news release 29 july 2014 gkn plc results announcement … · gkn plc results announcement for the...

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NEWS RELEASE 29 July 2014

GKN plc Results Announcement for the six months ended 30 June 2014

Management basis(1)

As reported

2014 £m

2013 £m

Change %

2014 £m

2013 £m

Change %

Sales 3,828 3,869 -1 3,565 3,647 -2

Operating profit 340 320 +6 259 163(*)

+59

Trading margin (%) 8.9% 8.3% +60bps

Profit before tax 296 278 +6 224 127(*)

+76

Earnings per share 14.4p 13.8p +4 11.2p 5.5p(*)

+104

Interim dividend per share 2.8p 2.6p +8 2.8p 2.6p +8

(*) restated for a hindsight fair value adjustment, see note 2 of the financial statements

Financial Highlights(1)

Sales increased 6% organically, but 1% lower after £247 million currency translation impact

Trading margin improved 60bps to 8.9%

Profit before tax (management basis) up 6%, with £24 million of adverse currency this half offsetting restructuring costs of £25 million in the first half of 2013

Reported profit before tax was £224 million (2013(*): £127 million)

Earnings per share up 4% to 14.4p

Interim dividend increased 8% to 2.8 pence per share (up 6% on a normally weighted basis)

Return on average invested capital of 16.9% (2013: 16.6% excluding GKN Aerospace Engine Systems)

Free cash flow of £19 million (2013: £77 million), after £54 million repayment of a UK Government refundable advance

Net debt of £813 million (31 December 2013: £732 million), reflecting normal seasonality “This is another good performance, particularly in GKN Driveline which delivered 11% organic sales growth. We have continued to outperform our key markets and report good underlying financial results in spite of sterling’s strength and some end market weakness - we expect these trends to be maintained in the second half. GKN is continuing to make encouraging progress against its strategy.” Nigel Stein Chief Executive, GKN plc

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Divisional Highlights

Sales (£m)

Organic sales

growth %

Trading margin %

2014 2013 2014 2013

GKN Aerospace 1,100 1,123 3 11.0 10.5

GKN Driveline 1,765 1,728 11 8.0 6.8

GKN Powder Metallurgy 471 480 6 11.3 10.0

GKN Land Systems 426 487 -9 7.3 9.2

Group 3,828 3,869 6 8.9 8.3

The Group figures include Other Businesses (Emitec, Cylinder Liners, GKN Hybrid Power and Evo Electric).

GKN Aerospace

Organic growth in commercial aerospace (+5%) offsets decline in military (-2%)

Strong commercial order book with a trend towards global suppliers

Integration of North American engine components into GKN Aerospace Engine Systems

GKN Driveline

Growth significantly ahead of global auto production helped by increasing content per vehicle

Trading margin improved to 8.0% GKN Powder Metallurgy

Continued growth ahead of global auto production and trading margin increased to 11.3%

Upgrade of North American capacity underway

GKN Land Systems

Organic sales down 9% due to challenging markets and chassis contracts ending in 2013

Strong cost control results in trading margin of 7.3%

Investing to support industrial product sales in North America and capability in China, including enhanced position in Huading Wheels venture

Outlook Commercial aircraft production should continue to be strong whereas military markets are forecast to decline. GKN Aerospace’s 2014 organic sales are expected to show modest growth, reflecting these conflicting trends. In automotive, external forecasts suggest that global light vehicle production should grow around 3% in the second half as comparators get tougher. Increases are expected in China, North America and India, while Europe is forecast to be flat and Japan and Brazil decreasing. Against this background, GKN Driveline and GKN Powder Metallurgy are expected to continue to grow organically above the market. Softer agricultural equipment markets in Europe and North America are likely to more than offset the slight improvement in European industrial and construction markets. As a result, GKN Land Systems 2014 sales are expected to be lower than 2013. The strength in sterling will adversely affect reported results. However the Group’s underlying progress is expected to continue due to the benefits of its diverse exposure to global markets, strong customer positions and healthy order books.

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Notes (1) 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 to the time of its approval. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ materially from those currently anticipated. Nothing in this document should be regarded as a profits forecast. Further Enquiries Analysts/Investors: Guy Stainer Investor Relations Director GKN plc T: +44 (0)207 463 2382 M: +44 (0)7739 778187 E: [email protected] Media: Chris Fox Group Communications Director GKN plc T: +44 (0)1527 533238 M: +44 (0)7920 540051 E: [email protected] Andrew Lorenz FTI Consulting T: +44 (0)207 269 7113 M: +44 (0)7775 641807 There will be an analyst and investor meeting today at 09.30am at UBS, Ground Floor Presentation Suite, 1 Finsbury Avenue, London EC2M 2PP. A live 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=2014. 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: 75444300 A replay of the conference call will be available until 28 August 2014 on: Standard International Number: +44 (0) 1452 550 000 Replay Access Number: 75444300 This announcement together with the attached financial information thereto may be downloaded from: www.gkn.com/media/Pages/default.aspx.

http://www.gkn.com/investorrelations/Pages/Webcasts.aspx

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NEWS RELEASE GKN plc Results Announcement for the six months ended 30 June 2014 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, construction and mining equipment and to the automotive and commercial vehicle sectors. These results reflect a strong performance in GKN Driveline and GKN Powder Metallurgy, relative to their respective markets, solid results from GKN Aerospace, the weaker markets in GKN Land Systems and significant adverse currency translation impact. Results First half Change (%) 2014 2013 Headline Organic

Sales (£m) 3,828 3,869 (1) 6 Trading profit (£m) 340 320 6 14 Trading margin (%) 8.9% 8.3% Return on average invested capital (%) 16.9% 16.6%

Organic sales increased £210 million (6%). The effect of currency translation on management sales was £247 million adverse and there was a £3 million benefit from acquisitions which was more than offset by a £7 million reduction due to disposals. The organic increase in trading profit was £43 million (14%), including no repeat of £25 million of restructuring charges reported in the first half of 2013. There was an adverse currency translational impact of £24 million and the net positive effect of acquisitions and disposals of £1 million. Group trading margin in the first half was 8.9% (2013: 8.3%, or 8.9% excluding £25 million of restructuring). Return on average invested capital (ROIC) was 16.9% (2013: 16.6%). Divisional Performance

GKN Aerospace GKN Aerospace is a global tier one supplier of airframe and engine structures, components, assemblies, transparencies, ice protection systems and fuel and flotation systems for a wide range of aircraft and engine prime contractors and other tier one suppliers. It operates in three main product areas: aerostructures, engine components and sub-systems and special products. The overall aerospace market remains positive in 2014 driven by a growing commercial aircraft market partly offset by a declining military market. The division has increased its proportion of sales to commercial aerospace to 74%, with military representing 26%.

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Commercial aircraft production continues to grow strongly. Both Airbus and Boeing continue to benefit from increasing deliveries and a record order backlog, and both have announced plans to increase production levels for single aisle aircraft in the future. There is also increasing demand for strong global suppliers to support their expansion plans. Military spending remains under pressure, largely driven by cutbacks throughout the USA and Europe, with the ramp-up of new programmes being delayed and overseas military operations reduced. The key financial results for the period are as follows:

GKN Aerospace First half Change (%) 2014 2013 Headline Organic

Sales (£m) 1,100 1,123 (2) 3 Trading profit (£m) 121 118 3 6 Trading margin (%) 11.0% 10.5% Return on average invested capital (%) 16.8% 20.1%

Organic sales were £32 million higher (3%), including 5% higher commercial sales (particularly for the Boeing 787 and spares), 2% lower production rates on military programmes (such as F-18, Blackhawk and spares) and a £17 million reduction due to the previously announced supply chain contract at Filton being taken back in-house by Airbus in May 2013. There was a £55 million (5%) impact from adverse currency translation. The organic increase in trading profit of £7 million included income of £4 million from Rolls-Royce for milestones achieved in relation to Composite Technology and Applications Limited (CTAL). Other factors included improved commercial spares sales and higher volumes on new programmes offset by lower military sales on mature programmes. The impact from currency on translation of results was £6 million adverse and there was a £2 million benefit from the absence of costs following the disposal of GKN Aerospace’s stake in the CTAL joint venture. Trading margin was 11.0% (2013: 10.5%). Return on average invested capital was 16.8% (2013: 20.1% excluding GKN Aerospace Engine Systems). During the period a number of important milestones were achieved including the further integration of the North American engine components businesses into GKN Aerospace Engine Systems. This will allow a strong range of products to be offered to customers on a global basis including utilising low cost manufacturing facilities in Mexico. Further achievements included:

delivering the first engine to Honeywell from the new facility in Phoenix, USA;

winning a multi-million pound contract to design, develop and supply the composite integrated rudder and elevator for the new Bombardier Global 7000 and Global 8000;

being selected by AirAsia to supply the complete suite of cockpit transparencies for the airline’s new A320 fleet;

the Filton site being named as best performing supplier by Airbus; and

leading a consortium of UK companies in a £13 million programme backed by the UK’s Aerospace Technology Institute (ATI) called Horizon (AM) that builds on GKN Aerospace’s extensive and fast-developing additive manufacturing capability.

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Automotive market The major automotive markets of China, Japan, Europe and North America experienced increased production in the first half of the year compared to 2013, while Brazil and India declined. Overall, global production volumes increased by 3.9% to 44.1 million vehicles (2013: 42.5 million).

Car and light vehicle production (rounded millions of units) First half Growth

2014 2013 (%)(#)

Europe 10.5 10.0 5.0

North America 8.6 8.3 4.2

Brazil 1.5 1.7 -14.6

Japan 4.7 4.4 8.2

China 11.1 10.1 9.9

India 1.8 1.9 -5.7

Others 5.9 6.1 -3.4

Total – global 44.1 42.5 3.9

Source: IHS Automotive; (#)

Growth is derived from unrounded production figures

Overall production in Europe showed a solid improvement compared with the first half of 2013 due to a recovery in demand in Western Europe, partly offset by weaker production in Russia.

Production in North America benefitted from improved consumer confidence, further localisation of foreign manufacturers’ capacity and an increased level of exports. Strong production in Japan was due to a weak prior year comparator and the pull forward of sales into the first quarter of 2014 ahead of April’s consumption tax rise. Production in China continued to grow strongly in line with increasing consumer demand for passenger vehicles. The markets of Brazil and India were down as a result of weak economic conditions and low consumer confidence. External forecasts anticipate global production in 2014 will increase by 4% to 87.8m vehicles. China will continue to lead the growth (+9%) with support from North America (+5%) and Europe (+2%). Market recovery in India is expected to result in an increase in full-year production of 1%, Japan is forecast to be flat and Brazil is expected to experience output down by 8%. GKN Driveline GKN Driveline is the world’s leading supplier of automotive driveline systems and solutions. As a global business serving the leading vehicle manufacturers, it develops, builds and supplies an extensive range of automotive driveline products and systems – for use in the smallest low-cost car to the most sophisticated premium vehicle demanding complex driving dynamics. The key financial results for the period are as follows: GKN Driveline First half Change (%) 2014 2013 Headline Organic

Sales (£m) 1,765 1,728 2 11 Trading profit (£m) 142 117 21 35 Trading margin (%) 8.0% 6.8% Return on average invested capital (%) 17.9% 15.0%

Organic sales increased by £179 million (11%) compared with global vehicle production which was up 4%. The adverse effect of currency translation was £135 million (8%) and the impact from disposals was £7 million, being the proportionate loss of sales from a wholly owned business in China which was transferred into our Shanghai GKN HUAYU Driveline Systems Co Limited (SDS) joint venture in that country in November 2013. Constant Velocity Jointed (CVJ) Systems accounted for 60% of sales and non-CVJ sales were 40%.

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Strong growth was achieved in North America, China, Japan and Europe while sales in Brazil fell sharply. The overall market outperformance reflected market share gains, strong demand for premium vehicles and GKN Driveline’s broadening product mix, particularly within all-wheel drive (AWD) systems. The organic improvement in trading profit was £37 million, including the absence of £16 million of restructuring charges reported in 2013. Other factors included higher engineering costs to support the large number of new programme start-ups and higher warranty and quality claims partly offset by a provision release as commercial progress was made on an onerous contract. The impact of currency translation on trading profit was £11 million adverse. GKN Driveline’s trading margin was 8.0% (2013: 6.8%, or 7.7% excluding restructuring charges). Return on average invested capital was 17.9% (2013: 15.0%).

During the period, around £300 million of new business was secured and a number of important milestones achieved, including:

expanding facilities in Mexico and AWD capacity in Newton, USA;

expanding AWD facility in China with new PTU wins and localisation of AWD products from Europe and North America;

CVJ systems wins with Ford, GM, VW, BMW, Renault Nissan, Mazda, Hyundai;

AWD systems wins with Ford, GM, VW, Fiat, JLR, BMW, Toyota, Renault Nissan; and

BMW launching i8 with GKN 2-speed eAxle.

GKN Powder Metallurgy GKN Powder Metallurgy is the world’s largest manufacturer of sintered components. GKN Powder Metallurgy comprises GKN Sinter Metals and Hoeganaes. Hoeganaes produces the metal powder that GKN Sinter Metals and other customers use to manufacture precision automotive components for engines, transmissions and body and chassis applications. GKN Sinter Metals also produces a range of components for industrial and consumer applications. The key financial results for the period are as follows: GKN Powder Metallurgy First half Change (%) 2014 2013 Headline Organic

Sales (£m) 471 480 (2) 6 Trading profit (£m) 53 48 10 20 Trading margin (%) 11.3% 10.0% Return on average invested capital (%) 21.0% 19.2%

The strong organic sales increase of £26 million (6%) was more than offset by the £35 million (8%) adverse impact of currency translation. Strong growth was achieved in North America and China whereas growth in Europe was more in line with vehicle production. Sales in South America fell due to weaker automotive markets. The organic increase in profit was £9 million, including £5 million of restructuring charges reported in 2013, which was partially offset by the £4 million negative impact of currency translation. The divisional trading margin was 11.3% (2013: 10.0%, or 11.0% excluding restructuring charges). Return on average invested capital was 21.0% (2013: 19.2%). GKN Powder Metallurgy continued its strong product and operational development in engines and transmissions, being awarded more than £75 million of annualised sales in new business. It also won a number of quality awards including Paccar’s “Quality Achievement Award 2013”, Schaeffler’s “Best Technical Cooperation” and Nexteer’s “Perfect Quality 2013” award. Reflecting our move into more advanced applications of powder technologies, GKN Powder Metallurgy is expanding its facilities in North America with more complex and efficient tooling and presses and also announced a technology collaboration agreement with McPhy Energy to develop solid state hydrogen storage solutions.

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GKN Land Systems GKN Land Systems is a global leading supplier of technology differentiated power management components and services. It designs, manufactures and supplies products and services for the agricultural, construction, mining, and industrial machinery markets. In addition, it provides global aftermarket distribution and through-life support. Sales in GKN Land Systems were lower than the prior year due to weaker agricultural equipment markets in Europe and North America while construction and industrial markets remained relatively stable. The key financial results for the period are as follows:

GKN Land Systems First half Change (%) 2014 2013 Headline Organic

Sales (£m) 426 487 (13) (9) Trading profit (£m) 31 45 (31) (26) Trading margin (%) 7.3% 9.2% Return on average invested capital (%) 14.6% 18.7%

The organic decrease in sales was £43 million (9%) and the adverse impact of currency translation was £19 million (4%). The organic decrease in sales included £14 million due to the previously announced cessation of two chassis contracts in 2013. The establishment of the new wheels venture in China had sales of £1 million. The organic decrease in trading profit was £11 million, despite the absence of £3 million of restructuring charges in 2013. The negative impact of currency translation was £3 million. Trading margin was 7.3% (2013: 9.2%, or 9.9% excluding restructuring charges). Return on average invested capital was 14.6% (2013: 18.7%). Good progress was made towards winning new business and implementing the GKN Land Systems strategy through broadening its product offering and geographic footprint, particularly investing to support industrial product sales in North America and enhancing capacity in China, including increasing our stake in the Huading Wheels venture. Other Businesses and corporate costs GKN’s Other Businesses comprise Cylinder Liners (which is mainly a 59% owned venture in China, manufacturing engine liners for the truck market in the US, Europe and China), a 50% share in Emitec (which manufactures metallic substrates for catalytic converters in Germany, the US, China and India) and our joint venture stake in EVO Electric (a developer of axial flux motors). On 30 April 2014 GKN announced its agreement to sell its stake in Emitec for a cash consideration of €46 million (£36 million). The sale is expected to complete shortly. The activities relating to GKN Hybrid Power, acquired on 1 April 2014 from Williams Grand Prix Engineering Limited, are also included in Other Businesses. Since the acquisition, GKN Hybrid Power has secured an order to retro-fit 500 buses with its innovative fuel-saving solution. GKN’s Other Businesses reported combined sales in the period of £66 million (2013: £51 million), reflecting an improvement in the commercial vehicle market, and trading profit of £5 million (2013: £2 million, after £1 million of restructuring charges). Corporate costs, which comprise the costs of stewardship of the Group and operating charges and credits associated with the Group’s legacy businesses, were £12 million (2013: £10 million).

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Other Financial Information All comparative information provided below relates to the first half of 2013, 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 Group enters into foreign exchange contracts to hedge much of its transactional exposure. Where hedge accounting has not been applied, the change in fair value between 1 January 2014 and 30 June 2014, or the date of maturity if earlier, is reflected in the income statement as a component of operating profit and has resulted in a charge of £11 million (2013: £98 million charge), primarily due to changes in rate for the US Dollar:Swedish Krona, US Dollar:Euro and US Dollar:UK Sterling. There was a £1 million charge arising from a change in the value of embedded derivatives in the period (2013: £3 million credit) and a credit of £5 million attributable to the translational currency impact on intra-group funding balances (2013: £4 million credit). Amortisation of non-operating intangible assets arising on business combinations The charge for amortisation of non-operating intangible assets (for example, customer contracts, technology assets and intellectual property rights) arising on business combinations was £35 million (2013: £35 million restated for a hindsight fair value adjustment).

Post-tax earnings of joint ventures On a management basis, the sales and trading profits of joint ventures are included pro-rata in the individual divisions to which they relate, although shown separately post-tax in the statutory income statement. The Group’s share of post-tax earnings of joint ventures in the period was £31 million (2013: £24 million) with trading profit of £39 million (2013: £31 million). The Group’s share of post-tax earnings on a management basis was £32 million (2013: £25 million). The Group’s share of the tax charge amounted to £7 million (2013: £6 million) with no net financing costs in either period. The organic increase in trading profit was £7 million. Net financing costs Net financing costs totalled £66 million (2013: £60 million) and comprise the net interest payable of £37 million (2013: £36 million), the non-cash charge on post-employment benefits of £25 million (2013: £19 million) and unwind of discounts of £4 million (2013: £5 million). The non-cash charge on post-employment benefits and unwind of discounts are not included in management figures. Details of the assumptions used in calculating post-employment costs and income are provided in note 10 of the financial statements. Interest payable was £38 million (2013: £38 million), whilst interest receivable was £1 million (2013: £2 million) resulting in net interest payable of £37 million (2013: £36 million). Profit before tax Management profit before tax was £296 million (2013: £278 million). Profit before tax on a statutory basis was £224 million (2013: £127 million, restated for a hindsight fair value adjustment). The main differences in the first half of 2014 between management and statutory figures are the change in value of derivative and other financial instruments, amortisation of non-operating intangible assets and the interest charge on net defined benefit pension plans. Further details are provided in note 3 to the financial statements.

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Taxation The book tax rate on management profits of subsidiaries was 22% (2013: 20%), arising as a £58 million tax charge (2013: £51 million charge) on management profits of subsidiaries of £264 million (2013: £253 million). The Group’s theoretical weighted average tax rate, which assumes that book profits/losses are taxed at the statutory tax rates in the countries in which they arise, is 33% (2013: 31%). The book tax rate is significantly lower, largely because of the recognition of substantial deferred tax assets (mainly in the US) due to increased confidence in the Group’s ability to offset brought forward tax deductions against future taxable profits in various countries. ‘Cash tax’ provides a proxy for the cash cost of taxation of management profits, plus the cash effect of prior year items, and so excludes elements of the book tax charge which do not have a cash effect. The cash tax rate was 12% (2013: 12%) primarily due to the utilisation of prior years’ tax losses. Both the book tax and the cash tax rates are expected to increase in future years. The tax rate on statutory profits of subsidiaries was 20% (2013: 27%) arising as a £39 million tax charge (2013: £28 million charge, restated for a hindsight fair value adjustment) on a statutory profit of £193 million (2013: £103 million, restated for a hindsight fair value adjustment). Non-controlling interests The profit attributable to non-controlling interests was £2 million (2013: £10 million, including £8 million in relation to the Pension partnership arrangement). Earnings per share Management earnings per share was 14.4 pence (2013: 13.8 pence). On a statutory basis earnings per share was 11.2 pence (2013: 5.5 pence, restated for a hindsight fair value adjustment). Dividend In view of the Group’s continued progress, the Board has decided to pay an interim dividend of 2.8 pence per share (2013: 2.6 pence), an increase of 8%. If the prior year’s total dividend of 7.9 pence per share had been paid in the usual one-third interim and two-thirds final proportion, then the 2014 interim dividend would represent an increase of 6% on a normally weighted basis. The interim dividend will be paid on 22 September 2014 to shareholders on the register at 15 August 2014. 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 1 September 2014. Cash flow Operating cash flow, which is defined as cash generated from operations of £227 million (2013: £267 million) adjusted for capital expenditure (net of proceeds from capital grants) of £161 million (2013: £158 million), proceeds from disposal of fixed assets £7 million (2013: nil) and repayment of the principal of a government refundable advance in the UK of £38 million (2013: nil), was an inflow of £35 million (2013: £109 million). Within operating cash there was an outflow in working capital and provisions of £151 million (2013: £131 million). Average working capital as a percentage of sales was 7.9% (2013: 8.7%). Capital expenditure (net of proceeds from capital grants) on both tangible and intangible assets totalled £161 million (2013: £158 million). Of this, £132 million (2013: £133 million) was on tangible fixed assets and was 1.2 times (2013: 1.2 times) the depreciation charge. Expenditure on intangible assets, mainly non-recurring costs on Aerospace programmes, totalled £29 million (2013: £25 million).

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Net interest paid totalled £38 million (2013: £21 million) including £16 million of previously accrued interest on a government refundable advance, and tax paid in the period was £21 million (2013: £24 million). Free cash flow Free cash flow, which is operating cash flow including joint venture dividends and after interest, tax, amounts paid to non-controlling interests and shares purchased but before dividends paid to GKN shareholders, was an inflow of £19 million (2013: £77 million). The year on year change reflects increased profitability, offset by repayment of a government refundable advance in the UK relating to the A350 programme of £54 million (including interest), incremental pension funding of £12 million and an adverse movement in working capital. Net borrowings At the end of the period, the Group had net borrowings of £813 million (31 December 2013: £732 million) after payment of the 2013 final dividend of £87 million and a gross government refundable advance of £54 million. Pensions and post-employment obligations GKN operates a number of defined benefit and defined contribution pension schemes together with retiree medical arrangements across the Group. The amount included within trading profit for the period comprises current service cost of £23 million (2013: £26 million) and administrative costs of £1 million (2013: £2 million). Interest on net defined benefit plans, which is excluded from management figures, was £25 million (2013: £19 million), and the removal of the UK pension partnership plan asset and related interest credit in the first half of 2013 is the primary reason for this period-on-period increase. The deficit across all schemes at 30 June 2014 was £1,363 million, a £92 million increase over the 31 December 2013 deficit (£1,271 million). This increase is caused by lower discount rates which have fallen during the period due to the marked decrease in corporate bond yields from which they are derived. Both UK pension schemes underwent funding valuations as at 5 April 2013 and final agreement was reached on the valuation and resulting deficit recovery plan for each scheme during the period. The agreed deficit recovery plan requires payments of £10 million per year to the pension schemes combined and the potential for further additional payments commencing in 2015, contingent upon asset performance. The first payment of £10 million was made during the period. During the period, a bulk annuity pensioner “buy-in” was completed in relation to the UK pension scheme, GKN 1, as a result of which a proportion of GKN 1 liabilities are now fully insured. The transaction involved a payment to Rothesay Life of £123 million, made from GKN 1’s assets. This gave rise to an additional scheme funding requirement of £8 million which the Group will pay to GKN 1 over a 4 year period. The first payment of £2 million was made during the period. Group-wide contributions totalled £71 million (2013: £54 million), including a £30 million payment from the pension partnership to the UK pension schemes and £12 million from the above mentioned deficit recovery plan and “buy-in” funding. The Group is currently in consultation with its UK work-force regarding prospective changes to pension benefit provision. Defined contribution pension schemes In addition to the defined benefit pension schemes, the Group also operates a number of defined contribution pension schemes for which the income statement charge was £16 million (2013: £17 million).

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Net assets Net assets of £1,706 million were £89 million lower than the December 2013 year end figure of £1,795 million, restated for a hindsight fair value adjustment. The decrease includes management profit after tax of £236 million more than offset by dividends paid to equity shareholders of £87 million, adverse currency on translation of subsidiaries and joint ventures net of tax of £86 million and a loss on remeasurement of defined benefit plans net of tax of £105 million. Exchange rates Exchange rates used for currencies most relevant to the Group’s operations are:

Average Period End 2013 Full Year

H1 2014

H1 2013

June 2014

June 2013

Average Period End

Euro 1.22 1.18 1.25 1.17 1.18 1.20 US Dollar 1.67 1.55 1.71 1.52 1.57 1.66

The approximate impact on first half 2014 trading profit of subsidiaries and joint ventures of a 1% movement in the average rate would be euro - £1 million, US dollar - £2 million. Funding, liquidity and going concern At 30 June 2014, UK committed bank facilities were £910 million. Within this amount there were committed revolving credit facilities of £830 million and an £80 million eight-year amortising facility from the European Investment Bank (EIB). The £80 million EIB facility was fully drawn and there were drawings of £53 million against the revolving credit facilities. As at 30 June 2014, the next major maturities of the revolving credit facilities were for £590 million in 2016 followed by further maturities of £240 million in 2017. However, during July, the Group completed a refinancing exercise in relation to all of its revolving credit facilities, which delivered the benefit of lower borrowing costs on total facilities of £800 million and an extension of their maturities to 2019. The first of five equal, annual £16 million EIB repayments falls due in 2015. Capital market borrowings at 30 June 2014 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. As at 30 June 2014, the Group had net borrowings of £813 million (31 December 2013: £732 million). All of the Group’s committed credit facilities have financial covenants requiring EBITDA of subsidiaries to be at least 3.5 times net financing costs 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 12 months to 30 June 2014, EBITDA was 11.8 times greater than net interest, whilst net debt was 0.9 times EBITDA. The Directors have taken into account both divisional and Group forecasts for the 18 months from the balance sheet date to assess the future funding requirements of the Group and compared them to the level of committed available borrowing facilities, described above. Having carried out sensitivity analysis, the Directors have concluded that the Group will have a sufficient level of headroom in the foreseeable future and that the likelihood of breaching covenants in this period is remote, such that it is appropriate for the financial statements to be prepared on a going concern basis.

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Principal risks and uncertainties The principal risks and uncertainties faced by the Group in the remaining six months of the year remain largely unchanged from those reported in the 2013 annual report. The macro-economic and political environment contains risk: challenging credit conditions; US budget priorities; volatile automotive, agricultural, construction, mining and industrial markets; exchange rate fluctuations; supply chain volatility; and inflation in Asian and other economies. Additional risks include: customer concentration; highly competitive markets; misalignment of objectives with joint venture partners; failure to innovate; integrated systems complexity; product quality issues and recall costs; business continuity (including disruption to facilities or supply chain); health, safety and environmental incidents; lack of people capability; programme management weaknesses; poor acquisition integration or post-acquisition performance; compliance with laws and regulations across global jurisdictions; information systems resilience; pension funding; foreign exchange risk; and operating internationally in environments subject to complex tax rules. A more detailed explanation of the principal risks and uncertainties, together with the mitigating actions in place, can be found in pages 42 to 51 of the 2013 annual report. Basis of Reporting The financial statements for the period are shown on pages 15 to 32 and have been prepared using accounting policies which were used in the preparation of audited accounts for the year ended 31 December 2013 and which will form the basis of the 2014 Annual Report, with the exception of the adoption of IFRS 10 and 11 which has not impacted the comparative numbers. Definitions Financial information set out in this announcement, unless otherwise stated, is presented on a management basis which aggregates the sales and trading profit of subsidiaries (excluding certain subsidiary businesses sold and closed) with the Group’s share of the sales and trading profit of joint ventures. References to trading margins are to trading profit expressed as a percentage of sales. Management profit or loss before tax is management trading profit less net subsidiary interest payable and receivable and the Group’s share of net interest payable and receivable and taxation of joint ventures. These figures better reflect performance of continuing businesses. Where appropriate, reference is made to organic results which exclude the impact of acquisitions/divestments as well as currency translation on the results of overseas operations. Operating cash flow is cash generated from operations adjusted for capital expenditure, government capital grants, proceeds from disposal of fixed assets and government refundable advances. Free cash flow is operating cash flow including interest, tax, joint venture dividends, own shares purchased and amounts paid to non-controlling interests, but excluding dividends paid to GKN shareholders. Return on average invested capital (ROIC) is management trading profit as a percentage of average total net assets of continuing subsidiaries and joint ventures excluding current and deferred tax, net debt, post-employment obligations and derivative financial instruments.

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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 2013 Annual Report that could do so.

The Directors of GKN plc are listed in the GKN annual report for 2013; however since the publication of the annual report Mr. W. C. Seeger has retired from the Board. Approved by the Board of GKN plc and signed on its behalf by: Mike Turner Chairman 28 July 2014

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APPENDICES

Page GKN Condensed Consolidated Financial Statements Consolidated Income Statement for the half year ended 30 June 2014 16 Consolidated Statement of Comprehensive Income for the half year ended 30 June 2014

17

Condensed Consolidated Statement of Changes in Equity for the half year ended 30 June 2014

18

Consolidated Balance Sheet at 30 June 2014 19 Consolidated Cash Flow Statement for the half year ended 30 June 2014 20 Notes to the Half Year Consolidated Financial Statements 21 – 32 Independent Review Report 33

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CONSOLIDATED INCOME STATEMENT

FOR THE HALF YEAR ENDED 30 JUNE 2014

Unaudited

Notes First half First half Full year

2014 2013* 2013

£m £m £m

Sales 1a 3,565 3,647 7,136

Trading profit 1b 301 289 597

Change in value of derivative and other financial instruments 4 (7) (91) 26

Amortisation of non-operating intangible assets arising on

business combinations (35) (35) (75)

Gains and losses on changes in Group structure 5 - - 12

Operating profit 259 163 560

Share of post-tax earnings of joint ventures 6 31 24 52

Interest payable (38) (38) (76)

Interest receivable 1 2 3

Other net financing charges 7 (29) (24) (55)

Net financing costs (66) (60) (128)

Profit before taxation 224 127 484

Taxation 8 (39) (28) (77)

Profit after taxation for the period 185 99 407

Profit attributable to other non-controlling interests 2 2 4

Profit attributable to the Pension partnership - 8 8

Profit attributable to non-controlling interests 2 10 12

Profit attributable to owners of the parent 183 89 395

185 99 407

Earnings per share - pence

Continuing operations - basic 11.2 5.5 24.2

Continuing operations - diluted 11.0 5.4 23.8

* restated for the impact of a hindsight fair value adjustment relating to the purchase of Volvo Aerospace in

2012, see note 2.

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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


Unaudited


2014 2013* 2013

£m £m £m

Profit after taxation for the period 185 99 407

Other comprehensive income

Items that may be reclassified to profit or loss

Currency variations – subsidiaries

Arising in period (80) 119 (114)

Reclassified in period - - -

Currency variations – joint ventures

Arising in period (8) 9 (1)


Taxation 8 2 1 1

(86) 129 (114)

Items that will not be reclassified to profit or loss

Remeasurement of defined benefit plans

Subsidiaries 10 (136) 106 60

Joint ventures - - -

Taxation 8 31 (9) (28)

(105) 97 32

(191) 226 (82)

Total comprehensive income/(expense) for the period (6) 325 325

Total comprehensive income for the period attributable to:

Owners of the parent (8) 315 315

Other non-controlling interests 2 2 2

Pension partnership - 8 8

Non-controlling interests 2 10 10

(6) 325 325

* restated for the impact of a hindsight fair value adjustment relating to the purchase of Volvo Aerospace in 2012, see note 2.

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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


Non-controlling

interests

Notes

Share capital

£m

Capital redemption

reserve £m

Share premium account

£m

Retained earnings

£m

Other reserves

£m

Share- holders’

equity £m

Pension partner-

ship £m

Other £m

Total equity

£m

At 1 January 2014 166 298 139 1,392 (220) 1,775 - 20 1,795

Profit for the period - - - 183 - 183 - 2 185

Other comprehensive income/(expense)

for the period - - - (105) (86) (191) - - (191)

Share-based payments - - - 4 - 4 - - 4

Share options exercised 14 - - - 1 - 1 - - 1

Dividends paid to equity shareholders 9 - - - (87) - (87) - - (87)

Dividends paid to non-controlling interests - - - - - - - (1) (1)

At 30 June 2014 (unaudited) 166 298 139 1,388 (306) 1,685 - 21 1,706

At 1 January 2013 166 298 139 1,079 (108) 1,574 334 19 1,927

Profit for the period* - - - 89 - 89 8 2 99


for the period - - - 97 129 226 - - 226


Share options exercised 14 - - - 5 - 5 - - 5

Distribution from Pension partnership

to UK Pension scheme - - - - - - (10) - (10)

Amendment to the Pension partnership

arrangement 10 - - - (10) - (10) (332) - (342)

Addition of non-controlling interests - - - - - - - 2 2

Purchase of own shares by Employee

Share Ownership Plan Trust 14 - - - (4) - (4) - - (4)


At 30 June 2013 (unaudited)* 166 298 139 1,183 21 1,807 - 23 1,830

At 1 January 2013 166 298 139 1,079 (108) 1,574 334 19 1,927

Profit for the year - - - 395 - 395 8 4 407


for the year - - - 32 (112) (80) - (2) (82)


Share options exercised - - - 8 - 8 - - 8

Distribution from Pension partnership to

UK Pension scheme - - - - - - (10) - (10)

Amendment to the Pension partnership

arrangement 10 - - - (10) - (10) (332) - (342)

Addition of non-controlling interests - - - - - - - 2 2

Purchase of own shares by Employee

Share Ownership Plan Trust - - - (5) - (5) - - (5)


Dividends paid to non-controlling interests - - - - - - - (3) (3)

At 31 December 2013 166 298 139 1,392 (220) 1,775 - 20 1,795


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CONSOLIDATED BALANCE SHEET AT 30 JUNE 2014

Unaudited

Notes 30 June 30 June 31 December

2014 2013* 2013

£m £m £m

Assets

Non-current assets

Goodwill 528 584 544

Other intangible assets 897 1,012 932

Property, plant and equipment 12 1,894 2,037 1,945

Investments in joint ventures 6 158 162 179

Other receivables and investments 43 38 52

Derivative financial instruments 45 42 52

Deferred tax assets 250 277 225

3,815 4,152 3,929

Current assets

Inventories 939 987 931

Trade and other receivables 1,288 1,333 1,142

Current tax assets 11 10 11

Derivative financial instruments 29 21 42

Cash and cash equivalents 11 181 233 184

2,448 2,584 2,310

Total assets 6,263 6,736 6,239

Liabilities

Current liabilities

Borrowings (117) (87) (27)

Derivative financial instruments (10) (27) (11)

Trade and other payables (1,495) (1,569) (1,485)

Current tax liabilities (166) (151) (135)

Provisions (51) (51) (55)

(1,839) (1,885) (1,713)

Non-current liabilities

Borrowings (877) (1,074) (889)

Derivative financial instruments (30) (100) (37)

Deferred tax liabilities (149) (190) (178)

Trade and other payables (185) (277) (237)

Provisions (114) (140) (119)

Post-employment obligations 10 (1,363) (1,240) (1,271)

(2,718) (3,021) (2,731)

Total liabilities (4,557) (4,906) (4,444)

Net assets 1,706 1,830 1,795

Shareholders' equity

Share capital 166 166 166

Capital redemption reserve 298 298 298

Share premium account 139 139 139

Retained earnings 1,388 1,183 1,392

Other reserves (306) 21 (220)

1,685 1,807 1,775

Non-controlling interests 21 23 20

Total equity 1,706 1,830 1,795

* restated for the impact of a hindsight fair value adjustment relating to the purchase of Volvo Aerospace in

2012, see note 2.

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CONSOLIDATED CASH FLOW STATEMENT FOR THE HALF YEAR ENDED 30 JUNE 2014

Unaudited


2014 2013 2013

£m £m £m

Cash flows from operating activities

Cash generated from operations 11 227 267 782

Interest received 1 5 6

Interest paid (39) (26) (71)

Tax paid (21) (24) (52)

Dividends received from joint ventures 44 27 44

212 249 709

Cash flows from investing activities

Purchase of property, plant and equipment (133) (134) (274)

Receipts of government capital grants 1 1 1

Purchase of intangible assets (29) (25) (76)

Proceeds from sale and realisation of fixed assets 7 - 4

Payment of deferred and contingent consideration - (49) (74)

Acquisitions of subsidiaries (net of cash acquired) (8) - -

Proceeds from sale of businesses (net of cash disposed

and fees) - - 2

Repayment of government refundable advance 14 (38) - -

Proceeds from sale of joint ventures - - 3

Investment in joint ventures - (11) (13)

(200) (218) (427)

Cash flows from financing activities

Distribution from Pension partnership to UK Pension scheme - (10) (10)

Purchase of own shares by Employee Share Ownership

Plan Trust - (4) (5)

Proceeds from exercise of share options 1 5 8

Proceeds from borrowing facilities 60 145 10

Repayment of other borrowings (10) (8) (93)

Finance lease payments - - (1)

Dividends paid to shareholders 9 (87) (78) (121)

Dividends paid to non-controlling interests (1) - (3)

(37) 50 (215)

Movement in cash and cash equivalents (25) 81 67

Cash and cash equivalents at beginning of period 181 124 124

Currency variations on cash and cash equivalents (6) 5 (10)

Cash and cash equivalents at end of period 11 150 210 181

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NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS FOR THE HALF YEAR ENDED 30 JUNE 2014

1 Segmental analysis

The Group's reportable segments have been determined based on reports reviewed by the Executive Committee led by the Chief Executive. The operating activities of the Group are largely structured according to the markets served; aerospace, automotive, and the land systems agricultural, construction and mining equipment markets. Automotive is managed according to product groups; driveline and powder metallurgy. Reportable segments derive their sales from the manufacture of product and sale of service. Revenue from inter segment trading and royalties is not significant. There have been no changes to segments in the period.

a) Sales

Automotive

Powder Land

Aerospace Driveline Metallurgy Systems Total

£m £m £m £m £m

FIRST HALF 2014 (unaudited)

Subsidiaries 1,100 1,561 471 415 Joint ventures - 204 - 11

1,100 1,765 471 426 3,762

Other businesses 66

Management sales 3,828 Less: Joint venture sales (263)

Income statement – sales 3,565



1,123 1,728 480 487 3,818

Other businesses 51



FULL YEAR 2013


2,243 3,416 932 899 7,490

Other businesses 104



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NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2014

1 Segmental analysis (continued) b) Trading profit

Automotive

Powder Land


£m £m £m £m £m


Trading profit before depreciation and amortisation 160 164 70 39

Depreciation of property, plant and equipment (28) (54) (17) (8)

Amortisation of operating intangible assets (11) (3) - (1)

Trading profit – subsidiaries 121 107 53 30

Trading profit – joint ventures - 35 - 1

121 142 53 31 347

Other businesses 5

Corporate and unallocated costs (12)

Management trading profit 340

Less: Joint venture trading profit (39)

Income Statement – trading profit 301


Trading profit before depreciation and amortisation 160 149 65 53 Depreciation of property, plant and equipment (30) (61) (17) (9) Amortisation of operating intangible assets (10) (2) - (1)

Trading profit – subsidiaries 120 86 48 43 Trading profit/(loss) – joint ventures (2) 31 - 2

118 117 48 45 328

Other businesses 2 Corporate and unallocated costs (10)

Management trading profit 320 Less: Joint venture trading profit (31)


FULL YEAR 2013

Trading profit before depreciation, impairment and amortisation 355 309 129 92 Depreciation and impairment of property, plant and equipment (60) (122) (35) (18) Amortisation of operating intangible assets (26) (5) - (1)

Trading profit – subsidiaries 269 182 94 73 Trading profit/(loss) – joint ventures (3) 64 - 2

266 246 94 75 681

Other businesses 5 Corporate and unallocated costs (25)

Management trading profit 661 Less: Joint venture trading profit (64)


No income statement items between trading profit and profit before tax are allocated to management trading profit, which is the Group's segmental measure of profit or loss. During the period, the Group has recorded a net charge of £5 million in relation to a warranty matter and specific commercial resolution related to an onerous contract provision. This net charge is recorded in the trading profit of Driveline. In the year ended 31 December 2013, the Group sold rights to certain of its intellectual property (which had not previously met the intangible asset recognition criteria under IAS 38) realising a profit on sale of £5 million. Further income of £4 million has been recognised in the period ended 30 June 2014. These amounts have been recorded in the trading profit of Aerospace. During the first half 2013, the Group charged £25 million of restructuring costs in trading profit relating to; Driveline (£16 million), Powder Metallurgy (£5 million), Land Systems (£3 million) and Other businesses (£1 million). Incrementally, in the full year 2013 a £4 million restructuring credit was recorded in Aerospace Engine Systems.

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1 Segmental analysis (continued)

c) Goodwill, fixed assets and working capital - subsidiaries only

Automotive

Powder Land


£m £m £m £m £m


Property, plant and equipment and operating intangible

assets 927 906 330 135 2,298

Working capital 171 144 107 94 516

Net operating assets 1,098 1,050 437 229

Goodwill and non-operating intangible assets 525 265 25 170

Net investment 1,623 1,315 462 399


Property, plant and equipment and operating intangible assets 968 984 340 147 2,439 Working capital 150 139 112 91 492

Net operating assets 1,118 1,123 452 238 Goodwill and non-operating intangible assets* 639 308 29 191

Net investment 1,757 1,431 481 429

FULL YEAR 2013

Property, plant and equipment and operating intangible assets 934 932 335 142 2,343 Working capital 113 76 90 85 364

Net operating assets 1,047 1,008 425 227 Goodwill and non-operating intangible assets 566 280 26 181

Net investment 1,613 1,288 451 408


d) Inter segment sales

Subsidiary segmental sales gross of inter segment sales are; Aerospace £1,100 million (first half 2013: £1,123 million, full year 2013: £2,243 million), Driveline £1,591 million (first half 2013: £1,589 million, full year 2013: £3,124 million), Powder Metallurgy £472 million (first half 2013: £480 million, full year 2013: £934 million) and Land Systems £416 million (first half 2013: £469 million, full year 2013: £872 million).

e) Reconciliation of segmental property, plant and equipment and operating intangible assets to the Balance Sheet

Unaudited

First half First half Full year 2014 2013* 2013 £m £m £m

Segmental analysis – property, plant and equipment and operating intangible assets 2,298 2,439 2,343 Segmental analysis – goodwill and non-operating intangible assets 985 1,167 1,053 Goodwill (528) (584) (544) Other businesses 28 19 17 Corporate assets 8 8 8

Balance Sheet – property, plant and equipment and other intangible assets 2,791 3,049 2,877


f) Reconciliation of segmental working capital to the Balance Sheet

Unaudited

First half First half Full year 2014 2013 2013 £m £m £m

Segmental analysis – working capital 516 492 364 Other businesses 12 12 11 Corporate items (30) (33) (34) Accrued interest (25) (27) (15) Restructuring provisions (3) (4) (4) Deferred and contingent consideration (15) (36) (12) Government refundable advances (42) (95) (93) Loan to joint venture 8 8 8 Investment 4 4 4

Balance Sheet – inventories, trade and other receivables, trade and other payables and provisions 425 321 229

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NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2014 2 Basis of preparation

These half year condensed consolidated financial statements for the six months ended 30 June 2014 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and International Financial Reporting Standards, as adopted by the European Union, in accordance with IAS 34 'Interim Financial Reporting'. These financial statements have been prepared on a going concern basis. These financial statements, which are unaudited but have been reviewed by the auditors, provide an update of previously reported information and should be read in conjunction with the audited consolidated financial statements for the year ended 31 December 2013. These financial statements do not constitute statutory accounts. A copy of the audited consolidated statutory accounts for the year ended 31 December 2013 has been delivered to the Registrar of Companies. The auditors’ report on these accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498(2) or (3) of the Companies Act 2006.

Accounting policies

The accounting policies and methods of presentation applied in these financial statements are the same as those applied in the audited consolidated financial statements for the year ended 31 December 2013, with the exception of adoption of IFRS 10 ‘Consolidated Financial Statements’, IFRS 11 ‘Joint Arrangements’ and IFRS 12 ‘Disclosure of Interests in Other Entities’. These new standards, which have been applied from 1 January 2014 have not had any material impact on the Group’s results, assets or liabilities.

Restatement

During the hindsight period related to the acquisition of Volvo Aerospace, subsequent to interim reporting in 2013, the useful economic life of one contract related intangible asset was amended, as referenced in the 2013 financial statements. The amendment from 25 years to 6 years was to reflect better the consumption of value. The impact on “amortisation of non-operating intangible assets arising on business combinations” for the first half of 2013 is an incremental charge of £7 million.

This adjustment takes the previously reported amortisation charge of £28 million to a charge of £35 million with a corresponding impact on operating profit and profit before tax. The associated tax, is adjusted by an incremental credit of £2 million. This adjustment takes the previously reported tax charge of £30 million to a charge of £28 million.

For the first half 2013 basic earnings per share has been reduced from 5.8 pence to 5.5 pence and diluted earnings per share has been reduced from 5.7 pence to 5.4 pence. There has been no impact on management basis numbers as a result of this change.

In the balance sheet at 30 June 2013; “other intangible assets” have been reduced by the £7 million from £1,019 million to £1,012 million and “deferred tax liabilities” have reduced by the £2 million from £192 million to £190 million.

Estimates, judgements and assumptions

The Group’s significant accounting policies are set out in the audited consolidated financial statements for the year ended 31 December 2013. The application of the Group’s accounting policies requires the use of estimates, subjective judgement and assumptions. The Directors base these estimates, judgements and assumptions on a combination of past experience, professional expert advice and other evidence that is relevant to the particular circumstance.

The accounting policies where the Directors consider the more complex estimates, judgements and assumptions have to be made are those in respect of acquired assets and liabilities – business combinations, post-employment obligations, derivative and other financial instruments, taxation, provisions and impairment of non-current assets. The details of the principal estimates, judgements and assumptions are set out in notes 1, 24, 4b, 20, 6, 21 and 11 of the audited consolidated financial statements for the year ended 31 December 2013 as updated in notes 10 (Post-employment obligations), 4 (Change in value of derivative and other financial instruments), 8 (Taxation) and 14 (Other financial information) of these financial statements.

Date of approval

These financial statements were approved by the Board of Directors on Monday 28 July 2014.

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NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2014 3 Adjusted performance measures

(a) Reconciliation of reported and management performance measures


As

reported Joint

ventures

Exceptional and non-

trading items Management

basis

£m £m £m £m

Sales 3,565 263 - 3,828

Trading profit 301 39 - 340

Change in value of derivative and other financial instruments (7) - 7 -


business combinations (35) - 35 -

Operating profit 259 39 42 340

Share of post-tax earnings of joint ventures 31 (39) 1 (7)

Interest payable (38) - - (38)

Interest receivable 1 - - 1

Other net financing charges (29) - 29 -

Net financing costs (66) - 29 (37)

Profit before taxation 224 - 72 296

Taxation (39) - (19) (58)

Profit after taxation for the period 185 - 53 238

Profit attributable to non-controlling interests (2) - - (2)

Profit attributable to owners of the parent 183 - 53 236

Earnings per share - pence 11.2 - 3.2 14.4

FIRST HALF 2013* (unaudited)

As

reported Joint

ventures

Exceptional and non-

trading items Management

basis

£m £m £m £m

Sales 3,647 222 - 3,869

Trading profit 289 31 - 320

Change in value of derivative and other financial instruments (91) - 91 -


business combinations (35) - 35 -

Operating profit 163 31 126 320

Share of post-tax earnings of joint ventures 24 (31) 1 (6)

Interest payable (38) - - (38)

Interest receivable 2 - - 2

Other net financing charges (24) - 24 -

Net financing costs (60) - 24 (36)

Profit before taxation 127 - 151 278

Taxation (28) - (23) (51)

Profit after taxation for the period 99 - 128 227

Profit attributable to non-controlling interests (10) - 8 (2)

Profit attributable to owners of the parent 89 - 136 225

Earnings per share - pence 5.5 - 8.3 13.8


FULL YEAR 2013

For the year ended 31 December 2013, management sales were £7,594 million, management trading profit was £661 million, management profit before tax was £578 million and management earnings per share was 28.7 pence.

of 33

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2014 3 Adjusted performance measures (continued)

(b) Summary by segment


Sales Trading

profit Margin £m £m

Aerospace 1,100 121 11.0% Driveline 1,765 142 8.0% Powder Metallurgy 471 53 11.3% Land Systems 426 31 7.3% Other businesses 66 5 Corporate and unallocated costs - (12)

3,828 340 8.9%


Sales Trading



3,869 320 8.3%

FULL YEAR 2013

Sales Trading



7,594 661 8.7%

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NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2014 4 Change in value of derivative and other financial instruments

Unaudited

First half First half Full year

2014 2013 2013

£m £m £m

Forward currency contracts (not hedge accounted) (11) (98) 19

Embedded derivatives (1) 3 (4)

(12) (95) 15

Net gains and losses on intra-group funding

Arising in period 5 4 11


5 4 11

Change in value of derivative and other financial instruments (7) (91) 26

Forward foreign currency contracts (level 2) and embedded derivatives (level 2) are valued using observable rates and published prices together with forecast cash flow information where applicable, consistent with the prior year. The amounts in respect of embedded derivatives represents a commercial contract denominated in US dollars between European Aerospace subsidiaries and a customer outside the USA.

5 Gains and losses on changes in Group structure

Unaudited


2014 2013 2013

£m £m £m

Profits and losses on sale or closure of businesses

Business sold - - 9

Profit on sale of joint venture - - 3

Gains and losses on changes in Group structure - - 12

6 Share of post-tax earnings of joint ventures

Unaudited


2014 2013 2013

£m £m £m

Sales 263 222 458

Operating costs (224) (191) (394)

Trading profit 39 31 64

Net financing costs - - (1)

Profit before taxation 39 31 63

Taxation (7) (6) (9)

Share of post-tax earnings - before exceptional and non-trading

items 32 25 54

Exceptional and non-trading items (1) (1) (2)

Share of post-tax earnings 31 24 52

Exceptional and non-trading items represent amortisation of non-operating intangible assets arising on business combinations and other net financing charges including tax of £nil (first half 2013: £nil, full year 2013: £nil).

There has been no change in the fair value of a guarantee contract (level 3), signed with the external bankers of Emitec (a 50% joint venture company). The guarantee contract has been valued at £10 million based on future cash forecasts and an estimate of the probability of default if the guarantee were not in place.

On 30 April 2014, the Group agreed to sell its 50% shareholding in Emitec for cash consideration of approximately £36 million (€46 million) subject to regulatory approvals. At 30 June 2014, the transaction had not completed. The net carrying value of Emitec at 30 June 2014 was £14 million, reported in the balance sheet within ‘investments in joint ventures’ (£24 million) and ‘derivative financial instruments – non current liabilities’ (£10 million).

7 Other net financing charges

Unaudited


2014 2013 2013

£m £m £m

Interest charge on net defined benefit plans (25) (19) (45)

Unwind of discounts (4) (5) (10)

Other net financing charges (29) (24) (55)

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8

Taxation

The tax charge for the period is based on an estimate of the Group’s expected annual effective rate of tax for 2014 based on tax legislation substantively enacted at 30 June 2014 applied to taxable profit for the period ended 30 June 2014.

Unaudited


2014 2013* 2013

£m £m £m

Tax included in the income statement

Analysis of tax charge in the period

Current tax (charge)/credit

Current period charge (66) (43) (85)

Utilisation of previously unrecognised tax losses and other assets - 2 4

Adjustments in respect of prior periods (2) - 4

Net movement on provisions for uncertain tax positions 10 6 8

(58) (35) (69)

Deferred tax 19 7 (8)

Total tax charge for the period (39) (28) (77)

Analysed as:

Tax in respect of management profit

Current tax (58) (35) (65)

Deferred tax - (16) (40)

(58) (51) (105)

Tax in respect of items excluded from management profit

Current tax - - (3)

Deferred tax 19 23 31

19 23 28

Total tax charge for the period (39) (28) (77)


Unaudited


2014 2013 2013

£m £m £m

Tax included in other comprehensive income

Current tax on post-employment obligations 2 10 21

Current tax on foreign currency gains and losses on intra-group funding 2 - -

Deferred tax on post-employment obligations 29 (19) (49)

Deferred tax on foreign currency gains and losses on intra-group funding - 1 1

33 (8) (27)

Management tax rate

The tax charge arising on management profits of subsidiaries of £264 million (first half 2013: £253 million, full year 2013: £524 million) was £58 million (first half 2013: £51 million charge, full year 2013: £105 million charge) giving an effective tax rate of 22% (first half 2013: 20%, full year 2013: 20%). Deferred tax asset recognition

There is a net £19 million deferred tax credit (first half 2013: £7 million credit, full year 2013: £8 million charge) in the Income Statement, primarily relating to the recognition of previously unrecognised tax losses in the US due to increased confidence in the Group’s ability to offset these against future taxable profits.

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9 Dividends

An interim dividend of 2.8 pence per share (first half 2013: 2.6 pence per share, full year 2013: 7.9 pence per share)

has been declared by the Directors and will be paid on 22 September 2014 to shareholders on the register at 15 August 2014. Based on the number of shares ranking for dividend at 30 June 2014, the interim dividend is expected to absorb £46 million. During the period £87 million (first half 2013: £78 million, full year 2013: £121 million) was paid in respect of dividends to equity shareholders.

10 Post-employment obligations

Actuarial assessments of the key defined benefit pension and post-employment medical plans (representing 97% of liabilities and 98% of assets) were carried out as at 30 June 2014.

Movement in post-employment obligations during the period:

Unaudited

First half First half Full Year 2014 2013 2013 £m £m £m

At 1 January (1,271) (978) (978) Current service cost (23) (26) (51) Administrative costs (1) (2) (3) Interest on net defined benefit plans (25) (19) (45) Remeasurement of defined benefit plans (136) 106 60 Contributions/benefits paid 71 54 102 Removal of pension partnership plan asset - (342) (342) Currency variations 22 (33) (14)

At end of period (1,363) (1,240) (1,271)

Post-employment obligations as at the period end comprise:

Unaudited

30 June 30 June 31 December 2014 2013 2013 £m £m £m

Pensions - funded (805) (679) (742) - unfunded (492) (485) (462) Medical - funded (20) (24) (21) - unfunded (46) (52) (46)

(1,363) (1,240) (1,271)

UK Americas Europe ROW Total £m £m £m £m £m

At 30 June 2014 - unaudited (769) (94) (486) (14) (1,363)

At 30 June 2013 - unaudited (621) (137) (463) (19) (1,240) At 31 December 2013 (714) (87) (455) (15) (1,271)

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10 Post-employment obligations (continued) Assumptions The major assumptions used were:

UK Americas Europe ROW

GKN1 GKN2 % % % % %

At 30 June 2014 – unaudited Rate of increase in pensionable salaries n/a 4.20 n/a 2.50 - Rate of increase in payment and deferred pensions 3.20 3.20 n/a 1.75 n/a Discount rate 4.00 4.20 4.30 2.80 1.25 Inflation assumption 3.20 3.20 n/a 1.75 n/a Rate of increase in medical costs: Initial/long term 5.5 /5.5 7.5/5.0 n/a n/a

At 30 June 2013 – unaudited Rate of increase in pensionable salaries n/a 4.30 n/a 2.50 - Rate of increase in payment and deferred pensions 3.20 3.30 n/a 1.75 n/a Discount rate 4.20 4.60 4.80 3.50 1.45 Inflation assumption 3.10 3.30 n/a 1.75 n/a Rate of increase in medical costs: Initial/long term 6.1/6.1 8.0/5.0 n/a n/a

At 31 December 2013 Rate of increase in pensionable salaries n/a 4.30 n/a 2.50 - Rate of increase in payment and deferred pensions 3.25 3.30 n/a 1.75 n/a Discount rate 4.20 4.50 4.80 3.50 1.25 Inflation assumption 3.25 3.30 n/a 1.75 n/a Rate of increase in medical costs: Initial/long term 5.5/5.5 7.5/5.0 n/a n/a

Consistent with the prior period and year end, the UK discount rate at 30 June 2014 is based on AA corporate bonds with duration weighted to the UK pension schemes’ liabilities, derived from the Mercer pension discount yield curve. The methodologies used to derive the German and US discount rates were similarly consistent with those used at 31 December 2013.

The UK scheme mortality assumptions are based on S1NA (year of birth) mortality tables with CMI 2013 improvements and a 1.25% long term improvement trend. In Germany RT2005-G tables were used, whilst PPA 2013 tables were used in the US.

Assumption sensitivity analysis

The impact of a one percentage point movement in the primary assumptions for the defined benefit net obligations as at 30 June 2014 is set out below:

UK Americas Europe ROW £m £m £m £m

Discount rate +1% 410 33 71 3 Discount rate -1% (516) (41) (91) (3) Rate of inflation +1% (446) - (59) - Rate of inflation -1% 355 - 50 - Life expectancy +1 year (97) (8) (16) - Life expectancy -1 year 93 8 15 -

UK deficit funding

During the period, a bulk annuity pensioner “buy-in” was transacted in relation to the UK pension scheme, GKN 1, as a result of which a proportion of GKN 1 liabilities are now fully insured. The transaction involved a payment to Rothesay Life of £123 million, made from GKN 1’s assets. This gave rise to an additional scheme funding requirement of £8 million which the Group will pay to GKN 1 over a 4 year period. The first payment of £2 million was made during the period. The bulk annuity covers £107 million of pensioner liabilities valued on an IAS19 accounting basis, as at 30 June 2014. In the UK, the Group is required to complete a statutory valuation of its pension schemes at least every three years and to agree a recovery plan to eliminate any resulting deficit. Both UK pension schemes underwent funding valuations as at 5 April 2013 and during the period final agreement was reached with the Trustees on the valuation and resulting deficit recovery plan for each scheme. The agreed deficit recovery plan requires payments of £10 million per year to the pension schemes combined and the potential for further additional payments commencing in 2015, contingent upon asset performance. The first payment of £10 million was made during the period.

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11 Cash flow notes

Unaudited


2014 2013 2013

£m £m £m

Cash generated from operations

Operating profit* 259 163 560

Adjustments for:

Depreciation, impairment and amortisation of fixed assets

Charged to trading profit

Depreciation 109 119 235

Impairment - - 2

Amortisation 15 13 32

Amortisation of non-operating intangible assets arising on business

Combinations* 35 35 75

Change in value of derivative and other financial instruments 7 91 (26)

Amortisation of government capital grants (1) (2) (3)

Net profit on sale/realisation of fixed assets (2) - (1)

Gains and losses on changes in Group structure - - (12)

Charge for share-based payments 4 5 14

Movement in post-employment obligations (48) (26) (47)

Change in inventories (36) (64) (74)

Change in receivables (163) (180) (74)

Change in payables and provisions 48 113 101

227 267 782

Movement in net debt

Net movement in cash and cash equivalents (25) 81 67

Net movement in borrowings and deposits (50) (137) 83

Finance leases - - (1)

Currency variations (6) (1) (10)

Movement in period (81) (57) 139

Net debt at beginning of period (732) (871) (871)

Net debt at end of period (813) (928) (732)

Reconciliation of cash and cash equivalents

Cash and cash equivalents per balance sheet 181 233 184

Bank overdrafts included within “current liabilities – borrowings” (31) (23) (3)

Cash and cash equivalents per cash flow 150 210 181


The fair values of most financial instruments approximate to carrying value either due to the short-term maturity of the instruments or because interest rates are reset frequently, with the exception of other borrowings and government refundable advances which are carried at amortised cost. The carrying value of other borrowings at 30 June 2014 was £944 million (first half 2013: £1,095 million) with a fair value of £1,034 million (first half 2013: £1,122 million) and the carrying value of government refundable advances at 30 June 2014 was £42 million (first half 2013: £94 million) with a fair value of £50 million (first half 2013: £102 million).

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12 Property, plant and equipment (unaudited)

During the six months ended 30 June 2014 the Group asset additions were £114 million (first half 2013: £121 million). Assets with a carrying value of £5 million (first half 2013: £nil) were disposed of during the six months ended 30 June 2014.

13 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. The Group also provides short-term financing facilities to joint venture companies. There have been no significant changes in the nature of transactions between subsidiaries and joint ventures that have materially affected the financial statements in the period. Similarly, there has been no material impact on the financial statements arising from changes in the aggregate compensation of key management.

14 Other financial information (unaudited)

Commitments relating to future capital expenditure not provided by subsidiaries at 30 June 2014 amounted to £122 million (30 June 2013: £98 million) and the Group's share not provided by joint ventures amounted to £27 million (30 June 2013: £17 million). During the period a total of 527,459 ordinary shares (first half 2013: 4,506,727 ordinary shares) were issued in connection with the exercise of options under the Company’s share option schemes, all of which were transferred from treasury. This generated a cash inflow of £1 million (first half 2013: £5 million). During the period no shares were purchased by the GKN Employee Share Ownership Plan Trust (first half 2013: 1,723,040 shares were purchased in the open market for cash consideration of £4 million). On 1 April 2014 the Group acquired 100% of the equity share capital of Williams Hybrid Power Limited, now renamed GKN Hybrid Power Limited, from Williams Grand Prix Engineering Limited. The fair value consideration of £11 million comprises an initial cash investment of £8 million, plus contingent consideration estimated at £3 million. The range of the contingent consideration payment, based on specific sales from GKN Hybrid Power Limited at a contractual royalty rate is unlimited. The fair value of net assets acquired of £11 million, comprises; property, plant and equipment of £1 million, a technology based non-operating intangible asset of £7 million, a marketing related non-operating intangible asset of £2 million, a deferred tax liability of £1 million and provisional goodwill of £2 million. Amounts remain provisional until work is finalised later in 2014. GKN Hybrid Power Limited has been included in Other businesses for segmental reporting. In May 2014, the Group repaid a government refundable advance in the UK, received in 2009 and 2010 relating to the A350 programme. The principle repaid was £38 million and the associated accrued interest was £16 million.

15 Contingent assets and liabilities (unaudited)

Since 2003, the Group has been involved in litigation with HMRC in respect of various advance corporate tax payments made and corporate tax paid on certain foreign dividends which, in its view, were levied by HMRC in breach of the Group’s EU community law rights. A High Court judgment regarding payments on account was handed down in January 2013 confirming HMRC should repay payments on account to GKN. The European Court of Justice published its decision on 13 November 2012 and the case has returned to the UK Courts. The continuing complexity of the case and uncertainty over the issues raised means that it is not possible to predict the final outcome of the litigation with any reasonable degree of certainty and, as a result, no contingent asset has been recognised. There are no other material contingent assets at 30 June 2014 or 30 June 2013. At 30 June 2014 the Group had no contingent liabilities in respect of bank arrangements but one guarantee in respect of a joint venture’s funding, consistent with 2013 year end (30 June 2013: one). In the case of certain businesses, performance bonds and customer finance obligations have been entered into in the normal course of business.

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Independent review report to GKN plc

Report on the condensed consolidated financial information

Our conclusion We have reviewed the condensed consolidated financial statements defined below, in the Half year report of GKN plc for the six months ended 30 June 2014. Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

This conclusion is to be read in the context of what we say in the remainder of this report.

What we have reviewed The condensed consolidated financial statements, which are prepared by GKN plc comprise:

the consolidated balance sheet as at 30 June 2014;

the consolidated income statement and statement of comprehensive income for the period then ended;

the consolidated cash flow statement for the period then ended;

the condensed consolidated statement of changes in equity for the period then ended; and

the explanatory notes to the half year consolidated financial statements.

As disclosed in note 2, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

The condensed consolidated financial statements included in the Half year report have been prepared in accordance with International Accounting Standard 34, ‘Interim Financial Reporting’, as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

What a review of condensed consolidated financial statements involves We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ‘Review of Interim Financial Information Performed by the Independent Auditor of the Entity’ issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the Half year report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated financial statements.

Responsibilities for the condensed consolidated financial statements and the review

Our responsibilities and those of the directors The Half year report, including the condensed consolidated financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Half year report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express to the company a conclusion on the condensed consolidated financial statements in the Half year report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure and Transparency Rules of the Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

PricewaterhouseCoopers LLP Chartered Accountants 28 July 2014 Birmingham

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