Interim Results

2nd Aug 2007 07:02

GKN PLC02 August 2007 2 August 2007 For immediate release GKN plc 2007 Interim Results Announcement As reported Business performance - (note 1) see notes (1) and (2) below First First First First Half Half Half Half 2007 2006 Change 2007 2006 £m £m £m £m £m Change Sales - including share of joint 2,056 2,001 3% ventures Less share of joint ventures (125) (105) 19% Sales - subsidiaries 1,931 1,896 35 1,931 1,896 2% Trading profit - subsidiaries 137 125 12 137 125 10% Operating profit 113 129 (16) 137 125 10% Share of joint ventures 12 8 4 12 8 50% (post-tax) Net financing costs (24) (15) (9) (24) (15) (60)% Profit before tax 101 122 (21) 125 118 6% Profit after tax 101 104 (3) 122 98 24% Earnings per share - p 14.2 14.6 (0.4) 17.2 13.8 25% 2007 2006 Change Interim dividend per share 4.3p 4.1p 5% Notes (1) Comparative figures for the first half of 2006 have beenre-analysed in respect of amortisation of non-operating intangible assetsarising on business combinations together with losses incurred by the UKcylinder liner business which is in the process of completely ceasingoperations. Trading results of this business are shown in the Income Statementwithin "Profits and losses on sale or closure of businesses". (2) Figures exclude the impact of restructuring and impairmentcharges, amortisation of non-operating intangible assets arising on businesscombinations, profits and losses on sale or closure of businesses and changes infair value of derivative financial instruments. These figures representunderlying performance of continuing businesses. Business performance highlights • Sales up 3%; profit before tax up 6%; and, helped by a lower tax rate, earnings per share up 25% • At constant currency sales are up 8% and profit before tax up 10% • Aerospace and OffHighway both deliver double digit sales and profits growth • Sinter continues to make good progress with higher sales, profits and margins • Driveline produces steady results in line with expectations • New business wins across the Group support above sector growth targets • Dividend increased by 5% to 4.3p Sir Kevin Smith, Chief Executive of GKN plc, commented: "GKN is moving into higher gear in 2007 with all our major businesses makinggood progress. "The strong pound has had a significant impact on the translation of overseassales and profits in our reported results. Notwithstanding this, on all keybusiness performance measures we are ahead of the same period last year.Underlying Group profit before tax at £125 million is 6% ahead on total sales of£2,056 million which are 3% ahead. At constant exchange rates, sales are up 8%and profit before tax up 10%. Overall margins have improved and earnings pershare are also strongly ahead. "Order books have continued to expand. Driveline, Sinter Metals, OffHighway andAerospace have all been successful in winning levels of new business which fullysupport our above sector growth targets. "We have also underpinned those growth targets by launching new, technology ledproducts, making selective bolt-on acquisitions and continuing to invest in astronger emerging markets presence. "GKN is in good shape and looks to the future with confidence." 2007 Outlook Trading in the year to date has been in line with expectations and there is nochange in our view of the Group's prospects for the year as a whole. Second half Automotive production forecasts for Western Europe and North Americaare slightly above last year's levels, as the sharp volume cutbacks seen in thethird quarter of 2006 are not being repeated. Emerging markets look set tocontinue their strong growth. Overall OffHighway market conditions should remain supportive whilst Aerospacemarkets in all sectors are expected to be strong. Against this background, the Group expects to continue its progress for theyear, notwithstanding the impact of high raw material costs and adverse currencytranslation. Driveline should see a better level of second half performance than last yeardue to stronger demand and the benefits of restructuring. Powder Metallurgy isexpected to continue its improvement, although the second half of last yearbenefited from favourable raw material contracts being closed out. OffHighwayand Aerospace should both maintain their progress with the acquisition ofTeleflex also making a modest contribution to the year. Order intake and new business wins continue to run at healthy levels and supportthe Group's confidence in continuing growth. Further Enquiries GKN Corporate Communications Tel:+44 (0)20 7463 2354 The full text of this press release together with the attached financialstatements and notes thereto may be downloaded from www.gkn.com. Interim Report 2007 Board changes On 1 June, Marcus Bryson and Andrew Reynolds Smith were appointed to the Boardas Executive Directors. Marcus Bryson has responsibility for the Group'sAerospace business. Andrew Reynolds Smith has responsibility for our PowderMetallurgy, OffHighway and Industrial Distribution Services businesses. Inaddition, Nigel Stein has assumed executive responsibility at Board level forthe Group's Automotive businesses. He will also retain his current post asFinance Director until the appointment of a successor. Basis of Reporting The financial statements for the period are shown on pages 16 to 29 and havebeen prepared using accounting policies which were used in the preparation ofaudited accounts for the year ended 31 December 2006 and which will form thebasis of the 2007 Annual Report. Further details on the basis of preparation are shown on page 23. Measurement and reporting of performance In this press release, in addition to statutory measures of profit, we have madereference to profits and earnings excluding the impact of: o strategic restructuring and impairment charges, o amortisation of non-operating intangible assets arising onbusiness combinations, o profits and losses on sale or closure of businesses, and o changes in the fair value of derivative financial instruments, since we believe they show more clearly the underlying trend in businessperformance. Trading profit is defined as operating profit before any of the above. Closure of business: The 2006 trading profit of the Group, both at the half andfull year, has been re-analysed in respect of the results of GKN SheepbridgeStokes, the UK cylinder liner business which formed a significant component ofthe Other Automotive segment. The closure of this operation was announced inJanuary 2007. Trading will cease during the second half of the year and itstrading results are shown as a separate component of operating profit within thecaption "Profits and losses on sale or closure of businesses". Sales of thebusiness in the period were £13 million (first half 2006 - £15 million) and areincluded in total Group sales. First half 2006 figures have also been re-analysed in respect of amortisation ofnon-operating intangible assets arising on business combinations. This is nowshown as a separate component of operating profit, having previously beenincluded within trading profit on the grounds of materiality. In the segmental analysis, comparative figures for the Driveline and OffHighwaysegments have been restated by equal and opposite amounts in respect of twobusinesses formerly reported in Driveline, the customer and product base ofwhich has become increasingly focused on off-highway applications. Where appropriate, reference is also made to results excluding the impact of2006 acquisitions and divestments as well as the impact of currency translationon the results of overseas operations. Exchange rates used for currencies most important to the Group's operations are: Average Period End 2006 Full Year First Half June June Period 2007 2006 2007 2006 Average End Euro 1.48 1.46 1.49 1.45 1.47 1.48US Dollar 1.97 1.79 2.01 1.85 1.84 1.96 The approximate impact on annual trading profit of a 1% movement in the averagerate is Euro - £1.2 million, US Dollar - £0.5 million. In our internal performance reporting we aggregate our share of sales andtrading profits of joint ventures with those of subsidiaries. This isparticularly important in assessing sales and profit progress in our Drivelineand Other Automotive businesses where significant activity takes place in jointventures. Reference to these combined figures is made, where appropriate, as"management sales" and "management trading profits". Changes in the composition of the Group The first half results contain a full six months' contribution from a number ofacquisitions made during the course of 2006. These were the OffHighwaybusinesses of Hytecomp AB (June), Rockford Powertrain Inc (August) and LiuzhouSteel Rim Factory (November) together with the Aerospace business StellexAerostructures Corporation (September). Comparison with the first half of 2006 is also affected by the disposal of theGKN Driveline subsidiary Fujiwa Machinery Industry (Kunschan) Company ("Fujiwa")which took place in March 2006. Where appropriate, reference is made to the impact of these acquisitions anddivestments in the remainder of this review. As reported above, on 16 January 2007 we announced the closure of manufacturingoperations of GKN Sheepbridge Stokes Ltd and this business will cease trading inSeptember. On 29 June 2007 the acquisition of the Teleflex Aerospace Manufacturing Group ofTeleflex, Inc. was completed. Its results will be consolidated from that dateand there has been no impact on Group results for the first half year. Group Performance Management sales (subsidiaries and share of joint ventures) £2,056 million(first half 2006 - £2,001 million) On a management basis (i.e. including the Group's share of joint ventures) salesof continuing businesses totalled £2,056 million compared with £2,001 million inthe same period of last year, an increase of £55 million (3%). The adverseimpact of currency on translation was £95 million (5%) and there was a netbenefit of £57 million (3%) from acquisitions and divestments. The underlyingincrease was £93 million (5%). Sales of subsidiaries £1,931 million (first half 2006 - £1,896 million) Subsidiaries' sales for the period were £1,931 million (first half 2006 - £1,896million). The effect of exchange rates on the translation of the sales ofoverseas subsidiaries was £89 million (5%) negative which was partially offsetby the net £57 million (3%) positive impact of 2006 acquisitions anddivestments. Excluding these factors, sales of continuing subsidiaries increasedby £67 million (4%) with increases in all divisions except Other Automotive,where there was a modest reduction. Share of sales of joint ventures £125 million (first half 2006 - £105 million) The Group's share of joint venture sales was £125 million compared with £105million in the first half of 2006. There were no acquisitions or divestments andthe impact of exchange rates was £6 million negative. The underlying increase of£26 million (26%) came from strong growth in Driveline's Chinese joint venturesand in Other Automotive where Emitec saw a sharp increase in demand. Management trading profit (subsidiaries and joint ventures) £153 million (firsthalf 2006 restated - £136 million) The aggregated trading profit of subsidiaries and our share of joint venturesrose from £136 million to £153 million, an increase of £17 million (13%). Thetranslational impact of currency was £5 million negative and there was a netbenefit of £9 million from acquisitions and divestments. The underlying increasewas £13 million (10%) with a 6% improvement in subsidiaries and strong resultsfrom Driveline joint ventures as well as the Other Automotive joint ventures ofChassis Systems Ltd and Emitec. Trading profit of subsidiaries £137 million (first half 2006 restated - £125million) Trading profit of continuing subsidiaries rose to £137 million from £125 million(restated) in the first half of 2006. The impact of currency was £4 millionnegative which was more than offset by a £9 million net positive contributionfrom acquisitions and divestments. The underlying increase was £7 million, animprovement of 6%. Within this figure, Driveline was £2 million lower, largelyas a result of higher raw material costs, not all of which could be recovered,and the impact of material shortages in Europe. With conditions in most marketsgenerally favourable compared with the same period last year, all otherdivisions showed progress. However, this was restricted to some extent as higherraw material costs, particularly in Hoeganaes, were only partially offset bycost savings from strategic restructuring and the favourable impact of progresson certain environmental remediation activities. Share of trading profit of joint ventures £16 million (first half 2006 - £11million) The trading profit of joint ventures increased by £5 million (45%) mainly as aresult of the higher sales noted above together with the resolution ofoutstanding pricing issues in Other Automotive. The Group's share of post-tax profits of joint ventures increased from £8million to £12 million. Divisional Performance The Group operates mainly in the global automotive, off-highway and aerospacemarkets. Virtually the whole of Driveline and Other Automotive sales are in theautomotive market to manufacturers of passenger cars and light vehicles. Some80% of Powder Metallurgy sales are also to this market with the balance to otherindustrial customers. OffHighway sells to producers of agricultural,construction and industrial equipment whilst Aerospace sells to manufacturers ofmilitary and civil aircraft, aircraft engines and equipment. The Group'sperformance is heavily influenced by conditions in these markets and the currentbehaviour of both end markets and costs is discussed in the relevant sections ofthis report. Automotive Markets In general, automotive markets in the period behaved as anticipated earlier thisyear. In the mature markets, production of cars and light vehicles in Western Europewas 1.3% higher than the first half of 2006 at 8.5 million vehicles, Japaneseproduction was up by 0.8% to 5.6 million, while North American production was4.8% lower at 7.8 million. In emerging markets, recent growth trends continued with China up by 19.8% to4.0 million vehicles, India 16.5% to 1.0 million and Brazil 5.7% to 1.3 million. For the full year, Global Insight-DRI forecasts suggest a slightly more positivepattern in mature markets with Western Europe increasing by 1.7%, Japan by 1.8%and North America down by only 1.4%. Global Insight-DRI's year on year forecastsfor emerging markets are for sustained growth of 19.5% in China and 8.1% inBrazil but some slowing is anticipated in India to 12%. Costs The major raw material for our automotive businesses is steel (bar and scrap)either directly or through steel based products. During the six months to June,prices for scrap steel and nickel were somewhat higher than had been expectedand in most cases the increases could not be fully recovered in the period.There have been recently some signs of easing of nickel prices but, in general,input prices for the year as a whole look likely to be slightly higher thanpreviously anticipated. GKN Driveline (Subsidiaries' Trading Profit £71 million; first half 2006restated - £76 million) GKN Driveline comprises GKN Driveshafts, which is the global leader in theproduction of constant velocity jointed ("CVJ") products for use in lightvehicle drivelines, Torque Technology, which produces a wide variety ofcomponents aimed at actively managing the flow of torque to the driven wheelsand Industrial and Distribution Services ("IDS"). By comparison with 2006, theresults of the double universal joint business whose customer and product basehas become increasingly focused on off-highway applications are now reportedwithin that segment. Comparative figures have been restated accordingly. Driveline subsidiary sales in the period were £969 million compared with £999million in the first half of 2006. The negative impact of currency translationwas significant at £47 million and a further £5 million reduction arose as aresult of the 2006 divestment of Fujiwa. Excluding these factors, salesincreased by £22 million (2%), mainly as a result of improvements in TorqueTechnology which benefited from the ongoing recovery of Mitsubishi, its majorcustomer. As anticipated, Driveshafts' underlying sales were flat by comparisonwith the same period of last year. Driveline subsidiaries' trading profit of £71 million was £5 million lower thanthe same period of 2006. Currency accounted for £2 million of the reduction andthere was a further reduction of £1 million because of divestments. Theremaining £2 million reduction largely reflected the flat sales and raw materialissues in Driveshafts where, in addition to increased costs, the higher thanexpected production levels in Europe led to shortages of certain steel productscausing operational inefficiencies and some increased costs of distribution.These additional costs were not fully offset by cost savings from the strategicrestructuring programme and improvements in Torque Technology and IDS. Subsidiaries' margin in the period was 7.3% compared with 7.6% in the first halfof 2006. Driveline joint ventures, the principal one being Shanghai GKN Drive ShaftCompany Ltd, saw good growth in both sales and profit so that on a managementbasis (i.e. including the Group's share of joint ventures) total divisionalsales showed £32 million (3%) underlying growth to £1,032 million. On the samebasis, trading profit of £79 million compared with £82 million in 2006 whichreflected a 1% improvement in underlying performance. Margin of 7.7% comparedwith 7.8% a year earlier. Early in the half, Driveshafts announced the final stage of its strategicrestructuring plan. Costs charged in the period totalled £9 million, with thetotal for the year still expected to be some £29 million as actions take placein the second half of the year in line with plan. Benefits remain as anticipatedearlier in the year. During the period, Driveshafts was again successful in obtaining new andreplacement business and won some 68% (first half 2006 - 75%) of all availablesideshaft business, equating to approximately 50% of the total market.Production of countertrack (TM)joints for two major European vehiclemanufacturers will begin in 2008 and annual volume is expected to grow to some 3million joints by the end of 2010. The first production application of the division's torque vectoring technologywas announced in July. This will be used in volume application in future BMWvehicles, and interest from major vehicle manufacturers in torque vectoring andother axle control technologies is being actively developed. During the first half, Torque Technology also won business from new customers inChina, Europe and South Korea in addition to further orders across all productareas from existing Japanese and US customers. Other Automotive (Subsidiaries' Trading Profit £nil; first half 2006 restated -loss £4 million). Following the announced closure of GKN Sheepbridge Stokes the results of whichare excluded from the above, subsidiary operations comprise the UKAutostructures business together with the recently established Chinese cylinderliner manufacturer. The businesses manufacture structural chassis components forthe passenger car, SUV and light vehicle markets in Western Europe and enginecylinder liners for the North American and, increasingly, Chinese truck markets. Excluding GKN Sheepbridge Stokes, sales in the period of £44 million were £5million lower than the first half of 2006, largely as a consequence of customermodel changes in the UK. The division broke even in the half (first half 2006 restated - £4 million loss)as prior period start-up losses were not repeated and residual legacy issueswere favourably resolved. Within joint ventures, Chassis Systems Ltd had a good first half as underlyingsales again increased and the finalisation of contractual pricing arrangementsprovided a one-off benefit. Emitec continued to benefit from the retrofit activity triggered by therequirements of environmental legislation in Germany in 2006. On a management basis (i.e. including the Group's share of joint ventures)divisional sales were £104 million compared with £94 million in the first halfof 2006 and trading profit increased to £8 million from £1 million in the sameperiod of last year. Margin on a management basis was 7.7% compared with 1.1% inthe same period of 2006. Powder Metallurgy (Trading Profit £15 million; first half 2006 - £13 million) Powder Metallurgy produces metal powder (Hoeganaes) and sintered products(Sinter Metals). Approximately 80% of sales are into the automotive market withthe balance to a variety of other industrial manufacturers. Sales in the period were £309 million compared with £313 million in the sameperiod in 2006. Excluding the impact of currency on translation, there was anincrease of £14 million (5%) with improvements in both Europe and Asia Pacificbut a reduction in North America as a result of the lower level of vehicleproduction. Programme launches in the second half are anticipated to accelerategrowth. First half trading profit improved to £15 million from £13 million with theunderlying figure (excluding currency) also up by £2 million (15%). In SinterMetals there were increased profits in both the Americas and Europe but therewas a reduction in Hoeganaes, largely as a consequence of higher raw materialand energy costs not fully recovered in the period. The division's trading margins in the first half improved to 4.9% from 4.2% inthe same period of 2006, with Sinter rising to over 5%. The second half shouldsee continued improvement as Hoeganaes recovers first half cost increases andSinter Metals sees the further top line growth referred to above. Approximately £50 million of new business was won in the period which willcontinue to support the anticipated annual growth rate of 6%-8% for 2008 andbeyond. There was also further success in moving Sinter's technology into newproduct areas and a number of development contracts were entered into withvehicle manufacturers and fellow tier one suppliers. The final elements of the restructuring programme which were announced inFebruary this year are proceeding according to plan and the final plant closureswill be completed during the second half of the year. Following the first halfcharge of £5 million, the total charge for the year is expected to be in theregion of £8 million, in line with earlier expectations. In China production of the first powder metal parts commenced in line with planin May, and in Argentina work began on the construction of a new plant tosupport the anticipated high growth in demand in South America. OffHighway (Trading Profit £19 million; first half 2006 restated - £13 million) OffHighway designs and manufactures steel wheels, gearboxes, axles and drivelinesystems for the global agricultural, construction, mining and industrialmachinery sectors. European agricultural markets performed strongly with demand up more than 5% bycomparison with the first half of 2006, fuelled by a 4% increase in farm incomesin 2006. Current expectations are for demand to remain strong. In the US,agricultural machinery demand was down by 2%-3% but the growing interest inbio-fuels has led to corn planting reaching the highest level for over 60 yearsand this may lead to increased equipment sales in the next six to twelve months. In construction the picture has been mixed. In the US, the lower level ofhousing starts has led to a decline in demand for light and medium constructionequipment but demand remained strong in mining and extraction markets. Thispattern is expected to continue for the remainder of the year. European and Asiavolumes continued to increase. The major input cost is steel where prices were higher in the first half of 2007than the same period of 2006. Although pricing agreements are in place whichenabled recovery of most of the increases, the timing of their application meantthat there was some under recovery in the period. Prior period sales and profits have been restated to reflect the transfer ofbusinesses previously reported as part of the Driveline division. Sales in the first half were £219 million compared with £186 million in the sameperiod of last year. 2006 acquisitions, mainly Rockford Powertrain, accountedfor £22 million but currency was £6 million negative leaving the underlyingincrease at £17 million (9%). The 2006 acquisitions have integrated well andhave resulted in a considerably greater presence in the construction sectorwhich now accounts for approximately 30% of divisional sales. Trading profit also improved significantly to £19 million from £13 million.Acquisitions contributed £4 million so that the underlying increase, afterabsorbing unrecovered material price increases, was £2 million, largelyreflecting the increase in sales. Margin improved from 7.0% to 8.7%. During the period, the first deliveries of agricultural power take-off shaftswere made from the new factory in Shanghai, and the recently acquired wheelsfactory in Liuzhou increased sales to Chinese customers. Volume production forexport is expected to start later in the year. GKN Aerospace (Trading Profit £38 million; first half 2006 - £33 million) GKN Aerospace is a global first tier supplier of airframe and engine structures,components, assemblies and engineering services to aircraft prime contractors. The generally buoyant aerospace market conditions of 2006 continued into thefirst half of 2007 with strength in both civil and military sectors whichappears likely to be sustained for some time. During the period Airbus andBoeing delivered 451 aircraft, an increase of 9% over the first half of 2006 andboth are anticipating a similar pattern in the second half. Military demand,which is largely driven by US defence spending, is also likely to remain solidin the short term and there are good growth prospects in regional aircraft, aswell as business and light jet markets. Sales in the first half of £377 million were £43 million (13%) higher than thesame period of 2006. Currency was £18 million negative while Stellex, acquiredin September 2006, added £40 million. The underlying increase of £21 millionrepresented a 7% improvement and arose from increased deliveries across a rangeof US military programmes. Trading profit increased by £5 million to £38 million. The impact of currency ontranslation was £2 million negative and Stellex added £6 million so that theunderlying increase was £1 million (3%). The margin improved to 10.1% from 9.9%in the first half of 2006. During the period, a number of important wins including the Sikorsky CH53K afttransition, Boeing 737/767 winglets and 747-8 exhausts have secured new businesswhich will further underpin future growth. The division was also awarded a £10million development phase contract for the entire composite fuselage of theHonda business jet where entry into service is planned for 2009. At the end of June, the division acquired the Aerospace Manufacturing Group ofTeleflex, Inc. which has annual sales of approximately £70 million and producesengine cases, fan blades, blisks, impellers and other components for theaerospace engine and power generation markets. The acquisition is in line withthe divisional strategy of acquiring complementary technologies and addsproducts in the hot and rotating areas of the engine to our existingcapabilities on critical elements of the cold section. Corporate Costs (£6 million; first half 2006 - £6 million) Corporate costs, which comprise the costs of stewardship of the Group, remainedat the same level as the first half of 2006. Restructuring and impairment charges (£13 million; first half 2006 - £24million) The first half charges of £13 million mainly related to the final phase of theprogramme first announced in March 2004 to re-align productive capacity in GKNDriveline, accelerate recovery in Powder Metallurgy and reduce overheadselsewhere in the Group. The restructuring element was £14 million whichconsisted of £6 million redundancy (first half 2006 - £14 million) and £8million other reorganisation costs (first half 2006 - £10 million). In addition, there was a £1 million credit (first half 2006 - £nil) relating tothe reversal of a prior year asset impairment at GKN Sheepbridge Stokes. Thecost of completing the strategic restructuring programme is estimated at £23million, most of which is likely to be charged in the second half of 2007. Amortisation of non-operating intangibles arising on business combinations (£3million; first half 2006 restated - £1 million) The charge of £3 million in the period was £2 million higher than in the sameperiod of 2006 with the increase arising in respect of intangible assets (e.g.customer contracts and relationships, brands, technological know-how andintellectual property rights) of the Rockford and Stellex acquisitions made inthe second half of 2006. Profits and losses on sale or closure of businesses (loss £7 million; first half2006 restated - £nil) The loss of £7 million in the period related to the results of the Group's UKcylinder liner business, GKN Sheepbridge Stokes, the closure of which wasannounced in January 2007 and where trading will cease in the second half of theyear. Costs of closure will be partially offset by the profit on disposal ofland and buildings where a binding sale agreement now exists. As a consequence,there are unlikely to be further charges in the second half. Changes in the fair value of derivative financial instruments (£1 millioncharge; first half 2006 - credit £29 million) The Group enters into foreign exchange contracts to hedge much of itstransactional exposure. Hedge accounting continues to be applied to a smallproportion of these transactions. Where hedge accounting has not been applied,the change in fair value between 1 January 2007 and 30 June 2007, or the date ofmaturity if earlier, is reflected in the income statement as a component ofoperating profit and has resulted in a charge of £1 million (first half 2006 -£30 million credit). In addition, between these dates, there were changes in thevalue of Powder Metallurgy commodity contracts and Aerospace embeddedderivatives of, respectively, £1 million credit (2006 - £4 million credit) and£1 million charge (2006 - £5 million charge). Operating profit £113 million (first half 2006 - £129 million) Operating profit of £113 million compared with £129 million in the first half of2006, reflecting the movements discussed above. Post tax earnings of joint ventures (£12 million; first half 2006 - £8 million) The post tax earnings of joint ventures in the period increased to £12 millionfrom £8 million a year earlier. Within this, trading profit improved by £6million to £16 million with strong growth in Driveline and Other Automotivebusinesses which are discussed in more detail above. Net financing costs (£24 million; first half 2006 - £15 million) Net financing costs totalled £24 million (first half 2006 - £15 million) andincluded financing costs of post-employment benefits of £1 million (first half2006 - £2 million). The net of interest payable and interest receivable was £23million (first half 2006 - £13 million). The £10 million increase was largely asa result of lower interest received from the reduced level of surplus fundstogether with a reduction in the interest benefit from foreign currency debtinstruments used to hedge the Group's overseas investments. Whilst the benefitderived from these instruments will be consistent year on year, by comparisonwith the same period last year, the first half 2007 benefit is £3 million lowerdue to the impact of exchange rate positions at the respective half year ends. Profit before tax (£101 million; first half 2006 - £122 million) Profit before tax on a statutory basis was £101 million compared with £122million in the first half of 2006. Excluding the impact of restructuring andimpairment charges, amortisation of non-operating intangible assets arising onbusiness combinations, profits and losses on the sale or closure of businessesand changes in fair value of derivative financial instruments, the figure was£125 million (first half 2006 restated - £118 million), an increase of 6%. Atconstant currency the increase was £11 million (10%). Taxation (£nil; first half 2006 - £18 million charge) The tax charge for subsidiaries for the period, including deferred taxation, was£nil (first half 2006 - £18 million). Within this figure was a credit for taxrelief on restructuring items and profits and losses on sale or closure ofbusinesses of £5 million (first half 2006 - £4 million) and there was a chargeof £2 million relating to changes in fair value of derivative financialinstruments (first half 2006 - £2 million charge). Excluding these items, the tax charge as a percentage of profit before tax,before restructuring and impairment charges, amortisation of non-operatingassets arising on business combinations, profits and losses on sale or closureof businesses and changes in fair value of derivative financial instruments, is2.7% compared with 18.2% (restated) in the first half of 2006. This reduction isprimarily due to the 2007 tax charge benefiting from the recognition and use ofsignificant previously unrecognised deferred tax assets in respect of losses inthe UK, US and Japan totalling £23 million. The recognition of these deferredtax assets has been based upon management projections which indicate animprovement in future taxable profits in the various territories. Other factorsaffecting the rate include an increase due to a smaller credit from prior yearitems of £2 million (first half 2006 - £14 million credit) offset by abeneficial impact from profit mix, use of other previously unrecognised deferredtax assets and statutory tax rate reductions. Minority Interests (£1 million; first half 2006 - £nil) The movement of £1 million in the profit attributable to minority interests waslargely attributable to the elimination of losses in the recently formed Chinesecylinder liner company. Earnings per share Earnings per share were 14.2p (first half 2006 - 14.6p). Before restructuringand impairment charges, amortisation of non-operating intangible assets arisingon business combinations, profits and losses on the sale or closure ofbusinesses and changes in the fair value of derivative financial instruments,the figure was 17.2p (first half 2006 restated - 13.8p). Dividend The Board has decided to pay an interim dividend of 4.3p per share, representingan increase of 5% over the 2006 interim dividend. The cost of the dividend willbe £30 million (first half 2006 - £29 million). The interim dividend will be paid on 28 September 2007 to shareholders on theregister at 17 August 2007. Shareholders may choose to use the DividendReinvestment Plan (DRIP) to reinvest the interim dividend. The closing date forreceipt of new DRIP mandates is 14 September 2007. Cash Flow Operating cash flow, which we define as cash generated from operations of £98million inflow (first half 2006 - £98 million outflow) adjusted for capitalexpenditure of £89 million (first half 2006 - £106 million) and proceeds fromthe disposal of fixed assets of £7 million (first half 2006 - £6 million), wasan inflow of £16 million compared with an outflow of £198 million (after the£200 million payment into the UK pension scheme) in the first half of 2006. Within operating cash flow there was an outflow on working capital andprovisions of £87 million (first half 2006 - £73 million) reflecting both theusual seasonal factors and some incremental investment in inventory ahead of newAerospace and Powder Metallurgy programmes. Capital expenditure on both tangible and intangible assets totalled £89 million(first half 2006 - £106 million). Of this, £80 million (first half 2006 - £93million) was on tangible fixed assets and was 1.1 times (first half 2006 - 1.3times) the depreciation charge. The ratio for the full year is expected to be ata similar level. Expenditure on intangible assets, mainly initial non-recurring costs onAerospace programmes, totalled £9 million (first half 2006 - £13 million). Net interest paid totalled £25 million compared with £18 million in the sameperiod last year, reflecting the lower level of surplus funds mainly as a resultof the 2006 contribution to the UK pension scheme and acquisitions made in thesecond half of that year. Tax paid in the period was £14 million (first half 2006 - £10 million). Expenditure on acquisitions, net of cash acquired, was £70 million (first half2006 - £2 million) while the cost of the 2006 final dividend was £61 million(first half 2006 - £59 million). Period end borrowings totalled £574 million compared with £358 million at 30June 2006 and £426 million at the end of December 2006. Post-employment costs Post-employment costs comprise both pensions and post-employment medicalbenefits. Details of the amounts included in the Balance Sheet and theassumptions used in their computation are shown in Note 9 on page 28. Income Statement For the six month period, the current service cost included in operating profitwas £17 million compared with £19 million in the first half of 2006. Thedecrease was principally in the UK and Americas mainly as a consequence of theend 2006 valuation assumptions of higher expected returns partially offset bythe increase in the discount rate. Financing charges in respect of post-employment obligations totalled £1 million(first half 2006 - £2 million) and comprised expected returns on pension schemeassets for the period of £74 million (first half 2006 - £68 million) which weremore than offset by the £75 million (first half 2006 - £70 million) of notionalinterest on pension scheme liabilities. Balance Sheet and funding The gross deficit of all schemes at 30 June 2007 was £355 million, a £206million reduction over December 2006, which is shown on the Balance Sheet as anon-current liability. Discount rate increases in the UK, Americas and Europereduced liabilities by £235 million from levels at 31 December 2006. Company contributions for the six months across the Group totalled £21 millionand compared with first half 2006 contributions of £221 million which included a£200 million one-off contribution to the UK scheme. UK Post-Employment Obligations The gross deficit of £14 million was £174 million lower than the December 2006year end figure of £188 million. The £208 million reduction in liabilities dueto the 70 basis point higher discount rate was partially offset by liabilityincreases arising from other assumption changes. Mortality assumptionsunderlying the valuation will be reviewed in the second half following theannual publication of scheme specific mortality experience. This is likely tolead to some increase in the reported deficit. Cautionary Statement This press release contains forward looking statements which are made in goodfaith based on the information available to the time of its approval. It isbelieved that the expectations reflected in these statements are reasonable butthey may be affected by a number of risks and uncertainties that are inherent inany forward looking statement which could cause actual results to differmaterially from those currently anticipated. APPENDICES GKN Consolidated Financial Statements Consolidated Income Statement for the half year ended 30 June 2007 Consolidated Balance Sheet at 30 June 2007 Consolidated Statement of Changes in Equity for the half year ended 30 June 2007 Consolidated Cash Flow Statement for the half year ended 30 June 2007 Consolidated Cash Flow Statement - Notes Notes Auditors' Review Opinion CONSOLIDATED INCOME STATEMENTFOR THE HALF YEAR ENDED 30 JUNE 2007 Unaudited Notes First First Full half half year 2007 2006 2006 2 Restated Restated £m £m £m Sales - subsidiaries * 1 1,931 1,896 3,634---------------------------------------------------------------------------------- Trading profit 137 125 251Restructuring and impairment charges (13) (24) (74)Amortisation of non-operating intangible assetsarising onbusiness combinations (3) (1) (3)Profits and losses on sale or closure of (7) - (4)businessesChanges in fair value of derivative financial (1) 29 33instruments----------------------------------------------------------------------------------Operating profit 1/3 113 129 203---------------------------------------------------------------------------------- Share of post-tax earnings of joint ventures 1/4 12 8 17 Interest payable (30) (27) (57)Interest receivable 7 14 23Other net financing charges (1) (2) (4)----------------------------------------------------------------------------------Net financing costs 5 (24) (15) (38)---------------------------------------------------------------------------------- Profit before taxation 101 122 182 UK taxation 9 (2) 10Overseas taxation (9) (16) (15)----------------------------------------------------------------------------------Taxation 6 - (18) (5)---------------------------------------------------------------------------------- Profit after taxation for the period 101 104 177---------------------------------------------------------------------------------- Profit attributable to minority interests 1 - -Profit attributable to equity shareholders 100 104 177---------------------------------------------------------------------------------- 101 104 177---------------------------------------------------------------------------------- Earnings per share - p 7Basic 14.2 14.6 25.0Diluted 14.2 14.5 24.9 Dividends 8Payments to shareholders - £m 61 59 88Interim dividend per share - p 4.3p 4.1p 4.1pFinal dividend per share - p - - 8.7p There were no discontinued operations in any of the above periods. * Includes sales of £13 million (first half 2006: £15 million, full year 2006: £27million) made by the Group's UK cylinder liner manufacturing operation which is inthe process of completely ceasing operations. CONSOLIDATED BALANCE SHEETAT 30 JUNE 2007 Unaudited 30 June 30 June 31 December 2007 2006 2006 Notes £m £m £mAssetsNon-current assetsIntangible assets - goodwill 10 283 230 245 - other 111 59 111Property, plant and equipment 12 1,348 1,334 1,354Investments in joint ventures 93 82 83Other receivables and investments including loans to 17 20 24joint venturesDeferred tax assets 66 115 114------------------------------------------------------------------------------------ 1,918 1,840 1,931------------------------------------------------------------------------------------Current assetsInventories 515 469 470Trade and other receivables 647 603 520Derivative financial instruments 46 41 32Cash and cash equivalents 206 411 342------------------------------------------------------------------------------------ 1,414 1,524 1,364------------------------------------------------------------------------------------Assets held for sale 4 2 -------------------------------------------------------------------------------------Total assets 3,336 3,366 3,295------------------------------------------------------------------------------------ LiabilitiesCurrent liabilitiesBorrowings (54) (35) (39)Derivative financial instruments (12) (13) (11)Trade and other payables (812) (766) (743)Current income tax liabilities (94) (108) (93)Provisions (52) (48) (66)------------------------------------------------------------------------------------ (1,024) (970) (952)------------------------------------------------------------------------------------Non-current liabilitiesBorrowings (726) (734) (729)Deferred tax liabilities (72) (67) (63)Other payables (31) (24) (29)Provisions (48) (70) (53)Post-employment obligations 9 (355) (549) (561)------------------------------------------------------------------------------------ (1,232) (1,444) (1,435)------------------------------------------------------------------------------------Total liabilities (2,256) (2,414) (2,387)------------------------------------------------------------------------------------ Net assets 1,080 952 908------------------------------------------------------------------------------------ EquityOrdinary share capital and share premium 399 394 396Retained earnings and other reserves 663 540 496------------------------------------------------------------------------------------Total shareholders' equity 1,062 934 892Minority interest - equity 18 18 16------------------------------------------------------------------------------------Total equity 1,080 952 908------------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE HALF YEAR ENDED 30 JUNE 2007 Unaudited First half First half Full year 2007 2006 2006 Notes £m £m £mAt 1 January 908 901 901Amounts not recognised in the Income Statement Currency variations (12) (60) (124) Derivative financial instruments: Transactional hedging - 1 1 Translational hedging 11 15 43 Actuarial gains on post-employment obligations including tax: Subsidiaries 128 78 40 Joint ventures - - -Net profits/(losses) not recognised in the Income Statement 127 34 (40)------------------------------------------------------------------------------------------------------Profit for the period 101 104 177------------------------------------------------------------------------------------------------------Total recognised income for the period 228 138 137------------------------------------------------------------------------------------------------------Transactions with shareholders Share issues 13 3 1 3 Purchase of treasury shares 13 - (22) (40) Dividends 8 (61) (59) (88)------------------------------------------------------------------------------------------------------ (58) (80) (125)------------------------------------------------------------------------------------------------------Other adjustments Share-based payments 2 2 5 Minority interests - (8) (9) Accumulated currency variations realised on sale of business - (1) (1)------------------------------------------------------------------------------------------------------ 2 (7) (5)------------------------------------------------------------------------------------------------------At end of period 1,080 952 908------------------------------------------------------------------------------------------------------ CONSOLIDATED CASH FLOW STATEMENTFOR THE HALF YEAR ENDED 30 JUNE 2007 Unaudited First half First half Full year 2007 2006 2006 £m £m £mCash flows from operating activitiesCash generated from operations (note a) 98 (98) 117Interest received 4 8 25Interest paid (29) (26) (58)Tax paid (14) (10) (31)Dividends received from joint ventures 3 2 7----------------------------------------------------------------------------------------------------------- 62 (124) 60----------------------------------------------------------------------------------------------------------- Cash flows from investing activitiesPurchase of property, plant and equipment and intangible assets (89) (106) (230)Proceeds from sale of property, plant and equipment 7 6 13Acquisitions of subsidiaries (net of cash acquired) (70) (2) (126)Proceeds from sale of businesses (net of cash disposed) - 3 13Investment loans and capital contributions 2 - 1----------------------------------------------------------------------------------------------------------- (150) (99) (329)----------------------------------------------------------------------------------------------------------- Cash flows from financing activitiesNet proceeds from issue of ordinary share capital 3 1 3Purchase of treasury shares - (22) (40)Finance lease payments (1) (1) (1)Net movement in borrowings 1 8 34Dividends paid to shareholders (61) (59) (88)Dividends paid to minority interests - - (1)----------------------------------------------------------------------------------------------------------- (58) (73) (93)----------------------------------------------------------------------------------------------------------- Currency variations on cash and cash equivalents 1 (5) (7)----------------------------------------------------------------------------------------------------------- Movement in cash and cash equivalents (note b) (145) (301) (369)Cash and cash equivalents at 1 January 328 697 697-----------------------------------------------------------------------------------------------------------Cash and cash equivalents at end of period (note c) 183 396 328----------------------------------------------------------------------------------------------------------- Cash inflows from government capital grants of £1 million (first half 2006: £nil, full year 2006: £3 million) have been offset against purchases of property, plant and equipment and intangible assets. CONSOLIDATED CASH FLOW STATEMENT - NOTESFOR THE HALF YEAR ENDED 30 JUNE 2007 Note a: Cash generated from operations Unaudited First First Full year half half 2007 2006 2006 Restated* £m £m £mCash generated from operationsOperating profit 113 129 203Adjustments for:Amortisation of non-operating intangible assets arising 3 1 3on business combinationsProfits and losses on sale of businesses - (5) (5)Changes in fair value of derivative financial 1 (29) (33)instrumentsImpairment/reversal of impairment of fixed assets (1) - 1Impairment of goodwill - - 11Amortisation of government capital grants (2) (1) (3)Depreciation and amortisation 74 74 145Net profits on sale of fixed assets (1) (1) (3)Charge for share-based payments 2 2 5Movement in post-employment obligations (4) (195) (204)Changes in working capital and provisions (87) (73) (3)------------------------------------------------------------------------------------- 98 (98) 117-------------------------------------------------------------------------------------* See note 2 Cash generated from operations includes a £2 million outflow arising from the Group'sUK cylinder liner manufacturing operation which is in the process of completelyceasing operations (first half 2006: £6 million outflow, full year 2006: £14 millionoutflow). Cash generated from operations in the 2006 comparatives includes the £200million additional pension contribution which the Group made to its UK pension schemein March 2006. Note b: Movement in net debt Unaudited First First Full year half half 2007 2006 2006 £m £m £mMovement in cash and cash equivalents (145) (301) (369)Net movement in borrowings (5) (8) (36)Currency variations on borrowings 1 3 34Finance leases 1 1 1Subsidiaries acquired and sold - 12 9-------------------------------------------------------------------------------------Movement in period (148) (293) (361)Net debt at beginning of period (426) (65) (65)-------------------------------------------------------------------------------------Net debt at end of period (574) (358) (426)------------------------------------------------------------------------------------- Note c: Reconciliation of cash and cash equivalents Unaudited 30 June 30 June 31 December 2007 2006 2006 £m £m £mCash and cash equivalents per cash flow statement 183 396 328Bank overdrafts included within "Current liabilities - Borrowings" 23 15 14-------------------------------------------------------------------------------------Cash and cash equivalents per balance sheet 206 411 342------------------------------------------------------------------------------------- NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTSFOR THE HALF YEAR ENDED 30 JUNE 2007 1 Segmental analysis The Group is managed by type of business. Segmental information is provided having regard to the nature of the goods and services provided and the markets served. For the half year ended 30 June 2007 (unaudited) Other Powder Driveline Automotive Metallurgy OffHighway Aerospace Corporate Total £m £m £m £m £m £m £m Sales - subsidiaries * 969 57 309 219 377 - 1,931---------------------------------------------------------------------------------------------- EBITDA 110 2 30 24 51 (6) 211 Depreciation and impairment charges (38) (2) (15) (5) (10) - (70) Amortisation of intangible assets (1) - - - (3) - (4)---------------------------------------------------------------------------------------------- Trading profit/ (loss) 71 - 15 19 38 (6) 137 Restructuring (9) - (5) - - - (14) Other impairments - 1 - - - - 1 Amortisation of business combination non-operating intangibles - - - (1) (2) - (3) Profits and losses on sale or closure of businesses - (7) - - - - (7) Changes in fair value of derivative financial instruments (1) - - - - - (1)---------------------------------------------------------------------------------------------- Operating profit/(loss) 61 (6) 10 18 36 (6) 113---------------------------------------------------------------------------------------------- Share of post-tax earnings of joint ventures 7 5 - - - - 12---------------------------------------------------------------------------------------------- Other segment items Capital expenditure (including acquisitions) - Property, plant and equipment 39 1 15 4 25 - 84 - Intangible assets 1 - - - 8 - 9 Other non-cash expenses (share-based payments) 1 - - - - 1 2---------------------------------------------------------------------------------------------- * Other Automotive includes sales of £13 million (first half 2006: £15 million, full year 2006: £27 million) made by the Group's UK cylinder liner manufacturing operation which is in the process of completely ceasing operations. For the half year ended 30 June 2006 (restated/unaudited) Other Powder Driveline Automotive Metallurgy OffHighway Aerospace Corporate Total £m £m £m £m £m £m £m Sales - subsidiaries 999 64 313 186 334 - 1,896---------------------------------------------------------------------------------------------- EBITDA 116 (2) 28 17 46 (6) 199 Depreciation and impairment charges (39) (2) (15) (4) (10) - (70) Amortisation of intangible assets (1) - - - (3) - (4)---------------------------------------------------------------------------------------------- Trading profit/(loss) 76 (4) 13 13 33 (6) 125 Restructuring (16) - (8) - - - (24) Other impairments - - - - - - - Amortisation of business combination non-operating intangibles (1) - - - - - (1) Profits and losses on sale or closure of 5 (5) - - - - - businesses Changes in fair value of derivative financial instruments 9 - 4 1 15 - 29---------------------------------------------------------------------------------------------- Operating profit/(loss) 73 (9) 9 14 48 (6) 129---------------------------------------------------------------------------------------------- Share of post-tax earnings of joint ventures 6 2 - - - - 8---------------------------------------------------------------------------------------------- Other segment items Capital expenditure (including acquisitions) - Property, plant and equipment 43 3 20 5 12 - 83 - Intangible assets 1 - - 1 11 - 13 Other non-cash expenses (share-based payments) 1 - - - - 1 2---------------------------------------------------------------------------------------------- NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)FOR THE HALF YEAR ENDED 30 JUNE 2007 1. Segmental analysis (continued) Restatement of comparative data i) Double Universal Joint business transfer: With effect from 1 January 2007 the Group's DoubleUniversal Joint activities in Italy and Uruguay have been managed within our OffHighway segmenthaving previously been included within Driveline. Segmental analyses presented in this noterepresent the current period structure. Previously reported analyses have been restated. ii) Cessation of UK cylinder liner manufacturing operation: In January 2007 the Group announced itsintention to cease manufacturing at its UK cylinder liner operation. This operation constitutes amajor proportion of the Group's Other Automotive segment. The losses of this business have beenre-analysed from trading profit to profits and losses on sale or closure of businesses. iii) Amortisation of non-operating intangible assets: As outlined in the 2006 Annual Report, theanalysis of operating profit was amended to separately identify the amortisation arising onnon-operating intangible assets (e.g. brands and trademarks, proprietary technological know-how,intellectual property rights and customer contracts and relationships) arising on businesscombinations. This re-analysis has resulted in an amendment to the comparative interim publishedresults in respect of the amortisation charge arising from the Group's acquisition in April 2004 ofTFS Japan. The impact of this re-analysis has been to increase 2006 interim trading profit by £1million with no impact on operating profit. The impact of these restatements is shown as follows: As previously reported Restated Other Other Driveline Automotive OffHighway Driveline Automotive OffHighway £m £m £m £m £m £mFor the half year ended 30 June 2006(unaudited)Sales 1,011 64 174 999 64 186Trading profit/(loss) 76 (9) 12 76 (4) 13Operating profit/(loss) 74 (9) 13 73 (9) 14For the yearended 31December 2006Sales 1,906 120 331 1,884 120 353Trading profit/(loss) 140 (10) 23 138 (1) 25Operating profit/(loss) 107 (10) 24 105 (10) 26 For the yearended 31December 2006(restated) Other Powder Driveline Automotive Metallurgy OffHighway Aerospace Corporate Total £m £m £m £m £m £m £mSales - subsidiaries 1,884 120 582 353 695 - 3,634--------------------------------------------------------------------------------------------------- EBITDA 215 4 60 34 95 (12) 396Depreciation and impairmentcharges (74) (5) (28) (9) (21) - (137)Amortisation of intangible assets (3) - (1) - (4) - (8)---------------------------------------------------------------------------------------------------Trading profit/(loss) 138 (1) 31 25 70 (12) 251Restructuring (37) - (24) - - (2) (63)Other impairments (11) - - - - - (11)Amortisation ofbusiness combinationnon-operatingintangibles (1) - - (1) (1) - (3)Profits and losses on saleor closure ofbusinesses 5 (9) - - - - (4)Changes in fairvalue of derivativefinancial instruments 11 - (1) 2 21 - 33---------------------------------------------------------------------------------------------------Operating profit/(loss) 105 (10) 6 26 90 (14) 203--------------------------------------------------------------------------------------------------- Share of post-taxearnings ofjoint ventures 12 5 - - - - 17--------------------------------------------------------------------------------------------------- Other segment itemsCapital expenditure(including acquisitions)- Property, plant and equipment 96 7 49 12 30 - 194- Intangible assets 3 - 1 2 27 - 33Other non-cash expenses (share-basedpayments) 2 - 1 - 1 1 5--------------------------------------------------------------------------------------------------- All business segments shown above are continuing. EBITDA is earnings before interest, tax,depreciation and amortisation. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)FOR THE HALF YEAR ENDED 30 JUNE 2007 2 Basis of preparation The interim consolidated financial statements of GKN plc are as at and for the six months ended 30 June 2007 and comprise the results, assets and liabilities of the Company and its subsidiaries (the "Group") and the Group's interests in jointly controlled entities. These interim consolidated financial statements have been prepared in accordance with the Listing Rules of the Financial Services Authority. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the audited consolidated financial statements of the Group as at and for the year ended 31 December 2006. These interim consolidated financial statements were approved by the Board of Directors on Wednesday 1 August 2007. The accounting policies applied by the Group in these interim consolidated financial statements are the same as those applied by the Group in its audited consolidated financial statements as at and for the year ended 31 December 2006. The basis of consolidation is set out in the Group's accounting policies in those financial statements. The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. In preparing these interim consolidated financial statements, the significant judgements made by management in applying the Group's accounting policies and the key source of estimation uncertainty were the same as those applied to the audited consolidated financial statements as at and for the year ended 31 December 2006. Comparative information has been presented as at and for the six months ended 30 June 2006 and as at and for the 12 months ended 31 December 2006. Certain items in the comparatives have been restated, full details are reported in note 1. The impact of the restatements on previously reported results is set out below: First half 2006 Full year 2006 As As previously previously reported Restated reported Restated Trading profit (£m) 119 125 242 251 Operating profit (£m) 129 129 203 203 Profit after taxation for the 104 104 177 177 period (£m) Basic earnings per share - 14.6 14.6 25.0 25.0 total (p) Net cash from operating (124) (124) 60 60 activities (£m) Net assets (£m) 952 952 908 908 The comparative figures for the year ended 31 December 2006 do not constitute statutory accounts for the purpose of s240 of the Companies Act 1985. A copy of the Group statutory accounts for the year ended 31 December 2006 has been delivered to the Registrar of Companies and contained unqualified auditors' reports in accordance with s235 of the Companies Act 1985 and did not contain statements made under either s237(2) or 237(3) of the Companies Act 1985, in respect of both the Group and the Company. The audited consolidated financial statements of the Group as at and for the year ended 31 December 2006 are available upon request from the Company's registered office at Ipsley House, Ipsley Church Lane, Redditch, Worcestershire, B98 0TL or at www.gkn.com. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)FOR THE HALF YEAR ENDED 30 JUNE 2007 3 Operating profit The analysis of the non-trading components of operating profit is shown below:3a Restructuring and impairment charges Unaudited First half First half Full year 2007 2006 2006 £m £m £m Goodwill impairment - - (11) Tangible fixed asset impairments/reversals 1 - (1) Other asset write-downs - - (1) ------------------------------------------------------------------------------- 1 - (13) Redundancy costs including post-employment charges and curtailments (6) (14) (35) Reorganisation costs including property surpluses (8) (10) (26) ------------------------------------------------------------------------------- (13) (24) (74) ------------------------------------------------------------------------------- Restructuring In the first half of 2007 the Group initiated the final phases of its strategic restructuring programme, as well as continuing the execution of previously announced restructuring actions. This has led to a net restructuring charge of £14 million in the first half. First half 2007 activity has included the announced closure of a North American Powder Metallurgy production facility and the continuation of the strategic fixed headcount reduction programme in Driveline which primarily impacts its European operations. Redundancy charges include £1 million in respect of estimated UK pension augmentation charges. Reorganisation costs includes the costs incurred in transferring and rationalising production facilities, capabilities and capacity within both Driveline and Powder Metallurgy divisions. In the period a net £2 million surplus has arisen on the disposal of a UK Powder Metallurgy facility that became surplus to operational requirements as a consequence of the restructuring. In the six months ended 30 June 2006 the restructuring charges arose primarily in respect of the announced closure and/or downsizings of four Driveline facilities (£6 million), Driveline strategic fixed headcount reductions (£10 million) and the announced closure of three Powder Metallurgy manufacturing facilities (£8 million). The segmental analysis of restructuring charges in first half 2007 is set out in note 1. Cash outflow in respect of 2007 and earlier periods' strategic restructuring actions in the first half of 2007 was £20 million (first half 2006: £27 million, full year 2006: £57 million). The disposal of the surplus property noted above generated a net £4 million cash inflow. Other impairment The £1 million impairment reversal recognised in the first half of 2007 arose in relation to the Group's UK cylinder liner manufacturing operation. The business has reached an unconditional agreement to dispose of its land and buildings and consequently the previously recognised impairment has been reversed to restate the asset at the lower of cost and realisable value. No other impairments arose in the first half of 2007. The 2006 full year goodwill impairment arose in Driveline. 3b Amortisation of non-operating intangible assets arising on business combinations Unaudited First half First half Full year 2007 2006 2006 Restated £m £m £m Intellectual property rights (1) (1) (1) Customer contracts and relationships (2) - (1) Proprietary technological know-how - - (1) ------------------------------------------------------------------------------- (3) (1) (3) ------------------------------------------------------------------------------- NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)FOR THE HALF YEAR ENDED 30 JUNE 2007 3c Profits and losses on sale or closure of businesses Unaudited First half First half Full year 2007 2006 2006 Restated Restated £m £m £m Profits and losses on closure of businesses Trading losses of the UK cylinder liner manufacturing operation (7) (5) (9) Profits and losses on sale of businesses Sale of Fujiwa China - 5 5 --------------------------------------------------------------------------------- (7) - (4) --------------------------------------------------------------------------------- No business disposals occurred in the six months ended 30 June 2007. The prior year disposal relates to the sale of the Group's 60% shareholding in Fujiwa to its business partner, Lioho Corporation. The consideration for the disposal was £15 million. 3d Derivative financial instruments Unaudited First half First half Full year 2007 2006 2006 £m £m £m Forward currency and commodity contracts - 34 38 Embedded derivatives (1) (5) (5) --------------------------------------------------------------------------------- (1) 29 33 --------------------------------------------------------------------------------- The amounts in respect of embedded derivatives primarily represent the period movement in the value of the embedded derivatives in commerical contracts, between European Aerospace subsidiaries and customers and suppliers outside the USA, which are denominated in US dollars, where the dollar is not routinely used, as defined in IAS 39, in such contractual arrangements. 4 Joint ventures Unaudited First half First half Full year 2007 2006 2006 £m £m £m Group share of results of joint ventures Sales 125 105 208 Operating costs and other income (109) (94) (187) Net financing costs - - (1) --------------------------------------------------------------------------------- Profit before taxation 16 11 20 Taxation (4) (3) (3) --------------------------------------------------------------------------------- Share of post-tax earnings 12 8 17 --------------------------------------------------------------------------------- Segmental analysis of the Group share of joint ventures sales and trading profit Sales Driveline 63 58 113 Other Automotive 60 45 92 OffHighway 2 2 3 --------------------------------------------------------------------------------- 125 105 208 --------------------------------------------------------------------------------- Trading profit Driveline 8 6 13 Other Automotive 8 5 8 OffHighway - - - --------------------------------------------------------------------------------- 16 11 21 --------------------------------------------------------------------------------- NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)FOR THE HALF YEAR ENDED 30 JUNE 2007 5 Net financing costs Unaudited First First Full half half year 2007 2006 2006 £m £m £m Interest payable (30) (27) (57) Interest receivable 7 14 23 Other net financing charges: Expected return on pension scheme assets 74 68 136 Interest on post-employment obligations (75) (70) (140) ---------------------------------------------------------------------------------- (1) (2) (4) ---------------------------------------------------------------------------------- (24) (15) (38) ---------------------------------------------------------------------------------- 6 Taxation Unaudited First First Full half half year 2007 2006 2006 £m £m £m Analysis of charge in period Current tax Current period 18 18 38 Utilisation of previously unrecognised tax losses and (1) (1) (2) other assets Adjustments in respect of prior periods (2) (1) (3) Net movement on provisions for uncertain tax positions 1 (6) (15) ---------------------------------------------------------------------------------- 16 10 18 Deferred tax (18) 6 (15) Deferred tax on changes in fair value of derivative financial instruments 2 2 2 ---------------------------------------------------------------------------------- Total tax charge for the period - 18 5 ---------------------------------------------------------------------------------- Tax on items included in equity Deferred tax on post-employment obligations 71 56 67 Deferred tax on non-qualifying assets - - - ---------------------------------------------------------------------------------- Tax in respect of restructuring and impairment charges and sale or closure of businesses included in total charge for the period Current tax (3) (1) (6) Deferred tax (2) (3) (8) ---------------------------------------------------------------------------------- The first half 2007 deferred tax credit is principally due to the recognition of previously unrecognised deferred tax assets in respect of losses in the UK, US and Japan totalling £23 million. The recognition of these deferred tax assets has been based on management projections which indicate an improvement in future taxable profits in the various territories. The tax charge arising on profits before the non-trading components of operating profit as identified in note 3 was £3 million (2006: £20 million) giving an effective tax rate of 2.7% (2006: 18.2% restated). This change in the effective rate is predominantly attributable to the recognition of deferred tax assets referred to above. Other factors affecting the rate include an increase due to a smaller credit from prior year items of £2 million (2006: £14 million credit) offset by a beneficial impact from profit mix and statutory tax rate reductions. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)FOR THE HALF YEAR ENDED 30 JUNE 2007 7 Earnings per share Basic earnings per share Basic earnings per share are calculated by dividing the profit attributable to equity shareholders by the weighted average number of Ordinary Shares in issue during the period, excluding Ordinary Shares purchased by the Company and held as treasury shares. Diluted earnings per share Diluted earnings per share are calculated by adjusting the weighted average number of Ordinary Shares outstanding to assume conversion of all dilutive potential Ordinary Shares. The Company has only one category of dilutive potential Ordinary Shares: share options. The calculation is performed for the share options to determine the number of shares that could have been acquired at fair value (determined as the average market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options. Earnings per share are computed as follows: Unaudited First half 2007 First half 2006 Full year 2006 Earnings Weighted Earnings Earnings Weighted Earnings Earnings Weighted Earnings average per average per average per share number share number share number of of of shares shares shares £m m p £m m p £m m p Basic eps: Profit attributable to ordinary shareholders 100 702.9 14.2 104 711.9 14.6 177 708.8 25.0 Dilutive securities: Dilutive potential Ordinary Shares - 1.9 - - 6.7 (0.1) - 2.1 (0.1) ------------------------------------------------------------------------------------------------------------------- Diluted eps 100 704.8 14.2 104 718.6 14.5 177 710.9 24.9 ------------------------------------------------------------------------------------------------------------------- Adjusted earnings per share Earnings per share before non-trading components of operating profit, as analysed in note 3, which the Directors consider gives a useful additional indicator of underlying performance, is calculated on earnings for the period adjusted as follows: Unaudited Restated* First half 2007 First half 2006 Full year 2006 £m p £m p £m p Profit attributable to equity shareholders 100 14.2 104 14.6 177 25.0 Charges/(credits) included in operating profit: Restructuring and impairment charges 13 1.9 24 3.4 74 10.5 Amortisation of non-operating intangible assets arising on business combinations 3 0.4 1 0.2 3 0.4 Profits and losses on sale or closure of businesses 7 1.0 - - 4 0.6 Changes in fair value of derivative financial instruments 1 0.1 (29) (4.1) (33) (4.7) Taxation on charges/(credits) included in operating profit (3) (0.4) (2) (0.3) (12) (1.7) ---------------------------------------------------------------------------------------------------------------------- Adjusted earnings attributable to equity shareholders 121 17.2 98 13.8 213 30.1 ---------------------------------------------------------------------------------------------------------------------- Diluted adjusted earnings per share attributable to equity shareholders 17.2 13.6 30.0 ---------------------------------------------------------------------------------------------------------------------- * See note 2 8 Dividends Unaudited First half First half Full year 2007 2006 2006 £m £m £m Equity dividends paid in the period Final 8.7p (2006: 8.2p) per share 61 59 59 Interim (2006: 4.1p) per share - - 29 -------------------------------------------------------------------------------------------------------------------- 61 59 88 -------------------------------------------------------------------------------------------------------------------- An interim dividend of 4.3p per share (2006: 4.1p per share) has been declared by the Directors. Based on shares ranking for dividend at 30 June 2007 the interim dividend is anticipated to absorb resources amounting to £30 million (2006: £29 million). NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)FOR THE HALF YEAR ENDED 30 JUNE 2007 9 Post-employment obligations Actuarial assessments of the key defined benefit pension and post-employment medical plans (representing 95% of liabilities and 97% of assets) were carried out as at 30 June 2007. Post-employment obligations as at the period end comprise: Unaudited 30 June 30 June 31 December 2007 2006 2006 £m £m £m Pensions - funded and unfunded (281) (470) (485) Medical - funded and unfunded (74) (79) (76) -------------------------------------------------------------------------------------- (355) (549) (561) -------------------------------------------------------------------------------------- The overall position in respect of defined benefit funded pension schemes and unfunded pension and medical post-employment obligations was: Unaudited 30 June 2007 30 June 31 December UK Americas Europe ROW Total 2006 2006 £m £m £m £m £m £m £m Gross deficits (14) (95) (238) (8) (355) (549) (561) Related deferred tax asset - 19 16 - 35 112 102 -------------------------------------------------------------------------------------- Net post-employment obligations (14) (76) (222) (8) (320) (437) (459) -------------------------------------------------------------------------------------- Assumptions Actuarial assessments of all the principal defined benefit retirement plans were carried out as at 30 June 2007. The major assumptions used were: UK Americas Europe ROW % % % % At 30 June 2007 Rate of increase in pensionable salaries 4.3 3.5 2.5 2.0 Rate of increase in payment and deferred pensions 3.4 2.0 1.75 n/a Discount rate 5.8 6.1 5.3 2.5 Inflation assumption 3.3 2.5 1.75 1.0 Rate of increases in medical costs: initial 8.0 10.0 n/a n/a long term 4.5 5.0 n/a n/a -------------------------------------------------------------------------------------- At 30 June 2006 Rate of increase in pensionable salaries 4.4 3.5 2.5 2.0 Rate of increase in payment and deferred pensions 3.0 2.0 1.5 n/a Discount rate 5.2 6.2 4.8 2.5 Inflation assumption 2.9 2.5 1.5 1.0 Rate of increases in medical costs: initial 9.5 10.0 n/a n/a long term 4.3 5.0 n/a n/a -------------------------------------------------------------------------------------- At 31 December 2006 Rate of increase in pensionable salaries 4.1 3.5 2.5 2.0 Rate of increase in payment and deferred pensions 3.2 2.0 1.75 n/a Discount rate 5.1 5.9 4.7 2.5 Inflation assumption 3.1 2.5 1.75 1.0 Rate of increases in medical costs: initial 8.0 10.0 n/a n/a long term 4.5 5.0 n/a n/a -------------------------------------------------------------------------------------- NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)FOR THE HALF YEAR ENDED 30 JUNE 2007 10 Goodwill and business combinations (unaudited) On 29 June 2007 the Group completed the acquisition of the aerospace manufacturing group of Teleflex Inc., in a mixed trade and asset and entity deal, for a fair value consideration of £70 million. The businesses acquired provide manufacturing and engineering services from operations in the US, Mexico, France and the UK. Goodwill arising in respect of this acquisition amounted to £41 million. Fair value amounts remain provisional. 11 Related party transactions (unaudited) In the ordinary course of business, sales and purchases of goods take place between subsidiaries and joint venture companies priced on an 'arm's length' basis. Sales of product by subsidiaries to joint ventures in the first half of 2007 totalled £35 million (first half 2006: £36 million). The amount due at the period end in respect of such sales was £9 million (June 2006: £10 million). Purchases by subsidiaries from joint ventures in the first half of 2007 totalled £9 million (first half 2006: £3 million). The amount due at the period end in respect of such purchases was £2 million (June 2006: £2 million). At 30 June 2007, a Group subsidiary was owed £5 million (June 2006: £8 million) by a joint venture in respect of a loan, bearing interest at EURIBOR plus 1%. In addition, a Group subsidiary had £5 million receivable from (June 2006: £2 million payable to) a joint venture in respect of a short-term financing facility, which bears interest at LIBOR plus 2% (June 2006: LIBOR less 0.125%). 12 Property, plant and equipment (unaudited) During the six months ended 30 June 2007 the Group acquired assets with a cost of £84 million (first half 2006: £83 million) including assets acquired through business combinations of £13 million (first half 2006: £nil). Assets with a carrying amount of £6 million (first half 2006: £3 million) were disposed of during the six months ended 30 June 2007. Except as reported in note 3a, no material reversal of prior period impairments arose in the six months ended 30 June 2007 and 30 June 2006. As at 30 June 2007 Group capital commitments amounted to £50 million (June 2006: £55 million). 13 Other financial information (unaudited) Adjustments made to the carrying value of inventories across the Group in the six months ended 30 June 2007 and 30 June 2006 were not significant. Amounts written off and provided for and charged to the Income Statement in respect of customer financial difficulties amounted to £nil (2006: £1 million). 1,627,294 Ordinary Shares of the Company were issued in the six months ended 30 June 2007 (first half 2006: 200,414) which generated a cash inflow of £3 million (first half 2006: £1 million). The Group concluded its share buy-back programme in 2006 purchasing 13,439,142 shares in the year of which 7,121,850 were purchased in the first half. These transactions were completed at net costs of £40 million and £22 million respectively. Independent review report to GKN plc Introduction We have been instructed by the Company to review the financial information forthe six months ended 30 June 2007 which comprises the Consolidated IncomeStatement, Consolidated Balance Sheet, Consolidated Statement of Changes inEquity, Consolidated Cash Flow Statement and the related notes. We have read theother information contained in the interim report and considered whether itcontains any apparent misstatements or material inconsistencies with thefinancial information. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the Directors. The Listing Rulesof the Financial Services Authority require that the accounting policies andpresentation applied to the interim figures should be consistent with thoseapplied in preparing the preceding annual accounts except where any changes, andthe reasons for them, are disclosed. This interim report has been prepared in accordance with the basis set out inNote 2. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of Group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the disclosed accounting policies havebeen applied. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit and therefore provides a lower level of assurance.Accordingly we do not express an audit opinion on the financial information.This report, including the conclusion, has been prepared for and only for theCompany for the purpose of the Listing Rules of the Financial Services Authorityand for no other purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2007. PricewaterhouseCoopers LLP Chartered Accountants Birmingham 1 August 2007 This information is provided by RNS The company news service from the London Stock Exchange

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GKN PLC