Sales increased 1% organically Trading margin improved to 9.0%

NEWS RELEASE 28 July 2015

GKN plc Results Announcement for the six months ended 30 June 2015

Group Highlights

(1)



Sales increased 1% organically



Trading margin improved to 9.0%



Profit before tax (management basis) up 4%



Reported profit before tax was £212 million (2014: £224 million)



Earnings per share up 1%, impacted by an increased tax rate of 24% (2014: 22%)



Interim dividend increased 4% to 2.9 pence per share



Free cash flow of £21 million (2014: £19 million)



Net debt of £708 million (31 December 2014: £624 million), reflecting normal seasonality



Acquisition of Fokker Technologies and placing announced separately today.

Management basis

(1)

As reported

2015

£m

2014

£m

Change

%

2015

£m

2014

£m

Change

%

Sales

Operating profit

Trading margin (%)

Profit before tax

Earnings per share

3,853

346

9.0%

307

14.5p

3,828

340

8.9%

296

14.4p

+1

+2

+10bps

+4

+1

3,616

245

212

9.9p

3,565

259

224

11.2p

+1

-5

-5

-12

Interim dividend per share 2.9p 2.8p +4 2.9p 2.8p +4

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

“This was another solid performance, particularly in our automotive businesses, with GKN Driveline delivering 4% organic sales growth and an 8.3% trading margin while GKN Powder Metallurgy achieved an 11.8% margin. GKN Aerospace delivered in line with expectations and won some important new contracts for the future. We have continued to perform well against our key markets and report good results in spite of some end market weakness, particularly in GKN Land Systems.

We expect these trends to continue in the second half and for 2015 to be another year of growth.

The acquisition of Fokker Technologies, also announced today, supports our strategy, brings excellent technology, an expanded geographic footprint and additional content on high growth aerospace programmes.

”

1

Divisional Highlights

GKN Aerospace



Organic growth in commercial aerospace (+2%) partially offset by decline in military (-4%)



Acquisition of Sheets Manufacturing Inc., to support a new contract for engine inlet lip skins for the Boeing 737Max and Boeing 777X, and additional content on Boeing 787



New work packages won exceed $2.3 billion over contract lives



Acquisition of Fokker Technologies Group B.V., announced today, supports GKN Aerospace strategy

GKN Driveline



Growth continues ahead of global auto production helped by increased content per vehicle



Trading margin improved to 8.3%



£460 million of annualised new and replacement business won

GKN Powder Metallurgy



Trading margin increased to 11.8%



Strong focus on technology and £90 million annualised new and replacement business won



Chinese powder joint venture agreed subject to approvals

GKN Land Systems



Organic sales down 8% mainly due to challenging agricultural equipment markets



Strong cost control results in trading margin of 4.0%, including £5 million restructuring charge

Outlook

GKN Aerospace’s 2015 organic sales are expected to be broadly flat, reflecting growth in commercial aircraft production, a decline in military markets and the phasing of our programmes.

A strong commercial order book supports attractive growth for GKN Aerospace over the medium term.

In automotive, external forecasts predict growth in global light vehicle production of around 2% with increases in India, China, North America and Europe offsetting a decline in Japan and Brazil.

Against this background, GKN Driveline and GKN Powder Metallurgy are expected to continue to grow organically above the market.

Global agricultural equipment markets are expected to remain soft with only modest improvement in industrial markets. As a result, GKN Land Systems 2015 sales are expected to be lower than

2014 and the remaining £3 million restructuring charge is planned in the second half to reduce further the fixed cost base.

Although some markets remain challenging, 2015 is expected to be a year of further growth.

Beyond 2015, we are well positioned to outperform in our large global markets.

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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 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: guy.stainer@gkn.com

Media:

Chris Fox, Group Communications Director, GKN plc

T: +44 (0)1527 533238

M: +44 (0)7920 540051

E: chris.fox@gkn.com

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 the Grand Hall, JP Morgan,

60 Victoria Embankment, London EC4Y 0JP.

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/News/Pages/default.aspx

.

Questions will only be taken at the event.

A live dial in facility will be available by telephoning: +44 (0) 1452 557 851, Conf ID: 85540574

Following the event, the webcast will be made available on the company website www.gkn.com

and a replay of the conference call will be available until 28 August 2015 on:

Standard International Number: +44 (0) 1452 550 000

Replay Access Number : 85540574

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

.

3

NEWS RELEASE

GKN plc Results Announcement for the six months ended 30 June 2015

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 and to the automotive and commercial vehicle sectors.

Results

Sales (£m)

Trading profit (£m)

Trading margin (%)

Return on average invested capital (%)

First half Change (%)

2015 2014 Headline Organic

3,853 3,828

346 340

1

2

1

1

9.0% 8.9%

17.5% 16.9%

Organic sales increased £50 million (1%). The effect of currency translation on management sales was a £20 million benefit and there was a £2 million benefit from acquisitions which was more than offset by a £47 million reduction due to disposals.

Organic trading profit increased £3 million (1%) with improvements in GKN Aerospace, GKN

Driveline and GKN Powder Metallurgy whilst GKN Land Systems declined. There was a favourable currency translational impact of £9 million and a negative net effect of acquisitions and disposals of £6 million. Corporate costs were lower due to the recognition of a £7 million UK pension past service credit partly offset by £3 million of acquisition related costs.

Group trading margin in the first half was 9.0% (2014: 8.9%). Return on average invested capital

(ROIC) was 17.5% (2014: 16.9%).

Divisional Performance

GKN Aerospace

GKN Aerospace is a leading global tier one supplier of airframe and engine structures, components, assemblies and transparencies to 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 2015 driven by a growing commercial aircraft market partly offset by a declining military market. The division’s commercial sales were 74%, with military representing 26%.

In commercial, both Airbus and Boeing continue 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. There is also more demand for strong global suppliers to support their expansion plans.

4

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

Sales (£m)


First half

2015 2014

1,171 1,100

133 121

Trading margin (%) 11.4% 11.0%

Return on average invested capital (%) 17.7% 16.8%

Change (%)

Headline

6

10

Organic

1

3

Organic sales were £7 million (1%) higher. Commercial organic sales were 2% higher, benefiting from stronger orders for business jets and A350 partly offset by a reduction in A330 production.

Military organic sales were 4% lower primarily due to the ending of the C-17 programme in the second half of 2014. There was a £64 million (5%) benefit from currency translation.

The organic increase in trading profit was £4 million. There was a favourable currency translation impact of £8 million.

Each year there are commercial issues and provision movements which are included within the results. During the last six months, progress has been made on an engine contract which resulted in a release of £10 million and a warranty matter has been resolved with a £5 million credit (2014:

£4 million for milestones achieved in relation to the divestment of Composite Technology and

Applications Limited (CTAL)).

Trading margin was 11.4% (2014: 11.0%). Return on average invested capital was 17.7% (2014:

16.8%).

During the period a number of important milestones were achieved including:



The acquisition of Sheets Manufacturing Inc. on 8 June 2015, a technology leader in the manufacture of aircraft engine inlet lip skins with legacy program positions on the Boeing

747-8 and KC-46 tanker. This acquisition will support GKN Aerospace on the recently awarded contract for engine inlet lip skins for the Boeing 737Max and Boeing 777X, and work to assemble the Section 47 floor grid for the Boeing 787;



Winning a contract to supply wing skins to Gulfstream for their G500 and G600 ultra long range business jets;



Agreeing a new (US$650 million) risk and revenue sharing partnership (RRSP) with Pratt &

Whitney covering the supply of components for the PurePower ® PW1400-JM Geared

Turbofan™ engine for the Irkut MC-21 mid-range, single aisle aircraft;



Filton facility being awarded ‘Accredited Member’ status by Airbus, the highest level of recognition by the Airbus supply chain and quality improvement programme (SQIP); and



Entering into a strategic partnership with Arcam AB to develop and industrialise one of the most promising new additive manufacturing processes to meet the needs of the expanding future aerospace market.

5

Automotive market

The major automotive markets of China, India, North America and Europe experienced increased production in the first half of the year compared to 2014, while Brazil and Japan declined. Overall, global production volumes increased by 0.9% to 44.8 million vehicles (2014: 44.4 million).

Car and light vehicle production (rounded millions of units)

2015

First half

2014

Growth

(%)

(#)

Europe

North America

Brazil

Japan

China

India

10.8

8.8

1.2

4.4

11.7

1.9

10.6

8.6

1.5

4.8

11.2

1.8

2.2

2.0

-16.7

-9.1

5.0

6.0

Others 6.0 5.9 0.5

Total – global 44.8

Source: IHS Automotive;

(#)

Growth is derived from unrounded production figures

44.4 0.9

Production in Europe showed an improvement compared with the first half of 2014 due to recovery in demand in Western Europe being offset by the decline in Russia.

Production in North America benefitted from improved consumer confidence and localisation of foreign manufacturers’ capacity. The deteriorating economy in Brazil caused vehicle manufacturers to cut back production in line with the significant fall in vehicle sales.

Weak production in Japan resulted from the long term trend in production moving offshore and the comparison with a strong first half of 2014, boosted by demand from consumer purchases to beat

April 2014’s rise in consumption tax. Production growth in China slowed to 5%, as the economy slowed whereas the rate of growth in Indian output increased to 6% due to stronger economic activity, improved consumer confidence and lower fuel prices.

External forecasts anticipate global production in 2015 will increase 2% to 88.9 million vehicles. The recovery in India will lead growth (6%) with China (5%) and North America (3%) in support. Production in Europe is forecast to increase 2% with the 4% rise in West Europe offset by continued problems in Russia. Production in Japan is expected to decline by 6% while that of

Brazil is forecast to fall 16%.

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.


GKN Driveline

Sales (£m)




First half

2015 2014

Change (%)

Headline Organic

1,814 1,765

150 142

3

6

4

4

8.3% 8.0%

19.6% 17.9%

6

Organic sales increased by £68 million (4%) compared with global vehicle production which was up 1%. The adverse effect of currency translation was £19 million (1%).

GKN Driveline’s market outperformance was mainly in Europe reflecting recent market share gains, a stronger position in premium vehicles, demand for which continued to be positive, and

GKN Driveline’s broadening product mix, particularly with all-wheel drive (AWD) systems. GKN

Driveline performed broadly in line with the markets in North America (reflecting its lower content on truck-based platforms) and China (recognising the strong comparator period in 2014 and its greater exposure to global brands, which performed less strongly than domestic producers).

Growth in China is expected to be above the market in the second half due to the strong order book and new programme launches.

The organic improvement in trading profit was £6 million reflecting higher volumes in Europe.

Profit conversion was limited by lower profitability in Japan and Brazil. The positive impact of currency translation on trading profit was £2 million. GKN Driveline’s trading margin was 8.3%

(2014: 8.0%). Return on average invested capital was 19.6% (2014: 17.9%).

During the period, around £460 million of annualised sales in new and replacement business was secured in CVJ and AWD systems and a number of important milestones achieved, including:



Winning an Automotive News PACE award for its two-speed eAxle technology, showcased on the class-redefining BMW i8 plug-in hybrid supercar. GKN Driveline was also a finalist in the 'Product' catego ry for its AWD disconnect technology featured on JLR’s Active

Driveline Range Rover Evoque, Fiat 500X and Jeep Renegade;



Being selected by Volvo Cars to be their development partner on the front-wheel drive, allwheel drive (AWD) and hybrid drivelines of the all-new Volvo XC90;



Becoming the first global Tier One supplier to design, develop and manufacture a complete all-wheel drive (AWD) system in China. GKN Driveline supplies the complete AWD to SAIC

Motors’ new MG GS compact SUV, as well as the front wheel-drive system;



Expanding production facilities in Mexico, Turkey, Poland, Thailand and Chongqing, China and opening a state-of-the-art engineering facility at MIRA Technology Park, UK to test and develop the driveline technologies of the future; and

 GKN Driveline Brazil being awarded Toyota’s prestigious South America Supplier Quality

Excellence Award for the second year in a row.


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.



Sales (£m)



First half

2015 2014

Change (%)

Headline Organic

474

56

11.8%

471

53

11.3%

Return on average invested capital (%) 22.0% 21.0%

1

6

1

4

Organic sales at GKN Powder Metallurgy were £6 million higher (1%), after the £8 million pass through to customers of lower scrap steel prices. There was no impact from currency translation and there was a £3 million decline as a result of a disposal. Good growth was achieved in North

America, China and Europe but sales in Brazil fell due to weaker automotive and industrial markets.

7

The organic increase in profit was £2 million and there was a £1 million gain on currency translation. The divisional trading margin was 11.8% (2014: 11.3%) 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 22.0%

(2014: 21.0%), reflecting the improvement in profitability.

During the period, GKN Powder Metallurgy continued to achieve a number of important milestones, which included:



Continuing strong product and development activities in engines and transmissions;



Award of £90 million of annualised sales in new and replacement business;



Its position in China being further enhanced by agreeing to file for approval to form a new joint venture to produce metal powders; and



Development of new technically enhanced powders continuing with a new research titanium atomizer being commissioned at the Powder Innovation Centre, in the USA.


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 year primarily due to progressively worsening agricultural equipment markets while demand for construction and industrial equipment remained relatively stable.



Sales (£m)




First half

2015 2014

Change (%)

Headline Organic

371

15

426

31

(13)

(52)

(8)

(48)

4.0% 7.3%

7.6% 14.6%

The organic decrease in sales was £32 million (8%) and the adverse impact of currency translation was £23 million (5%).

The organic decrease in trading profit was £14 million, including £5 million of restructuring charges in the first half of 2015. The negative impact of currency translation was £2 million. There is expected to be a further restructuring charge of £3 million in the second half. Trading margin was

4.0%, or 5.4% before restructuring charges (2014: 7.3%). Return on average invested capital was

7.6% (2014: 14.6%).

The first half of 2015 has been a period of tough trading and restructuring to right size the business for the future. At the same time good progress has been made in further developing capabilities in

China and continuing to bring new technology leading products to customers.

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 mechanical flywheel energy storage and hybrid system manufacturer), acquired on 1 April 2014 from Williams Grand Prix

Engineering Limited.

8

GKN’s Other Businesses reported combined sales in the period of £23 million (2014: £66 million), reflecting a £1 million organic increase in sales and £2 million benefit from acquisitions, more than offset by the £44 million impact from the disposal of Emitec on 31 July 2014 and £2 million adverse currency translation. A trading loss of £2 million was reported in the first half (2014: £5 million profit) reflecting the disposal of Emitec and the start-up costs of GKN Hybrid Power.

Corporate costs, which comprise the costs of stewardship of the Group and operating charges and credits associated with the Group’s legacy businesses, were £6 million (2014: £12 million), primarily due to a £7 million past service credit following completion of a Pension Increase

Exchange exercise in the UK partly offset by £3 million of acquisition related costs.

Other Financial Information

All comparative information provided below relates to the first half of 2014, 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 £20 million (2014: loss of £7 million).

When the business wins long term customer contracts that are in a foreign currency, the

Group mitigates the potential volatility of the future cash flows by hedging through forward foreign 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 2015, the net fair value of such instruments was a liability of

£211 million (31 December 2014: liability of £180 million) and the change in fair value during the year was a £31 million charge (2014: £11 million charge).

There was no change in the fair value of embedded derivatives in the period (2014: £1 million charge) and a net gain of £11 million attributable to the currency impact on Group funding balances (2014: £5 million net gain).

Amortisation of non-operating intangible assets arising on business combinations

The charge for the amortisation of non-operating intangible assets arising on business combinations (for example, customer contracts, order backlog, technology and intellectual property rights) was £36 million (2014: £35 million).

Gains and losses on changes in Group structure

The loss on changes in Group structure was £5 million (2014: nil).

On 30 January 2015, the Group sold GKN Sinter Metals Argentina SA for cash consideration of £1 million before cash disposed and fees. The carrying value on the date of disposal was £2 million and £4 million of previous currency variations were reclassified from other reserves resulting in a loss on sale of £5 million.

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.

9

The Group’s share of post-tax earnings of joint ventures in the period was £34 million (2014: £31 million) with trading profit of £40 million (2014: £39 million). The Group’s share of post-tax earnings on a management basis was £34 million (2014: £32 million). The Group’s share of the tax charge amounted to £6 million (2014: £7 million) with no net financing costs in either period.

The organic increase in trading profit was £2 million.

Net financing costs

Net financing costs totalled £67 million (2014: £66 million) and comprise the net interest payable of

£33 million (2014: £37 million), a non-cash charge on post-employment benefits of £25 million

(2014: £25 million), a £6 million charge for changes in fair value on net investment hedges (2014: nil) and unwind of discounts of £3 million (2014: £4 million). The non-cash charge on postemployment benefits, changes in fair value on net investment hedges and unwind of discounts are not included in management figures. Details of the assumptions used in calculating postemployment costs and income are provided in note 10 of the financial statements.

Profit before tax

Management profit before tax was £307 million (2014: £296 million). Profit before tax on a statutory basis was £212 million (2014: £224 million). The main differences in the first half of 2015 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.

Taxation

The book tax rate on management profits of subsidiaries was 24% (2014: 22%), arising as a £66 million tax charge (2014: £58 million charge) on management profits of subsidiaries of £273 million

(2014: £264 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% (2014: 33%). The book tax rate is significantly lower, largely because of the utilisation of deferred tax assets, movements in tax risk provisions as outstanding issues are settled and tax on items excluded from management profit.

The tax rate on statutory profits of subsidiaries was 26% (2014: 20%) arising as a £46 million tax charge (2014: £39 million charge).

Non-controlling interests

The profit attributable to non-controlling interests was £3 million (2014: £2 million).

Earnings per share

Management earnings per share was 14.5 pence (2014: 14.4 pence). On a statutory basis earnings per share was 9.9 pence (2014: 11.2 pence), impacted by an increased charge on the change in value of derivatives and other financial instruments and an increased tax charge.

Dividend

In view of the Group’s continued progress, the Board has decided to pay an interim dividend of 2.9 pence per share (2014: 2.8 pence), an increase of 4%. The interim dividend will be paid on 21

September 2015 to shareholders on the register at 14 August 2015. 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 28 August 2015.

10

Cash flow

Operating cash flow, which is defined as cash generated from operations of £242 million (2014:

£227 million) adjusted for capital expenditure (net of proceeds from capital grants) of £198 million

(2014: £161 million), proceeds from disposal of fixed assets £2 million (2014: £7 million), was an inflow of £46 million (2014: £35 million). 2014 operating cash flow included repayment of the principal of a UK government refundable advance of £38 million.

Capital expenditure (net of proceeds from capital grants) on both tangible and intangible assets totalled £198 million (2014: £161 million). Of this, £166 million (2014: £132 million) was on tangible fixed assets and was 1.6 times (2014: 1.2 times) the depreciation charge. Expenditure on intangible assets, mainly non-recurring costs on Aerospace programmes, totalled £32 million

(2014: £29 million).

Interest paid was £22 million (2014: £39 million), whilst interest received was £1 million (2014: £1 million) resulting in net interest paid of £21 million (2014: £38 million, including £16 million interest paid on repayment of a Government refundable advance).

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 £21 million (2014: £19 million).

Net debt

At the end of the period, the Group had net debt of £708 million (2014: £813 million) after payment of the 2014 final dividend of £92 million. In September 2014, the Group entered into a series of cross currency interest rate swaps to better align its foreign currency income receipts with its debt coupon payments. The fair value of these derivative instruments at 30 June 2015 was a liability of

£10 million (31 December 2014: £26 million liability) which is included in the net debt figure of £708 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 £27 million (2014: £23 million) and administrative costs of £1 million (2014: £1 million). Interest on net defined benefit plans, which is excluded from management figures, was £25 million (2014: £25 million).

The deficit across all schemes at 30 June 2015 was £1,533 million, a £178 million decrease over the 31 December 2014 deficit (£1,711 million). This decrease is caused by favourable changes in the discount rates used, further deficit contributions and beneficial currency movements.

Both UK pension schemes underwent funding valuations as at 5 April 2013. The agreed deficit recovery plan requires payments of £10 million per year to the pension schemes combined.

A “pension increase exchange” (PIE) exercise was completed in the UK legacy scheme, GKN1, during the period. This involved pensioners being offered the no-obligation opportunity to exchange future inflationary increases to their pensions for a one-off payment with no future increases. Around 54% of members eligible for the offer accepted it. Due to differences in the inflation assumption used to determine the pension increases and those used for accounting purposes, the PIE exercise has led to a £7 million income statement credit which has been recognised in trading profit.

11

Group-wide contributions totalled £71 million (2014: £71 million), including a £30 million payment from the pension partnership to the UK pension schemes and £12 million from the deficit recovery plan and a bulk annuity “buy-in” funding.

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 £20 million (2014: £16 million).

Net assets

Net assets of £1,580 million were £79 million higher than the December 2014 year end figure of

£1,501 million. The increase includes statutory profit after tax of £166 million and a gain on remeasurement of defined benefit plans net of tax of £78 million partially offset by dividends paid to equity shareholders of £92 million and adverse currency on translation of subsidiaries and joint ventures net of tax of £98 million.

Exchange rates

Exchange rates used for currencies most relevant to the Gro up’s operations are:

Euro

US Dollar

H1

2015

1.37

1.53

Average

H1

2014

1.22

1.67

June

2015

1.41

1.57

Period End

June

2014

1.25

1.71

2014 Full Year

Average

1.24

1.65

Period

End

1.29

1.56

The approximate impact on first half 2015 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 2015, UK committed bank facilities were £879 million. Within this amount were committed Revolving Credit Facilities of £800 million, £64 million outstanding on an eight-year amortising facility from the European Investment Bank (EIB) and a new euro denominated £15 million seven-year amortising facility from KfW, which was fully drawn at inception. There were drawings of £56 million against the Revolving Credit Facilities.

As at 30 June 2015, the next major maturities of the Revolving Credit Facilities were for £800 million in 2019.

Capital market borrowings at 30 June 2015 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 2015, the Group had net debt of £708 million (31 December

2014: £624 million).

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 12 months to 30 June 2015, EBITDA was 12.6 times greater than net interest, whilst net debt was 0.8 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.

12

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 43 to 51 of the 2014 Annual Report. These risks relate to the following: highly competitive markets; supply chain; customer concentration; joint ventures; laws, regulations and corporate reputation; operating in global markets; technology and innovation; contract risk; programme management; product quality; people capability; health and safety; information system resilience; business continuity; and pension funding.

The acquisition of Fokker comes with transaction related risks, such as potential integration issues, difficulty achieving planned synergies, or unexpected compliance or litigation related costs. The

Board has carefully reviewed these risks and considers them to be mitigated appropriately. The

Group has considerable experience managing integration processes and integration plans will be regularly reviewed by divisional management, the Executive Committee and the Board.

Basis of Reporting

The financial statements for the period are shown on pages 16 to 33 and have been prepared using accounting policies which were used in the preparation of audited accounts for the year ended 31 December 2014 and which will form the basis of the 2015 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 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.

13

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 2014 Annual Report that could do so.

The Directors of GKN plc are listed in the GKN annual report for 2014.

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

Mike Turner

Chairman

27 July 2015

14

APPENDICES

GKN Condensed Consolidated Financial Statements

Consolidated Income Statement for the half year ended 30 June 2015

Consolidated Statement of Comprehensive Income for the half year ended 30 June

2015

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

June 2015

Consolidated Balance Sheet at 30 June 2015

Consolidated Cash Flow Statement for the half year ended 30 June 2015

Notes to the Half Year Consolidated Financial Statements

Independent Review Report

Page

16

17

18

19

20

21 – 33

34

15

CONSOLIDATED INCOME STATEMENT

FOR THE HALF YEAR ENDED 30 JUNE 2015

Sales

Notes

1a

Trading profit 1b

Change in value of derivative and other financial instruments 4

Amortisation of non-operating intangible assets arising on

business combinations

Gains and losses on changes in Group structure

Impairment charges

5

Operating profit

Share of post-tax earnings of joint ventures

Interest payable

Interest receivable

Other net financing charges


Profit before taxation

Taxation

Profit after taxation for the period

6

7

8

Profit attributable to non-controlling interests

Profit attributable to owners of the parent

Earnings per share - pence

Continuing operations - basic

Continuing operations - diluted

Unaudited

First half First half Full year

2015 2014 2014

£m £m £m

3,616 3,565 6,982

3

163

166

9.9

9.8

(66)

224

(39)

185

259

31

(38)

1

(29)

301

(7)

(35)

-

-

(67)

212

(46)

166

245

34

(34)

1

(34)

306

(20)

(36)

(5)

-

2

183

185

11.2

11.0

(129)

221

(47)

174

289

61

(75)

2

(56)

612

(209)

(69)

24

(69)

5

169

174

10.3

10.2

16

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


Profit after taxation for the period

Other comprehensive income:

Items that may be reclassified to profit or loss

Currency variations – subsidiaries

Arising in period

Reclassified in period

Currency variations – joint ventures

Arising in period


Net investment hedge changes in fair value

Arising in period


Taxation

Items that will not be reclassified to profit or loss

Remeasurement of defined benefit plans

Subsidiaries

Joint ventures

Taxation

Other comprehensive income/(expense) for the period

Total comprehensive income/(expense) for the period

Notes

10

8

5

8

Unaudited


2015 2014 2014

£m £m £m

166 185 174

(102)

4

(2)

-

23

-

2

(75)

(80)

-

(8)

-

-

-

2

(86)

47

-

2

(1)

(30)

-

9

27

106

-

(28)

78

3

169

(136)

-

31

(105)

(191)

(6)

(485)

-

122

(363)

(336)

(162)

Total comprehensive income for the period attributable to:

Owners of the parent

Non-controlling interests

167

2

169

(8)

2

(6)

(167)

5

(162)

17

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


At 1 January 2015

Profit for the period

Other comprehensive income/(expense)

Total comprehensive income/(expense)

Share-based payments

Share options exercised

Dividends paid to equity shareholders

Dividends paid to non-controlling interests

At 30 June 2015 (unaudited)

Notes

14

9

Share capital

£m

166

-

-

-

-

-

-

-

166

Capital redemption reserve

£m

298

-

-

-

-

-

-

-

298

Share premium account

£m

139

-

-

-

-

-

-

-

139

Retained earnings

£m

1,069

163

78

241

1

2

(92)

-

1,221

Other reserves

£m

(193)

-

(74)

Equity attributable to equity holders of the parent

£m

1,479

163

4

(74)

-

-

-

-

(267)

167

1

2

(92)

-

1,557


Profit for the period







At 30 June 2014 (unaudited)


Profit for the year





Purchase of non-controlling interests



At 31 December 2014

14

9

9

1,392

183

(105)

78

4

1

(87)

-

1,388

1,392

169

(363)

(194)

3

1

-

(133)

-

1,069

139

-

-

-

-

-

-

-

139

139

-

-

-

-

-

-

-

-

139

298

-

-

-

-

-

-

-

298

298

-

-

-

-

-

-

-

-

298

166

-

-

-

-

-

-

-

166

166

-

-

-

-

-

-

-

-

166

(220)

-

(86)

(86)

-

-

-

-

(306)

(220)

-

27

27

-

-

-

-

-

(193)

1,775

183

(191)

(8)

4

1

(87)

-

1,685

1,775

169

(336)

(167)

3

1

-

(133)

-

1,479

Noncontrolling interests

£m

22

3

(1)

2

-

-

-

(1)

23

20

2

-

2

-

-

-

(1)

21

5

-

-

(1)

-

(2)

20

5

-

22

1,795

185

(191)

(6)

4

1

(87)

(1)

1,706

Total equity

£m

1,501

166

3

169

1

2

(92)

(1)

1,580

1,795

174

(336)

(162)

3

1

(1)

(133)

(2)

1,501

18

CONSOLIDATED BALANCE SHEET

AT 30 JUNE 2015

Assets

Non-current assets

Goodwill

Other intangible assets

Property, plant and equipment

Investments in joint ventures

Other receivables and investments

Derivative financial instruments

Deferred tax assets

Current assets

Inventories

Trade and other receivables

Current tax assets


Other financial assets

Cash and cash equivalents

Total assets

Liabilities

Current liabilities

Borrowings


Trade and other payables

Current tax liabilities

Provisions

Non-current liabilities

Borrowings


Deferred tax liabilities

Trade and other payables

Provisions

Post-employment obligations

Total liabilities

Net assets

Shareholders' equity

Share capital

Capital redemption reserve

Share premium account

Retained earnings

Other reserves

Equity attributable to equity holders of the parent

Non-controlling interests

Total equity

10

12

11

Notes

19

Unaudited

30 June

2015

30 June 31 December

2014 2014

£m

491

£m

528

897

1,894

£m

498

944

2,060

911

2,014

151

35

18

314

3,934

158

43

45

250

174

44

16

407

3,815

939

4,143

971 1,000

1,259

7

8

3

273

2,550

1,288

11

29

-

181

2,448

1,226

8

10

3

319

2,537

6,484

(103)

(87)

(1,561)

(120)

(51)

6,263

(117)

(10)

(1,495)

(166)

(51)

(1,839)

6,680

(43)

(76)

(1,611)

(125)

(51)

(1,906) (1,922)

(871)

(152)

(145)

(199)

(82)

(1,533)

(2,982)

(4,904)

(877)

(30)

(149)

(185)

(114)

(1,363)

(2,718)

(4,557)

(877)

(148)

(223)

(202)

(112)

(1,711)

(3,273)

(5,179)

1,580 1,706 1,501

166

298

139

1,221

(267)

1,557

23

1,580

166

298

139

1,388

(306)

1,685

21

1,706

166

298

139

1,069

(193)

1,479

22

1,501

CONSOLIDATED CASH FLOW STATEMENT


Cash flows from operating activities

Cash generated from operations

Interest received

Interest paid

Costs associated with refinancing

Tax paid

Dividends received from joint ventures

Cash flows from investing activities

Purchase of property, plant and equipment

Receipts of government capital grants

Purchase of intangible assets

Proceeds from sale and realisation of fixed assets

Payment of deferred and contingent consideration

Acquisitions of subsidiaries (net of cash acquired)

Repayment of government refundable advance

Proceeds from sale of joint ventures

Joint venture loan settlement

Investment in joint ventures

Cash flows from financing activities

Purchase of non-controlling interests

Proceeds from exercise of share options

Amounts placed on deposit

Proceeds from borrowing facilities

Repayment of other borrowings

Dividends paid to shareholders


Movement in cash and cash equivalents

Cash and cash equivalents at beginning of period

Currency variations on cash and cash equivalents

Cash and cash equivalents at end of period

9

14

Notes

11

11

Unaudited


2015 2014 2014

£m

242

£m

227

£m

765

1

(22)

-

(58)

55

1

(39)

-

(21)

44

2

(82)

(3)

(68)

44

218

(167)

1

(32)

2

(1)

(8)

-

-

-

(2)

212

(133)

1

(29)

7

658

(329)

1

(75)

19

(207)

-

2

-

75

(24)

(92)

(200)

-

1

-

60

(10)

(87)

-

(8)

(38)

-

-

-

(391)

(1)

1

(3)

66

(63)

(133)

(6)

(8)

(38)

37

8

-

(1)

(40)

(29)

317

(19)

(1)

(37)

(25)

181

(6)

(2)

(135)

132

181

4

269 150 317

20

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS


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 industrial 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

FIRST HALF 2015 (unaudited)

Subsidiaries

Joint ventures

Other businesses

Aerospace Driveline Metallurgy Systems Total

£m

1,171

-

1,171

Automotive

£m

1,590

224

1,814

Powder

£m

474

-

474

Land

£m

358

13

£m

371 3,830

Management sales

Less: Joint venture sales

Income statement – sales

FIRST HALF 2014 (unaudited)

Subsidiaries

Joint ventures

1,100

-

1,561

204

471

-

415

11

23

3,853

(237)

3,616

Other businesses

Management sales



FULL YEAR 2014

Subsidiaries

Joint ventures

1,100

2,226

-

2,226

1,765

3,050

394

3,444

471

916

-

916

426 3,762

66

3,828

(263)

3,565

752

24

776 7,362

Other businesses

Management sales



94

7,456

(474)

6,982

21

NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued)


1 Segmental analysis (continued) b) Trading profit


Trading profit before depreciation and amortisation

Depreciation of property, plant and equipment

Amortisation of operating intangible assets

Trading profit – subsidiaries

Trading profit

– joint ventures

Other businesses

Corporate and unallocated costs

Management trading profit

Less: Joint venture trading profit

Income Statement – trading profit


Trading profit before depreciation and amortisation

Depreciation of property, plant and equipment


Trading profit

– subsidiaries

Trading profit – joint ventures

Other businesses




Income Statement

– trading profit

Automotive

Powder Land


£m £m £m £m £m

176

(28)

(15)

133

-

133

164

(50)

(3)

111

39

150

75

(19)

-

56

-

56

22

(8)

-

14

1

15 354

(2)

(6)

346

(40)

306

160

(28)

(11)

121

-

121

164

(54)

(3)

107

35

142

70

(17)

-

53

-

53

39

(8)

(1)

30

1

31 347

5

(12)

340

(39)

301

FULL YEAR 2014

Trading profit before depreciation, impairment and

amortisation

Depreciation and impairment of property, plant and

equipment


Trading profit

– subsidiaries

Trading profit – joint ventures

Other businesses




Income Statement

– trading profit

356

(55)

(24)

277

-

277

325

(109)

(6)

210

70

280

137

(35)

(1)

101

-

101

60

(17)

(1)

42

2

44 702

5

(20)

687

(75)

612

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 first half of 2015, the Group recorded; a net credit of £3 million (first half 2014: net charge of £5 million) in trading profit of Driveline relating to warranty and commercial matters (£5 million charge) and resolution of an onerous contract (£8 million credit) and a net credit of £15 million (first half 2014: £4 million credit) in trading profit of

Aerospace relating to settlement of a warranty matter (£5 million credit) and progress on an onerous contract (£10 million credit). In addition the Group has charged £5 million of restructuring costs in trading profit of Land Systems.

Corporate and unallocated costs in the first half 2015 include a £7 million credit following completion of a pension increase exchange exercise in the UK (see note 10 for further details) and £3 million of transaction costs related to the announced acquisition of Fokker Technologies Group B.V. (see note 16).

22



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

Working capital

Net operating assets

Goodwill and non-operating intangible assets

Net investment



assets

Working capital



Net investment

FULL YEAR 2014


assets

Working capital

1,050

208

1,258

487

1,745

927

171

1,098

525

1,623

949

116

1,065

253

1,318

906

144

1,050

265

1,315

357

100

457

27

484

330

107

437

25

462

121

76

197

131

328

94

229

170

399

2,477

500

135 2,298

516

1,024

148

995

47

363

89

132 2,514

75 359



1,172

507

1,042

268

452

27

Net investment d) Inter segment sales

1,679 1,310 479

Subsidiary segmental sales gross of inter segment sales are; Aerospace £1,171 million (first half 2014:

207

146

353

£1,100 million, full year 2014: £2,226 million), Driveline £1,617 million (first half 2014: £1,591 million, full year 2014:

£3,106 million), Powder Metallurgy £475 million (first half 2014: £472 million, full year 2014: £919 million) and Land

Systems £360 million (first half 2014: £416 million, full year 2014: £754 million). e) Reconciliation of segmental property, plant and equipment and operating intangible assets to the Balance

Sheet

Segmental analysis

– property, plant and equipment and operating intangible

assets

Segmental analysis

– goodwill and non-operating intangible assets

Goodwill

Other businesses

Corporate assets

Balance Sheet

– property, plant and equipment and other intangible assets f) Reconciliation of segmental working capital to the Balance Sheet

Unaudited


2015

£m

2,477

898

(491)

32

9

2,925

2014

£m

2,298

985

(528)

28

8

2,791

2014

£m

2,514

948

(498)

31

9

3,004

Segmental analysis

– working capital

Other businesses

Corporate items

Accrued interest

Restructuring provisions

Deferred and contingent consideration

Government refundable advances

Loan to joint venture

Joint venture funding

Investment

Balance Sheet

– inventories, trade and other receivables, trade and other

payables and provisions

Unaudited


2015 2014 2014

£m £m £m

500

15

(24)

(26)

(2)

(12)

(46)

-

(4)

-

401

516

12

(30)

(25)

(3)

(15)

(42)

8

-

4

425

359

11

(31)

(17)

(2)

(9)

(46)

-

-

-

265

23



2 Basis of preparation

These half year condensed consolidated financial statements for the six months ended 30 June 2015 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 2014.

These financial statements do not constitute statutory accounts. A copy of the audited consolidated statutory accounts for the year ended 31 December 2014 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 2014.

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 2014. A pplication 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 post-employment obligations, derivative and other financial instruments, taxation, provisions and impairment of non-current assets. Details of the principal estimates, judgements and assumptions are set out in notes 24, 4b, 20, 6, 21 and 11 of the audited consolidated financial statements for the year ended 31 December 2014 as updated in notes 10 (Post-employment obligations), 4 (Change in value of derivative and other financial instruments) and 8 (Taxation) of these financial statements.

Date of approval

These financial statements were approved by the Board of Directors on Monday 27 July 2015.

24



3 Adjusted performance measures

(a) Reconciliation of reported and management performance measures


As reported

£m

Joint ventures

£m

Exceptional and non- trading items

Management basis

£m £m

Sales 3,616 237 - 3,853

Trading profit

Change in value of derivative and other financial instruments



Gains and losses on changes in Group structure



Interest payable

Interest receivable




Taxation




Earnings per share - pence


Sales

306

(20)

(36)

(5)

245

34

(34)

1

(34)

(67)

212

(46)

166

(3)

163

9.9

As reported

£m

3,565

40

-

-

-

40

(40)

-

-

-

-

-

-

-

-

-

-

20

36

5

61

-

-

-

34

34

95

(20)

75

-

75

- 4.6 14.5

Joint ventures

£m

Exceptional and non- trading items

Management basis

£m £m

263 - 3,828

346

-

-

-

346

(6)

(34)

1

-

(33)

307

(66)

241

(3)

238

Trading profit

Change in value of derivative and other financial instruments





Interest payable

Interest receivable




Taxation




Earnings per share - pence

301

(7)

(35)

259

31

(38)

1

(29)

(66)

224

(39)

185

(2)

183

11.2

39

(39)

-

-

-

-

-

-

-

39

-

-

-

-

-

-

7

35

42

1

-

-

29

29

72

(19)

53

-

53

3.2

FULL YEAR 2014

For the year ended 31 December 2014, management sales were £7,456 million, management trading profit was

£687 million, management profit before tax was £601 million and management earnings per share was 29.0 pence.

340

-

-

340

(7)

(38)

1

-

(37)

296

(58)

238

(2)

236

14.4

25



3 Adjusted performance measures (continued)

(b) Summary by segment


Aerospace

Driveline

Powder Metallurgy

Land Systems

Other businesses



Aerospace

Driveline

Powder Metallurgy

Land Systems

Other businesses


FULL YEAR 2014

Aerospace

Driveline

Powder Metallurgy

Land Systems

Other businesses


Sales

£m

2,226

3,444

916

776

94

-

7,456

Sales

£m

1,100

1,765

471

426

66

-

3,828

Sales

£m

1,171

1,814

474

371

23

-

3,853

Trading profit

£m

Trading profit

£m

277

280

101

44

5

(20)

121

142

53

31

5

(12)

340

687

133

150

56

15

(2)

(6)

346

Trading profit

£m

Margin

11.4%

8.3%

11.8%

4.0%

9.0%

Margin

11.0%

8.0%

11.3%

7.3%

8.9%

Margin

12.4%

8.1%

11.0%

5.7%

9.2%

26



4 Change in value of derivative and other financial instruments

Forward currency contracts (not hedge accounted)

Embedded derivatives

Unaudited

First half First half

2015

£m

2014

£m

(31)

-

(11)

(1)

Full year

2014

£m

(232)

4

Net gains and losses on intra-group funding

Arising in period

(31)

11

(12)

5

(228)

19

Change in value of derivative and other financial instruments (20) (7) (209)

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 amount 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

Profits and losses on sale or closure of businesses

Unaudited


2015 2014

£m £m

(5)

-

-

-

Full year

2014

£m

Business sold

Profit on sale of joint venture

-

24

Gains and losses on changes in Group structure (5) - 24

On 30 January 2015, the Group sold GKN Sinter Metals Argentina SA for cash consideration of £1 million before professional fees. The loss on sale of £5 million comprises a £1 million loss on disposal of net assets and £4 million loss on reclassification of previous currency variations from other reserves.

6 Share of post-tax earnings of joint ventures

Sales

Operating costs

Trading profit

Net financing costs

Profit before taxation

Taxation

Unaudited


2015 2014

£m £m

237

(197)

40

-

40

(6)

263

(224)

39

-

39

(7)

Full year

2014

£m

474

(399)

75

(1)

74

(12)

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

items

Exceptional and non-trading items

34

-

Share of post-tax earnings 34 31

Exceptional and non-trading items represent amortisation of non-operating intangible assets arising on business combinations and other net financing charges.

7 Other net financing charges

61

Unaudited

32

(1)

62

(1)

Interest charge on net defined benefit plans

Fair value changes on net investment hedges

Unwind of discounts

Other net financing charges


2015

£m

(25)

(6)

(3)

(34)

2014

£m

(25)

-

(4)

(29)

Full year

2014

£m

(50)

3

(9)

(56)

27



8 Taxation

The tax charge for the period is based on an estimate of the Group’s expected annual effective rate of tax for 2015 based on tax legislation substantively enacted at 30 June 2015 applied to taxable profit for the period ended 30

June 2015.

Tax included in the income statement

Analysis of tax charge in the period

Current tax (charge)/credit

Current period charge

Utilisation of previously unrecognised tax losses and other assets

Adjustments in respect of prior periods

Net movement on provisions for uncertain tax positions

Deferred tax

Unaudited


2015

£m

2014

£m

2014

£m

(74)

-

8

3

(63)

17

(66)

-

(2)

10

19

(58)

(86)

1

(4)

9

(80)

33

Total tax charge for the period

Analysed as:

Tax in respect of management profit

Current tax

Deferred tax

Tax in respect of items excluded from management profit

Current tax

Deferred tax

(46)

(63)

(3)

(66)

-

20

(39)

(58)

-

(58)

-

19

Total tax charge for the period

20

(46)

19

(39)

74

(47)

Unaudited


2015 2014 2014

£m £m £m

Tax included in other comprehensive income

Current tax on post-employment obligations 2 2 4

Current tax on foreign currency gains and losses on intra-group funding - 2 13

Deferred tax on post-employment obligations (30) 29 118

Deferred tax on foreign currency gains and losses on intra-group funding 2 - (4)

(26) 33 131

Management tax rate

The tax charge arising on management profits of subsidiaries of £273 million (first half 2014: £264 million, full year

2014: £539 million) was £66 million (first half 2014: £58 million charge, full year 2014: £121 million charge) giving an effective tax rate of 24% (first half 2014: 22%, full year 2014: 22%).

Deferred tax asset recognition

There was no significant deferred tax asset recognition in the period (first half 2014: £19 million credit, full year

2014: £33 million credit).

UK tax rate reduction

On 8 July 2015 the UK government announced reductions to the mainstream rate of UK corporation tax from April

2017 to 19%, falling to 18% from April 2020. These changes have not been substantively enacted. As reductions are substantively enacted there will be a corresponding reduction in the value of recognised deferred tax assets in the UK.

(47)

(77)

(44)

(121)

(3)

77

28



9 Dividends

An interim dividend of 2.9 pence per share (first half 2014: 2.8 pence per share, full year 2014: 8.4 pence per share) has been declared by the Directors and will be paid on 21 September 2015 to shareholders on the register at

14 August 2015. Based on the number of shares ranking for dividend at 30 June 2015, the interim dividend is expected to absorb £48 million. Subsequent to the period end the Group has announced its intention to raise approximately £200 million of equity by a placing of new ordinary shares related to the acquisition of Fokker

Technologies Group B.V. (see note 16). These shares will also rank for the interim dividend and are expected to absorb a further £2 million.

During the period £92 million (first half 2014: £87 million, full year 2014: £133 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 2015.

Movement in post-employment obligations during the period:

At 1 January

Current service cost

Past service

Settlements and curtailments

Administrative costs

Interest on net defined benefit plans

Remeasurement of defined benefit plans

Contributions/benefits paid

Currency variations

At end of period

Post-employment obligations as at the period end comprise:

Unaudited


2015 2014

£m

(1,711)

(27)

£m

(1,271)

6

-

(1)

(25)

(23)

-

-

(1)

106

71

48

(1,533)

(25)

(136)

71

22

(1,363)

Full Year

2014

£m

(1,271)

(1,711)

(49)

-

9

(3)

(50)

(485)

108

30

Pensions - funded

Medical - funded

- unfunded

- unfunded

Unaudited

30 June

2015

£m

(967)

(489)

(27)

(50)

(1,533)

30 June 31 December

2014

£m

(805)

2014

£m

(1,067)

(492)

(20)

(46)

(1,363)

(564)

(28)

(52)

(1,711)

At 30 June 2015 - unaudited

At 30 June 2014 - unaudited

At 31 December 2014

UK Americas Europe

£m

(920)

£m

(117)

£m

(483)

(769)

(1,005)

(94)

(136)

(486)

(556)

ROW

£m

(13)

(14)

(14)

Total

£m

(1,533)

(1,363)

(1,711)

29



10 Post-employment obligations (continued)

Assumptions

The major assumptions used were:

At 30 June 2015 – unaudited

Rate of increase in pensionable salaries

Rate of increase in payment and deferred pensions

Discount rate

Inflation assumption

Rate of increase in medical costs:

Initial/long term

At 30 June 2014 – unaudited



Discount rate



Initial/long term

At 31 December 2014


GKN1

% n/a

3.20

3.50

3.20

UK

5.5/5.5 n/a

3.20

4.00

3.20

5.5 /5.5 n/a

GKN2

%

4.20

3.20

3.75

3.20

4.20

3.20

4.20

3.20

4.05/4.10

Americas

% n/a n/a

4.40 n/a

7.0/5.0 n/a n/a

4.30 n/a

7.5/5.0 n/a

Europe

%

2.50

1.75

2.20

1.75 n/a

2.50

1.75

2.80

1.75 n/a

2.50

ROW

%

- n/a

0.80 n/a n/a

- n/a

1.25 n/a n/a

-


Discount rate



3.05 3.05

3.25 3.55/3.80

3.05 3.05/3.10

5.5/5.5 n/a

3.90 n/a

7.0/5.0

1.75

1.90

1.75 n/a n/a

0.80 n/a n/a Initial/long term

Consistent with the prior period and year end, the UK discount rate at 30 June 2015 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 2014.

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 RP-

2014 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 2015 is set out below:

Discount rate +1%

Discount rate -1%

Rate of inflation +1%

Rate of inflation -1%

Life expectancy +1 year

Life expectancy -1 year

UK deficit funding

UK Americas Europe

£m

516

(670)

(509)

412

(114)

113

£m

37

(46)

-

-

(7)

8

£m

75

(96)

(76)

64

(18)

16

ROW

£m

3

(2)

-

-

-

-

During the period, a pension increase exchange agreement was entered into with a number of members from the

GKN 1 scheme. The arrangement involved offering a one off immediate uplift in pension payments to those members who accepted the offer in exchange for any future inflationary increases in their pension payments. This has resulted in a past service credit of £7 million which is partially offset by a past service cost of £1 million on the

GKN 2 scheme in respect of early retirement funding for a small number of members. Also see note 1b.

Following the most recent triennial valuation in the UK, additional deficit funding payments of £10 million per year have continued and there is potential for further payments commencing in 2016, contingent upon asset performance. In addition the Group agreed, during 2014, to pay £2 million per year for 4 years to the UK scheme,

GKN 1, to cover a funding requirement arising from a £123 million bulk annuity purchase.

During the period the Group paid £30 million (first half 2014: £30 million, full year 2014: £30 million) to the 2 UK pension schemes through its pension partnership arrangement.

30



11 Cash flow notes

Unaudited

Cash generated from operations

Operating profit

Adjustments for:

Depreciation, impairment and amortisation of fixed assets

Charged to trading profit

Depreciation

Impairment

Amortisation

Amortisation of non-operating intangible assets arising on business

Combinations

Impairment charges

Change in value of derivative and other financial instruments

Amortisation of government capital grants

Net loss/(profit) on sale/realisation of fixed assets

Gains and losses on changes in Group structure

Charge for share-based payments

Movement in post-employment obligations

Change in inventories

Change in receivables

Change in payables and provisions

Movement in net debt

Net movement in cash and cash equivalents

Net movement in borrowings and deposits

Costs associated with refinancing

Amortisation of debt issue costs

Cross currency interest rate swaps

Currency variations

Movement in period

Net debt at beginning of period

Net debt at end of period

Reconciliation of cash and cash equivalents

Cash and cash equivalents per balance sheet

Bank overdrafts included within “current liabilities – borrowings”

Cash and cash equivalents per cash flow


2015 2014 2014

£m £m £m

245 259 289

106

-

20

109

-

15

216

4

36

-

20

35

-

7

32

69

69

(1)

1

5

1

(1)

(2)

-

4

209

(2)

(2)

(24)

(49)

(61)

(71)

(10)

(48)

(36)

(163)

48

3

(65)

(31)

(76)

242

(29)

(51)

-

(1)

16

(19)

227

(25)

(50)

-

(1)

-

(5)

74

765

132

-

3

(3)

(26)

2

(84)

(624)

(81)

(732)

108

(732)

(708) (813) (624)

273

(4)

181

(31)

319

(2)

269 150 317

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 2015 was £952 million (first half 2014: £944 million) with a fair value of

£1,054 million (first half 2014: £1,034 million) and the carrying value of government refundable advances at

30 June 2015 was £46 million (first half 2014: £42 million) with a fair value of £45 million (first half 2014:

£50 million).

31



12 Property, plant and equipment (unaudited)

During the period ended 30 June 2015 the Group asset additions were £138 million (first half 2014:

£114 million). Assets with a carrying value of £3 million (first half 2014: £5 million) were disposed of during the period ended 30 June 2015.

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 2015 amounted to £134 million (30 June 2014: £122 million) and the Group's share not provided by joint ventures amounted to £8 million (30 June 2014: £27 million).

During the period a total of 5,362,689 ordinary shares (first half 2014: 527,459 ordinary shares) were issued in connection with the exercise/release of options/awards under the Company’s share incentive schemes, all of which were transferred from treasury. This generated a cash inflow of £2 million (first half

2014: £1 million).

On 22 June 2015, the Group repaid the first of five annual instalments of £16 million on its £80 million

European Investment Bank Loan.

On 8 June 2015 the Group acquired 100% of the equity share capital of Sheets Manufacturing Inc (SMI).

SMI specialises in metallic spin forming and is a technology leader in the manufacture of aircraft engine inlet lip skins.

The fair value of consideration was £9 million and comprises an initial cash payment of £6 million plus contingent consideration estimated at £3 million.

The range of the contingent consideration, based on achievement of specific technology milestones is between nil and £3 million.

The fair value of net assets acquired of £9 million comprises; property, plant and equipment of £1 million and provisional goodwill of

£8 million. A formal valuation exercise will be performed in the second half of the year to appropriately allocate the fair value of assets and liabilities acquired, due to the proximity of the transaction to the reporting date. SMI has been included in Aerospace for segmental reporting.

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. The most recent High Court judgment in the case was published in December 2014. Although the judgement was broadly positive, it is anticipated that

HMRC will appeal at least some of the technical points decided.

GKN have historically received payments from HMRC in respect of the case, which have been recognised as received. The continuing complexity of the case and uncertainty over the issues raised (and in particular which points HMRC may seek to appeal) 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 2015 or 30 June 2014. At 30 June 2015 the

Group had no contingent liabilities in respect of bank arrangements and no guarantees (30 June 2014: one). In the case of certain businesses, performance bonds and customer finance obligations have been entered into in the normal course of business.

32



16 Post balance sheet event (unaudited)

The Group has agreed to acquire Fokker Technologies Group B.V. headquartered in the Netherlands. The acquisition enterprise value of approximately £499 million (€706 million) includes equity consideration of

£353 million (€500 million) together with debt and debt like items of £146 million (€206 million).

Completion is expected in the fourth quarter of the year, subject to antitrust and regulatory approvals.

The proposed acquisition will be funded from the gross proceeds of a £200 million (approximately) equity share placing and utilisation of existing debt facilities.

33

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 2015. 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 2015;



the consolidated income statement and consolidated 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 condensed 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

27 July 2015

Birmingham

34

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