GKN Annual Results for the year ended 31 Dec 2013

NEWS RELEASE 25 February 2014

GKN plc Results Announcement for the year ended 31 December 2013

*2012 figures restated for the impact of IAS 19 revised. Within Management figures, this had the impact of increasing corporate costs by £4 million. Further details can be found in note 2 on page 3.

Group Highlights(1)

· Group results reflect the continued strong organic growth in Automotive businesses, the contribution from GKN Aerospace Engine Systems (previously Volvo Aero) and the weaker performance of GKN Land Systems

· Sales increased 10%, up 3% on an organic basis

· Operating profit up 20%, up 4% organically, and trading margin improved 70bps to 8.7%

· Profit before tax up 17%

· Reported profit before tax of £484 million (2012: £568 million), lower primarily due to a smaller gain on the mark to market of foreign exchange hedging contracts than the prior year

· Earnings per share up 9% to 28.7p (2012: 26.3p) and total dividend increased 10% to 7.9 pence per share (2012: 7.2 pence per share)

· Return on average invested capital of 17.3% (2012: 18.0%, excluding GKN Aerospace Engine Systems)

· Free cash flow of £346 million, up 54% (2012: £225 million, excluding one-time acquisition related payments)

· Net debt of £732 million, £139 million lower than last year

"We have again made good progress in-line with our strategy to grow a market-leading global engineering business. Although some of our end markets were challenging, we continued to show growth and are reporting good underlying financial results, helped by our 2012 acquisition of GKN Aerospace Engine Systems, which performed strongly. We expect the Group's progress to continue in 2014."

Nigel Stein

Chief Executive, GKN plc

Divisional Highlights

(1) Included £22 million restructuring and acquisition related charges in respect of GKN Aerospace Engine Systems.

(2) Restated for the impact of IAS 19 revised.

The Group figures include Other Businesses (Emitec, Cylinder Liners and Evo Electric).

GKN Aerospace

· GKN Aerospace Engine Systems, in first full year of ownership, achieved margin, return on average invested capital (ROIC) and cash flow ahead of expectations, despite sales being slightly lower than forecast

· Continuing growth in commercial aerospace offsets decline in military and aftermarket

· New work packages awarded exceed $1billion

GKN Driveline

· Continued growth ahead of global auto production

· Trading margin improved, before restructuring charges

· Expansion continued in Mexico and our joint venture in China was broadened to include all-wheel drive (AWD) products

GKN Powder Metallurgy

· Growth ahead of global auto production and trading margin increased to 10.1%

· Continued strong product development and new business awarded

GKN Land Systems

· Organic sales down 6% due to challenging end markets and chassis contracts ending

· Operational discipline maintained, trading margin of 8.3%, including restructuring charges

Outlook

In aerospace, commercial aircraft production should continue to grow whereas military demand is forecast to decline. GKN Aerospace's 2014 sales are expected to be slightly higher than the prior year, due to our presence on new commercial programmes and despite lower military sales and the full year impact of the previously announced transfer of a supply chain contract back to Airbus.

In automotive, external forecasts suggest that global light vehicle production should grow around 3% with increases in China, North America and Europe but Japan decreasing. Against this background, GKN Driveline and GKN Powder Metallurgy are expected to continue to grow above the market.

European industrial and construction markets are forecast to show a slight improvement while agricultural equipment markets in Europe and North America are expected to soften. The performance of GKN Land Systems is expected to be broadly flat for 2014, before adjusting for the ending of two chassis contracts.

Overall, 2014 is expected to be another year of continued progress. Whilst adverse currency could provide a significant translational headwind, this should be outweighed by the benefits of the Group's diverse exposure to global markets, strong customer positions and healthy order books.

Notes

(1) Financial information set out in this announcement, unless otherwise stated, is presented on a management basis as defined on page 15.

(2) 2012 figures restated for the impact of IAS 19 revised. This had the impact of increasing corporate costs by £4 million and thus reducing management profit by the same amount. Further details can be found in note 1 of the financial statements on page 22.

Cautionary Statement

This announcement contains forward looking statements which are made in good faith based on the information available to 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)207 269 7113

M: +44 (0)7775 641807

There will be an analyst and investor meeting today at 09.30am at UBS, Ground Floor Presentation Suite, 1 Finsbury Avenue, London EC2M 2PP.

A live audiocast of the presentation will be available at http://www.gkn.com/investorrelations/Pages/Webcasts.aspx.

Slides will be put onto the GKN website approximately 45 minutes before the presentation is due to begin, and will be available to download from the GKN website at: http://www.gkn.com/investorrelations/Pages/results-and-presentations.aspx?year=2013.

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: 73780067#

A replay of the conference call will be available until 28 March 2014 on:

Standard International Number: +44 (0) 1452 550 000

Replay Access Number: 73780067#

This announcement together with the attached financial information thereto may be downloaded from: www.gkn.com/media/Pages/default.aspx.

NEWS RELEASE

GKN plc Results Announcement for the year ended 31 December 2013

Group Overview

Markets

The Group operates in the global aerospace, automotive and land systems 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. GKN Land Systems sells to producers of agricultural, industrial, construction and mining equipment and to the automotive and commercial vehicle sectors.

These results reflect a strong performance in GKN Driveline and GKN Powder Metallurgy, relative to their respective markets, the benefit of the successful integration of GKN Aerospace Engine Systems and the weaker performance of GKN Land Systems.

Results

*2012 management figures restated for the impact of IAS 19 revised which increased corporate costs by £4 million and ROIC excludes GKN Aerospace Engine Systems.

Management sales increased 10% in the year ended 31 December 2013 helped by the £5 million positive effect of currency translation and a £469 million net benefit from acquisitions and disposals. Excluding these items, the organic increase was £216 million (3%). Within this organic figure, Aerospace was £12 million lower, Driveline was £217 million higher, Powder Metallurgy increased by £52 million, Land Systems was £57 million lower while Other Businesses were £16 million higher.

Management trading profit increased £108 million to £661 million. After adjusting for the positive currency translational impact of £4 million and the net effect of acquisitions and disposals of £79 million, the organic increase was £25 million (4%). This included the £25 million of restructuring charges reported at the half year. Within the organic total, Aerospace increased £15 million, Driveline was £12 million higher, Powder Metallurgy increased £6 million, Land Systems reduced £15 million, Other Businesses were £9 million higher and Corporate Costs were £2 million higher.

The contribution from GKN Aerospace Engine Systems for the whole of 2013 (its first full year of GKN ownership) was sales of £656 million and a trading profit of £92 million (including a £4 million restructuring provision release), a trading margin of 14.0% (13.4%, excluding provision release).

Group trading margin increased to 8.7% (2012: 8.0%). ROIC was 17.3% (2012: 18.0%, excluding GKN Aerospace Engine Systems).

Divisional Performance

GKN Aerospace

GKN Aerospace is a global tier one supplier of airframe and engine structures, components, assemblies, transparencies, ice protection systems and fuel and flotation systems for a wide range of aircraft and engine prime contractors and other tier one suppliers. It operates in three main product areas: aerostructures, engine components and sub-systems and special products.

The overall aerospace market remained positive in 2013 driven by a growing commercial aircraft market partly offset by a declining military market. The division has increased its share of sales to commercial aerospace to 73%, with military representing 27%.

Commercial aircraft production continues to grow strongly with Airbus and Boeing delivering a combined record 1,274 aircraft in 2013 and projecting the procurement of new single aisle and wide-bodied aircraft at between 29,000 and 35,000 by 2032. Both Airbus and Boeing continue to benefit from increasing deliveries and a record order backlog, and both have announced plans to increase production levels for single aisle aircraft in the future.

Military spending remains under pressure, largely driven by cutbacks throughout the USA and Europe, with the ramp-up of new programmes being delayed and overseas military operations reduced.

The key financial results for the year are as follows:

 (1)Included £22 million restructuring and acquisition related charges for GKN Aerospace Engine Systems

(2)Excluded GKN Aerospace Engine Systems

GKN Aerospace sales increased £468 million with the incremental period of ownership of GKN Aerospace Engine Systems, which was acquired on 1 October 2012, adding £472 million of sales. The positive currency translation impact was £8 million and organic sales were £12 million lower.

The organic decline reflects 10% lower production rates on military programmes (such as C-130J, F-22 spares, Blackhawk and C-17) and 4% higher commercial sales (particularly for the Boeing 787 and Airbus A320, A330 and A380). The growth in commercial sales was restricted by the £65 million reduction in the Airbus supply chain contract that ended in May 2013, as previously announced. There will be a corresponding £35 million loss of sales in 2014.

The full year sales of GKN Aerospace Engine Systems was £656 million, slightly lower than originally expected due to softer spares demand. Spares sales rebounded strongly in the fourth quarter due to catch-up purchases, albeit not quite to the level experienced in 2012.

Trading profit of GKN Aerospace in 2013 increased by £96 million. The impact of currency translation was £1 million positive and the incremental contribution from acquisitions was £58 million. The organic increase in trading profit of £37 million benefited from a strong performance from GKN Aerospace Engine Systems and the absence of £22 million integration and restructuring charges that impacted 2012. The core GKN Aerospace business experienced lower military sales on mature programmes and lost profit on the Airbus supply chain contract. These were partly offset by operational improvements and a £5 million profit on the sale of rights to use background intellectual property in relation to Composite Technology and Applications Limited (CTAL), with the prospect of further payments to be received depending on performance. GKN Aerospace's share of CTAL's trading losses during the year was £3 million and the start-up operating losses at the new A350 facility were £11 million, both unchanged from 2012.

GKN Aerospace Engine Systems, in its first full year under GKN's ownership, generated a trading profit of £92 million (including release of a £4 million underspent severance accrual), and trading margin of 14.0% (13.4%, excluding this release), fully meeting our expectations for synergies and operational improvements. The trading margin of GKN Aerospace overall was 11.9%, or 11.7% excluding the release (2012: 9.6%, including £22 million restructuring and acquisition related charges for GKN Aerospace Engine Systems).

Capital expenditure on tangible assets in 2013 amounted to £58 million (2012: £42 million) which represents 1.0 times depreciation (2012: 1.0 times). Expenditure on intangible assets, mainly initial non-recurring programme costs, was £62 million (2012: £50 million). £22 million of the capital expenditure and non-recurring programme costs relate to the A350 wing assembly and trailing edge programme. A total of £175 million had been invested on this programme by 31 December 2013, excluding £16 million of capitalised borrowing costs.

Return on average invested capital was 17.8% (2012: 23.0%, excluding GKN Aerospace Engine Systems).

During the year a number of important new contracts worth more than $1 billion and other milestones were achieved, including:

· A new contract for the manufacture of the Boeing 737MAX winglet;

· Delivery of the first set of production aircraft winglets for the new Bombardier CSeries aircraft;

· Signing a long term agreement with Snecma (Safran) to manufacture low pressure turbine (LPT) cases for their new Silvercrest® large/long range business jet engine;

· Establishing a new facility in Phoenix, USA to carry out integration activity for Honeywell's HTF7000 series of business jet engines; and

· Commissioning of a new advanced engineering facility in Bangalore, India.

In December 2013, GKN Aerospace sold its 49% interest in the CTAL joint venture to Rolls-Royce for £3 million, enabling Rolls-Royce to progress the activities of CTAL in full alignment with its business plans. GKN Aerospace also sold the rights to use certain intellectual property for £5 million.

Earlier in the year, discussions about a potential joint venture with Commercial Aircraft Corporation of China (COMAC) ended due to commercial differences although work continues to secure other opportunities in that market.

Automotive market

The major automotive markets of China, North America and Brazil experienced increased production relative to 2012, while Europe was flat and Japan and India declined. Overall, global production volumes increased 4% to 84.8 million vehicles (2012: 81.5 million).

Source: IHS Automotive; (1) Growth is derived from unrounded production figures

Production in Europe was up only modestly due to weak economies, particularly in Southern Europe, and slowing demand in Russia. Production of smaller vehicles was low while premium vehicles remained robust due to export demand in North America and China helping to offset weaker demand in Europe.

Production in North America continued its recovery, benefiting from improved consumer confidence and the release of pent-up demand.

Production in China was stronger than expected, increasing 15%. In contrast, Japanese production fell 4% as a result of local demand no longer being supported by government incentives and an off-shoring of production, while production in India also fell 4% due to the economic slowdown in that country.

External forecasts anticipate global production in 2014 will increase by 3% to 87.3 million vehicles. The major markets where production is expected to grow fastest include China (9%), India (5%) and North America (4%). Production in Europe is forecast to continue its long slow recovery with an increase of 1% while production in Brazil and Japan is expected to contract by 1% and 7%, respectively.

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 the smallest low-cost car to the most sophisticated premium vehicle demanding complex driving dynamics.

The key financial results for the year are as follows:

GKN Driveline's sales increased £180 million (6%). The adverse effect of currency translation was £35 million and the impact from disposals was £2 million, being the proportionate loss of sales from a wholly owned business in China which was transferred into our Shanghai GKN HUAYA Driveline Systems Co Limited (SDS) joint venture in that country. Organic sales increased by £217 million (7%) compared with global vehicle production which was up 4%. Constant Velocity Jointed (CVJ) Systems accounted for 63% of sales and non-CVJ sales were 37%. 

GKN Driveline's market outperformance was broad based across most markets including North America, China, Europe and Japan reflecting recent market share gains, a stronger position in premium vehicles, demand for which continued to be good, and GKN Driveline's broadening product mix, particularly with all-wheel drive (AWD) systems.

Trading profit increased £11 million. The impact of currency translation was £1 million adverse. The organic improvement in trading profit was £12 million, after incurring £16 million of restructuring charges in Europe and Japan and absorbing operational inefficiencies in Brazil and Thailand. Driveline's trading margin was 7.2% (2012: 7.3%), or 7.7% excluding restructuring charges.

Capital expenditure on tangible fixed assets was £142 million (2012: £159 million), 1.2 times (2012: 1.3 times) depreciation. Return on average invested capital was 17.0% (2012: 16.0%).

During the year, a number of important milestones and new business wins were secured by GKN Driveline, including:

· Celebrating its 25 year anniversary in China by extending its joint venture agreement to include the full driveline product range and opening an extension to the Wuhan forge;

· Significant customer wins in AWD systems, notably the final drive unit (FDU) for the BMW X series in the US;

· Continued strong wins for CVJ products and systems;

· Further expansion of manufacturing facilities in Mexico and in Poland; and

· Contract to supply a "disconnect" AWD system for the 2014 Range Rover Evoque.

GKN Powder Metallurgy

GKN Powder Metallurgy is the world's largest manufacturer of sintered components. GKN Powder Metallurgy comprises GKN Sinter Metals and Hoeganaes. Hoeganaes produces the metal powder that GKN Sinter Metals and other customers use to manufacture precision automotive components for engines, transmissions and body and chassis applications. GKN Sinter Metals also produces a range of components for industrial and consumer applications.

The key financial results for the year are as follows:

GKN Powder Metallurgy sales increased £58 million (7%). The positive impact of currency translation was £6 million. Organicsales increased by £52 million (6%), despite a fall in material surcharges, with strong growth in North America, Europe and China but with a more modest improvement in India, where vehicle markets remained volatile. Sales in Brazil fell due to weaker industrial markets.

Trading profit increased £7 million. The positive impact of currency translation was £1 million and the organic increase in profit was £6 million, after including a £5 million restructuring charge. The divisional trading margin was 10.1% (2012: 10.0%), or 10.6% excluding restructuring charges.

Capital expenditure on tangible fixed assets was £51 million (2012: £47 million). The ratio of capital expenditure to depreciation was 1.5 times (2012: 1.5 times). Return on average invested capital was 21.1% (2012: 19.8%), reflecting the improvement in profitability.

During the year GKN Powder Metallurgy continued its strong product development, particularly with advanced products and powders, and was awarded £144 million of annualised sales in new business. Notable milestones included:

· Opening a new sintering plant in Yizheng China;

· Receiving the Award of Distinction for its rear camshaft cap component used on Chrysler four-cylinder engines in the Dodge Dart;

· Good progress in developing transmission gears which were validated by a major European transmission manufacturer; and

· New products to aid fuel-efficiency, such as: helical pulley gear for electric power steering system for ZF Group; pump components for a global double clutch transmission (DCT) programme for Getrag; high strength gear ring component for "Start Stop" systems for Valeo; and components for a number of variable valve timing (VVT) systems.

GKN Land Systems

GKN Land Systems is a global leading supplier of technology differentiated power management components and services. It designs, manufactures and supplies products and services for the agricultural, construction, mining, and industrial machinery markets. In addition, it provides global aftermarket distribution and through-life support.

Sales in GKN Land Systems were lower than the prior year due to weaker construction, mining, European aftermarket and industrial markets while the agricultural equipment market remained relatively stable. Automotive structures activity declined due to expected programme cessations representing around £45 million of annualised sales, which required some restructuring activity.

The key financial results for the year are as follows:

GKN Land Systems sales in the year fell £34 million (4%). The positive impact of currency translation was £24 million, the establishment of a new wheels venture in China had sales of £3 million and the disposal of an aftermarket branch in the fourth quarter of 2012 reduced sales by £4 million. The organic decrease in sales was £57 million, a fall of 6%, including around £25 million due to the cessation of two chassis contracts. The ending of these contracts will further reduce sales by £20 million in 2014.

Trading profit was £13 million lower, including £3 million of restructuring charges. The positive impact of currency translation was £3 million, acquisition and divestment activities reduced profit by £1 million and the organic decrease in trading profit was £15 million. Trading margin was 8.3% (2012: 9.4%), or 8.7% excluding restructuring charges.

Capital expenditure on tangible fixed assets was £20 million (2012: £20 million), 1.1 times (2012: 1.2 times) depreciation. Return on average invested capital was 18.3% (2012: 21.3%).

Good progress was made towards winning new business and implementing the GKN Land Systems strategy through broadening its product offering and geographic footprint. Specific areas of success included:

· A new venture established in Donghai, China to manufacture agricultural wheels;

· Reorganising marketing and customer account management to enable cross-selling of the full Land Systems power management product range and holding the first integrated customer technology days;

· Winning a contract to supply wheels to Armstrong Tyres and its subsidiary Agritech Wheels for distribution in the Australian and Pacific Islands' agricultural markets; and

· Supporting a hybrid bus project with the provision of the drive train (EVO motor, gearbox and drive shafts) and systems integration with the carbon fibre flywheel energy storage system.

Other Businesses and corporate costs

GKN's Other Businesses comprise Cylinder Liners, which is mainly a 59% owned venture in China, manufacturing engine liners for the truck market in the US, Europe and China and a 50% share in Emitec, which manufactures metallic substrates for catalytic converters in Germany, the US, China and India. The activities relating to our joint venture stake in EVO Electric, a developer of axial flux motors, are also included.

Sales in the year were £104 million (2012: £86 million), reflecting an improvement in the commercial vehicle market. GKN's Other Businesses reported a combined trading profit of £5 million (2012: trading loss of £4 million), after £1 million of restructuring charges.

Corporate costs, which comprise the costs of stewardship of the Group and operating charges and credits associated with the Group's legacy businesses, were £25 million (2012: £23 million).

Other Financial Information

Items excluded from management trading profit

In order to achieve consistency and comparability between reporting periods the following items are excluded from management measures as they do not reflect trading activity:

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 profit of £26 million (2012: profit of £126 million).

When the business wins long term customer contracts that are in a foreign currency, the Group offsets the potential volatility of the cash flows from these transactions by hedging through forward foreign 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 2013, the net fair value of such instruments was an asset of £52 million (2012: net asset of £33 million) and the change in fair value during the year was £19 million credit (2012: £117 million credit).

There was also a £4 million charge arising from the change in the fair value of embedded derivatives in the year (2012: £1 million charge) and a net gain of £11 million attributable to the currency impact on Group funding balances (2012: £9 million net gain).

Amortisation of non-operating intangible assets arising on business combinations

The charge for the amortisation of non-operating intangible assets arising on business combinations (for example, customer contracts, order backlog, technology and intellectual property rights) was £75 million (2012: £37 million). The increase reflects the full year impact of the acquisition of GKN Aerospace Engine Systems in 2012.

Gains and losses on changes in Group structure

The net gain on changes in Group structure was £12 million (2012: £5 million).

During the year the Group sold its controlling interest in GKN Driveline Torque Technology (Shanghai) Co. Ltd (TSH) to Shanghai GKN HUAYA Driveline Systems Co Limited (SDS), a joint venture company. The consideration received represented an increased equity interest in SDS of £15 million with a £9 million profit realised.

The Group also sold to Rolls-Royce its 49% share of CTAL for a cash consideration of £3 million, resulting in a profit on sale of £3 million.

2012 items

In 2012 there were pension scheme curtailment gains of £63 million. In addition, there was a loss on reversal of inventory fair value adjustments relating to GKN Aerospace Engine Systems of £37 million.

Post-tax earnings of joint ventures

In management figures, the sales and trading profits of joint ventures 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 were £54 million (2012: £41 million), with trading profit of £64 million (2012: £49 million). The Group's share of the tax and interest charge amounted to £10 million (2012: £8 million). Underlying trading profit increased £14 million, reflecting a strong trading performance by our joint venture companies, primarily in China.

Net financing costs

Net financing costs totalled £128 million (2012: £94 million, restated for the impact of IAS 19 (revised)) and comprise the net interest payable of £73 million (2012: £52 million), the non-cash charge on post-employment benefits of £45 million (2012: £36 million, restated for the impact of IAS 19 (revised)) and unwind of discounts of £10 million (2012: £6 million). The non-cash charge on post-employment benefits of £45 million and unwind of discounts of £10 million are not included in management figures. Details of the assumptions used in calculating post-employment costs and income are provided in note 13.

Interest payable was £76 million (2012: £60 million), whilst interest receivable was £3 million (2012: £8 million) resulting in net interest payable of £73 million (2012: £52 million), higher than the prior year due to acquisition related funding.

There was no capitalised interest cost (2012: £5 million, attributable to the Group's A350 investment) and interest charged on Government refundable advances was £6 million (2012: £5 million).

Profit before tax

The management profit before tax was £578 million (2012: £493 million, restated for the impact of IAS 19 (revised)). The profit before tax on a statutory basis was £484 million (2012: £568 million, restated for the impact of IAS 19 (revised)). The differences between management and statutory figures are provided in note 3 to the financial statements.

Taxation

The book tax rate on management profits of subsidiaries was 20% (2012: 16%), arising as a £105 million tax charge (2012: £73 million charge, restated for the impact of IAS 19 (revised)) on management profits of subsidiaries of £524 million (2012: £452 million, restated for the impact of IAS 19 (revised)).

The Group's theoretical weighted average tax rate, which assumes that book profits/losses are taxed at the statutory tax rates in the countries in which they arise, is 34% (2012: 32%). The book tax rate was significantly lower, largely because of the recognition of deferred tax assets (mainly in Canada, Spain and the US) due to increased confidence in the Group's ability both to access and realise future taxable profits that absorb brought forward tax deductions.

The cash tax rate was 10% (2012: 12%), primarily due to the utilisation of prior years' tax losses. Both the book tax and the cash tax rates are expected to increase in future years.

The tax rate on statutory profits of subsidiaries was 18% (2012: 15%) arising as a £77 million tax charge (2012: £80 million charge, restated for the impact of IAS 19 (revised)) on statutory profits of subsidiaries of £432 million (2012: 530 million, restated for the impact of IAS 19 (revised)).

Non-controlling interests

The profit attributable to non-controlling interests was £12 million (2012: £23 million) including £8 million (2012: £20 million) from the pension partnership before changes were made to the arrangement, see note 13 to the financial statements for further details.

Earnings per share

Management earnings per share was 28.7 pence (2012: 26.3 pence, restated for the impact of IAS 19 (revised)). Average shares outstanding in 2013 were 1,634.7 million (2012: 1,587.8 million) the increase reflecting the full year impact of the incremental shares issued in 2012 in relation with the acquisition of GKN Aerospace Engine Systems.

On a statutory basis earnings per share was 24.2 pence (2012: 29.3 pence, restated for the impact of IAS 19 (revised)), lower primarily due to a smaller gain on the mark to market of foreign exchange hedging contracts than the prior year.

Dividend

In view of the continued improvement in trading performance and taking into account the Group's future prospects, the Board has decided to recommend a final dividend of 5.3 pence per share (2012: 4.8 pence per share). The total dividend for the year will, therefore, be 7.9 pence per share (2012: 7.2 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 21 May 2014 to shareholders on the register at 11 April 2014. 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 29 April 2014.

Cash flow

Operating cash flow, which is defined as cash generated from operations of £782 million (2012: £538 million) adjusted for capital expenditure (net of proceeds from capital grants) of £349 million (2012: £334 million) and proceeds from the disposal/realisation of fixed assets of £4 million (2012: £6 million), was an inflow of £437 million (2012: £210 million).

Within operating cash flow there was an outflow of working capital and provisions of £47 million (2012: £104 million outflow). Average working capital as a percentage of sales was 7.9% (2012: 8.5%, excluding GKN Aerospace Engine Systems).

Capital expenditure (net of proceeds from capital grants) on both tangible and intangible assets totalled £349 million (2012: £334 million), including £22 million (2012: £25 million) on the A350 programme. Of this, £273 million (2012: £271 million) was on tangible fixed assets and was 1.2 times (2012: 1.2 times) the depreciation charge. Expenditure on intangible assets, mainly initial non-recurring costs on Aerospace programmes, totalled £76 million (2012: £63 million).

The Group invested £149 million in the year (2012: £124 million) on research and development activities not qualifying for capitalisation, net of customer and government funding. In 2014, it is expected that capital expenditure on tangible fixed assets will increase to 1.4 times the depreciation charge, which includes an additional £60 million for one-off projects to support growth in the Automotive businesses.

Net interest paid totalled £65 million (2012: £68 million, including £9 million of costs associated with refinancing). The underlying increase is a result of the additional debt required to fund acquisitions. Tax paid in the year was £52 million (2012: £62 million).

Free cash flow

Free cash flow, which is operating cash flow including joint venture dividends and after interest, tax, amounts paid to non-controlling interests and own shares purchased but before dividends paid to GKN shareholders, was an inflow of £346 million (2012: £86 million, including £139 million of one-time post-acquisition payments related to GKN Aerospace Engine Systems). The year on year change reflects an improvement in profitability offset partially by increased capital expenditure.

Net borrowings

At the end of the year, the Group had net borrowings of £732 million (2012: £871 million).

Pensions and post-employment obligations

GKN operates a number of funded and unfunded defined benefit pension schemes across the Group, together with historic retiree medical arrangements. In 2013, the new requirements of IAS 19 have been introduced, and prior period comparative amounts have been restated on a consistent basis. The restatement principally affects the other net financing charge and the presentation of administrative expenses.

At 31 December 2013, the total deficit on post-employment obligations of the Group totalled £1,271 million (2012: £978 million), comprising the deficits on funded obligations of £763 million (2012: £446 million) and on unfunded obligations of £508 million (2012: £532 million). The total deficit represents a £293 million increase since 31 December 2012 due to the previously announced amendment to the UK pension partnership arrangement of £342 million as the partnership income interests no longer meet the criteria for recognition as plan assets (further details are provided in note 13 to the financial statements). Excluding this change, the reported deficit would have fallen, primarily due to positive asset performance and the benefit of higher discount rates.

The amount included within trading profit for the period comprises current service cost of £51 million (2012: £44 million) and administrative costs of £3 million (2012: £3 million). The increase in current service cost was driven primarily by discount rate and inflation assumptions. Interest on net defined benefit plans, which is excluded from management figures, was £45 million (2012: £36 million), and the removal of the pension partnership plan asset and related interest credit is the primary reason for this year on year increase.

Cash contributions to the various defined benefit pension schemes and retiree medical arrangements totalled £112 million, including a £17 million accelerated one-off payment made to the International Association of Machinists and Aerospace Workers (IAM) National Pension Fund. In 2012, cash contributions were £144 million, including £46 million paid to buy-out Swedish pension arrangements following the acquisition of GKN Aerospace Engine Systems.

UK pensions

The accounting deficit for UK schemes increased to £714 million (2012: £341 million), primarily as a result of the pension partnership amendment, described above. More conservative mortality assumptions also contributed to the increase.

During the year, the Group commenced a triennial valuation of each UK scheme, and has now agreed recovery plans with each of the scheme trustees to pay a combined additional cash contribution of £10 million, with the potential in 2015 for limited additional payments if asset performance is below expectations.

The UK defined benefit scheme was closed to new entrants during the year.

Net assets

Net assets of £1,795 million were £132 million lower than the December 2012 year end figure of £1,927 million. The decrease includes management profit after tax of £473 million more than offset by an amendment to the pension partnership arrangement of £342 million, dividends paid to equity shareholders of £121 million, adverse currency on translation of subsidiaries and joint ventures net of tax and the change in value of derivative and other financial instruments of £88 million.

Exchange rates

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

The approximate impact on 2013 trading profit of subsidiaries and joint ventures of a 1% movement in the average rate would be euro - £1 million, US dollar - £4 million.

Funding, liquidity and going concern

At 31 December 2013, UK committed bank facilities were £917 million. Within this amount there are committed revolving credit facilities of £837 million and an £80 million eight-year amortising facility from the European Investment Bank (EIB). The next major maturities of the revolving credit facilities are for £595 million in 2016, whilst the first of five equal, annual £16 million EIB repayments falls due in 2015. At 31 December 2013, the £80 million EIB facility was fully drawn and there were no drawings on any of the UK revolving credit facilities.

Capital market borrowings at 31 December 2013 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 2013, the Group had net borrowings of £732 million (31 December 2012: £871 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 2013, EBITDA was 11.9 times greater than net interest payable, whilst net debt was 0.8 times EBITDA.

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 (excluding certain subsidiary businesses sold and closed) with the Group's share of the sales and trading profit of joint ventures. 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 joint ventures. 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, joint venture dividends, own shares purchased 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 joint ventures excluding current and deferred tax, net debt, post-employment obligations and derivative financial instruments.

APPENDICES

* restated for the impact of IAS 19 (revised), see note 1.

* restated for the impact of IAS 19 (revised), see note 1.

* restated for the impact of IAS 19 (revised), see note 1.

* restated for the impact of changes to the acquisition balance sheet related to the purchase of Volvo Aerospace on 1 October 2012, see note 1.