GKN Annual Results - year ended 31 December 2012

NEWS RELEASE 26 February 2013

GKN plc Results Announcement for the year ended 31 December 2012

Group Highlights(1)

·; Group results reflect the continued strong organic growth and the contribution from acquisitions

·; Record profits achieved in all four divisions

·; Sales increased 13%, up 6% on an organic basis

·; Management trading (operating) profit up 19%

·; Trading margin improved to 8.1%

·; Profit before tax up 19%

·; Return on average invested capital of 18.1% (excluding Volvo Aero)

·; Earnings per share up 17%

·; Final dividend of 4.8 pence per share, giving a total for 2012 of 7.2 pence per share, a 20% increase

·; Reported profit before tax of £588 million (2011: £351 million)

·; Positive free cash flow of £213 million (2011: £147 million), excluding Volvo Aero

·; Net debt of £871 million (2011: £538 million), reflecting the acquisition of Volvo Aero.

"2012 was another strong year for GKN with record profits in all four divisions. The Group has continued to make good progress financially and in implementing our strategy to build a market-leading global business, with excellent technology, a focus on operational excellence and above-market growth.

GKN operates in global markets and has the capabilities needed to take advantage of the growth opportunities that those markets bring. With the benefit of a full year contribution from Volvo Aero, we expect 2013 to be a year of good progress for the Group."

Nigel Stein

Chief Executive, GKN plc

Divisional Highlights

(1) GKN Aerospace excludes the fourth quarter contribution from Volvo Aero.

(2) 8.4% excluding Volvo Aero

The table does not include Other Businesses (Cylinder Liners and Emitec).

GKN Driveline

·; GKN Driveline continued its expansion in Mexico and also in China, where output reached a record 12 million driveshafts in the year

·; Growth above the market with additional business wins in Constant Velocity Jointed (CVJ) Systems

·; Integration of Getrag Driveline Products completed and good progress made in all-wheel drive (AWD) new business wins, including the design and build of a complete AWD system for three customers

GKN Powder Metallurgy

·; Continued strong product development and new business awarded of £120 million of annualised sales

·; Received supplier quality excellence awards from General Motors (GM) Powertrain, placing GKN Sinter Metals within the top 2% of all GM Powertrain suppliers

·; Trading margin improved 150bps, to 10.0%.

GKN Aerospace

·; Acquisition of Volvo Aero successfully completed and integration proceeding well

·; New work packages won worth c$1.4 billion, on a number of key commercial programmes

·; A350XWB in start-up phase

GKN Land Systems

·; Integration of Stromag completed

·; Created a specialist centre for mining wheels and started the manufacture of double universal joints for tractors in Liuzhou, China

·; Trading margin improved 140bps, to 9.4%.

Outlook

GKN expects 2013 overall to be a year of good progress for the Group.

In automotive, external forecasts suggest that global light vehicle production should grow around 2% with increases in Asia and North America but Europe down.

Against this background, GKN Driveline and GKN Powder Metallurgy are expected to show further improvement in 2013 overall. However, the first half results will be impacted by lower market demand in Europe and, recognising that the market is unlikely to recover for some time, actions are being taken to reduce the fixed cost base. Restructuring charges, primarily in the first quarter, are expected to be £16 million in GKN Driveline and £5 million in GKN Powder Metallurgy.

In aerospace, commercial aircraft production is expected to continue to grow, as both Airbus and Boeing increase production, whereas US military aircraft demand is expected to decline. GKN Aerospace's commercial aircraft sales growth is broadly expected to offset lower military sales and the impact of the ending of the previously announced £100 million supply chain contract with Airbus (see page 9 for further details).

The integration of Volvo Aero is progressing well. The Group remains confident of meeting its guidance on first year sales, margin and returns.

The performance of GKN Land Systems is expected to be broadly flat for 2013 as a whole, with the first few months more challenging due to weaker European industrial and passenger vehicle markets. European and North American agricultural equipment markets are expected to remain robust.

Overall, the Group's broad exposure to global markets, strong customer positions and healthy order books mean that GKN should make good progress in 2013, benefiting from the full year contribution from Volvo Aero.

Notes

(1) Financial information set out in this announcement, unless otherwise stated, is presented on a management basis as defined on page 17.

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 30 minutes before the presentation is due to begin http://www.gkn.com/investorrelations/GKNResults/full-year-results-2012-presentation.pdf

Questions will only be taken at the event.

A live dial in facility will be available by telephoning:

Standard International Dial In: +44 (0) 1452 555 566, Conf ID: 95082636#

A replay of the conference call will be available until 25 March 2013 on:

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

Replay Access Number: 95082636#

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 2012

Group Overview

Markets

The Group operates as a tier one supplier to the global automotive, aerospace and land systems markets. In the automotive market, GKN Driveline sells to manufacturers of passenger cars and light vehicles. Around 75% of GKN Powder Metallurgy sales are also to the automotive market, with the balance to other industrial customers. GKN Aerospace sells to manufacturers of commercial and military aircraft, aircraft engines and equipment. GKN Land Systems sells to producers of agricultural, construction, mining and industrial equipment and to the automotive and commercial vehicle sectors.

These results reflect a good performance in each division and the benefit of the successful integration of the 2011 and 2012 acquisitions.

Results

Management sales increased 13% in the year ended 31 December 2012 to £6,904 million (2011: £6,112 million). The effect of currency translation was £133 million adverse and there was a £602 million benefit from acquisitions which was partly offset by the £22 million reduction due to disposals. Excluding these items, the organic increase was £345 million (6%). Within this figure, Driveline was £187 million higher, Powder Metallurgy increased by £57 million, Aerospace was £111 million higher, Land Systems was up £6 million while Other Businesses were £16 million lower.

Management trading profit increased £89 million to £557 million (2011: £468 million). After adjusting for the adverse currency translational impact of £12 million, the £19 million 2011 impact from the Gallatin incident and the profit from acquisitions of £23 million, the organic increase was £54 million (12%). Within this figure, Driveline was £23 million higher, Powder Metallurgy increased by £18 million, Aerospace (excluding Volvo Aero) was £10 million higher, Land Systems increased £10 million and Other Businesses was £7 million lower. The initial contribution from Volvo Aero was an underlying trading profit of £15 million, which, after incurring £22 million of acquisition and restructuring related charges, became a trading loss of £7 million.

Group trading margin increased to 8.1% (2011: 7.7%). Return on average invested capital (ROIC), was 18.1%, excluding Volvo Aero (2011: 18.3%; or 16.2% including the pro forma impact of acquisitions).

Divisional Performance

As shown in the table below, the major automotive markets of Japan, North America, China and India experienced increased production relative to 2011, while Brazil was flat and Europe declined. Overall, global production volumes increased 6.1% in 2012 to 81.5 million vehicles (2011: 76.8 million).

Source: IHS Automotive

Demand for premium vehicles continued to grow with production in Europe benefitting from continued strength in export demand, while in North America the recovery continued. Japanese production rebounded from the impact of the 2011 earthquake and sales were supported by government incentives. Demand for smaller vehicles in Europe continued to decline, particularly in the weaker economies of Southern Europe.

External forecasts indicate that global production in 2013 will increase by approximately 1.6% to 82.8 million vehicles. The major markets where production is expected to grow fastest include China (9%), India (8%), Brazil (3%) and North America (3%). Production in Europe is expected to contract by 3% and to decline by 12% in Japan.

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

The key financial results for the year are as follows:

* Getrag Driveline Products was acquired on 30 September 2011 and trading profit in 2011 included acquisition related charges of £3 million.

GKN Driveline's sales increased 16% to £3,236 million (2011: £2,795 million). The adverse impact of currency translation was £78 million. The additional period of ownership of Getrag Driveline Products, which was acquired on 30 September 2011, added £339 million of sales which was partly offset by £7 million lower sales resulting from the sale of GKN Driveline's 49% share of the Japanese driveshaft sales and distribution joint venture GKN JTEKT Ltd (GTK), in March 2011. Organic sales increased by £187 million (7%), including Constant Velocity Jointed (CVJ) Systems which grew 6% and non-CVJ sales which increased by 8%, compared with global vehicle production which was up 6%.

The Division's sales are across diverse geographies and platforms. Its market outperformance was broad based across North America, Europe and China 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. In Japan, GKN Driveline was affected less than the market generally by the earthquake in 2011 and therefore did not benefit from the significant bounce back in production volumes in 2012. Furthermore, many of GKN Driveline's sales in Japan are AWD products for cars that are exported, including many to China where a political dispute affected sales of Japanese cars in that country.

Trading profit increased to £235 million (2011: £195 million). The impact of currency translation was £7 million adverse while the additional period of ownership of Getrag Driveline Products contributed £21 million. The organic increase in trading profit was £26 million (14%), held back by slower demand in Japan and Europe, operating inefficiencies in India, increased engineering costs to support new programmes and helped by the absence of £3 million of one-off Getrag Driveline Products acquisition charges that reduced profits in 2011. Driveline's trading margin was 7.3% (2011: 7.0%).

Capital expenditure on tangible fixed assets was £159 million (2011: £113 million), 1.3 times (2011: 1.0 times) depreciation. Return on average invested capital was 16.0% (2011: 17.0%; or 14.7% including the pro forma impact of Getrag Driveline Products).

During the year, new business wins continued across GKN Driveline's product groups, including the CVJ Systems business, significant customer wins in AWD systems, strong gains in electronic differential lockers (which is part of TransAxle Solutions) and eAxle wins for hybrid vehicles (which is part of eDrive).

GKN Driveline's expansion plans also continued with the addition of its third precision forge in Celaya, Mexico with an annual capacity of more than 15 million forgings, the expansion of two of its plant in China and the opening of a new plant in Pune, India. A new innovative manufacturing flow line was also opened at Trier, Germany which automates the production of precision forgings. This process increases safety and efficiency and reduces inventory and energy consumption.

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 were £874 million (2011: £845 million), an increase of 3%. The negative impact of currency translation was £28 million. Organic sales increased by £57 million (7%). Hoeganaes increased the number of tons of powder shipped by 9% driven by strong automotive markets in North America. Organic sales for GKN Sinter Metals increased 10% in North America, due to strong automotive production, and 1% in Europe, where automotive production fell 5%. Strong growth was achieved in China and modest growth achieved in India and Brazil where vehicle markets were more volatile.

Overall, GKN Powder Metallurgy reported a trading profit of £87 million (2011: £72 million). The divisional trading margin was 10.0% (2011: 8.5%).

Capital expenditure on tangible fixed assets was £47 million (2011: £44 million). The ratio of capital expenditure to depreciation was 1.5 times (2011: 1.4 times). Return on average invested capital was 19.8% (2011: 16.7%), reflecting the improvement in profitability.

During the year GKN Powder Metallurgy continued its strong product development and was awarded £120 million of annualised sales in new business. Its technology and quality was also recognised externally, receiving Design Excellence Awards for its variable valve timing rotor adapter assembly and a unitised one-way clutch module. In addition, four supplier quality excellence awards from General Motors (GM) Powertrain were received, placing GKN Sinter Metals within the top 2% of all GM Powertrain suppliers and in Europe it was awarded "Supplier of the year 2012" by INA Schaeffler. Work began on a new manufacturing facility in Yizheng, China as GKN Powder Metallurgy continues to build its global footprint.

GKN Aerospace

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

The overall aerospace market remained positive in 2012 driven by a growing commercial aircraft market partly offset by a more subdued military market. The division has increased its sales for commercial air transport to 64%, with military representing 36%.

In the commercial aerospace market, preliminary data indicate that passenger air traffic rose around 5% in 2012 and is projected to continue to grow at a similar pace throughout 2013. Longer term worldwide passenger market demand is projected to grow at around 5% with worldwide cargo traffic market growth at around 6%.

Commercial aircraft production is expected to grow strongly with Airbus and Boeing continuing to project the procurement of new single aisle and wide-bodied aircraft at between 28,000 and 34,000 by 2030. Both companies continue to benefit from increasing deliveries and record order backlog. This sustained order growth led both Airbus and Boeing to increase production levels for single aisle and wide-bodied aircraft. The business jet market is also showing some signs of recovery.

World-wide military spending remains under pressure, largely driven by cutbacks throughout Europe and likely reductions in the U.S. Defense Budget. GKN's position on key multi-year programmes such as the UH-60 Blackhawk helicopter, F/A-18 Super Hornet, F-15 Eagle and C-130J Super Hercules provide a stable production base despite potential budget pressure and delay in the F-35 programme ramp-up.

The key financial results for the year are as follows:

* Volvo Aero trading profit includes restructuring and acquisition related charges of £22 million

GKN Aerospace sales of £1,775 million were £294 million higher than the prior year (2011: £1,481 million). The impact from currency on translation of sales was £7 million positive. The first time contribution of Volvo Aero acquired on 1 October 2012 was £191 million and sales from disposals was £15 million negative, representing sales from the Engineering Services division, which was sold in November 2011. The organic increase in sales of £111 million represented an 8% increase. This level of increase reflects 2% lower production rates on military programmes, such as the C-17, F-15 and F-18, being more than offset by 15% higher commercial sales, particularly for the Airbus A320, A330 and the Boeing 787.

As previously reported with the 2012 half year results, as part of the finalisation of commercial contracts relating to the Filton acquisition, it has been agreed that GKN Aerospace would cease managing a supply chain contract on behalf of Airbus from the end of 2012, which has an annual sales value of around £100 million. However, its trading profit will only reduce slightly and its trading margin will improve, due to the lower margin earned on this pass-through business.

Trading profit in 2012 increased by £4 million to £170 million (2011: £166 million). The impact from currency on translation of results was £1 million positive and the lower than anticipated volumes through the new A350 facility reduced profit by around £11 million. Volvo Aero generated a trading profit of £15 million before incurring £22 million of one-off restructuring and transaction costs. The inventory fair-value adjustment and pension scheme curtailment credit in relation to Volvo Aero are taken outside of management figures and details can be found on page 11 and page 15, respectively. The trading margin was unchanged at 11.2%, excluding Volvo Aero.

Capital expenditure on tangible assets in 2012 amounted to £42 million (2011: £59 million) which represents 1.0 times depreciation (2011: 1.7 times). Expenditure on intangible assets, mainly initial non-recurring programme costs, was £50 million (2011: £35 million). £21 million of the capital expenditure and non-recurring programme costs, including £3 million of capitalised borrowing costs, relate to the A350 wing assembly and trailing edge programme. A total of £153 million had been invested on this programme by 31 December 2012, excluding £16 million of capitalised borrowing costs. Spending is likely to reduce to around £25 million in 2013.

Customer advances in the GKN Aerospace businesses, which are shown in trade and other payables in the balance sheet, amounted to £66 million (2011: £63 million). Return on average invested capital was 23.0% (2011: 22.7%), excluding Volvo Aero.

During the year a number of important new contracts worth around $1.4 billion and other milestones were achieved, including:

·; Establishing a new composite aerostructures manufacturing facility in Mexico to manufacture composite airframe structures, initially for the Sikorsky UH-60 Blackhawk helicopter;

·; Winning new contracts to provide key metal and composite structures and fuel systems for the new 525 Relentless Bell helicopter;

·; A new contract for the design, development and production of transparencies (cockpit and passenger cabin windows), winglets and ailerons for the Bombardier Global 7000 and Global 8000 business jets;

·; Further work packages for the Boeing 787 relating to floor sections, wing ribs and seat tracks;

·; A multi-year contract extension for the UH-60 Blackhawk helicopter.

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 ahead of the prior year although its markets were very mixed. The agricultural equipment market continued to enjoy good growth whereas construction, mining, industrial and automotive markets became more challenging as the year progressed, particularly in Europe. Industrial markets were particularly volatile in certain segments, including wind, with weakness particularly acute in certain regions, such as Europe. Automotive structures activity declined slightly due to some planned programme cessations with further reductions anticipated in 2013.

The key financial results for the year are as follows:

* Stromag was acquired on 5 September 2011 and trading profit in 2011 included acquisition related charges of £5 million.

Against this background, sales in the period were £933 million, 5% higher than the prior year (2011: £885 million). The negative impact of currency translation was £30 million. Excluding the £72 million of sales attributable to the additional period of ownership of Stromag, which was acquired on 5 September 2011, the organic increase in sales was £6 million (1%).

GKN Land Systems reported a 31% increase in trading profit to £88 million (2011: £67 million). Organic trading profit increased within GKN Land Systems, principally driven by pricing actions and productivity improvements. The additional period of ownership of Stromag contributed £9 million. The trading margin was 9.4% compared with 7.6% in 2011, reflecting the strong increase in profitability of the division and the absence of £5 million of one-off Stromag acquisition charges that reduced profits in 2011.

Capital expenditure on tangible fixed assets was £20 million (2011: £18 million), 1.2 times (2011: 1.3 times) depreciation. Return on average invested capital was 21.3% (2011: 29.5%; or 17.9% including the pro forma impact of Stromag).

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

·; Creating a specialist centre for mining wheels and starting the manufacture of double universal joints for tractors in Liuzhou, China, and signing a five year distribution agreement for mining wheels with Rimtec Pty Ltd in the Asia Pacific region;

·; Developing the industry's first double clutch technology for industrial gearboxes;

·; Creating a prototype overload clutch for Atlas Copco/Carraro in a mining application;

·; Design and manufacture of the drivetrain for a combine header for a Claas harvester.

Other Businesses

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.

Sales in the year were £86 million (2011: £106 million), reflecting the slowing sales in the commercial vehicle market. GKN's Other Businesses reported a trading loss of £4 million (2011: trading profit of £3 million).

Impact on prior year comparatives

In 2011, there was a net £19 million cost due to the temporary closure of the Hoeganaes Gallatin plant in the US, following a hydrogen explosion.

Other Financial Information

Corporate costs

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 (2011: £16 million).

Change in value of derivative and other financial instruments

The Group enters into foreign exchange contracts to hedge much of its transactional exposure. At 31 December 2012, the net fair value of such instruments was an asset of £33 million (2011: net liability of £84 million). Where hedge accounting has not been applied, the change in fair value is reflected in the income statement as a component of operating profit and resulted in a credit of £117 million (2011: £29 million charge). There was a £1 million charge arising from the change in the fair value of embedded derivatives in the year (2011: £3 million charge) and a net gain of £9 million attributable to the currency impact on Group funding balances (2011: £2 million net gain). There was a £1 million gain due to the change in the fair value of GKN Powder Metallurgy commodity contracts (2011: £1 million loss).

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 £37 million (2011: £22 million). The increase relates to the impact of the Getrag Driveline Products and Stromag acquisitions in September 2011 and the Volvo Aero acquisition on 1 October 2012.

Gains and losses on changes in Group structure

During the year the Group sold GKN Geplasmetal S.A. for cash consideration of £3 million realising a profit of £1 million and its 49% share in a joint venture company, GKN JTEKT (Thailand) Limited for cash consideration of £1 million, realising neither a profit nor loss. In addition a gain of £4 million was realised after final settlement of contingent consideration relating to a previous transaction.

Reversal of inventory fair value adjustment arising on business combinations

The inventory fair value adjustment of £37 million arising on acquisition of Volvo Aero reversed in full before the year end.

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 of joint ventures in the year was £38 million (2011: £38 million). Post-tax earnings on a management basis were £41 million (2011: £40 million), with trading profit of £49 million (2011: £49 million). The Group's share of the tax charge amounted to £7 million (2011: £8 million) with an interest charge of £1 million (2011: £1 million). Underlying trading profit decreased £1 million reflecting a slow-down in sales to the commercial vehicle market within Other Businesses.

Net financing costs

Net financing costs totalled £78 million (2011: £61 million) and include the non-cash charge on post-employment benefits of £20 million (2011: £17 million) and unwind of discounts of £6 million (2011: £2 million). Interest payable was £60 million (2011: £47 million), whilst interest receivable was £8 million (2011: £5 million) resulting in net interest payable of £52 million (2011: £42 million). Capitalised interest costs attributable to the Group's A350 investment were £5 million (2011: £6 million) and interest charged on UK Government refundable advances was £5 million (2011: £2 million).

The non-cash charge on post-employment benefits arises as the expected return on scheme assets of £138 million (2011: £153 million) was more than offset by interest on post-employment obligations of £158 million (2011: £170 million). Details of the assumptions used in calculating post-employment costs and income are provided in note 14.

Profit before tax

The management profit before tax was £497 million (2011: £417 million). The profit before tax on a statutory basis was £588 million (2011: £351 million).

Taxation

The book tax rate on management profits of subsidiaries was 16% (2011: 16%), arising as a £74 million tax charge on management profits of subsidiaries of £456 million.

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 32% (2011: 31%). The book tax rate is significantly lower, largely because of the recognition of substantial deferred tax assets (mainly in the US and UK) due to increased confidence in the Group's ability both to access and realise future taxable profits that absorb brought forward tax deductions, partially offset by an increase in the Group's provision for uncertain tax positions.

One of GKN's tax objectives is to utilise prior years' tax losses in order to reduce the 'cash tax' charge on management profits. 'Cash tax' provides a proxy for the cash cost of taxation of management profits. The cash tax charge was 12% (2011: 13%). In the near term, the 'cash tax' rate is expected to continue at or below 20% due to further utilisation of brought forward tax deductions.

The tax rate on statutory profits of subsidiaries was 15% (2011: 14%) arising as an £85 million tax charge on statutory profits of £550 million.

Non-controlling interests

The profit attributable to non-controlling interests was £23 million (2011: £27 million) including a £20 million (2011: £21 million) impact from the pension partnership arrangement (see note 13 for further details).

Earnings per share

Management earnings per share was 26.5 pence (2011: 22.6 pence, including the effect of the £19 million net charge relating to the Hoeganaes incident at Gallatin, US). On a statutory basis earnings per share was 30.2 pence (2011: 18.0 pence). Average shares outstanding in 2012 were 1,587.8 million (see note 9 for further details).

Dividend

In view of the improving trading performance and taking into account the Group's future prospects, the Board has decided to recommend a final dividend of 4.8 pence per share (2011: 4.0 pence). The total dividend for the year will, therefore, be 7.2 pence (2011: 6.0 pence). The Group's objective is to have a progressive dividend policy reflecting growth in earnings per share and free cash flow generation, including the pension deficit funding. The final dividend is payable on 20 May 2013 to shareholders on the register at 12 April 2013. 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 26 April 2013.

Cash flow

Operating cash flow, which is defined as cash generated from operations of £538 million (2011: £500 million) adjusted for capital expenditure (net of proceeds from capital grants) of £334 million (2011: £281 million) and proceeds from the disposal/realisation of fixed assets of £6 million (2011: £8 million), was an inflow of £210 million (2011: £227 million).

Within operating cash flow there was an outflow of working capital and provisions of £104 million (2011: £89 million outflow). Average working capital as a percentage of sales increased from 7.5% in 2011, to 8.5% in 2012.

Capital expenditure (net of proceeds from capital grants) on both tangible and intangible assets totalled £334 million (2011: £281 million), including £25 million (2011: £54 million) on the A350 programme. Of this, £271 million (2011: £235 million) was on tangible fixed assets and was 1.2 times (2011: 1.2 times) the depreciation charge. Expenditure on intangible assets, mainly initial non-recurring costs on Aerospace programmes, totalled £63 million (2011: £46 million). The Group invested £124 million in the year (2011: £103 million) on research and development activities not qualifying for capitalisation.

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 £213 million before the impact of Volvo Aero (2011: £147 million), or an inflow of £86 million including Volvo Aero. The year on year change reflects an improvement in profitability more than offset by increased capital expenditure and a working capital outflow.

Net interest paid totalled £59 million (2011: £43 million), excluding £9 million of costs associated with refinancing. The increase is a result of the additional debt required to fund acquisitions. Tax paid in the period was £62 million (2011: £38 million).

Net borrowings

At the end of the year, the Group had net borrowings of £871 million (2011: £538 million), the increase reflecting the acquisition of Volvo Aero. The Group's share of net funds in joint ventures was £nil (2011: £2 million).

Pensions and post-employment obligations

GKN operates a number of defined benefit pension schemes and historic retiree medical arrangements, some of which are funded plans and some unfunded. At 31 December 2012, the total deficit on post-employment obligations of the Group totalled £978 million (2011: £868 million), comprising the deficits on funded obligations of £446 million (2011: £465 million) and on unfunded obligations of £532 million (2011: £403 million). 

The net amount included within trading profit of £42 million (2011: £33 million) includes the current service cost of £44 million (2011: £38 million) partly offset by past service credits and settlement credits. The increase in service cost is primarily attributable to the UK and includes the effects of increases in pensionable payroll and the removal of age related rebates from April 2012 due to the UK Government's abolition of "contracting out" rules (this "contracting out" effect is partly offset by lower national insurance payments within the staff costs component of the Income Statement). The net post-employment finance charge of £20 million (2011: £17 million) has risen slightly due to interest costs on liabilities being more than offset by lower expected returns on scheme assets.

Contributions to the various defined benefit pension schemes and retiree medical arrangements totalled £114 million (2011: £67 million), including £46 million paid to buy-out Swedish pension arrangements. In addition, £30 million was distributed from the pension partnership to the UK pension scheme in June 2012.

UK pensions

During the year, the UK defined benefit pension scheme was split into two separate schemes each with different characteristics. Both schemes are funded, defined benefit plans: one of the schemes primarily comprises pensioner members associated with businesses no longer owned by GKN, whilst the other comprises other pensioner and deferred members as well as current employees who accrue future benefits on a career average basis. A hybrid pension plan providing a combination of defined benefit and defined contribution benefits is currently open to new members. Members currently in employment with the Company represent approximately 17% of total liabilities of £2,846 million (2011: £2,650 million).

The accounting deficit at 31 December 2012 of £324 million was £65 million higher than the deficit at the end of 2011. December 2012 asset values were above those of end December 2011 but the valuations of liabilities at 31 December 2012 were £196 million higher. This increase in liabilities largely reflected a 60 basis point reduction in discount rate to 4.1%. 

Overseas pensions

Overseas pension obligations arise mainly in the US, Germany and Japan.

The overseas pension deficit increased by £40 million to £579 million. This included a £97 million adverse impact from actuarial assumptions, offset to an extent by a US curtailment gain.

On 1 April 2012 the Group transferred the assets and liabilities of its defined benefit pension scheme of the hourly paid workers at GKN Aerospace's St. Louis facility in the US to the International Association of Machinists and Aerospace Workers ('IAM') National Pension Fund. As a result there was a net pension scheme curtailment benefit of £35 million.

When acquiring Volvo Aero, the Group wished to minimise its exposure to historic Swedish pension liabilities and, therefore, a portion of the agreed acquisition price was set aside in order to insure against this risk on completion of the deal. On acquisition, the Group assumed a defined benefit pension deficit of £67 million, £64 million of which related to a Swedish pension scheme. Shortly after the acquisition, the Group spent £46 million to fund a fully insured buy-out of the Swedish pension scheme with a third party insurer, thereby taking control of a business in which pensions had been largely de-risked. This resulted in a net pension curtailment credit of £18 million recognised in the Income Statement, in addition to a credit of £10 million on the settlement of associated payroll taxes, which took the total curtailment credit for the Swedish pension arrangements to £28 million.

Retiree medical and life insurance

GKN operates retiree medical and life insurance arrangements in North America and the Group also has a UK scheme which has been closed to new members for many years.

The obligation in respect of all schemes at the end of the year was £75 million compared with £70 million at the end of 2011, the movement being caused principally by changed actuarial assumptions.

Defined contribution pension schemes

Besides the above defined benefit pension schemes, the Group also operates a number of defined contribution pension schemes in relation to which the 2012 income statement charge was £21 million.

2013 reporting changes

2013 will see the new requirements of IAS 19 introduced with the primary impact on the Group being an increase in other net financing charge of around £20 million. Additionally, the Company will review the structure of the pension partnership arrangement which, subject to the consent of the Trustees, may result in an increase to the IAS 19 reported UK deficit and related other net financing charge in 2013. If these partnership changes were effective from the start of 2013 the reported deficit would increase by around £340 million and 2013 other net financing charge would increase by a further £14 million.

None of the above reporting changes would impact the underlying cash flows paid to the UK Pension scheme.

Net assets

Net assets of £1,927 million were £303 million higher than the December 2011 year end figure of £1,624 million. The increase includes actuarial losses on post-employment obligations net of tax of £73 million, adverse currency movements net of tax of £134 million and dividends paid to equity shareholders of £101 million offset by retained profit of £503 million and net proceeds from an equity placing of £137 million.

Exchange rates

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

The approximate impact on 2012 trading profit of subsidiaries and joint ventures of a 1% movement in the average rate would be euro - £1 million, US dollar - £2 million.

Funding, liquidity and going concern

At 31 December 2012, UK committed bank facilities were £917 million, £837 million of which were committed revolving credit facilities together with an £80 million eight-year amortising facility from the European Investment Bank (EIB). The next major maturities of the committed bank facilities are £592 million in 2016. At 31 December 2012, the £80 million facility from the EIB was fully drawn and drawings against the revolving credit facilities were £77 million, leaving undrawn, committed UK borrowing facilities totalling £760 million. 

Capital market borrowings were £800 million at 31 December 2012 (31 December 2011: £526 million) and include existing unsecured £350 million 6.75% bonds maturing in October 2019 and new unsecured £450 million 5.375% bonds maturing in September 2022. The weighted average maturity profile of the Group's committed borrowing facilities was 6.1 years. At 31 December 2012, the Group had net borrowings of £871 million.

All of the Group's committed credit facilities have a financial covenant requiring EBITDA of subsidiaries to be at least 3.5 times net financing costs and net debt must 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 2012, EBITDA was 13 times greater than net interest, whilst net debt was 1.2 times EBITDA.

The Directors have taken into account both divisional and Group forecasts 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.

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