million and Land Systems £5 million. Cash outflow in respect of previous restructuring plans was £31 million (2010: £55 million). Proceeds from sale of fixed assets, put out of use as part of previous restructuring programmes, of £2 million were recognised in the year (2010: £2 million).
(c)	Change in value of derivative and other financial instruments
				2011	2010
				£m	£m
	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.

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

				2011	2010
				£m	£m
	Marketing related			-	-
	Customer related			(17)	(16)
	Technology based			(5)	(3)
				(22)	(19)

(e)	Gains and losses on changes in Group structure
				2011	2010
				£m	£m
	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 £8 million. A profit on sale of £4 million was realised which includes £2 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 £5 million. A profit on sale of £4 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 £5 million and a net loss of £5 million was realised representing trading losses of £2 million, tangible fixed asset impairment of £1 million, other asset write downs of £3 million and reclassified currency variations from other reserves of £1 million.

3	Net financing costs
				2011	2010
				£m	£m
(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
				£m		£m
(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			£m		£m
	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	£m	%	£m		%
	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
			£m		£m
	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
			£m		£m
	Assets		16		10
	Liabilities		(138)		(100)
			(122)		(90)

(d)	Recognised deferred tax

			2011		2010
			£m		£m
	Deferred tax assets		224		171
	Deferred tax liabilities		(96)		(63)
			128		108

	There is a net £48 million deferred tax credit to the income statement in the year (2010: £53 million) and a further deferred tax credit of £31 million has been recorded directly in other comprehensive income (2010: £46 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
		£m	£m	£m	£m	£m	£m
	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 £41 million (2010: £39 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 value	Gross	Expiry	Tax value	Gross	Expiry
		£m	£m	period	£m	£m	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 £13 million (2010: £25 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: £100 million)

7	Investments in joint ventures

	Group share of results
			2011	2010
			£m	£m
	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 £1 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 share of equity			Provisions for impairment		Net book amount		Group share of equity		Provisions for impairment				Net book amount
						£m			£m		£m		£m		£m				£m
				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
														£m			£m
				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
								Within		One to two		Two to five	More than			Total
								one year		years		years	five years
								£m		£m		£m	£m			£m		£m
			2011
			Other borrowings
			£350 million 6¾% 2019 unsecured bond				i	-		-		-	(347)			(347)		(347)
			£176 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
			£350 million 6¾% 2019 unsecured bond				i	-		-		-	(347)			(347)		(347)
			£176 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 £350 million (2010: £350 million) 6¾% bond maturing in 2019 less unamortised issue costs of £3 million (2010: £3 million); unsecured £176 million (2010: £176 million) 7% bond maturing in 2012 less unamortised issue costs of nil (2010: nil); and a secured term loan of £6 million (2010: £8 million) secured by way of a fixed and floating charge on certain Aerospace fixed assets. Other long term borrowings include £80 million drawn under the Group's European Investment Bank unsecured facility. The loan is due for repayment in five equal annual instalments of £16 million, commencing in June 2015 and attracts a fixed interest rate of 4.1% per annum payable annually in arrears. Also included is £33 million drawn from the Group's new 2016 Revolving Credit Facility of £445 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: £1 million within one year (2010: £1 million), £3 million in one to five years (2010: £3 million) and nil in more than five years (2010: £1 million).
	(v)	£24 million (2010: £11 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 value	Fair value	Book value	Fair value
			£m	£m	£m	£m
	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.

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)		£m
	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 £6 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 £8 million, however, there is a maximum cap of £6 million. The fair value of the contingent consideration at the acquisition date was £6 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 £117 million to sales and £7 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 £6,082 million and £438 million respectively. Acquisition related fees of £2 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)

		£m
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 £38 million to sales and £4 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 £5,827 million and £428 million respectively. Acquisition related fees of £2 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 £12 million was recorded. The indemnity asset is recorded in other receivables; non current £9 million, current £3 million. The range of outcomes for the indemnity receipt is nil to £12 million with payment based on contractual events.

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 £2 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 £5 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 £12 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 £4 million with an adjustment for scrap and obsolete items of £1 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 £20 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 £19 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			£m	£m
	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:												£m			£m
	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			-
	Rate of increase in payment and deferred pensions						2.90 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
				Liabilities £m	Income statement £m	Liabilities £m		Income statement £m		Liabilities £m	Income statement £m			Liabilities £m		Income statement £m
	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
			£m			£m			£m		£m
	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
		£m		£m		£m		£m		£m			£m
	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 £29 million and to overseas schemes £45 million. Section (d) of this note describes the Pension partnership interest created on 31 March 2010 under which the second distribution of £30 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
										£m		£m
	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
					£m		£m	£m		£m			£m
	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
						£m		£m		£m		£m		£m
	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
				£m		£m		£m		£m		£m			£m
	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 term			Long term				Long term				Long term
		rate of			rate of				rate of				rate of
		return			return				return				return
		expected	Value		expected		Value		expected		Value		expected		Value
		%	£m		%		£m		%		£m		%		£m
	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 £132 million (2010: £230 million).

11	Post-employment obligations (continued)
	History of experience gains and losses
			UK	Americas	Europe	ROW
	2011
	Experience adjustments arising on scheme assets:
		Amount - £m	-	(19)	-	(2)
		Percentage of scheme assets	-	(7.7)%	-	(8.7)%
	Experience gains/(losses) on scheme liabilities:
		Amount - £m	(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 - £m		(2,663)	(469)	(383)	(46)
	Fair value of scheme assets - £m		2,391	248	31	23
	Deficit - £m		(272)	(221)	(352)	(23)

	2010
	Experience adjustments arising on scheme assets:
		Amount - £m	77	10	-	(1)
		Percentage of scheme assets	3.3%	4.1%	-	(4.3%)
	Experience gains/(losses) on scheme liabilities:
		Amount - £m	71	(5)	(1)	-
		Percentage of the present value of scheme liabilities	2.9%	(1.3%)	(0.3%)	-
	Present value of scheme liabilities - £m		(2,448)	(398)	(369)	(45)
	Fair value of scheme assets - £m		2,364	245	28	23
	Deficit - £m		(84)	(153)	(341)	(22)

	2009
	Experience adjustments arising on scheme assets:
		Amount - £m	152	21	(1)	-
		Percentage of scheme assets	7.9%	9.8%	(3.7%)	-
	Experience gains/(losses) on scheme liabilities:
		Amount - £m	-	1	6	-
		Percentage of the present value of scheme liabilities	-	0.3%	1.7%	-
	Present value of scheme liabilities - £m		(2,440)	(355)	(352)	(39)
	Fair value of scheme assets - £m		1,930	215	27	18
	Deficit - £m		(510)	(140)	(325)	(21)

	2008
	Experience adjustments arising on scheme assets:
		Amount - £m	(539)	(86)	-	(4)
		Percentage of scheme assets	(30.6%)	(43.1%)	-	(21.0%)
	Experience gains/(losses) on scheme liabilities:
		Amount - £m	7	2	(5)	-
		Percentage of the present value of scheme liabilities	0.3%	0.5%	(1.4%)	-
	Present value of scheme liabilities - £m		(2,043)	(401)	(353)	(46)
	Fair value of scheme assets - £m		1,759	202	29	19
	Deficit - £m		(284)	(199)	(324)	(27)

	2007
	Experience adjustments arising on scheme assets:
		Amount - £m	21	-	(1)	(1)
		Percentage of scheme assets	0.9%	-	(4.8%)	(7.1%)
	Experience gains/(losses) on scheme liabilities:
		Amount - £m	(7)	4	(3)	-
		Percentage of the present value of scheme liabilities	(0.3%)	1.6%	(1.4%)	-
	Present value of scheme liabilities - £m		(2,264)	(270)	(268)	(24)
	Fair value of scheme assets - £m		2,248	212	21	14
	Deficit - £m		(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 £15 million (2010: £15 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 £535 million. On 31 March 2010, the Group made a special contribution to the UK Pension scheme of £331 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 £331 million. The UK Pension scheme's nominal partnership interest entitles it to a distribution from the income of the partnership of £30 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 £331 million which was recognised as a pension plan asset and as a non-controlling interest in equity. The first distribution of £23 million for the period from 31 March to 31 December 2010 was made in the second quarter of 2011.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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