GKN plc Results for the year ended 31 Dec 2011

NEWS RELEASE 28 February 2012

GKN plc Results Announcement for the year ended 31 December 2011

(*) Includes a net £19 million charge relating to the temporary Hoeganaes plant closure in Gallatin, USA.

Group highlights(1)

·; Group sales up £683 million (13%) to £6.1 billion, an underlying increase of 10%

·; Excluding net £19 million Gallatin charge:

·; Trading profit of £487 million, up £76 million, an increase of 18%

·; Group trading margin of 8.0%, up from 7.6%, and increased targets set for three divisions

·; Profit before tax of £417 million (2010: £363 million), an increase of 15%. Reported profit before tax, £351 million (2010: £345 million)

·; Earnings per share up 9% to 22.6 pence per share (2010: 20.7 pence per share)

·; Return on average invested capital (excluding 2011 acquisitions) of 18.3% (2010: 17.0%), reflecting higher profitability

·; Final dividend of 4.0 pence per share, giving a total for 2011 of 6.0 pence per share (2010: 5.0 pence per share), a 20% increase

·; Net debt of £538 million (2010: £151 million), reflecting £444 million for new acquisitions

"2011 was a year of good growth. GKN achieved a strong financial performance with all four divisions at or near record profits. Each division has leading technology and market positions and out-performed their respective markets, with a strong pipeline of new business. GKN Driveline and GKN Land Systems were further strengthened with the two highly complementary acquisitions of Getrag Driveline Products and Stromag.

As a result of the strong performance and reflecting our confidence in the future, the Board is recommending a final dividend of 4.0 pence per share, making a total of 6.0 pence for 2011, an increase of 20%.

Looking forward, GKN expects 2012 to be another year of good progress for the Group."

Nigel Stein

Chief Executive, GKN plc

Divisional Highlights

* GKN Driveline excludes £117 million of Getrag Driveline Products sales and GKN Land Systems excludes £38 million of Stromag sales.

The table does not include Other businesses.

GKN Driveline

·; GKN Driveline wins £500 million annualised new and replacement business, with strong all-wheel drive (AWD) and eDrive order books

·; Acquisition of Getrag Driveline Productsbusiness createsthe leading global supplier of AWD driveline products 

GKN Powder Metallurgy

·; New and replacement business wins exceed £100 million of annualised sales

·; Trading margin improves 140bps, to 8.5%

GKN Aerospace

·; GKN Aerospace wins $3.5 billion of new work

·; First A350 XWB fixed trailing edge assembly delivered to Airbus

·; New facility to open in South Carolina, USA to assemble the state of the art all-composite fuselage for the HondaJet

GKN Land Systems

·; Stromag Holding GmbH (Stromag) acquisition - market leading engineer of industrial power management components

·; Building a world leader in industrial power management

Outlook

Although the macroeconomic environment remains uncertain, GKN expects 2012 to be another year of good progress for the Group.

In automotive, external forecasts suggest that global light vehicle production should grow 5% 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, although the rate of market outperformance will be lower than in 2011.

In aerospace, civil aircraft production is expected to continue to grow, as both Airbus and Boeing increase production. This should more than offset the anticipated reduction in US military aircraft demand. Although new programmes may be subject to delays, GKN Aerospace is expected to maintain its sales growth in 2012.

The performance of GKN Land Systems should continue to improve, benefiting particularly from the expected on-going strength in European and North American agricultural equipment markets.

Overall, the Group's broad exposure to global markets, strong customer positions and healthy order books mean that GKN should make further progress in 2012, with the added benefit of a full year contribution from the recent acquisitions.

Notes

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

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 9.30am 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 15 minutes before the presentation is due to begin http://www.gkn.com/investorrelations/GKNResults/full-year-results-2011-presentation.pdf

Questions will only be taken at the event.

A live dial in facility will be available on +44 (0) 1452 551 089, conference ID 46597821.

A replay of the conference call will be available until 12 March 2012 on +44 (0) 1452 55 00 00

Replay Access Number: 46597821#.

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

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.

NEWS RELEASE

GKN plc Results Announcement for the year ended 31 December 2011

Group Overview

Markets

The Group operates in 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 military and civil 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 good market outperformance in each division.

Results

Management sales increased 13% in the year ended 31 December 2011 to £6,112 million (2010: £5,429 million). The effect of currency translation was £15 million adverse and there was a £164 million benefit from acquisitions which was partly offset by the £29 million reduction due to disposals. Excluding these items, the underlying increase was £563 million (10%). Within this figure, Driveline was £252 million higher, Powder Metallurgy increased by £97 million, Aerospace was £52 million higher, while Land Systems was up £148 million.

Management trading profit increased £76 million to £487 million (2010: £411 million), excluding the £19 million net impact from the temporary closure of Hoeganaes' Gallatin facility in the US (£34 million cost, as previously announced, which was partially offset by £15 million of insurance recovery). The effect of currency translational was £3 million adverse and there was a £2 million net benefit from acquisitions. Excluding these items, the underlying increase was £77 million. Within this figure, Driveline was £21 million higher, Powder Metallurgy increased by £19 million, Aerospace was up by £6 million and Land Systems increased by £31 million. Excluding the Gallatin impact, Group trading margin increased to 8.0% (2010: 7.6%), against a target range of 8-10%.

Return on average invested capital (ROIC) increased to 18.3%, compared with the Group target of 20% or better.

(*) excludes the net £19 million impact from Gallatin

Divisional Performance

Automotive

As shown in the table below, all major markets, except Japan, due to the earthquake and tsunami in March 2011, experienced increased production relative to 2010. The strongest rates of production growth were in North America and India.

Source: IHS Automotive

Overall, global production volumes increased 3% in 2011 to 76.9 million vehicles (2010: 74.4 million) whilst sales of cars and light commercial vehicles increased by 4%, from 72.4 million vehicles to 75.1 million vehicles.

Demand for larger (premium) vehicles and light commercial vehicles increased strongly. The demand for smaller vehicles, particularly in Europe, was lower as the prior year's scrappage and tax incentive schemes had the effect of pulling forward demand. However, vehicle production in Europe overall benefited from a strong improvement in exports while in North America the recovery following the recession continued.

External forecasts indicate that global production in 2012 will increase by approximately 5% to 80.7 million vehicles. Major markets that are expected to grow fastest include Japan (18%), North America (10%), China (8%) and India (6%). Europe is expected to contract by 8%.

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 trading profit includes acquisition related charges of £3 million

GKN Driveline's sales increased 15% to £2,795 million (2010: £2,433 million). The favourable impact of currency translation was £20 million, the acquisition of Getrag Driveline Products on 30 September 2011 added £117 million, which was partly offset by £27 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. Underlying sales increased by £252 million (10%), including Constant Velocity Jointed (CVJ) Systems which grew 7% and non-CVJ sales which increased by 22%, compared with global vehicle production which was up 3%.

This market outperformance was broad based across North America, Europe, China and Japan reflecting recent market share gains, the Group's stronger position in premium vehicles, demand for which continued to be strong, and GKN Driveline's broadening product mix, particularly with AWD systems and TransAxle solutions. In Japan, the market outperformance reflected GKN Driveline's exposure to companies less affected by the earthquake and the priority given to reinstating production capability for exported vehicles. In North America, lower production from Japanese companies experiencing component shortages was more than offset by Driveline's market share gains through a broader product offering, new programme wins and stronger sales to domestic producers.

Trading profit increased to £195 million (2010: £169 million). The impact of translational currency was £1 million positive, acquisitions (after costs and inventory fair value adjustment of £3 million) added £4 million with underlying trading profit up by £21 million, including around £15 million negative impact from the Japanese earthquake and tsunami, compounded by the floods in Thailand. These affected production in Japan and overseas as component supply chains were disrupted. Outside Japan, it was most pronounced for GKN Driveline in North America where many of the Japanese car manufacturers cut production rates significantly in the second quarter. Engineering costs increased to support new programmes and future growth, and some temporary costs were incurred to raise capacity in some regions to keep pace with significant increases in demand. Driveline's trading margin was 7.1% (2010: 6.9%) excluding Getrag Driveline Products. GKN Driveline's medium term target margin range remains at 8-10%.

Capital expenditure on tangible fixed assets was £113 million (2010: £73 million), 1.0 times (2010: 0.7 times) depreciation.

Return on average invested capital, excluding the Getrag Driveline Products acquisition, was 17.0% (2010: 16.0%), reflecting the increase in profitability.

During the year, GKN Driveline opened a new CVJ systems plant in Changchun, Northern China, a precision forge at Oragadam, near Chennai, South India, expanded production at WuHan, China and construction began on a new CVJ systems facility in Pune, India.

Overall, GKN Driveline won £500 million annualised new and replacement business with the CVJ Systems business winning a healthy 65% of the contracts it bid for. GKN Driveline AWD Systems launched a power transfer unit (PTU) in China, saw good growth in propshaft production in Europe and benefited from strong sales in North America, including the Jeep Grand Cherokee. It also won significant new business with unique all-wheel drive disconnect technology with vehicle manufacturers in the US, Europe and China.

In June, GKN Driveline invested £4 million in EVO Electric Ltd, a UK pioneer in axial flux motors, and formed a joint venture, GKN EVO eDrive Systems Limited, to manufacture and sell axial flux electric motors and drive systems for use in hybrid and all-electric vehicles.

GKN Driveline is already a pioneer in the development and supply of eTransmissions and eAxles for hybrid and electric vehicles. This venture will enable GKN Driveline to offer advanced axial flux motors and generators for niche applications, adding to its existing eDrive systems portfolio and enhancing its capability in full driveline systems. Recent new business wins in eDrive, include:

·; major launch of eAxle for PSA Hybrid 4;

·; new European customer for 1-speed eTransmissions and demonstration vehicle contract for an Asian vehicle manufacturer; and

·; development orders for 2-speed transmissions from European and North American vehicle manufacturers.

On 30 September 2011, GKN Driveline completed the acquisition of Getrag Driveline Products, a tier one supplier of geared driveline products, namely power transfer units and rear drive units for AWD vehicles, along with final drive units for high performance rear wheel drive vehicles.

Getrag Driveline Products, with operations in the United States and Europe, has been integrated into GKN Driveline. Getrag Driveline Products has a product, manufacturing and customer footprint that is complementary to GKN Driveline's own geared product business, which is predominantly based in Asia. Combined, the businesses are now the leading global supplier of AWD driveline products with an excellent customer base and product portfolio. AWD and Trans Axle Solutions now represent 28% of GKN Driveline with significant further growth opportunities.

As part of the Getrag transaction, GKN Driveline also acquired an exclusive licence, principally for Europe and the Americas, to Getrag's electric drivetrain technology for use in electric and certain hybrid vehicles making GKN a leading player in eDrive solutions and very well placed for growth in the medium and long term.

GKN Powder Metallurgy

GKN Powder Metallurgy is the world's largest manufacturer of sintered components. It comprises GKN Sinter Metals and Hoeganaes. Hoeganaes produces the metal powder that GKN Sinter Metals uses to manufacture precision automotive components for engines, transmissions and body and chassis applications. It 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 £845 million (2010: £759 million), an increase of 11%. The negative impact of currency translation was £11 million. Sales increased in all regions as automotive markets recovered, recent new business wins entered production and market share gains were made. Underlying sales for GKN Sinter Metals increased by 17% in North America and 11% in Europe. Strong growth was also achieved in India, Brazil and China.

Overall, Hoeganaes' total tons shipped were 1% lower than in 2010 due to the temporary closure of the Gallatin plant. Underlying sales were 7% higher, principally due to an increase in the commodity metals surcharge passed on to customers as raw material prices increased.

Overall, GKN Powder Metallurgy reported a trading profit of £72 million (2010: £54 million), excluding £19 million of net costs associated with the temporary plant closure at the Gallatin, US facility which are reported outside the divisional trading performance (see below page 11). The divisional trading margin was 8.5% (2010: 7.1%). GKN Powder Metallurgy's medium term target margin range has now been increased to 9-11% (from 8-10%).

Capital expenditure on tangible fixed assets was £44 million (2010: £27 million). The ratio of capital expenditure to depreciation was 1.4 times (2010: 0.9 times). Return on average invested capital was 16.7% (2010: 13.2%), reflecting the improvement in profitability.

Increasing trends in industrial and automotive markets to improve fuel efficiency and reduce emissions, such as variable valve timing in engines, high performance gear sets in automatic transmissions and differential gears, are continuing to drive the demand for products made by powder metallurgy. During the year, more than £100 million (annualised sales) of new programme business was awarded and 48 technical days were hosted for existing and new customers, in order to promote powder metallurgy products and applications. New contracts include:

·; one way clutch system for a Mazda transmission in Asia with unique geometries which are only possible using powder metallurgy technology; and

·; variable valve timing stator - one piece combination sprocket for VW engine.

GKN Aerospace

GKN Aerospace is a world leading global first tier supplier of airframe and engine structures, components, assemblies, and transparencies to a wide range of aircraft and engine prime contractors and other first tier suppliers. It operates in three main product areas: aerostructures, engine components/sub-systems and special products.

The overall aerospace market remained positive in 2011 driven by a recovering civil aircraft market and a generally stable defence sector. The division has increased its position in civil aerospace to 58% of sales, with defence representing 42%.

In the civil aerospace market, preliminary data indicate that passenger air traffic rose around 6% in 2011 and is projected to continue to grow at a similar pace throughout 2012. Longer term worldwide passenger market demand is projected to grow at around 5% with worldwide cargo traffic market growth at around 6%.

Airbus and Boeing continued to benefit from record deliveries and order backlog. Combined deliveries reached a record 1,011 aircraft (2010: 923 aircraft) with the backlog of unfilled orders reaching more than 8,200 aircraft. The recovery in passenger and cargo volumes has led both companies to announce further increases in production levels of single aisle and wide bodied aircraft.

2011 saw the introduction into service of the Boeing 787, on which GKN Aerospace has sales of approximately $2.6 million per aircraft, and the announcement of the 737 MAX and A320neo single aisle aircraft upgrades. Airbus is ramping up production of the A380 (GKN sales of $8.0 million per aircraft), but announced that the first flight of the A350 would slip to 2013 (GKN sales of $2.5 million per aircraft). Airbus and Boeing estimate that between 28,000 and 32,000 new single aisle and wide bodied aircraft will be delivered by 2030.

World-wide defence spending remains under pressure, largely driven by cutbacks throughout Europe and likely reductions in the US Defense Budget. It is expected that the US 2013 defence budget submittal will be in line with 2012 spending levels. 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 strong production base for the business despite projected defence budget pressures.

The key financial results for the year are as follows:

GKN Aerospace sales of £1,481 million were £30 million higher than the prior year (2010: £1,451 million). The impact from currency on translation of sales was £24 million negative, from prior year acquisitions was £4 million positive, representing sales from GKN Aerospace Services Structures Corp. of which the Group gained management control in April 2010, and from disposals was £2 million negative, representing sales from the Engineering Services division, which was sold in November 2011. The underlying increase in sales of £52 million represented a 4% increase. This increase reflects lower F-22 sales as the programme continued its run down and lower production rates on the C-17, being more than offset by higher civil sales, particularly for the A320, A330 and A380 and also the early stages of the Boeing 787.

Trading profit increased by £4 million to £166 million (2010: £162 million). The impact from currency on translation of results was £3 million adverse and the net impact from acquisitions and divestments was £1 million positive. The trading margin was 11.2% (2010: 11.2%). GKN Aerospace's medium term target margin range has now been increased to 11-13% (from 10-12%).

Capital expenditure on tangible assets in 2011 amounted to £59 million (2010: £51 million) which represents 1.7 times depreciation (2010: 1.3 times), or 0.9 times depreciation excluding the Airbus A350 programme. Expenditure on intangible assets, mainly initial non-recurring programme costs, was £35 million (2010: £26 million). £57 million of the capital expenditure and non-recurring programme costs, including £6 million of capitalised borrowing costs, relate to the A350 wing assembly and trailing edge programme. A total of £128 million had been invested on this programme by 31 December 2011, excluding £11 million of capitalised borrowing costs. Spending, which has now peaked, is likely to reduce to around £33 million in 2012.

Customer advances in the GKN Aerospace businesses, which are shown in trade and other payables in the balance sheet, amounted to £63 million (2010: £70 million).

Return on average invested capital was 22.7% (2010: 23.3%) reflecting the increased investment in new programmes, particularly the A350.

Important milestones:

GKN Aerospace, with industry partners Airbus, AgustaWestland, Rolls-Royce, Umeco and Vestas celebrated the opening of the UK National Composites Centre near Filton, Bristol, UK. GKN Aerospace has been driving forward the use of composites in aviation and is expanding the application of new automated manufacturing techniques that will enable faster and more consistent manufacture of complex composite structures. These techniques will be critical if the industry is to meet rising demand for new aircraft and for aircraft that offer improved performance, lower emissions and reduced maintenance.

GKN Aerospace signed a memorandum of understanding with Commercial Aerospace of China (COMAC) to form a joint venture for composite structures manufacture of the horizontal tailplane for the C919 aircraft, positioning GKN Aerospace in the infancy of the civil aircraft industry in China.

In November, it was announced that a new 14,000 square metre aerospace facility in Orangeburg, South Carolina, USA would be opened in 2012. The facility will house assembly operations for the recently awarded contract for the state of the art all-composite fuselage for the HondaJet (GKN sales of $0.5 million per aircraft).

Also in November, GKN Aerospace delivered the first section of the A350 XWB fixed trailing edge (FTE) assembly comprising the composite port side wing spar with integrated trailing edge ribs, to Airbus, UK. The A350 XWB program is the latest step in a journey that has seen GKN Aerospace become a major supplier of critical wing assemblies for both the A380 and for the A400M.

GKN Aerospace was awarded around $3.5 billion of contract extensions, new programme wins and work scope expansions during the year, including:

·; new multi-year contracts for: UH-60 Blackhawk (5 years); F/A-18 Super Hornet (4 years), F-15 Eagle (7 years); C-130J Super Hercules (5 years); C-17 Transporter (3 years);

·; around $200 million of new customer's business won at Filton including Bombardier C-Series ailerons and life of programme contract for Dassault mid-sized business jet wing structure and moveable surfaces;

·; new $600 million long term agreement with Pratt & Whitney to supply the forward fan case for the Joint Strike Fighter F135 engine; and

·; HondaJet composite fuselage assembly.

In January 2012, the Composite Technology and Applications Limited joint venture with Rolls Royce opened a pre-production facility on the Isle of Wight, UK for the production of composite fan blades for aircraft engines.

GKN Land Systems

GKN Land Systems is a global leading supplier of technology differentiated power management solutions 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 strongly ahead of the prior year and reflected a solid performance against a continued broad market recovery. All regions and sectors enjoyed good growth, especially agriculture and heavy construction equipment in Europe and North America.

The key financial results for the year are as follows:

* Stromag trading profit includes acquisition related charges of £5 million

Against this background, sales in the period were £885 million, 27% higher than the prior year (2010: £699 million). There was no net impact from currency translation and excluding the £38 million of sales in Stromag, the acquisition that completed in September, the underlying increase in sales was £148 million (21%) with all product areas and regions seeing an improvement.

GKN Land Systems reported trading profit of £67 million (2010: £37 million). Underlying trading profit increased by £31 million, with Stromag reducing profit by £1 million, due to acquisition costs and inventory fair value adjustment of £5 million. The trading margin excluding Stromag was 8.0% compared with 5.3% in 2010, reflecting the strong increase in profitability of the division. GKN Land System's medium term target margin range has now been increased to 8-11% (from 7-10%).

Capital expenditure on tangible fixed assets was £18 million (2010: £7 million), 1.3 times (2010: 0.5 times) depreciation.

Return on average invested capital, excluding the Stromag acquisition, increased to 29.5% (2010: 15.8%), reflecting the strong increase in profitability driven by operational process improvements.

Good progress was made in winning new business. Specific areas of success included:

·; double universal joints for Dana and CNH;

·; custom clutch solution for John Deere; and

·; first application of auxiliary pump and high speed shafts in oil exploration.

In addition to achieving strong organic growth and new business wins, on 5 September 2011, GKN Land Systems completed the £170 million acquisition of Stromag.

Stromag is a market leading engineer of industrial power management components. Its core products include hydraulic clutches, electro-magnetic brakes and flexible couplings serving end-markets including renewable energy, agricultural equipment, construction and mining machinery and the metal processing industry. The acquisition is an important step in the implementation of the GKN Land Systems' strategy to build a global leader in industrial power management, extending its capability in electro-mechanical power management components and systems. In combination with the existing business, it provides a strong platform to accelerate growth in existing markets, together with access to a number of new customers and industrial segments, including renewable energy.

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 £106 million (2010: £87 million). Trading profit was £3 million (2010: £3 million) reflecting an improvement in the underlying business offset by the heavy investment by NoNOx, a division of Emitec, into selective catalytic reduction systems, particularly for the truck market.

Hoeganaes' Gallatin plant, USA

As reported with the first half results in August 2011, the Hoeganaes Gallatin plant in the US was temporarily closed on 27 May 2011, following an explosion which resulted in fatalities. Production was gradually brought back during the third quarter. In total, £34 million of incremental shipping, purchasing and plant closure and remedial works costs were recorded. £15 million has subsequently been recovered from external insurance claims. Refer to note 2 for further details.

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 £16 million (2010: £14 million).

Other Financial Information

Restructuring and impairment charges

There were no Group restructuring and impairment charges during the year (2010: £39 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 2011, the net fair value of such instruments was a liability of £84 million (2010: £54 million liability). Where hedge accounting has not been applied, the change in fair value resulted in a charge of £29 million (2010: £3 million charge). There was a £3 million charge arising from the change in the fair value of embedded derivatives in the year (2010: £3 million credit) and a net gain of £2 million attributable to the currency impact on Group funding balances (2010: £12 million net gain). There was a £1 million loss on the change in the fair value of GKN Powder Metallurgy commodity contracts (2010: nil). 

Amortisation of non-operating intangible assets arising on business combinations

The charge for the amortisation of non-operating intangible assets (for example, customer contracts, order backlogs and intellectual property rights) arising on business combinations was £22 million (2010: £19 million). The increase relates to the impact of the acquisitions of Getrag Driveline Products and Stromag.

Gains and losses on changes in Group structure

During the year the Group sold its 49% share in a joint venture company, GKN JTEKT Limited realising a profit of £4 million and its Aerospace Engineering Services business realising a further profit of £4 million. In 2010, the loss of £4 million principally related to the sale and closure of the Axles business.

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 accounts. The Group's share of post-tax earnings of joint ventures in the year was £38 million (2010: £35 million). Post-tax earnings on a management basis were £40 million (2010: £36 million), with trading profit of £49 million (2010: £44 million). The Group's share of the tax charge amounted to £8 million (2010: £7 million) with an interest charge of £1 million (2010: £1 million). Underlying trading profit increased £7 million due to strong performance in our Chinese joint ventures, up £6 million, and improvements in Emitec (up £2 million).

Net financing costs

Net financing costs totalled £61 million (2010: £75 million) and include the non-cash charge on post-employment benefits of £17 million (2010: £31 million) and unwind of discounts of £2 million (2010: £4 million). Interest payable was £47 million (2010: £46 million), whilst interest receivable was £5 million (2010: £6 million) resulting in net interest payable of £42 million (2010: £40 million). Capitalised interest costs attributable to the Group's A350 investment were £6 million (2010: £4 million) and interest charged on UK Government refundable advances was £2 million (2010: £2 million).

The non-cash charge on post-employment benefits arises as the expected return on scheme assets of £153 million (2010: £145 million) was more than offset by interest on post-employment obligations of £170 million (2010: £176 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 £436 million (2010: £363 million), before the net £19 million impact from the temporary closure of the Hoeganaes Gallatin plant, described above. The profit before tax on a statutory basis was £351 million (2010: £345 million).

Taxation

The book tax rate on management profits of subsidiaries was 16% (2010: 11%), arising as a £60 million tax charge on management profits of subsidiaries of £377 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 31% (2010: 32%). The book tax rate is significantly lower, largely because of the recognition of substantial deferred tax assets (mainly in the US, UK and Japan) 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 core strategic tax objectives is to access brought forward tax deductions in order to sustain a 'cash tax' charge on management profits at or below 20%. 'Cash tax' provides a proxy for the cash cost of taxation of management profits. The cash tax charge was 13% (2010: 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 14% (2010: 6%) arising as a £45 million tax charge on statutory profits of £313 million.

Non-controlling interests

The profit attributable to non-controlling interests was £27 million (2010: £20 million) including a£21 million (2010: £15 million) impact from the pension partnership arrangement (see note 14 for further details).

Earnings per share

Management earnings per share was 22.6 pence (2010: 20.7 pence). On a statutory basis earnings per share was 18.0 pence (2010: 19.6 pence). Average shares outstanding in 2011 were 1,553.1 million (see note 3 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 4.0 pence per share (2010: 3.5 pence). The total dividend for the year will, therefore, be 6.0 pence (2010: 5.0 pence), representing a management earnings cover ratio of 3.8 times (2010: 4.1 times). The intention is to have a progressive dividend policy based on a management earnings cover ratio of around 2.5 times. The final dividend is payable on 21 May 2012 to shareholders on the register at 27 April 2012. 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 27 April 2012.

Cash flow

Operating cash flow, which is defined as cash generated from operations of £500 million (2010: £420 million) adjusted for capital expenditure (net of proceeds from capital grants) of £281 million (2010: £190 million), proceeds from the disposal / realisation of fixed assets of £8 million (2010: £5 million) and UK Government refundable advances of nil (2010: £10 million), was an inflow of £227 million (2010: £245 million).

Within operating cash flow there was an outflow of working capital and provisions of £89 million (2010: £59 million outflow). Average working capital as a percentage of sales increased from 6.8% in 2010, to 7.5% in 2011.

Capital expenditure (net of proceeds from capital grants) on both tangible and intangible assets totalled £281 million (2010: £190 million), including £54 million (2010: £39 million) on the A350 programme. Of this, £235 million (2010: £159 million) was on tangible fixed assets and was 1.2 times (2010: 0.8 times) the depreciation charge. Expenditure on intangible assets, mainly initial non-recurring costs on Aerospace programmes, totalled £46 million (2010: £31 million). The Group invested £103 million in the year (2010: £92 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 £147 million (2010: £188 million), after £31 million (2010: £55 million) of expenditure on the Group's restructuring programmes and £19 million in relation to the temporary plant closure at Gallatin. 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 £43 million (2010: £46 million) and tax paid in the year was £38 million (2010: £33 million).

Net borrowings

At the end of the year, the Group had net borrowings of £538 million (2010: £151 million), the increase reflecting the £444 million acquisitions of Getrag Driveline Products and Stromag. The Group's share of net funds in joint ventures was £2 million (2010: £17 million).

Pensions and post-employment obligations

GKN operates a number of defined benefit and defined contribution pension schemes together with historic retiree medical arrangements across the Group. The net amount included within trading profit of £33 million (2010: £26 million) includes the current service cost of £38 million (2010: £35 million) partly offset by credits arising from initiatives taken to reduce the Group's post-employment liabilities. Other net financing charges of £17 million (2010: £31 million) have reduced partly due to the full year impact of the pension partnership arrangement and partly as a result of lower interest on liabilities due to the 30 basis point reduction in the discount rate between 31 December 2010 and 31 December 2009.

UK pensions

The UK defined benefit scheme is a funded plan with all future benefits accrued on a career average basis. A hybrid pension plan providing benefits from an element of both defined benefit and defined contribution arrangements is open to new members. Members currently in employment with the Company represent approximately 18% of total liabilities of £2,650 million (2010: £2,435 million).

The charge relating to the UK defined benefit scheme reflected in Trading Profit included a settlement credit of £2 million, net of expenses, relating to an enhanced transfer value exercise for deferred members of the UK scheme.

The accounting deficit at 31 December 2011 of £259 million was £188 million higher than the deficit at the end of 2010. December 2011 asset values were above those of end December 2010 but the valuations of liabilities at 31 December 2011 were £215 million higher. This increase largely reflected the 70 basis point reduction in discount rate to 4.7% (£274 million) partially offset by the £109 million positive impact from a 35 basis point reduction in the assumption for long term inflation to 3%. 

Overseas pensions

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

Trading profit benefited from the one-time curtailment/past service credit in Japan of £1 million.

The deficit increased by £71 million to £539 million, £54 million of which was as a result of discount rate reductions in the US and Europe by 100 and 10 basis points, respectively.

Retiree medical and life insurance

GKN operates retiree medical and life insurance arrangements in North America and has a scheme, closed to new members, in the UK.

The obligation in respect of all schemes at the end of the year was £70 million compared with £61 million at the end of 2010. The 100 basis point reduction in the US discount rate accounted for £7 million of the £9 million increase.

Summary

At 31 December 2011, the total deficit on post-employment obligations of the Group totalled £868 million (2010: £600 million), comprising the deficit on funded obligations of £465 million (2010: £193 million) and unfunded obligations of £403 million (2010: £407 million). 

Net assets

Net assets of £1,624 million were £63 million lower than the December 2010 year end figure of £1,687 million. The decrease includes actuarial losses on post-employment obligations net of tax of £223 million, adverse currency movements net of tax of £32 million and dividends paid to equity shareholders of £85 million offset by retained profit of £306 million.

Exchange rates

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

The approximate impact on 2011 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 and liquidity

At 31 December 2011, UK committed bank facilities were £755 million. Within this there are committed revolving credit facilities of £675 million that include £445 million of new five year facilities put in place in the second half of the year. The balance of UK committed facilities of £80 million is an eight-year amortising facility from the European Investment Bank (EIB). At 31 December 2011, drawings against the revolving credit facilities were £33 million and the Group drew down in full its £80 million facility from the EIB. The EIB loan is repayable in five £16 million instalments from 2015 and bears a fixed interest rate of 4.1%. Capital market borrowings were £526 million at 31 December 2011 and include unsecured issues of £176 million 7% bonds maturing in May 2012 and £350 million 6.75% bonds maturing in October 2019. The weighted average maturity profile of the Group's committed borrowing facilities was 4.7 years. This leaves the Group well placed in the short term to manage sudden changes in liquidity in the financial markets

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. In addition, the new five-year revolving credit facilities put in place in 2011 contains a financial covenant requiring 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 2011 EBITDA was 12.9 times greater than net interest, whilst net debt was 0.9 times EBITDA.

Financial resources and going concern

At 31 December 2011, the Group had net borrowings of £538 million. In addition, it had available, but undrawn, committed UK borrowing facilities totalling £642 million. The next maturities of the Group's committed UK borrowing facilities are £176 million unsecured bond in May 2012 and £160 million revolving bank credit facilities in July 2013.

The Directors have assessed the future funding requirements of the Group and the Company and compared them to the level of committed available borrowing facilities. The assessment included a review of both divisional and Group financial forecasts, financial instruments and hedging arrangements for the 19 months from the balance sheet date. Major assumptions have been compared to external reference points such as global light vehicle volumes, build schedules from aircraft assemblers and market forecasts from major manufacturers of agricultural and construction machinery.

The forecasts show that the Group will have a sufficient level of headroom in the foreseeable future and an assessment of the likelihood of breaching covenants in this period is considered to be remote.

Having undertaken this work, the Directors are of the opinion that the Group has adequate committed resources to fund its operations for the foreseeable future and so determine 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 underlying 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 deducting current and deferred tax, net debt, post-employment obligations and derivative financial instruments.

APPENDICES