Results for the period ended 30 June 2016

NEWS RELEASE 26 July 2016

GKN plc Results Announcement for the six months ended 30 June 2016

Group Highlights(*)

· Another period of growth - in line with expectations

o Sales up 17% and management eps increased 7%

o Continued market outperformance with organic sales up 2%

o Fokker integration on track and performing well

· Sharpening the focus

o Reducing fixed costs; annualised savings of £30 million from 2017 through a GKN wide fixed cost optimisation programme; charge of £35 million in the second half of 2016

o Capital allocation to be progressively directed towards productivity improvement in core aerospace and automotive divisions

· Continued investment in technology

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

o Momentum of new business wins continues to support growth ahead of markets

(1) As at 31 December 2015 

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

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

"This is a good set of first half results with GKN continuing to make underlying progress in line with our expectations. Each division has continued to deliver against our strategy. GKN is in good shape with excellent technology and strong positions in the aerospace and automotive markets. Capital allocation will continue to be focussed on these divisions, with greater emphasis on internal productivity.

We expect 2016 to be another year of growth, helped by currency translation and Fokker. To increase momentum going into 2017, we will reduce our fixed costs by £30 million.

With our excellent technologies, global footprint and strong focus on costs we are very well placed to compete and succeed in the future."  

Divisional Highlights

GKN Aerospace

· Strong headline sales growth, driven by good Fokker performance with integration on track

· Organic sales growth of 2%, comprising commercial (+8%) partially offset by a decline in military (-14%)

· Margin of 9.9% (2015: 11.4%), primarily impacted by the inclusion of Fokker and mature programmes declining

· New and replacement work packages won of c.$5 billion over contract lives

GKN Driveline

· Organic sales growth of 5%, significantly ahead of global auto production helped by our broad geographic footprint and increased content per vehicle

· Trading margin of 8.2% (2015: 8.3%), a good performance in Europe offset by excess launch costs on an US all-wheel drive (AWD) programme

· More than £400 million of annualised new and replacement business won

GKN Powder Metallurgy

· Organic sales growth in line with the market, before the pass-through of lower raw material surcharges

· Trading margin increased to 12.6% (2015: 11.8%), benefiting partly from the lower surcharges

· Strong focus on technology and £120 million annualised new and replacement business won

· Chinese powder production commenced

GKN Land Systems

· Organic sales down 6% due to challenging agricultural and construction equipment markets and the ending of chassis contracts

· Good cost control results in trading margin of 4.6% (2015: 4.0%)  

Outlook

Aerospace markets generally remain in transition as some aircraft programmes run down and others ramp up. The overall market in 2016 will be broadly flat, according to external forecasts. Against that backdrop, GKN Aerospace's 2016 organic sales are expected to be slightly up on last year, and the results will benefit from the contribution of Fokker. In the medium term, our strong commercial order book supports continuing growth for GKN Aerospace.

In automotive, external forecasts predict growth in global light vehicle production of around 3% with increases in China, North America, Europe and India. Against this background, GKN Driveline and GKN Powder Metallurgy are expected to continue to grow organically above the market.

GKN Land Systems sales are expected to continue to decline due to softer agricultural and construction equipment markets, although the rate of decline is slowing.

GKN is sharpening its focus on costs and also directing capital expenditure more towards productivity. Fixed cost reductions of £30 million will benefit 2017. There will be a charge to achieve these savings of £35 million (included within management results) in the second half of 2016. This is in addition to the Fokker integration charge that was previously announced.

Despite market uncertainty following the EU Referendum, there should be little impact on GKN over the medium term and 2016 is expected to be another year of growth, helped by currency translation and Fokker.

Notes 

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

Cautionary Statement

This announcement contains forward looking statements which are made in good faith based on the information available at the time of its approval. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ materially from those currently anticipated. Nothing in this document should be regarded as a profits forecast.

Further Enquiries

Analysts/Investors:

Guy Stainer, Investor Relations Director, GKN plc

T: +44 (0)207 463 2382

M: +44 (0)7739 778187

E: [email protected]

Media:

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)203 727 1323

M: +44 (0)7775 641807

There will be an analyst and investor meeting today at 08.30am at UBS, Ground Floor Presentation Suite, 1 Finsbury Avenue, London EC2M 2PP.

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

Slides will be put onto the GKN website approximately 45 minutes before the presentation is due to begin, and will be available to download from the GKN website at: http://www.gkn.com/investorrelations/Pages/results-and-presentations.aspx?year=2016.

Questions will only be taken at the event.

A live dial in facility will be available by telephoning: +44 (0) 1452 555 566, Conf ID: 46551273

Following the event, a replay of the conference call will be uploaded onto the GKN website and the on-demand archive webcast will be available via the link http://www.gkn.com/investorrelations/Pages/Webcasts.aspx.

NEWS RELEASE

GKN plc Results Announcement for the six months ended 30 June 2016

Group Overview

Markets

The Group operates in the global aerospace, automotive and land systems markets. GKN Aerospace sells to manufacturers of commercial and military aircraft, aircraft engines and equipment. In the automotive market, GKN Driveline sells to manufacturers of passenger cars and light vehicles. Around 80% of GKN Powder Metallurgy sales are also to the automotive market, with the balance to other industrial customers. GKN Land Systems sells to producers of agricultural, industrial and construction equipment.

Results

Organic sales increased £92 million (2%). The effect of currency translation on management sales was a £202 million benefit and there was a £371 million benefit from acquisitions.

Overall organic trading profit reduced by £10 million (3%). There was a benefit from currency translation of £22 million and a £32 million increase due to acquisitions (including the absence of £3 million acquisition costs in the first half of 2015).

Group trading margin in the first half was 8.6% (2015: 9.0%). Return on average invested capital (ROIC) was 16.6% (2015: 17.5%), excluding Fokker which has not been owned for a full 12 month period.

At 30 June 2016, the Group had net debt of £918 million (31 December 2015: £769 million) and the total deficit on post-employment obligations totalled £2,101 million (31 December 2015: £1,558 million).

Divisional Performance

GKN Aerospace

GKN Aerospace is a leading global tier one supplier of airframe and engine structures, landing gear, electrical interconnection systems, transparencies and aftermarket services. It supplies products and services to a wide range of commercial and military aircraft and engine prime contractors and other tier one suppliers.

According to external forecasts, the overall aerospace market is expected to be slightly down in 2016. In commercial, both Airbus and Boeing continued to benefit from higher deliveries and a record order backlog, and both have announced plans to increase production levels for single aisle aircraft in the future. The short term outlook for wide-body aircraft has been mixed with A330 and Boeing 777 rate reductions in advance of their next generation successors and plans for a reduction in A380 deliveries, while the A350 continues to ramp-up to full rate production. Sales of business jets and commercial rotorcraft are both expected to fall. Military sales are higher and will benefit from the ramp up in the production rate of the F-35.  

The key financial results for the period are as follows:

Overall, GKN Aerospace's organic sales were £30 million higher (2%). There was a £59 million (5%) benefit from currency translation and sales from acquisitions amounted to £371 million.

The organic reduction in trading profit was £9 million, due to the transition from more profitable mature military and commercial programmes, partly offset by good growth and catch-up payments in engine spares and the benefit from the ramping up of structures production on new programmes. There was a favourable currency translation impact of £8 million and the profit contribution from acquisitions was £29 million.

Trading margin was 9.9% (2015: 11.4%). Return on average invested capital, excluding Fokker which has not been owned for a full 12 month period, was 16.8% (2015: 17.7%).

The division's commercial sales were 76%, with military 24%. Organic commercial aerospace sales were 8% higher, benefiting from stronger orders for the A350, A320 and Boeing 737 partly offset by a reduction in A330 production. Military organic sales were 14% lower, primarily due to lower sales for F/A-18 Super Hornet, F-15 Eagle and rotorcraft.

The integration of Fokker Technologies, acquired on 28 October 2015, is proceeding well. It added sales of £369 million and a profit of £28 million. Restructuring costs, which are excluded from Management profits, were £22 million during the first half and are expected to total around €50 million (£39 million) in the year, as previously announced. During the period, the outstanding pre-acquisition fine that was agreed with the Department of Justice was settled.

During the period, new and replacement work packages totalling $5 billion over their contract lives have been won and a number of important milestones were achieved, including:

· An agreement to extend to the risk and revenue sharing partnership (RRSP) with Rolls-Royce on the Trent XWB engine. The agreement covers the design and supply of a lower weight, higher performance intermediate compressor case for the enhanced performance Trent XWB-84 engine;

· Signing a long term agreement with Mitsubishi Heavy Industries Ltd. to manufacture aero-engine casings for Rolls-Royce Trent engines which will power Airbus A330neo and Boeing 787 aircraft;

· Partnering with Rolls-Royce on the UltraFan™ large engine programme, with responsibility for the intercase;

· Being named by the US Air Force as one of seven major contractors who will join Northrop Grumman in building the next-generation B-21 bomber;

· Signing a four-year contract extension with FMV (Swedish Defence Material Administration) to provide comprehensive support for the GKN Aerospace RM12 engine, which powers the JAS 39 Gripen C/D fighter; and

· Extending an agreement with Boeing for a further three years to continue manufacturing electrical wiring systems and junction boxes for the 777 and 737 aircraft programmes and signing a memorandum of agreement with UTC Aerospace Systems to develop electrical integrated systems for the More Electric Aircraft initiative. 

Automotive market

The major automotive markets of China, India, Europe, and North America experienced increased production in the first half of the year compared to 2015, while Brazil and Japan declined. Overall, global production volumes increased 2.4% to 45.9 million vehicles (2015: 44.9 million).

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

Production in Europe increased in the first half of 2016 as demand in Western Europe continued to recover, partly offset by the decline in Russia.

Production in North America benefitted from continuing consumer confidence and localisation of foreign manufacturers' capacity. Cheap credit and the low price of fuel supported increased demand and production for full-size pickups and Sport Utility Vehicles (SUVs), which outpaced that of passenger cars. The recession in the Brazilian vehicle market deepened, resulting in a further decline in output.

Production growth in China resulted from the positive impact of the reduction in sales tax on small cars. Production in India increased due to improved economic conditions and higher demand for newly launched models. Japanese production, however, was adversely affected by the earthquakes in southern Japan and output stoppages at some manufacturers due to fuel economy irregularities.

External forecasts anticipate global production for full year 2016 will increase 2.9% to 91.3 million vehicles.

GKN Driveline

GKN Driveline is the world's leading supplier of automotive driveline systems and solutions. As a global business serving the leading vehicle manufacturers, it develops, builds and supplies an extensive range of automotive driveline products and systems, for use in everything from the smallest low-cost car to the most sophisticated premium vehicle demanding complex driving dynamics.

The key financial results for the period are as follows:

Organic sales increased by £95 million (5%) compared with global light vehicle production which was up 2%. The beneficial effect of currency translation was £93 million (5%). Constant Velocity Jointed (CVJ) Systems accounted for 60% of sales and non-CVJ sales were 40%. 

The organic improvement in trading profit was £5 million and the positive impact of currency translation was £9 million. GKN Driveline's trading margin was 8.2% (2015: 8.3%). Return on average invested capital was 18.5% (2015: 19.6%).

GKN Driveline's market outperformance was mainly in Europe reflecting recent market share gains and new customer programme launches, for example, with Daimler and Volvo. It also benefited from a stronger position in premium vehicles, demand for which continued to be positive, and a broadening product mix, particularly with AWD systems. GKN Driveline performed broadly in line with the market in the Americas (reflecting its lower content on truck-based platforms) and slightly below the market in China (recognising its greater exposure to global brands, which performed less strongly than domestic producers). Growth in North America and China is expected to be above the market in the second half due to the strong order book and new programme launches.

In terms of profitability, European plants were running at very high capacity utilisation with a strong conversion on the additional sales. In China, production was relatively stable following the tax incentives available for small cars, but margin was slightly lower, due to negative pricing, in-line with expectations. The Americas operations were impacted by short term production issues at AWD facilities as customers struggled to obtain parts following the Japanese earthquake and sizeable additional launch costs on a new global AWD programme. These launch problems have now been addressed with production reaching target levels, however, some further launch costs will be incurred in the second half. The technology developed provides an excellent platform for continued success in AWD.

To provide better strategic and customer alignment, GKN Driveline is reorganising in the second half of the year from three regions into two global product lines (CVJ and AWD/eDrive) which will provide a more efficient, leaner organisation.

During the period, more than £400 million of annualised sales in new and replacement business was secured and a number of important milestones achieved, including:

· Being selected by BMW to supply its eAxle on the BMW 2 Series Active Tourer;

· Winning an Automotive News PACE award for VL3 sideshaft technology, which debuted on the BMW 7 Series, whilst also picking up an innovation partnership award for work on the Ford Focus RS; and

· GKN Driveline Brazil being awarded Toyota's prestigious South America Supplier Quality Excellence Performance Award for the third year in a row.

GKN Powder Metallurgy

GKN Powder Metallurgy comprises GKN Sinter Metals and Hoeganaes. GKN Sinter Metals is the world's leading manufacturer of precision automotive sintered components as well as components for industrial and consumer applications. Hoeganaes is one of the world's leading manufacturers of metal powder, the essential raw material for powder metallurgy.

The key financial results for the period are as follows:

Organic sales were £3 million lower, after the £14 million pass through to customers of lower steel prices and other surcharges. There was a £28 million (6%) benefit from currency translation.

Underlying growth (before raw material pass through) was 2%, in line with global light vehicle production. Underlying sales growth was achieved in all regions with the strongest performance being in Asia.

The organic increase in trading profit was £3 million and there was a £4 million gain on currency translation. The divisional trading margin was 12.6% (2015: 11.8%) reflecting the move towards higher value "design for powder metallurgy" parts and a small margin benefit from lower raw material prices passed through to customers. Return on average invested capital was 21.3% (2015: 22.0%).

During the period, GKN Powder Metallurgy achieved a number of important milestones, which included:

· Winning, in just six months, around £120 million of annualised sales in new and replacement business;

· The commencement of production of high quality automotive grade powders in China for the Asian market; and

· Receiving three prestigious design awards from the Metal Powder Industries Federation (MPIF) at the annual technical conference POWDERMET2016.

GKN Land Systems

GKN Land Systems is a leading supplier of power management products and services. It designs, manufactures and supplies products and services for the agricultural and construction markets and key industrial segments, offering integrated powertrain solutions and complete in-service support.

Sales in GKN Land Systems were lower than the prior period primarily due to a significant decline in North American agricultural equipment markets and the ending of a chassis contract. Demand for construction equipment was also weaker while industrial sales remained relatively stable.

The key financial results for the period are as follows:

The organic decrease in sales was £24 million (6%) and the beneficial impact of currency translation was £21 million (5%). The first of two chassis contracts ending in 2016 reduced sales by £5 million in the first half. The second contract ends during the third quarter of 2016.

Trading profit was £1 million higher on an organic basis and there was a £1 million benefit from currency translation. Trading margin was 4.6% (2015: 4.0%). Return on average invested capital was 7.4% (2015: 7.6%).

End markets remain tough, particularly in North American agricultural equipment. Nevertheless, progress has been made with many mid-tier customers and important new business won in the industrial, shaft and wheels operations, whilst continuing to invest in technology.

Other Businesses and corporate costs

GKN's Other Businesses comprise Cylinder Liners (which is a 59% owned venture mainly in China, manufacturing engine liners for the truck market in the US, Europe and China), EVO eDrive Systems (a developer of axial flux motors) and GKN Hybrid Power (a flywheel energy storage and hybrid system manufacturer).

GKN's Other Businesses reported combined sales in the period of £18 million (2015: £23 million). The change reflects a £6 million organic decrease in sales and £1 million benefit from currency translation. A trading loss of £4 million was reported in the first half (2015: £2 million loss) reflecting a restructuring charge at GKN Hybrid Power. Following changes in the commercial landscape of the UK bus market, it has been decided to scale back this operation back and combine it with GKN Driveline's hybrid and electric engineering resource.

Corporate costs, which comprise the costs of stewardship of the Group and operating charges and credits associated with the Group's legacy businesses, were £11 million (2015: £6 million, including a £7 million past service credit following completion of a Pension Increase Exchange exercise in the UK and £3 million of costs in relation to the Fokker acquisition).

Other Financial Information

All comparative information provided below relates to the first half of 2015, unless otherwise stated.

Items excluded from management trading profit

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

Change in value of derivative and other financial instruments

The change in value of derivative and other financial instruments during the period resulted in a loss of £71 million (2015: £20 million loss).

When the business wins long term customer contracts that are in a foreign currency, the Group offsets the potential volatility of future cash flows by hedging through forward foreign currency exchange contracts. At each period end, the Group is required to mark to market these contracts even though it has no intention of closing them out in advance of their maturity dates.

At 30 June 2016, the net fair value of such instruments was a liability of £399 million (31 December 2015: liability of £351 million) and the change in fair value during the period was a £52 million charge (2015: £31 million charge).

There was also a £3 million credit arising from the change in fair value of embedded derivatives in the period (2015: nil) and a net loss of £22 million attributable to the currency impact on Group funding balances (2015: £11 million net gain).

Amortisation of non-operating intangible assets arising on business combinations

The charge for amortisation of non-operating intangible assets arising on business combinations (for example customer contracts, order backlog, technology and intellectual property rights) was £46 million (2015: £36 million).

Gains and losses on changes in Group structure

There was no change in Group structure during the period (2015: £5 million loss).

Restructuring charges

During the period there has been a charge of £22 million in relation to redundancy and integration costs relating to the Group's acquisition of Fokker in 2015.

Post-tax earnings of equity accounted investments

On a management basis, the sales and trading profits of equity accounted investments are included pro-rata in the individual divisions to which they relate, although shown separately post-tax in the statutory income statement.

The Group's share of post-tax earnings on a management basis was £34 million (2015: £34 million), with trading profit of £42 million (2015: £40 million). The Group's share of the tax charge amounted to £8 million (2015: £6 million) with no net financing costs in either period. The organic decrease in trading profit was £1 million.

Net financing costs

Net financing costs totalled £61 million (2015: £67 million) and comprise the net interest payable of £38 million (2015: £33 million), the non-cash charge on post-employment benefits of £27 million (2015: £25 million), a gain from fair value changes on cross currency interest rate swaps of £5 million (2015: £6 million charge) and charge for unwind of discounts of £1 million (2015: £3 million). The non-cash charge on post-employment benefits, fair value changes on cross currency interest rate swaps and unwind of discounts are not included in management figures. Details of the assumptions used in calculating post-employment costs are provided in note 10.

Profit before tax

Management profit before tax was £344 million (2015: £307 million). Profit before tax on a statutory basis was £182 million (2015: £212 million). The main differences between management and statutory figures for 2016 are the change in value of derivative and other financial instruments, amortisation of non-operating intangible assets arising on business combinations, restructuring charges and non-cash charge on post-employment benefits. Further details are provided in note 3 to the interim financial statements.

Taxation

The book tax rate on management profits of subsidiaries was 25% (2015: 24%), arising as a £76 million tax charge (2015: £66 million charge) on management profits of subsidiaries of £310 million (2015: £273 million).

The tax rate on statutory profits of subsidiaries was 11% (2015: 26%), arising as a £17 million tax charge (2015: £46 million charge) on statutory profits of subsidiaries of £148 million (2015: £178 million). The decrease is largely as a result of certain foreign exchange gains which are not taxable.

Non-controlling interests

The profit attributable to non-controlling interests was £2 million (2015: £3 million).

Earnings per share

Management earnings per share was 15.5 pence (2015: 14.5 pence). On a statutory basis earnings per share was 9.5 pence (2015: 9.9 pence), impacted by an increased charge on the change in value of derivatives and other financial instruments and restructuring charges. 

Dividend

The Board has declared an interim dividend of 2.95 pence per share (2015: 2.9 pence), an increase of 2%. The interim dividend will be paid on 19 September 2016 to shareholders on the register at 12 August 2016. Shareholders may choose to use the Dividend Reinvestment Plan (DRIP) to reinvest the interim dividend. The closing date for receipt of new DRIP mandates is 26 August 2016.

Cash flow

Operating cash flow, which is defined as cash generated from operations of £252 million (2015: £242 million) adjusted for capital expenditure (net of proceeds from capital grants) of £227 million (2015: £198 million), proceeds from the disposal/realisation of fixed assets of £25 million (2015: £2 million), was an inflow of £50 million (2015: £46 million).

Cash generated from operations includes movements in working capital and provisions totalling a net outflow of £188 million (2015: £142 million outflow), driven by a VAT payment following the substantial one-off customer advance received at the end of 2015.

Capital expenditure (net of proceeds from capital grants) on both tangible and intangible assets totalled £227 million (2015: £198 million). Of this, £192 million (2015: £166 million) was on tangible fixed assets and was 1.5 times (2015: 1.6 times) the depreciation charge. Expenditure on intangible assets, mainly non-recurring costs on Aerospace programmes, totalled £35 million (2015: £32 million).

Net interest paid totalled £23 million (2015: £21 million). Tax paid in the period was £42 million (2015: £58 million).

Free cash flow

Free cash flow, which is operating cash flow including equity accounted investment dividends and after interest, tax, amounts paid to non-controlling interests but before dividends paid to GKN shareholders, was an inflow of £40 million (2015: £21 million).

Net debt

At the end of the period, the Group had net debt of £918 million (31 December 2015: £769 million). At 30 June 2016 the fair value of cross currency interest rate swaps, taken out to better align foreign currency income receipts with debt coupon payments, was a liability of £165 million (31 December 2015: liability of £69 million) which is included in net debt.

Pensions and post-employment obligations

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

At 30 June 2016, the total deficit on post-employment obligations of the Group totalled £2,101 million (31 December 2015: £1,558 million), comprising deficits on funded obligations of £1,367 million (31 December 2015: £1,007 million) and on unfunded obligations of £734 million (31 December 2015: £551 million). In total, the deficit increased £543 million from 31 December 2015, primarily due to changes in the discount rates used and adverse currency movements.

The amount included within trading profit for the period comprises current service cost of £25 million (2015: £27 million) and administrative costs of £2 million (2015: £1 million). There was no past service credit in the period (2015: settlement credit of £6 million). The interest charge on net defined benefit plans, which is excluded from management figures, was £27 million (2015: £25 million).

Cash contributions to the various defined benefit pension schemes and retiree medical arrangements totalled £71 million (2015: £71 million).

UK pensions

The Group's two UK defined benefit pension schemes are currently undergoing triennial funding valuations as at 5 April 2016. Once the valuation process is complete, the 5 April 2016 funding deficit in each scheme will be confirmed and any incremental deficit contributions payable by the Group will be established. It is likely that some additional Group funding will be required, but given the early stage of negotiations with the scheme Trustees and the many variables involved in both establishing the valuation and agreeing any resulting recovery plan, the final outcome cannot currently be predicted with any reasonable degree of certainty. The current deficit funding payment is £42 million per year.

The accounting deficit for UK schemes increased to £1,234 million (31 December 2015: £912 million), following a decrease in discount rates.

Defined contribution pension schemes

In addition to defined benefit pension schemes, the Group also operates a number of defined contribution schemes for which the income statement charge was £28 million (2015: £20 million).

Net assets

Net assets of £1,916 million were £30 million higher than the 31 December 2015 figure of £1,886 million. The increase is primarily driven by management profit after tax of £266 million and currency retranslation from subsidiaries of £431 million, partially offset by a loss on remeasurement of defined benefit plans of £466 million and dividends paid to equity shareholders of £99 million.

Exchange rates

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

The approximate impact on 2016 trading profit of subsidiaries and equity accounted investments of a 1% movement in the average rate would be euro - £1 million, US dollar - £2 million.

Funding, liquidity and going concern

At 30 June 2016, UK committed bank facilities were £865 million. Within this amount were committed Revolving Credit Facilities of £801 million, £48 million outstanding on an eight-year amortising facility from the European Investment Bank (EIB) and £16 million outstanding on a seven-year £16 million amortising facility from KfW. There were drawings of £67 million against the Revolving Credit Facilities. There were also drawings of £31 million against uncommitted bank facilities.

Capital market borrowings at 30 June 2016 comprised a £350 million 6.75% annual unsecured bond maturing in October 2019 and a £450 million 5.375% semi-annual unsecured bond maturing in September 2022. At 30 June 2016, the Group had net debt of £918 million (31 December 2015: £769 million), including the fair value of the cross currency interest rate swaps, a liability of £165 million (31 December 2015: £69 million liability).

All of the Group's committed credit facilities have financial covenants requiring EBITDA of subsidiaries to be at least 3.5 times net interest payable and for net debt to be no greater than 3 times EBITDA of subsidiaries. The covenants are tested every six months using the previous 12 months' results. For the 6 months to 30 June 2016, EBITDA was 13.4 times greater than net interest payable, whilst net debt was 1.0 times EBITDA.

Following an assessment of the Group's principal risks and consideration of current financial forecasts the Directors consider it appropriate to adopt the going concern basis of accounting in preparing the interim financial statements.

Basis of Reporting

The interim financial statements for the period are shown on pages 16 to 32 and have been prepared using accounting policies which were used in the preparation of audited financial statements for the year ended 31 December 2015 and which will form the basis of the 2016 Annual Report.

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 equity accounted investments. 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 equity accounted investments. These figures better reflect performance of continuing businesses. Where appropriate, reference is made to organic results which exclude the impact of acquisitions/divestments as well as currency translation on the results of overseas operations. Operating cash flow is cash generated from operations adjusted for capital expenditure, government capital grants, proceeds from disposal of fixed assets and government refundable advances. Free cash flow is operating cash flow including interest, tax, equity accounted investment dividends and amounts paid to non-controlling interests, but excluding dividends paid to GKN shareholders. Return on average invested capital (ROIC) is management trading profit as a percentage of average total net assets of continuing subsidiaries and equity accounted investments excluding current and deferred tax, net debt, post-employment obligations and derivative financial instruments.

Principal risks and uncertainties

The principal risks faced by the Group in the remaining six months of the year remain largely unchanged from those reported on pages 38 to 47 of the 2015 Annual Report. These risks relate to the following: highly competitive markets; supply chain; customer concentration; operating in global markets; joint ventures; laws, regulations and corporate reputation; technology and innovation; acquisition integration; people capability; product quality; contract risk; programme management; health and safety; information systems resilience; business continuity and pension funding.

On Thursday 23 June 2016 the UK voted to leave the EU, resulting in uncertain future trading arrangements between the UK and the rest of the world, and falling expectations for UK GDP in the short to medium term. GKN is a global business with over 90% of its products manufactured outside the UK; this will limit the effect of the vote on the Group. Weaker sterling following the referendum has so far had a positive effect on the Group's reported earnings but a negative impact on its reported debt and pension liabilities. Pension liabilities have also increased as a result of falling yields on long term bonds. Discussions with the trustees of the UK pension schemes in relation to the April 2016 funding valuation are progressing in a constructive manner.

Directors' Responsibility Statement

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

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

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

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

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the 2015 Annual Report that could do so.

The Directors of GKN plc are listed in the GKN annual report for 2015, with the exception of Anne Stevens who was appointed as a non-executive Director on 1 July 2016.

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

Mike Turner

Chairman

25 July 2016

APPENDICES