GKN plc results for the six months to 30 June 2017

NEWS RELEASE 26 July 2017

GKN plc Results Announcement for the six months ended 30 June 2017

Group Highlights(*)

· Another period of growth delivering earnings momentum

o Sales up 15% (organic sales up 5%) and management eps increased 14%

o Profit before tax (management basis) up 14% to £393 million (2016: £344 million), helped by currency

o Reported profit before tax £559 million (2016: £182 million)

o Free cash flow of £116 million (2016: £40 million)

o Interim dividend increased 5% to 3.1 pence per share

o UK defined benefit pension closed to future accrual, £250 million lump sum payment planned to address the deficit and reduce future deficit recovery payments

· Continued investment in technology

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

o Focus on electrified drivetrains and additive manufacturing (3D printing)

o Industry 4.0 - expect to reduce cost and increase margin

(1) As at 31 December 2016 

(2) Primarily higher due to mark to market valuation of FX contracts

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

"We made progress in the first half and are on track for the full year. We are performing well against our key markets, demonstrating once again the strength of our businesses, strong market positions and leading technology. We continue to invest for growth and have made significant progress to address our UK pension deficit.

Our focus on innovation in key areas such as electrified drivetrains, additive manufacturing and Industry 4.0 is paying dividends and underpins our confidence in the longer term.

2017 is expected to be another year of growth. Our reputation for technological leadership in our key markets, our focus on driving flexibility and productivity through our manufacturing plants and our market leading position in all three divisions mean we are well placed for the future."

Divisional Highlights

GKN Aerospace

· Headline sales growth of 11%, reflecting a benefit from currency translation and organic growth in line with the market

· Organic sales growth of 1%, comprising slower commercial sales (-3%) more than offset by an increase in military (+15%)

· Margin of 9.3% (2016: 9.9%), primarily impacted by higher UK pension costs, lower profits resulting from asset write-downs at SABCA (equity accounted investment) and programme transitions and operational challenges in North America, partly offset by a benefit from programme pricing adjustments

· New and replacement work packages won of c.$2.3 billion over contract lives

GKN Driveline

· Organic sales growth of 8%, significantly ahead of global auto production, helped by our broad geographic footprint and increased content per vehicle

· Trading margin of 7.8% (2016: 7.9%, restated to include part of GKN Land Systems), with a good performance in Europe offset by lower margins in China, as expected, and increased costs to support the high number of launches in the Americas

· Around £230 million of annualised new and replacement business won

GKN Powder Metallurgy

· Organic sales growth of 4%, including the pass-through of higher raw material surcharges

· Trading margin of 11.3% (2016: 12.6%), reflecting principally the higher raw material surcharge and an investment in powder capability in China

· Strong focus on technology and £110 million of annualised new and replacement business won

Outlook

According to Teal forecasts, in 2017, the overall aerospace market is expected to be up 1%, with commercial deliveries 1% lower and military sales up 8%. Against that backdrop, GKN Aerospace's 2017 organic sales are expected to grow slightly above the market.

In automotive, external forecasts predict annual growth in global light vehicle production of around 2% with increases in China and Europe, but decreases in North America. 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 growth, helped by the benefits of actions taken in 2016 and GKN's constant focus on continuous improvement.

Notes

(*) Financial information set out in this announcement, unless otherwise stated, is presented on a management basis as defined on pages 13 and 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:

Nicola Foster, Head of Group Communications, GKN plc

T: +44 (0)1527 533495

M: +44 (0)7795 618320

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/results-and-presentations/

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: 53120005

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/

GKN plc LEI: 213800QNZ22GS95OSW84

NEWS RELEASE

GKN plc Results Announcement for the six months ended 30 June 2017

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

(1)excludes GKN Aerospace Fokker which had not been owned for a full 12 month period

Organic sales increased £252 million (5%). The benefit from currency translation on management sales was £482 million and there was a £40 million net reduction from acquisitions/divestments.

Overall organic trading profit increased by £7 million. There was a benefit from currency translation of £47 million and an £8 million net reduction due to acquisitions/divestments.

Group trading margin in the first half reduced to 8.4% (2016: 8.6%). Return on average invested capital (ROIC) reduced to 15.8% (2016: 16.6%, GKN Aerospace Fokker not included as it had not been owned for a full 12 month period).

At 30 June 2017, the Group had net debt of £697 million (31 December 2016: £704 million) and the total deficit on post-employment obligations totalled £1,849 million (31 December 2016: £2,033 million). During the period, the group issued a new £300 million 3.375% annual unsecured bond. It is the intention to pay £250 million into the UK pension scheme in the second half of the year.

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.

According to Teal forecasts, in 2017, overall aircraft deliveries are expected to be up 1%. 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 8% 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 period are as follows:

(1) excluding Fokker in the comparative period which had not been owned for a full 12 months

Overall, GKN Aerospace's organic sales were £20 million higher (1%) and there was a £158 million benefit from currency translation.

The division's sales were weighted commercial 73%, military 27%. Organic commercial aerospace sales declined 3%, principally due to the greater exposure to the wide-body market. GKN Aerospace recorded reduced sales of the A380, Boeing 737 MAX (due to the end of a temporary development contract in 2016), business jets, CFM56 engine and Boeing 777 partly offset by stronger production of the A350 and A320. Military sales were organically 15% higher, primarily due to an increase in production of the F/A-18 Super Hornet and F-35, as well as development sales for advanced proprietary military programmes.

Trading profit was £168 million (2016: £161 million), benefiting from a favourable currency translation impact of £16 million.

In addition to the changes in production rates across the many commercial and military platforms as set out above, trading profit in the period was impacted by: £5 million higher UK pension costs; recognising £4 million of lower profits from the SABCA equity accounted investment, principally due to asset write-downs; and programme transitions and operational challenges in North America. The engine business is performing well, helped by £13 million of programme pricing adjustments and investment continues in the PW PurePower® Geared Turbofan™ (GTF) engines across four different platforms. Fokker continues to trade in line with expectations. Across our production facilities worldwide we are driving ongoing productivity programmes to mitigate historical price downs.

Progress in the development and application of additive manufacturing (AM) continued in the first half. Momentum increased in both free form and powder bed with both technologies in production, new orders won and parts now flying on seven platforms across the commercial, military and space markets. This is a key area of focus for the Group.

During the period, new and replacement work packages totalling $2.3 billion over their contract lives have been won and a number of important milestones were achieved, including:

· Securing new work packages and extensions of long-term agreements on key engine platforms;

· Winning a three year contract extension worth over $175 million, covering the technical product support, maintenance and parts supply for the Gripen RM12 Engines used in Sweden, Hungary, Czech Republic and Thailand;

· Signing a contract with Honda Aircraft Company to manufacture the complete electrical wiring and interconnection system for the market-leading HondaJet;

· Securing a long-term agreement with Kawasaki Heavy Industries to supply Low-Pressure Compressor Vanes for the PW1100G-JM and PW1400G-JM PurePower® Geared Turbofan™ engines;

· Delivering the first advanced 2.5m diameter Ariane 6 nozzle (SWAN) to ArianeGroup for the Vulcain 2.1 engine incorporating laser-welded technology and AM structures; resulting in 90% fewer component parts, 40% cost reduction and 30% improvement in production time; and

· Signing research/partnership agreements with the U.S. Department of Energy's Oak Ridge National Laboratory, focused on AM in order to progress its use in the manufacture of major, structural components for aircraft.

Automotive market

In the first half of 2017, global car and light vehicle production volumes increased 2.8% to 47.3 million vehicles (2016: 46.1 million), with all major markets, except North America, enjoying increased volumes.

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

Production in Europe increased in the first half with some major markets reaching historically high levels. The Russian market remained weak, although production increased compared to the first half of 2016.

Production in North America was down due to a weaker US market, with lower fleet demand offsetting good retail sales. Cheap credit and the low price of fuel continued to support increased demand and production for full-size pickups and Sport Utility Vehicles (SUVs), which outpaced that of passenger cars. Production in Brazil rose strongly as the local market started to recover and exports increased.

Growth in China slowed as a result of an increase in the sales tax on small cars, following strong demand at the end of 2016. Production in India recovered from the weak 2016, driven by improved consumer sentiment and demand for newly launched models. Japan also grew compared to the prior year.

External forecasts anticipate global production for 2017 will increase 1.9% to 94.9 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 period are as follows:

(4)Restated to include Off-Highway Powertrain, previously part of GKN Land Systems

Organic sales increased by £206 million (8%) compared with global light vehicle production which was up 3%. The beneficial effect from currency translation was £246 million.

GKN Driveline's market outperformance was mainly in North America (reflecting strong recent all-wheel drive (AWD) programme gains slightly offset by lower light truck platform exposure) and in China due to new programme launches (particularly due to additional content from AWD sales, including to a number of domestic manufacturers). In Europe, production continued ahead of the market, benefitting from good demand for premium vehicles.

Trading profit increased £34 million to £207 million, including the favourable impact of currency translation of £21 million.

GKN Driveline's European plants continue to operate at very high capacity utilisation with a strong conversion on the additional sales. In China, margin reduced as expected, with the benefit of increased sales being offset by negative pricing pressure and the on-going investment in new programmes, engineering and technology localisation. The Americas operations were impacted by investment in programme management to support an unusually high number of launches. The AWD programmes are delivering to customer requirements, however, the necessary changes to product and process are taking longer than expected and therefore the cost impact was similar to the first half of 2016. The North American market continues to be monitored closely. The benefits of the restructuring action taken in 2016 have been realised and, as previously communicated, GKN Driveline has increased investment in eDrive and faced some raw material price increases that have not been fully passed on to customers.

As the trend towards electrification of passenger vehicles accelerates, GKN Driveline continues to make good progress with its eDrive products, responding to the need for lower emission vehicles in both hybrid and pure electric form. Due to its early move into electric AWD, GKN Driveline is already a market leader with around 400,000 HEV/EV drive systems delivered to our global customer base. During the period two large production orders were won, including the eAxle for the Volvo XC60/V90.

During the period, around £230 million of annualised sales in new and replacement business was secured and a number of important milestones achieved, including:

· Launching the second application of the new lightweight VL3 constant velocity joint (CVJ) on the new BMW 5 series;

· Commencing production of its latest technologies in China, through its joint venture: a complete AWD disconnect system for small to medium-sized vehicles, the new SX8 CVJ as well as production of its Disconnect four-wheel drive system;

· Providing innovative electric drive technology to StreetScooter - an emissions free parcel delivery service in Germany, owned by Deutsche Post DHL Group;

· Winning an Automotive News PACE Innovation Award for the integrated co-axial eAxle on the Volvo XC90 T8 twin engine;

· Announcing that China will become a global production hub for electrified driveline in 2018, when production of the latest eDrive technologies commences, including the production of the GKN Multimode eTransmission for a domestic Chinese automaker; and

· Opening a new winter test facility in Michigan, USA to complement the existing proving grounds for extreme cold-weather testing in Sweden and China.

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 period are as follows:

Organic sales were £23 million higher, including £17 million pass through to customers of higher scrap steel prices and other commodities. There was a £62 million benefit from currency translation and a £17 million increase from acquisitions, mostly the purchase of a majority share of a powder manufacturer in China.

Organic sales growth before raw material pass through was 1%, lower than global light vehicle production which was up 3%. Strong underlying sales growth was achieved in China, Europe and Brazil but sales in North America fell due to weaker automotive demand.

Trading profit increased £5 million to £68 million, benefiting from favourable currency translation of £8 million.

The divisional trading margin was 11.3% (2016: 12.6%), reflecting the powder investment in China, tougher market conditions in the US and a £4 million impact of higher raw material prices.

The European business, principally focused on small parts, grew well increasing its sales into the automotive market. Good progress continues in Asia with double digit sales growth. North America was tougher reflecting a slowdown in the automotive market. Digitisation across the shop floor is assisting with productivity gains across GKN Powder Metallurgy.

Commercial titanium powder production for AM started in Cinnaminson, USA as part of the venture with TLS Technik. Interest in powder continues to be strong and a number of production orders have been received from key customers for both standard and customised titanium AM powder alloys. There is also increased demand for AM parts for use in the automotive and industrial sectors.

During the period, around £110 million of annualised sales in new and replacement business was secured and a number of important milestones achieved, including:

· Completing the acquisition of Turkish powder metal parts manufacturer Tozmetal Ticaret Ve Sanayi AS (Tozmetal), adding pump part capacity;

· Making further steps towards Industry 4.0 with a new dedicated digital area for metal AM which will reduce lead times in prototype development and production;

· Launching a new e-commerce platform, InstAMetal, a revolutionary digitized quoting and design experience for metal AM that will bring speed and simplicity of online ordering to engineering prototypes;

· Receiving the Best Supplier Award for quality performance by Somfy for the high-class planetary gears and components that it supplies for electrical shutter motors; and

· Receiving two prestigious Grand Prize Design Excellence Awards from the Metal Powder Industries Federation in the Automotive Transmission category (planetary carrier assembly for Ford Motor Company) and the Automotive Chassis category (copper-steel output pulley for Nidec Automotive Motor Americas).

Other Businesses and corporate costs

GKN's Other Businesses now comprise Wheels and Structures (previously part of GKN Land Systems) and Cylinder Liners (a 59% owned venture mainly in China, manufacturing engine liners for the truck market in the US, Europe and China). First half 2016 comparators are restated for the inclusion of Stromag and Wheels and Structures, previously part of GKN Land Systems.

GKN's Other Businesses reported combined sales in the period of £148 million (2016: £186 million). The change reflects a £3 million organic increase in sales due to good growth in Cylinder Liners and Wheels, a £16 million benefit from currency translation and a reduction due to the disposal of Stromag of £57 million.

A trading profit of £9 million was reported in the first half (2016: £4 million) reflecting a strong performance in Cylinder Liners and the absence of a restructuring charge in 2016 for GKN Hybrid Power. Trading profit was £7 million lower due to the disposal of Stromag.

Corporate costs, which comprise the costs of stewardship of the Group and operating charges and credits associated with the Group's legacy businesses, were £16 million (2016: £11 million), due to £4 million of additional costs associated with closure of the UK pension scheme.

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 Group uses management measures, which are non-GAAP measures, for certain remuneration targets and to assess operating performance on a consistent basis, as we believe this gives a fairer assessment from period to period of the underlying activity of the business. The use of management measures allows the Group to chart progress, make decisions and allocate resources based on the actions for which management is responsible or can influence, without volatility arising from significant one-time trading and portfolio change transactions or the mark to market valuation of currency hedges.

The items excluded from management basis results are 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 (change in value of derivative and other financial instruments and fair value changes on cross currency interest rate swaps), it is non-cash (interest charge on post-employment benefits and unwind of discounts) or it does not relate to trading performance but rather acquisition or divestment activity (amortisation of non-operating intangible assets arising on business combinations, gains and losses on changes in Group structure and acquisition-related restructuring charges).

A full reconciliation of statutory to management basis numbers is provided in note 3 to the consolidated financial statements on page 26 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 period resulted in a credit of £242 million (2016: £71 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 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 30 June 2017, the net fair value of such instruments was a liability of £242 million (31 December 2016: £482 million liability) and the change in fair value during the period was a £240 million credit (2016: £52 million charge).

There was also a £2 million charge arising from the change in fair value of embedded derivatives in the period (2016: £3 million credit) and a net gain of £4 million attributable to the currency impact on Group funding balances (2016: £22 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 £45 million (2016: £46 million).

Gains and losses on changes in Group structure

The net loss on changes in Group structure was £1 million (2016: nil) and represents further costs relating to closure of the GKN Aerospace business in Yeovil, announced in 2016.

Acquisition-related restructuring charges

There were no charges regarding acquisition-related restructuring in the period (2016: £22 million).

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 £35 million (2016: £34 million), with trading profit of £41 million (2016: £42 million). The Group's share of the tax and financing charges amounted to £6 million (2016: £8 million). The organic decrease in trading profit was £4 million, principally impacted by asset write-downs in SABCA (Aerospace).

Net financing costs

Net financing costs totalled £67 million (2016: £61 million) and comprise the net interest payable of £37 million (2016: £38 million), the non-cash interest charge on post-employment benefits of £24 million (2016: £27 million), a loss from fair value changes on cross currency interest rate swaps of £5 million (2016: £5 million gain) and a charge for unwind of discounts of £1 million (2016: £1 million charge). The non-cash interest 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 obligations are provided in note 10 to the consolidated financial statements.

Interest payable was £42 million (2016: £41 million), whilst interest receivable was £5 million (2016: £3 million) resulting in net interest payable of £37 million (2016: £38 million).

Profit before tax

Management profit before tax was £393 million (2016: £344 million). Profit before tax on a statutory basis was £559 million (2016: £182 million). The main differences between management and statutory figures for the first half 2017 are the change in value of derivative and other financial instruments, amortisation of non-operating intangible assets arising on business combinations and non-cash interest charge on post-employment benefits. Further details are provided in note 3 to the consolidated financial statements.

Taxation

The book tax rate on management profits of subsidiaries was 24% (2016: 25%), arising as a £86 million tax charge (2016: £76 million charge) on management profits of subsidiaries of £358 million (2016: £310 million).

The tax rate on statutory profits of subsidiaries was 25% (2016: 11%), arising as a £131 million tax charge (2016: £17 million charge) on statutory profits of subsidiaries of £524 million (2016: £148 million).

Non-controlling interests

The profit attributable to non-controlling interests was £3 million (2016: £2 million).

Earnings per share

Management earnings per share was 17.7 pence (2016: 15.5 pence). On a statutory basis earnings per share was 24.8 pence (2016: 9.5 pence), impacted by a significant credit from the change in value of derivatives and other financial instruments. 

Dividend

The Board has declared an interim dividend of 3.1 pence per share (2016: 2.95 pence), an increase of 5%. The interim dividend will be paid on 18 September 2017 to shareholders on the register at 11 August 2017. Shareholders may choose to use the Dividend Reinvestment Plan (DRIP) to reinvest the interim dividend. The closing date for receipt of new DRIP mandates is 25 August 2017.

Cash flow

Operating cash flow, which is defined as cash generated from operations of £379 million (2016: £252 million) adjusted for capital expenditure (net of proceeds from government capital grants) of £254 million (2016: £227 million), repayment of principal on government refundable advances of £4 million (2016: nil) and proceeds from the disposal of fixed assets of £6 million (2016: £25 million), was an inflow of £127 million (2016: £50 million).

Cash generated from operations includes movements in working capital totalling a net outflow of £165 million (2016: £188 million outflow).

Capital expenditure (net of proceeds from government capital grants) on both tangible and intangible assets totalled £254 million (2016: £227 million). Of this, £217 million (2016: £192 million) was on tangible fixed assets and was 1.5 times (2016: 1.5 times) the depreciation charge. Expenditure on intangible assets, mainly non-recurring costs on Aerospace programmes, totalled £37 million (2016: £35 million).

Net interest paid totalled £21 million (2016: £23 million). Tax paid in the period was £49 million (2016: £42 million).

Free cash flow

Free cash flow, is defined as operating cash flow, an inflow of £127 million (2016: £50 million), including dividends received from equity accounted investments of £59 million (2016: £55 million) and after net interest paid of £21 million (2016: £23 million), tax paid of £49 million (2016: £42 million) and amounts paid to non-controlling interests of nil (2016: nil) but before dividends paid to GKN shareholders, was an inflow of £116 million (2016: £40 million).

Net debt

At the end of the period, the Group had net debt of £697 million (31 December 2016: £704 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 the end of the period was a liability of £187 million (31 December 2016: a liability of £214 million) which is included in the net debt figure of £697 million.

Pensions and post-employment obligations

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

At 30 June 2017, the total deficit on post-employment obligations of the Group totalled £1,849 million (31 December 2016: £2,033 million), comprising deficits on funded obligations of £1,160 million (31 December 2016: £1,322 million) and on unfunded obligations of £689 million (31 December 2016: £711 million).

The amount included within trading profit for the period comprises a current service cost of £31 million (2016: £25 million) and administrative costs of £2 million (2016: £2 million). The interest charge on net defined benefit plans, which is excluded from management figures, was £24 million (2016: £27 million).

Cash contributions to the various defined benefit pension schemes and retiree medical arrangements totalled £70 million (2016: £71 million).

UK pensions

The accounting deficit for UK schemes, which closed to future accrual with effect from 1 July 2017, decreased to £1,063 million (31 December 2016: £1,221 million) in part as a result of the latest study into mortality improvements indicating that life expectancy has not improved as quickly as previously expected (£72 million reduction).

The Group's two UK defined benefit pension schemes are conducting their 2016 triennial funding valuations (GKN2 as at 5 April 2016 and GKN3 as at 31 December 2016). It is expected that a lump sum of £250 million will be paid into the GKN2 Scheme in the second half and that the current annual deficit recovery payments of £42 million are expected to reduce slightly, from 2018.

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 £32 million (2016: £28 million).

Net assets

Net assets of £2,546 million were £384 million higher than the 31 December 2016 figure of £2,162 million. The increase is primarily driven by a statutory profit after tax (£428 million) and a favourable remeasurement of defined benefit plans, net of tax (£147 million), partially offset by an adverse currency retranslation from subsidiaries (including net investment hedges) and equity accounted investments, net of tax (£93 million) and dividends paid to equity shareholders (£101 million).

Exchange rates

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

The approximate impact on 2017 trading profit of subsidiaries and equity accounted investments of a 1% movement in the average rate would be euro - £1 million, US dollar - £2 million.

Funding, liquidity and going concern

At 30 June 2017, UK committed bank facilities were £846 million (31 December 2016: £863 million). Within this amount there are committed Revolving Credit Facilities of £800 million (31 December 2016: £800 million), £32 million outstanding on an eight-year amortising facility from the European Investment Bank (31 December 2016: £48 million) and £14 million outstanding on a seven-year amortising facility from KfW (31 December 2016: £15 million). There were no drawings against the Revolving Credit Facilities.

At 31 December 2016 the Group had capital market borrowings comprising 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. During the period, the group issued a new £300 million 3.375% annual unsecured bond maturing in May 2032.

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 6 months to 30 June 2017 EBITDA was 14.0 times greater than net interest payable (2016:13.4 times), whilst net debt was 0.6 times EBITDA (2016:1.0 times).

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. Having carried out sensitivity analysis, 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.

Basis of Reporting

The interim financial statements for the period are shown on pages 16 to 34 and have been prepared using accounting policies which were used in the preparation of audited financial statements for the year ended 31 December 2016 and which will form the basis of the 2017 Annual Report.

Definitions

Financial information set out in this announcement, unless otherwise stated, is presented on a management basis which excludes certain items. The items excluded from management trading results and the reasons for their exclusion are set out on pages 9 and 10.

Management results 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 management trading profit expressed as a percentage of management 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.

Organic results are management results excluding 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, repayment of principal on government refundable advances and proceeds from the disposal of fixed assets.

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 calculated on a rolling 12 month basis comprising 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.

Management earnings per share (as set out in note 3(a) to the consolidated financial statements) is calculated using management earnings for the Group divided by the weighted average number of ordinary shares in issue (excluding treasury shares).

Working capital comprises inventories, trade and other receivables, trade and other payables and provisions. Management working capital (as set out in note 1(f) to the consolidated financial statements) excludes; accrued interest, restructuring provisions, equity accounted investment funding, deferred and contingent consideration and government refundable advances.

Principal risks and uncertainties

The principal risks faced by the Group in the remaining six months of the year remain largely unchanged from those reported on pages 42 to 49 of the 2016 Annual Report. These risks relate to the following: highly competitive markets; supply chain; customer concentration; operating in global markets; laws, regulations and corporate reputation; technology and innovation; people capability; product quality; contract risk; programme management; health and safety; information systems resilience; and pension funding.

As noted in the 2016 Annual Report, the UK's decision to leave the EU has resulted in increased uncertainty in future trading arrangements between the UK and the rest of the world. That uncertainty remains; however, as around 90% of GKN's products are manufactured outside of the UK, the direct effect on our major markets will be limited. As outlined in the 2016 Annual Report, the effects of the vote and the accompanying reduction in interest rates and fall in bond yields increased our UK pension liability during 2016. We have subsequently taken steps to manage that liability as described below.

During the first half of 2017 good progress was made towards reducing both ongoing cash contributions and volatility in respect of the Group's UK defined benefit pension schemes, though the schemes remain exposed to changes in asset values, interest rates, inflation and mortality assumptions. As discussed on page 12, we have largely completed discussions with the Trustees of these schemes in relation to the 2016 funding valuations and are now working to finalise the contractual documentation.

Directors' Responsibility Statement

The half yearly financial report is the responsibility of the Directors who confirm that to the best of their knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as endorsed and adopted by the EU;

· the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the 2016 Annual Report that could do so.

The Directors of GKN plc are listed in the GKN annual report for 2016.

Approved by the Board of GKN plc and signed on its behalf by:

Mike Turner

Chairman

25 July 2017

APPENDICES

* As previously announced, following disposal of the Stromag business on 30 December 2016 the Group has changed its segments to remove Land Systems for reporting in 2017. The two businesses remaining in the Group that were part of Land Systems have been reported as follows: Wheels and Structures in Other Businesses and Driveshafts and Aftermarket Services, now renamed Off-Highway Powertrain, in Driveline. For the purpose of comparative information in 2016, Stromag has been included in Other Businesses. There is no change to Aerospace or Powder Metallurgy segmental reporting.