Final Results for the year ended 31 December 2016

NEWS RELEASE 28 February 2017

GKN plc Results Announcement for the year ended 31 December 2016

Group Highlights(1)

· Another year of growth delivering earnings momentum

o Sales up 22% and management eps increased 12%

o Continued market outperformance with organic sales up 2%

o Strong performance from Fokker Technologies ("Fokker") in first full year of ownership

o Profit before tax (management basis) up 12% to £678 million (2015: £603 million), including £39 million restructuring charge

o Reported profit before tax £292 million (2015: £245 million)

o Free cash flow of £201 million (2015: £370 million), lower due to the absence of a significant customer advance that benefited 2015

o Momentum of new business wins continues to support growth ahead of markets

· Sharpening the focus

o Group-wide fixed cost reduction programme resulted in a restructuring charge of £39 million - annualised savings of £30 million

o Disposal of Stromag completed; GKN focused on three core divisions and two end markets

o Capital allocation to be progressively directed towards productivity improvement in core aerospace and automotive divisions

· Continued investment in technology

o Strong technology pipeline; innovation recognised by customer and industry awards

o Primary focus - electrified drivetrains and additive manufacturing (3D printing)

Commenting on the results, Nigel Stein, Chief Executive of GKN said:

"This is a good set of results with GKN continuing to make underlying progress in line with our expectations. We performed well against our key markets, overcoming some demand weakness and demonstrating once again the strength of our businesses, strong market positions and leading technology. Strategically we made good progress, including smoothly integrating Fokker and completing the disposal of Stromag - evidence of our sharper focus on capital allocation towards Aerospace and Automotive markets.

We expect 2017 to be another year of further growth, helped by the benefits of the actions taken in 2016 and GKN's constant focus on continuous improvement."

Divisional Highlights

GKN Aerospace

· Strong headline sales growth, reflecting a full year of Fokker and organic growth above the market

· Organic sales growth in commercial aerospace (+3%) partly offset by decline in military (-2%)

· Margin of 10.2% (2015: 10.9%), excluding the £10 million restructuring, primarily impacted by the inclusion of Fokker, ramp up costs on new engines and mature programmes declining

· Fokker sales and margin ahead of expectations

· New and replacement work packages won exceed $7 billion

GKN Driveline

· Organic sales growth of 6%, ahead of global auto production, helped by our broad geographic footprint and increased content per vehicle

· Trading margin of 7.9% (2015: 8.2%), excluding the £10 million restructuring charge, with a good performance in Europe and China offset by excess launch costs on a significant US all-wheel drive (AWD) programme

· Around £1 billion of annualised new and replacement business won

GKN Powder Metallurgy

· Organic sales growth of 1%, before the pass-through of lower raw material surcharges

· Trading margin of 11.7% (2015: 12.0%), excluding the £3 million restructuring charge, reflecting a powder investment in China and a weaker North America

· Strong focus on technology and £200 million annualised new and replacement business won

GKN Land Systems

· Organic sales down 8% due to challenging agricultural and construction equipment markets and the ending of two chassis contracts

· Trading margin of 4.5% (2015: 3.5%), excluding the £14 million restructuring charge

· Stromag sale completed on 30 December 2016

· Remaining GKN Land Systems businesses absorbed into GKN Driveline and Other Businesses from 1 January 2017

Outlook

According to Teal forecasts, in 2017, the overall aerospace market is expected to be up 2%, with commercial deliveries 1% lower and military sales up 14%. Against that backdrop, GKN Aerospace's 2017 organic sales are expected to grow slightly above the market.

In automotive, external forecasts predict growth in global light vehicle production of around 2% with increases in China and Europe, but North America down. Against this background, GKN Driveline and GKN Powder Metallurgy are expected to grow organically above the market.

2017 is expected to be another year of further growth, helped by the benefits of the actions taken in 2016 and GKN's constant focus on continuous improvement.

Notes

(1) Financial information set out in this announcement, unless otherwise stated, is presented on a management basis as defined on page 14.

Cautionary Statement

This announcement contains forward looking statements which are made in good faith based on the information available at the time of its approval. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ materially from those currently anticipated. Nothing in this document should be regarded as a profits forecast.

Further Enquiries

Analysts/Investors:

Guy Stainer, Investor Relations Director, GKN plc

T: +44 (0)207 463 2382

M: +44 (0)7739 778187

E: [email protected]

Media:

Chris Fox, Group Communications Director, GKN plc

T: +44 (0)1527 533238

M: +44 (0)7920 540051

E: [email protected]

Andrew Lorenz, FTI Consulting

T: +44 (0)203 727 1323

M: +44 (0)7775 641807

There will be an analyst and investor meeting today at 09.00am at UBS, 5 Broadgate, London, EC2M 2QS in their Conference Suite located on the first floor.

A live videocast of the presentation will be available at http://www.gkn.com/en/investors/results-centre/webcasts/

Slides will be put onto the GKN website approximately 60 minutes before the presentation is due to begin, and will be available to download from the GKN website at: http://www.gkn.com/en/investors/results-centre/

Questions will only be taken at the event.

A live dial in facility will be available by telephoning: +44 (0) 1452 555 566, Conf ID: 71571846

Following the event, a replay of the conference call will be uploaded onto the GKN website and the on-demand archive webcast will be available via the link http://www.gkn.com/en/investors/results-centre/results-and-presentations/?docyear=2016

GKN plc LEI: 213800QNZ22GS95OSW84

NEWS RELEASE

GKN plc Results Announcement for the year ended 31 December 2016

Group Overview

Markets

The Group operates in the global aerospace and automotive markets. GKN Aerospace sells to manufacturers of commercial and military aircraft, aircraft engines and equipment. In the automotive market, GKN Driveline sells to manufacturers of passenger cars and light vehicles. Around 80% of GKN Powder Metallurgy sales are also to the automotive market, with the balance to other industrial customers.

Results

Organic sales increased £209 million (2%). The benefit from currency translation on management sales was £862 million and there was a £654 million benefit from acquisitions.

Overall organic trading profit reduced by £57 million, including a £39 million Group-wide restructuring programme cost. There was a benefit from currency translation of £89 million and a £62 million increase due to acquisitions.

The Group trading margin reduced to 8.2% (2015: 8.8%). This was primarily due to restructuring, launch related costs in GKN Driveline and the incorporation of Fokker. Return on average invested capital (ROIC) reduced to 16.0% (2015: 17.8%), principally due to the inclusion of Fokker for the first time.

Divisional Performance

GKN Aerospace

GKN Aerospace is a leading global tier one supplier of airframe and engine structures, landing gear, electrical interconnection systems, transparencies and aftermarket services. Its technology influences the performance and efficiency of the world's leading commercial and military aircraft.

The latest Teal data suggest that overall aerospace deliveries fell 2% in 2016, with both commercial and military each declining 2%. In commercial, single aisle aircraft deliveries grew 6%, while wide-body aircraft production declined 2% and business jets fell 11%. Military production was lower as the decline in fighters (-5%) and rotorcraft (-4%) more than offset the increase in transport aircraft (+13%).

According to Teal forecasts, in 2017, overall aircraft deliveries are expected to be up 2%. Commercial deliveries are expected to be 1% lower as the decline in wide body and business jets more than offsets growth in single aisle aircraft. Military sales are expected to be up 14% due to the ramp up in production of the F-35 fighter and growth in rotorcraft and transport aircraft.

The key financial results for the year are as follows:

Overall, GKN Aerospace's organic sales were £38 million higher (1%). There was a £243 million benefit from currency translation and non-organic sales from acquisitions amounted to £642 million.

The division's sales were weighted commercial 74%, military 26%. Organic commercial aerospace sales growth was 3%, benefiting principally from stronger production of the A350 and A320, partly offset by a reduction in A380 and A330. Military sales were organically 2% lower, primarily due to the decline of mature programmes, mainly the F/A-18 Super Hornet and UH-60 Black Hawk helicopters, partly offset by increased F-35 sales.

Trading profit was £339 million (2015: £273 million), benefiting from a full year contribution from Fokker and a favourable currency translation impact of £31 million. The organic reduction in trading profit is principally a result of ramp up costs on the PW1100 Geared Turbofan and Trent XWB engines (deployed on the A320neo and A350 aircraft, respectively), lower production of the A380 and Boeing 747-8 large aircraft (including engines) and a £10 million restructuring charge (as part of the Group-wide programme). The reduction was partially offset by increased engine spares sales and the ramp up of A350 and A320.

Trading margin was 9.9%, or 10.2% excluding the restructuring charge (2015: 10.9%). Return on average invested capital, was 14.6% (2015: 18.1%, excluding GKN Aerospace Fokker which had not been owned for a full 12 month period).

GKN Aerospace Fokker, acquired on 28 October 2015, performed strongly. In 2016, it generated sales of £769 million, profit of £66 million and a trading margin of 8.6%. Fokker restructuring, which is excluded from Management profits, was completed for £31 million, lower than the €50 million (£39 million) originally expected. During the year, the outstanding pre-acquisition fine that was agreed with the Department of Justice was settled.

During the year, new and replacement work packages exceeding $7 billion over their contract lives were won and a number of important milestones were achieved, including:

· An agreement to extend the risk and revenue sharing partnership (RRSP) with Rolls-Royce on the Trent XWB engine. The agreement covers the design and supply of a lower weight, higher performance intermediate compressor case for the enhanced performance Trent XWB-84 engine;

· Being named among the next generation B-21 bomber contractors;

· Signing a four-year contract extension with FMV (Swedish Defence Material Administration) to provide comprehensive support for the GKN Aerospace RM12 engine, which powers the JAS 39 Gripen C/D fighter;

· Entry into production of the Boeing 737 MAX engine inlet lip skins that enables laminar flow properties in a new state-of-the-art facility in Orangeburg, South Carolina, USA;

· Being chosen to maintain and service the landing gear for the F-35 fleet outside the USA; and

· Signing a memorandum of agreement with UTC Aerospace Systems to develop electrical integrated systems for the More Electric Aircraft initiative.

Automotive market

The major automotive markets of Europe, North America, China and India increased production in 2016 compared to 2015, while Brazil and Japan declined. Overall, global production volumes increased by 4.9% to 93.0 million vehicles (2015: 88.7 million).

Source: IHS Automotive; (#) Growth is derived from unrounded production figures

Overall production in Europe increased compared to 2015 due to continued recovery in demand in Western Europe and despite the extended downturn in the Russian market.

Production in North America benefitted from consumer confidence and localisation of foreign manufacturers' capacity. Cheap credit and the low price of fuel supported increased demand and production for full-size pickups and Sport Utility Vehicles (SUVs), which outpaced that of passenger cars. The recession in the Brazilian vehicle market continued, resulting in a further decline in output.

Strong production growth in China resulted from the positive impact of a reduction in sales tax on smaller engine cars. Production in India increased due to improved economic conditions and higher demand for newly launched models partly offset by diesel vehicle restrictions. Weak production in Japan resulted from demand depressed as a consequence of tax changes and economic concerns. 

External forecasts anticipate global production in 2017 will increase 1.9% to 94.8 million vehicles.

GKN Driveline

GKN Driveline is the world's leading supplier of automotive driveline systems and solutions. As a global business serving the leading vehicle manufacturers, it develops, builds and supplies an extensive range of automotive driveline products and systems, for use in everything from the smallest low-cost car to the most sophisticated premium vehicles that demand complex driving dynamics.

The key financial results for the year are as follows:

Organic sales increased by £242 million (6%) compared with global light vehicle production which was up 5%. The beneficial effect from currency translation was £426 million. Constant Velocity Jointed (CVJ) Systems accounted for 61% of sales and non-CVJ sales were 39%. 

GKN Driveline's market outperformance was mainly in Europe (reflecting recent market share gains and strong sales to Fiat Chrysler, Volvo and Daimler) and in North America (reflecting strong recent AWD programme gains slightly offset by lower light truck platform exposure). GKN Driveline performed slightly below the market in China (due to its lower exposure to domestic producers and smaller vehicles) although new launches for AWD vehicles were positive and should enhance performance in 2017.

The organic reduction in trading profit was £5 million (after incurring £10 million of restructuring charges) and the positive impact of currency translation on trading profit was £38 million. GKN Driveline's trading margin was 7.7%, or 7.9% excluding the restructuring charge (2015: 8.2%). Return on average invested capital was 19.2% (2015: 19.5%).

In terms of profitability, European plants were running at very high capacity utilisation with a strong conversion on the additional sales. In China, margin reduced slightly, with the benefits from increased production being offset by continued investment in the new technology centre and engineering, particularly to support AWD growth. The Americas operations were impacted by lower demand in Brazil and around £25 million of additional launch costs on a new global AWD programme. These launch problems have now largely been addressed with production reaching target levels. The technology developed provides an excellent platform for continued success in AWD and investment has continued in e-Drive, with new contracts won. The results also included some benefit from claims against a number of suppliers for anti-competitive behaviour. It is anticipated that further income may be recognised in 2017 as other cases are settled.

To provide better strategic and customer alignment, GKN Driveline reorganised from three regions into two global product lines (CVJ and AWD/eDrive) which also provides a more efficient, leaner organisation.

During the year, around £1 billion of annualised sales in new and replacement business was secured and a number of important milestones achieved, including:

· The selection by BMW to supply its eAxle on the BMW 2 Series Active Tourer 225xe and the plug-in hybrid version of the BMW X1 for the Chinese market;

· Being named as an Automotive News 2017 PACE Award finalist for its innovative electric driveline technology. PACE judges have selected the co-axial electric axle (eAxle) system that debuted on the acclaimed Volvo XC90 T8 Twin Engine plug-in hybrid as one of the finalists in 2017. The technology also launched on the Volvo S90 and will feature on other manufacturer's vehicles; and

· Adding five new AWD production lines across two facilities in Shanghai to support growing levels of business.

GKN Powder Metallurgy

GKN Powder Metallurgy comprises GKN Sinter Metals and Hoeganaes. GKN Sinter Metals is the world's leading manufacturer of precision automotive sintered components as well as components for industrial and consumer applications. Hoeganaes is one of the world's leading manufacturers of metal powder, the essential raw material for powder metallurgy.

The key financial results for the year are as follows:

Organic sales were flat, after the £11 million pass through to customers of lower steel prices and other surcharges. There was a £114 million benefit from currency translation and a £12 million increase due to the acquisition of a majority share of a powder manufacturer in China.

Underlying growth (before raw material pass through) was 1%, lower than global light vehicle production which was up 5%, due to under-representation in the strong China market. Underlying sales growth above the market was achieved in China, Europe and Brazil but sales in North America fell slightly due to weaker demand from the division's largest automotive customer.

The organic reduction in trading profit was £4 million, including a £3m restructuring charge as part of the Group-wide programme. There was a £2 million reduction from start-up losses in the new powder business acquired in China and the gain from currency translation was £15 million.

The divisional trading margin was 11.4%, or 11.7% excluding the restructuring charge (2015: 12.0%), reflecting investment in China and tougher market conditions in the US. Return on average invested capital was 21.0% (2015: 22.3%).

During the year, GKN Powder Metallurgy achieved a number of important milestones, which included:

· Winning around £200 million of annualised sales in new and replacement business;

· The commencement of production of high quality automotive grade powders in China for the Asian market;

· Forming a new business to manufacture titanium powders in North America for Additive Manufacturing (AM) applications; and

· Installation in Radevormwald, Germany of the first multi powder bed AM machine in the automotive industry to enable series production of designed for AM precision parts for engines and transmissions and supporting the trend towards lightweight products.

GKN Land Systems

GKN Land Systems comprised a number of businesses, designing, manufacturing and supplying products and services for the agricultural, construction and key industrial markets, offering integrated powertrain solutions and complete in-service support.

Sales in GKN Land Systems were lower than the prior period primarily due to a significant decline in North American agricultural equipment markets and the ending of two chassis contracts. Demand for construction equipment was also weaker while industrial sales remained relatively stable.

The key financial results for the year are as follows:

The organic decrease in sales was £65 million (8%) and the beneficial impact from currency translation was £76 million. Of the organic reduction, £17 million relates to two chassis contracts which ended during the first and third quarters of 2016, respectively. These contracts will have a further year on year negative impact of £24 million, in 2017.

Trading profit was £18 million after including a £14 million restructuring charge and a £5 million benefit from currency translation. Trading margin was 2.6% (2015: 3.5%) or 4.5% excluding the restructuring charge. Return on average invested capital was 7.0% (2015: 7.1%).

On 21 October 2016, the Group announced that it had agreed to sell the Stromag business for an enterprise value of €198 million (£177 million). The transaction completed on 30 December 2016.

From 1 January 2017, GKN Land Systems no longer operated as a division. Of the remaining operations, Shafts and Services now reports within GKN Driveline and Wheels and Structures, including the chassis contracts, reports within Other Businesses.

Other Businesses and corporate costs

In 2016, GKN's Other Businesses comprised Cylinder Liners (which is a 59% owned venture mainly in China, manufacturing engine liners for the truck market in the US, Europe and China), EVO eDrive Systems (a developer of axial flux motors) and GKN Hybrid Power (a flywheel energy storage and hybrid system manufacturer).

GKN's Other Businesses reported combined sales of £39 million (2015: £42 million). The change reflects a £6 million organic decrease in sales and £3 million benefit from currency translation. A trading loss of £4 million was reported in the year (2015: £1 million profit) reflecting a reorganisation charge at GKN Hybrid Power.

Corporate costs, which comprise the costs of stewardship of the Group and operating charges and credits associated with the Group's legacy businesses, were £21 million (2015: £18 million), including a pension gain of £5 million following a pensioner buy-out in December 2016 and a £2 million restructuring charge as part of the Group-wide programme. 2017 UK pension costs will be around £12 million higher, across the Group, as the pension service costs are determined by the deficit and discount rates at the end of 2016.

Other Financial Information

Items excluded from management trading profit

In order to achieve consistency and comparability of underlying results between reporting periods, certain items are presented separately from management basis results which are used in many of the Group's Key Performance Indicators. In addition management basis results aggregate the sales and trading profit of subsidiaries with the Group's share of the sales and trading profits of equity accounted investments.

The items excluded from management basis results adjusted because of their size or nature. The Group considers the following matters when assessing the nature of items to be excluded; whether the charge or income is significantly impacted by fair value movements outside of management control, it is non-cash or it does not relate to trading performance but rather acquisition or divestment activity.

A full reconciliation of statutory to management basis numbers is provided in note 3 to the consolidated financial statements on page 23 and further information on the items excluded from management trading profit is provided below:

Change in value of derivative and other financial instruments

The change in value of derivative and other financial instruments during the year resulted in a charge of £154 million (2015: £122 million charge).

When the business wins long term customer contracts that are in a foreign currency, the Group seeks to mitigate the potential volatility of the future cash flows by hedging through forward foreign currency exchange contracts. At each period end, the Group is required to mark to market these contracts even though it has no intention of closing them out in advance of their maturity dates. At 31 December 2016, the net fair value of such instruments was a liability of £482 million (2015: £351 million liability) and the change in fair value during the year was a £135 million charge (2015: £103 million charge).

There was also a £4 million credit arising from the change in fair value of embedded derivatives in the year (2015: £1 million credit) and a net loss of £23 million attributable to the currency impact on Group funding balances (2015: £20 million net loss).

Amortisation of non-operating intangible assets arising on business combinations

The charge for amortisation of non-operating intangible assets arising on business combinations (for example, customer contracts, order backlog, technology and intellectual property rights) was £103 million (2015: £80 million). The increase was primarily a result of the acquisition of Fokker.

Gains and losses on changes in Group structure

The net loss on changes in Group structure was £9 million (2015: £1 million loss).

On 30 December 2016, the Group sold its Stromag business (part of the GKN Land Systems division) for a cash consideration of £159 million, excluding an overdraft disposed of £7 million and before professional and completion fees. A profit on sale of £9 million was realised.

On 17 November 2016, the Group confirmed the closure of its GKN Aerospace business in Yeovil. The site closure, which is expected to conclude by the end of 2017, has necessitated a reorganisation charge of £12 million. A decision was also taken to curtail operations of a GKN Driveline business with an associated reorganisation charge of £6 million.

Acquisition related restructuring charges

During the year there has been a charge of £31 million (2015: nil) in relation to redundancy and integration costs following the Group's acquisition of Fokker in 2015.

Impairment charges

Consistent with previous years, goodwill and cash generating units were tested for impairment. As a result of difficult markets and reduced sales of certain products during the year an impairment charge of £52 million (2015: £71 million) has been recorded in respect of three cash generating units; two in GKN Aerospace and one in GKN Land Systems.

Post-tax earnings of equity accounted investments

On a management basis, the sales and trading profits of equity accounted investments are included pro-rata in the individual divisions to which they relate, although shown separately post-tax in the statutory income statement.

The Group's share of post-tax earnings on a management basis was £73 million (2015: £59 million), with trading profit of £89 million (2015: £70 million). The Group's share of the tax and interest charges amounted to £16 million (2015: £11 million). Trading profit increased £19 million, reflecting improved market conditions for our equity accounted investment companies, primarily in China.

Net financing costs

Net financing costs totalled £116 million (2015: £137 million) and comprise the net interest payable of £79 million (2015: £65 million), the non-cash charge on post-employment benefits of £53 million (2015: £49 million), a credit from fair value changes on cross currency interest rate swaps of £18 million (2015: £17 million charge) and charge for unwind of discounts of £2 million (2015: £6 million). The non-cash charge on post-employment benefits, fair value changes on cross currency interest rate swaps and unwind of discounts are not included in management figures. Details of the assumptions used in calculating post-employment costs are provided in note 15.

Interest payable was £86 million (2015: £72 million), whilst interest receivable was £7 million (2015: £7 million) resulting in net interest payable of £79 million (2015: £65 million).

Profit before tax

Management profit before tax was £678 million (2015: £603 million). Profit before tax on a statutory basis was £292 million (2015: £245 million). The main differences between management and statutory figures for 2016 are the change in value of derivative and other financial instruments, amortisation of non-operating intangible assets arising on business combinations, acquisition related restructuring charges, impairment charges and non-cash charge on post-employment benefits. Further details are provided in note 3 to the financial statements.

Taxation

The book tax rate on management profits of subsidiaries was 24% (2015: 24%), arising as a £144 million tax charge (2015: £133 million) on management profits of subsidiaries of £605 million (2015: £544 million).

The book tax rate is significantly lower than the theoretical weighted average tax rate, largely because of the tax on items excluded from management profit and movements in tax risk provisions as outstanding issues are settled.

The tax rate on statutory profits of subsidiaries was 22% (2015: 23%) arising as a £48 million tax charge (2015: £43 million) on statutory profits of subsidiaries of £219 million (2015: £186 million).

Non-controlling interests

The profit attributable to non-controlling interests was £2 million (2015: £5 million).

Earnings per share

Management earnings per share was 31.0 pence (2015: 27.8 pence). Average shares outstanding in 2016 were 1,712.1 million (2015: 1,674.1 million).

On a statutory basis earnings per share was 14.1 pence (2015: 11.8 pence).

Dividend

The Board has decided to recommend a final dividend of 5.9 pence per share (2015: 5.8 pence per share). The total dividend for the year will, therefore, be 8.85 pence per share (2015: 8.70 pence per share). The Group's objective is to have a progressive dividend policy reflecting growth in earnings per share and free cash flow generation. The final dividend is payable on 17 May 2017 to shareholders on the register on 7 April 2017. Shareholders may choose to use the Dividend Reinvestment Plan (DRIP) to reinvest the final dividend. The closing date for receipt of new DRIP mandates is 25 April 2017.

Cash flow

Operating cash flow, which is defined as cash generated from operations of £778 million (2015: £885 million) adjusted for capital expenditure (net of proceeds from capital grants) of £494 million (2015: £411 million), repayment of principal on government refundable advances of £6 million (2015: nil) and proceeds from the sale/realisation of fixed assets of £37 million (2015: £9 million), was an inflow of £315 million (2015: £483 million).

Cash generated from operations includes movements in working capital and provisions totalling a net outflow of £130 million (2015: £82 million inflow). In 2016, the reduction of £212 million was primarily as a result of a substantial one-off customer advance in 2015, the VAT on which was repaid in 2016.

Capital expenditure (net of proceeds from capital grants) on both tangible and intangible assets totalled £494 million (2015: £411 million). Of this, £410 million (2015: £330 million) was on tangible fixed assets and was 1.6 times (2015: 1.5 times) the depreciation charge. Expenditure on intangible assets, mainly initial non-recurring costs on Aerospace programmes, totalled £84 million (2015: £81 million).

The Group invested £186 million in the year (2015: £157 million) on research and development activities not qualifying for capitalisation, net of customer and government funding.

Net interest paid totalled £76 million (2015: £54 million) including £9 million following adverse currency movements on the Group's cross currency interest rate swaps. Tax paid in the year was £93 million (2015: £111 million).

Free cash flow

Free cash flow, which is operating cash flow including equity accounted investment dividends and after interest, tax, dividends paid to non-controlling interests but before dividends paid to GKN shareholders, was an inflow of £201 million (2015: £370 million).

Net debt

At the end of the year, the Group had net debt of £704 million (2015: £769 million). The Group has a series of cross currency interest rate swaps, used to better align its foreign currency income receipts with its debt coupon payments. The fair value of these derivative instruments at 31 December 2016 was a liability of £214 million (2015: liability of £69 million) which is included in the net debt figure of £704 million. The translational currency impact of weaker sterling was to increase net debt but this was partly offset by the £151 million net proceeds from the Stromag disposal.

Pensions and post-employment obligations

GKN operates a number of defined benefit pension schemes and historical retiree medical plans across the Group.

At 31 December 2016, the total deficit on post-employment obligations of the Group totalled £2,033 million (2015: £1,558 million), comprising deficits on funded obligations of £1,322 million (2015: £1,007 million) and on unfunded obligations of £711 million (2015: £551 million). In total, the deficit has increased £475 million since 31 December 2015, primarily due to changes in the discount rates used and adverse currency movements.

The amount included within trading profit for the year comprises current service cost of £48 million (2015: £50 million), administrative costs of £3 million (2015: £3 million) and a settlement credit of £5 million (2015: a past service credit of £4 million). The interest charge on net defined benefit plans, which is excluded from management figures, was £53 million (2015: £49 million).

Cash contributions to the various defined benefit pension schemes and retiree medical arrangements totalled £121 million (2015: £100 million), including a £15 million contribution as part of a pensioner buy-out arrangement that resulted in the removal of £268 million of liabilities and £263 million of assets from the balance sheet. The settlement gain was £5 million (net of expenses) and is included in the income statement.

UK pensions

The accounting deficit for UK schemes increased to £1,221 million (2015: £912 million), following a 30% decrease in the discount rate.

The Group's two UK defined benefit pension schemes are currently undergoing triennial funding valuations as at 5 April 2016 and 31 December 2016 respectively. Once the valuation process is complete, the funding deficit in each scheme will be confirmed and any incremental deficit contributions payable by the Group will be established. It is likely that some additional Group funding will be required, but given the stage of negotiations with the scheme Trustees and variables involved in both finalising the valuation and agreeing any resulting recovery plan, the outcome cannot currently be predicted with any reasonable degree of certainty. The current deficit funding payment is £42 million per year.

Defined contribution pension schemes

In addition to defined benefit pension schemes, the Group also operates a number of defined contribution schemes for which the income statement charge was £62 million (2015: £42 million).

Net assets

Net assets of £2,162 million were £276 million higher than the December 2015 year end figure of £1,886 million. The increase is driven by management profit after tax (£534 million) and currency (including fair value changes in net investment hedging) movements in other comprehensive income, net of tax (£504 million) which have been partially offset by changes in value of derivative and other financial instruments (£154 million), amortisation of non-operating intangible assets arising on business combinations (£103 million), a loss on remeasurement of defined benefit plans, net of tax (£333 million) and dividends paid to equity shareholders (£150 million).

Exchange rates

Exchange rates used for currencies most relevant to the Group's operations are:

The approximate impact on 2016 trading profit of subsidiaries and equity accounted investments of a 1% movement in the average rate would be euro - £2 million, US dollar - £4 million.

Funding, liquidity and going concern

At 31 December 2016, UK committed bank facilities were £863 million (2015: £864 million). Within this amount there are committed revolving credit facilities of £800 million (2015: £800 million) and a £48 million (2015: £64 million) eight-year amortising facility from the European Investment Bank (EIB). The revolving credit facilities of £800 million mature in 2019, whilst the second of five equal, annual £16 million EIB repayments was paid in 2016. At 31 December 2016, £48 million of the EIB facility was drawn (2015: £64 million drawn) and there were no drawings on any of the UK revolving credit facilities (2015: no drawings).

Capital market borrowings at 31 December 2016 and 31 December 2015 comprised a £350 million 6.75% annual unsecured bond maturing in October 2019 and a £450 million 5.375% semi-annual unsecured bond maturing in September 2022.

As at 31 December 2016, the Group had net debt of £704 million (2015: £769 million).

All of the Group's committed credit facilities have financial covenants requiring EBITDA of subsidiaries to be at least 3.5 times net interest payable and for net debt to be no greater than 3 times EBITDA of subsidiaries. The covenants are tested every six months using the previous 12 months' results. For the 12 months to 31 December 2016, EBITDA was 12.8 times greater than net interest payable, whilst net debt was 0.7 times EBITDA.

The Group has a series of cross currency interest rate swaps to better align its foreign currency income receipts in USD and EUR with its debt and had the effect of converting its Sterling bonds into US Dollars ($951 million) and Euros (€284 million). The cross currency interest rate swaps have been designated as a net investment hedge of the Group's USD and EUR net assets.

The Directors have taken into account both divisional and Group forecasts for the 18 months from the balance sheet date to assess the future funding requirements of the Group and compared them to the level of committed available borrowing facilities, described above. The Directors have concluded that the Group will have a sufficient level of headroom in the foreseeable future and that the likelihood of breaching covenants in this period is remote, such that it is appropriate for the financial statements to be prepared on a going concern basis.

Definitions

Financial information set out in this announcement, unless otherwise stated, is presented on a management basis which aggregates the sales and trading profit of subsidiaries with the Group's share of the sales and trading profit of equity accounted investments. References to trading margins are to trading profit expressed as a percentage of sales. Management profit or loss before tax is management trading profit less net subsidiary interest payable and receivable and the Group's share of net interest payable and receivable and taxation of equity accounted investments. These figures better reflect performance of continuing businesses.

Where appropriate, reference is made to organic results which exclude the impact of acquisitions/divestments as well as currency translation on the results of overseas operations.

Operating cash flow is cash generated from operations adjusted for capital expenditure, government capital grants, proceeds from disposal of fixed assets and government refundable advances. Free cash flow is operating cash flow including interest, tax, equity accounted investment dividends and amounts paid to non-controlling interests, but excluding dividends paid to GKN shareholders.

Return on average invested capital (ROIC) is management trading profit as a percentage of average total net assets of continuing subsidiaries and equity accounted investments excluding current and deferred tax, net debt, post-employment obligations and derivative financial instruments.

APPENDICES

Other reserves include accumulated reserves where distribution has been restricted due to legal or fiscal requirements and accumulated adjustments in respect of piecemeal acquisitions.