HALF YEAR REPORT 2012 GKN plc Half Year Report 2012 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 statement should be regarded as a profit forecast. Basis of reporting The financial statements for the period are shown on pages 17-34 and have been prepared using accounting policies which were used in the preparation of audited accounts for the year ended 31 December 2011 and which will form the basis of the 2012 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. Exchange rates Exchange rates used for currencies most relevant to the Group’s operations are: Average Euro US Dollar H1 2012 1.22 1.57 H1 2011 1.15 1.61 Period End June June 2012 2011 1.24 1.11 1.57 1.61 2011 Full Year Average Period End 1.15 1.20 1.60 1.55 The approximate impact on first half 2012 trading profit of subsidiaries and joint ventures of a 1% movement in the average rate would be euro - £1 million, US dollar - £1 million. 2 GKN plc Half Year Report 2012 FINANCIAL PERFORMANCE Management basis(1) Sales Operating profit (*) Profit before tax (*) Earnings per share (*) Interim dividend per share As reported 2012 £m 2011 £m Change % 2012 £m 2011 £m Change % 3,459 2,988 +16 3,254 2,799 +16 293 224 +31 301 210 +43 266 200 +33 289 202 +43 14.4p 10.9p +32 14.4p 10.4p +38 2.4p 2.0p +20 2.4p 2.0p +20 (*) 2011 includes a £23 million charge and 2012 includes a net £2 million credit following a further insurance claim recovery relating to the 2011 temporary Hoeganaes plant closure in Gallatin, USA. Group Highlights(1) Group results reflect the continued strong organic growth in all four Divisions and the contribution from acquisitions: o Sales up 16% (£471 million) to £3,459 million, +8% on an organic basis; Excluding the 2011 effects of the Gallatin incident: o Management trading (operating) profit up 19% to £293 million; o Trading margin improved to 8.5%; o Profit before tax increased 19% to £266 million; o Earnings per share up 22% to 14.4 pence per share; o Return on average invested capital reduced to 17.2% (2011: 18.1%), reflecting the 2011 acquisitions. Reported profit before tax of £289 million (2011: £202 million). Positive free cash flow of £28 million (2011: £25 million). Net debt of £590 million (31 December 2011: £538 million). Since 30 June 2012: o Announcement of agreement to acquire Volvo Aero, significantly strengthening GKN Aerospace’s engine components business. (1) Financial information set out in this announcement, unless otherwise stated, is presented on a management basis as set out in the definition on page 2. 3 GKN plc Half Year Report 2012 INTERIM MANAGEMENT REPORT GKN has continued to make good progress both in terms of financial performance and implementing our strategy to build a global market-leading business. First half trading has seen sales increases and margin progression for each of our four Divisions and our new acquisitions, Stromag and Getrag Driveline Products, are performing well. As a result of the strong performance and confidence in the future, the Board has decided to increase the interim dividend by 20% to 2.4 pence per share. The macroeconomic environment continues to be uncertain, with increasing headwinds in European auto markets. However, with the benefit of a good first half and the Group’s broad exposure to global markets, our expectations for 2012 remain unchanged. We expect 2012 to be another good year of progress for GKN and, in addition, we look forward to welcoming our new acquisition, Volvo Aero, into GKN when the transaction completes in the next few months. Group Overview Markets The Group operates in the global automotive, aerospace and land systems markets. In the automotive market, GKN Driveline sells to manufacturers of passenger cars and light vehicles. Around 75% of GKN Powder Metallurgy sales are also to the automotive market, with the balance to other industrial customers. GKN Aerospace sells to manufacturers of military and civil aircraft, aircraft engines and equipment. GKN Land Systems sells to producers of agricultural, construction, mining and industrial equipment and to the automotive and commercial vehicle sectors. These results reflect a good performance in each division and the benefit of the successful integration of the 2011 acquisitions. Management sales increased 16% in the six months ended 30 June 2012 to £3,459 million (2011: £2,988 million). The effect of currency translation was £35 million negative and there was a £294 million benefit from acquisitions which was partly offset by a £15 million reduction due to disposals. Excluding these items, the organic increase was £227 million (+8%). Within this organic figure, Driveline increased by £120 million, Powder Metallurgy was £40 million higher, Aerospace increased £47 million and Land Systems was up £24 million. Management trading profit increased £69 million to £293 million (2011: £224 million). In 2011, the temporary closure of Hoeganaes’ Gallatin facility in the US resulted in a £23 million charge in the first half, whereas in 2012, there was a net £2 million profit following a further insurance claim settlement. After adjusting for the adverse currency translational impact of £5 million and the profit from acquisitions of £27 million, the organic increase was £22 million, excluding the impact of the Gallatin incident. Within this figure, Driveline was £10 million higher, Powder Metallurgy increased by £9 million, Aerospace was £5 million higher and Land Systems increased £7 million. Group trading margin in the first half increased to 8.5% (2011: 8.3%, excluding the impact of Gallatin). Return on average invested capital (ROIC), was 17.2% (2011: 17.1% or 18.1%, excluding the impact of Gallatin), reflecting last year’s acquisitions. At 31 December 2011, ROIC excluding Gallatin and including the pro forma impact of the 2011 acquisitions was 16.9%. 4 GKN plc Half Year Report 2012 INTERIM MANAGEMENT REPORT continued Sales (£m) Trading profit (£m)(*) Trading margin (%)(*) Return on average invested capital (%)(*) Change (%) Headline Organic 16 8 31 21 First half 2011 2012 3,459 2,988 293 224 8.5% 7.5% 17.2% 17.1% (*) 2011 includes a £23 million charge and 2012 includes a net £2 million credit following a further insurance claim recovery relating to the 2011 temporary Hoeganaes plant closure in Gallatin, USA. Divisional performance Organic sales growth % 9 9 7 6 Sales (£m) GKN Driveline GKN Powder Metallurgy GKN Aerospace GKN Land Systems 2012 1,664 465 770 512 2011 1,333 435 723 444 Trading margin % 2012 7.3 10.1 11.2 10.2 2011 7.1 9.0 11.1 8.8 Group 2,988 8 8.5(*) 7.5(*) 3,459 ( ) * 2011 includes a £23 million charge and 2012 includes a net £2 million credit following a further insurance claim recovery relating to the 2011 temporary Hoeganaes plant closure in Gallatin, USA. The table does not include Other businesses (Cylinder Liners and Emitec). Automotive market As shown in the table below, Japan had the strongest growth in car and light vehicle production in the first half of 2012, recovering from the earthquake and tsunami that affected output in 2011. Strong growth was also experienced in North America, India and China while production in Europe and Brazil fell. Car and light vehicle production (rounded millions of units) H1 2012 H1 2011 Growth (%)(#) Europe North America Brazil Japan China India Others 10.1 7.9 1.5 5.0 9.0 2.0 5.9 10.6 6.5 1.6 3.2 8.5 1.9 5.7 (5) 22 (7) 57 6 7 2 Total – global 41.4 38.0 9 Source: IHS Automotive (#) Growth is derived from unrounded production figures Overall, global production volumes increased 9% in the first half of 2012 to 41.4 million vehicles (2011: 38.0 million) whilst sales of cars and light vehicles increased by 6%, from 38.0 million vehicles to 40.3 million vehicles. Global production, excluding Japan, increased 5%. 5 GKN plc Half Year Report 2012 INTERIM MANAGEMENT REPORT continued Demand for European larger (premium) vehicles remains strong outside of the region while demand for smaller vehicles, particularly in Europe, was lower. In North America recovery following the recession continued. External forecasts indicate that global production in 2012 will increase by 5% to 80.7 million vehicles. Major markets that are expected to grow fastest include Japan (+21%), North America (+14%) and China (+6%). Production in Western Europe is forecast to contract by 8%. GKN Driveline GKN Driveline is the world’s leading supplier of automotive driveline systems and solutions. As a global business serving the leading vehicle manufacturers, it develops, builds and supplies an extensive range of automotive driveline products and systems – for use in the smallest ultra lowcost car to the most sophisticated premium vehicle demanding the most complex driving dynamics. The key financial results for the period are as follows: Sales (£m) Trading profit (£m) Trading margin (%) Return on average invested capital (%) First half 2011 2012 1,664 1,333 121 94 7.3% 7.1% 15.2% 16.1% Change (%) Headline Organic 25 9 29 11 Return on average invested capital in 2012 reflects the pro forma impact of Getrag Driveline Products acquired on 30 September 2011 Driveline’s sales increased 25% to £1,664 million (2011: £1,333 million). The adverse impact of currency translation was £21 million and sales were £7 million lower due to the sale of GKN Driveline’s 49% share of the Japanese driveshaft sales and distribution joint venture GKN JTEKT Ltd, in March 2011. Getrag Driveline Products achieved strong sales of £239 million. Organic sales increased by £120 million, or 9%, compared with an increase in global vehicle production of 9%, or 5% excluding Japan. This strong growth was broad based across North America, Europe and China reflecting recent market share gains, a stronger position in premium vehicles, demand for which continued to be good, and GKN Driveline’s broadening product mix, particularly with all-wheel drive (AWD) systems. In Japan, GKN Driveline was affected less than the market generally by the earthquake in 2011 and is therefore not benefiting from the significant bounce back in production volumes. Trading profit increased to £121 million (2011: £94 million). The adverse impact of currency translation was £3 million and Getrag Driveline Products contributed £20 million. The organic increase in trading profit was £10 million, held back by slower demand in Brazil and some operating inefficiencies in India. Engineering costs increased to support new programmes and future growth. Driveline’s trading margin was 7.3% (2011: 7.1%). Return on average invested capital was 15.2% (2011: 16.1%), reflecting the impact of the Getrag Driveline Products acquisition. At 31 December 2011, return on average invested capital was 14.7%, including the pro forma impact of Getrag Driveline Products. In the first half, a good level of new business wins continued for the CVJ Systems business and progress was made in AWD systems, particularly with electronic differential lockers (EDLs) and eDrive, with a number of eAxle wins for hybrid vehicles. GKN Driveline expansion plans also continue with the addition of its third precision forge in Celaya, Mexico. 6 GKN plc Half Year Report 2012 INTERIM MANAGEMENT REPORT continued 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: Sales (£m) Trading profit (£m) Trading margin (%) Return on average invested capital (%) First half 2011 2012 435 465 47 39 10.1% 9.0% 18.2% 15.7% Change (%) Headline Organic 7 9 21 24 GKN Powder Metallurgy sales were £465 million (2011: £435 million), an increase of 7%. The negative impact of currency translation was £10 million. Organic sales increased by £40 million (+9%). Hoeganaes increased the number of tons of powder shipped by 8%. GKN Sinter Metals increased sales in all regions, benefiting from strong automotive production in North America and new business wins entering production. Organic sales for GKN Sinter Metals increased by 13% in North America and 3% in Europe. Strong growth was also achieved in India, Brazil and China. Overall, GKN Powder Metallurgy reported a trading profit of £47 million (2011: £39 million). The negative impact of currency translation was £1 million. The divisional trading margin was 10.1% (2011: 9.0%). Return on average invested capital was 18.2% (2011: 15.7%), reflecting the improvement in profitability. At 31 December 2011, return on average invested capital was 16.7%. Increasing trends in industrial and automotive markets to improve fuel efficiency and reduce emissions continue to drive the demand for products made by powder metallurgy. During the period, around £80 million (annualised sales) of new programme business was awarded. GKN Aerospace GKN Aerospace is a global first tier supplier of airframe and engine structures, components, assemblies, transparencies, fuel tank and flotation systems for a wide range of aircraft and engine prime contractors and other first tier suppliers. It operates in three main product areas: aerostructures, engine components and special products. The overall aerospace market remains positive in 2012 driven by a growing civil aircraft market partly offset by a more subdued military market. The division has increased its sales for civil aerospace to 63%, with defence representing 37%. Civil aircraft production is expected to grow well with Airbus and Boeing continuing to project the procurement of new single aisle and wide-bodied aircraft at between 26,900 and 33,500 by 2030. Both companies continue to benefit from record deliveries and record order backlog. This sustained order growth has led both Airbus and Boeing to increase production levels for single aisle and wide bodied aircraft. The smaller business jet market is also showing some signs of recovery. 7 GKN plc Half Year Report 2012 INTERIM MANAGEMENT REPORT continued World-wide defence spending remains under pressure, largely driven by cutbacks throughout Europe and likely reductions in the U.S. Defense Budget. GKN’s position on key multi-year programmes such as the UH-60 Blackhawk helicopter, F/A-18 Super Hornet, F-15 Eagle and C130J Super Hercules provide a stable production base despite potential budget pressure and delay in the F-35 programme ramp-up. The key financial results for the period are as follows: Sales (£m) Trading profit (£m) Trading margin (%) Return on average invested capital (%) First half 2011 2012 723 770 86 80 11.2% 11.1% 22.4% 22.5% Change (%) Headline Organic 7 7 8 6 Aerospace sales of £770 million were £47 million higher than the prior period (2011: £723 million). The £8 million positive impact from currency on translation of sales was exactly offset by the disposal of the Engineering Services division, which was sold in November 2011. The organic increase in sales of £47 million represented a 7% increase. This level of increase reflects lower production rates on military programmes, such as the C-17, F-15 and F-18, being more than offset by higher civil sales, particularly for the Airbus A320, A330, A380 and the Boeing 787. Trading profit increased by £6 million to £86 million (2011: £80 million). The impact from currency on translation of results was £1 million positive. The trading margin was 11.2% (2011: 11.1%). Return on average invested capital was 22.4% (2011: 22.5%) reflecting increased investment in new programmes, particularly the A350. At 31 December 2011, return on average invested capital was 22.7%. During the first half a number of important new contracts and other milestones were achieved, including: Composite Technology and Applications Limited (CTAL), a joint venture between GKN and RollsRoyce, opened a pre-production facility on the Isle of Wight, UK. The facility will develop and demonstrate new methods for high volume production of carbon fibre aero-engine fan blade and fan case technology to improve future aero-engine performance. Establishing a new composite aerostructures manufacturing facility in Mexico to manufacture composite airframe structures, initially for the Sikorsky UH-60 Blackhawk helicopter. New contracts awarded to provide key metal and composite structures and fuel systems for the new 525 Relentless Bell helicopter. A contract for the design, development and production of transparencies (cockpit and passenger cabin windows), winglets and ailerons for the Bombardier Global 7000 and Global 8000 business jets. Further work packages for the Boeing 787 relating to floor sections, wing ribs and seat tracks. A multi-year contract extension for the UH-60 Blackhawk helicopter. As part of the finalisation of commercial contracts relating to the Filton acquisition, it has been agreed that GKN Aerospace would cease managing a supply chain contract on behalf of its customer from the end of 2012. Therefore, in 2013, GKN Aerospace’s sales will reduce by around £100 million. However, its trading profit will only reduce marginally and its trading margin will improve, due to the relatively low margin earned on this pass-through business. 8 GKN plc Half Year Report 2012 On 5 July 2012, the SEK6.9 billion (£633 million) acquisition of Volvo Aero was announced. Volvo Aero designs, engineers and manufactures components and sub-assemblies for aircraft engine turbines. It supplies all the major aero engine manufacturers and has positions on most major civil aerospace platforms that are set to increase as aircraft build rates ramp up, significantly enhancing GKN Aerospace’s engine components business. The acquisition is expected to complete at the end of the third quarter. The combination of GKN Aerospace and Volvo Aero creates a world leader in both aero structures and aero engine components. 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 ahead of the prior year. This is due to the contribution from Stromag together with 6% organic growth, which has normalised following the strong recovery seen in the agricultural equipment, construction and mining markets in 2011 when sales increased by more than 30%. Industrial markets have seen some volatility in certain segments, including wind, with weakness in some geographic areas, notably Southern Europe. Automotive structures activity declined slightly due to some expected programme cessations. The key financial results for the period are as follows: Sales (£m) Trading profit (£m) Trading margin (%) Return on average invested capital (%) First half 2011 2012 444 512 52 39 10.2% 8.8% 18.7% 24.2% Change (%) Headline Organic 15 6 33 18 Return on average invested capital in 2012 reflects the pro forma impact of Stromag acquired on 5 September 2011 GKN Land Systems sales in the first half increased 15% to £512 million (2011: £444 million). The negative impact of currency translation was £11 million. Excluding the £55 million of sales in Stromag, the organic increase in sales was £24 million (+6%). The division reported a 33% increase in trading profit to £52 million (2011: £39 million). The negative impact of currency translation was £1 million. Excluding the £7 million of trading profit from Stromag, the organic increase in trading profit was £7 million (+18%). Trading margin was significantly higher at 10.2%. Return on average invested capital decreased to 18.7% (2011: 24.2%), reflecting the impact of the Stromag acquisition. At 31 December 2011, return on average invested capital was 17.9%, including the pro forma impact of Stromag. Since acquiring Stromag, good progress has been made in integrating the business, leveraging its customer relationships and extensive sales network, including its presence in the US, Brazil, India and China, and offering enhanced customer solutions through combined technology capabilities. With its broader “Power Source to Power Applied” product portfolio, recent examples of GKN Land System’s new business wins include: prototype overload clutch for Atlas Copco/Carraro in a mining application; drivetrain for a combine header for a Claas harvester; brakes a for Mitsubishi wind turbine. 9 GKN plc Half Year Report 2012 INTERIM MANAGEMENT REPORT continued Other Businesses GKN’s other businesses comprise Cylinder Liners, which is mainly a 59% owned venture in China, manufacturing engine liners for the truck market in the US, Europe and China and a 50% share in Emitec, which manufactures metallic substrates for catalytic converters in Germany, the US, China and India. Sales in the period were £48 million (2011: £53 million), reflecting the slowing sales in the commercial vehicle market. Trading profit was £1 million (2011: £2 million). Hoeganaes’ Gallatin plant, USA As previously reported, on 27 May 2011, the Hoeganaes Gallatin plant in the US was temporarily closed following a hydrogen explosion. In the first half of 2011, £23 million of costs were recorded. In the second half of 2011 a further £11 million of costs were recorded, offset by initial recoveries of £15 million from an insurance claim. During the first half of 2012, a further £2 million net has been recovered from external insurance claims. Other Financial Information Corporate costs Corporate costs, which comprise the costs of stewardship of the Group and operating charges and credits associated with the Group’s legacy businesses, were £16 million (2011: £7 million), the increase principally reflecting transaction costs, including those related to the proposed acquisition of Volvo Aero which was announced on 5 July 2012. 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 2012 and 30 June 2012, or the date of maturity if earlier, is reflected in the income statement as a component of operating profit and has resulted in a credit of £18 million (2011: £24 million credit). There was a £1 million charge arising from a change in the value of embedded derivatives in the period (2011: £2 million charge) and a credit of £1 million attributable to the translational currency impact on intra-group funding balances (2011: £4 million charge). Amortisation of non-operating intangibles arising on business combinations The charge for the amortisation of non-operating intangible assets (for example, customer contracts, technology assets and intellectual property rights) arising on business combinations was £16 million (2011: £10 million). The increase reflects the impact of the Group’s acquisitions in 2011 of Getrag Driveline Products and Stromag. Gains and losses on changes in Group structure During the period the Group sold its 49% share in a joint venture company, GKN JTEKT (Thailand) Limited for cash consideration of £1 million, realising neither a profit nor loss. 10 GKN plc Half Year Report 2012 INTERIM MANAGEMENT REPORT continued 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 £23 million (2011: £20 million) with trading profit of £29 million (2011: £26 million). The Group’s share of post-tax earnings on a management basis was £24 million (2011: £21 million). The Group’s share of the tax charge amounted to £5 million (2011: £5 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 £35 million (2011: £28 million) and include the non-cash charge on post-employment benefits of £11 million (2011: £8 million) and unwind of discounts of £2 million (2011: £1 million). Interest payable was £27 million (2011: £21 million), whilst interest receivable was £5 million (2011: £2 million) resulting in net interest payable of £22 million (2011: £19 million). The £3 million increase in net interest payable is primarily as a result of the increased borrowings following the acquisitions in 2011. The non-cash charge on post-employment benefits arises as the expected return on scheme assets of £72 million (2011: £77 million) was more than offset by interest on post-employment obligations of £83 million (2011: £85 million). Details of the assumptions used in calculating postemployment costs and income are provided in note 10 to the financial statements. Profit before tax Management profit before tax was £266 million including a net £2 million credit following a further insurance claim recovery relating to the temporary closure of the Hoeganaes Gallatin plant in 2011, described above (2011: £200 million, including a £23 million charge relating to the Gallatin impact). The profit before tax on a statutory basis was £289 million (2011: £202 million). Taxation The book tax rate on management profits of subsidiaries was 17% (2011:16%), arising as a £40 million tax charge on management profits of subsidiaries of £242 million. The Group’s theoretical weighted average tax rate, which assumes that book profits/losses are tax affected at the statutory tax rates in the countries in which they arise, is 34% (2011: 31%). The book tax rate is significantly lower, largely because of the recognition of substantial deferred tax assets (mainly in the UK and US) due to increased confidence in the Group’s ability to offset brought forward tax deductions against future taxable profits in various countries. The Group aims to access brought forward tax deductions in order to sustain a ‘cash tax’ charge on management profits of below 20%. ‘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 14%. In the near term, the cash tax rate is expected to continue below 20% as brought forward tax deductions are utilised. The tax rate on statutory profits of subsidiaries was 20% (2011: 15%) arising as a £53 million tax charge on a statutory profit of £266 million. 11 GKN plc Half Year Report 2012 INTERIM MANAGEMENT REPORT continued Non-controlling interests The profit attributable to non-controlling interests was £12 million (2011: £14 million) including a £10 million (2011: £11 million) impact from the pension partnership arrangement. Earnings per share Management earnings per share was 14.4 pence (2011: 10.9 pence, including the effect of the £23 million net charge relating to the Hoeganaes incident at Gallatin, US). On a statutory basis earnings per share was 14.4 pence (2011: 10.4 pence). Dividend In view of the improving trading performance, the Board has decided to pay an interim dividend of 2.4 pence per share (2011: 2.0 pence). The interim dividend will be paid on 24 September 2012 to shareholders on the register at 10 August 2012. 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 3 September 2012. Cash flow Operating cash flow, which is defined as cash generated from operations of £215 million (2011: £175 million) adjusted for capital expenditure (net of proceeds from capital grants) of £149 million (2011: £131 million) and proceeds from the disposal / realisation of fixed assets of £nil million (2011: £2 million), was an inflow of £66 million (2011: £46 million). Within operating cash flow there was a movement in working capital and provisions of £141 million (2011: £102 million), including cash outflow from previous restructuring plans of £3 million (2011: £22 million). Average working capital as a per cent of sales was 7.9% (2011: 6.9%). Capital expenditure (net of proceeds from capital grants) on both tangible and intangible assets totalled £149 million (2011: £131 million), including £13 million (2011: £35 million) on the A350 programme. Of this, £127 million (2011: £108 million) was on tangible fixed assets and was 1.2 times (2011: 1.2 times) the depreciation charge. Expenditure on intangible assets, mainly nonrecurring costs on Aerospace programmes, totalled £22 million (2011: £23 million). Net interest paid totalled £25 million (2011: £14 million) as a result of the additional debt required to fund the 2011 acquisitions and tax paid in the period was £24 million (2011: £13 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 £28 million (2011: £25 million). The year on year change reflects an improvement in profitability partially offset by increased capital expenditure and working capital outflow. Net borrowings At the end of the period, the Group had net debt of £590 million compared with £538 million at 31 December 2011. 12 GKN plc Half Year Report 2012 INTERIM MANAGEMENT REPORT continued 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 current service cost is £20 million (2011: £19 million). Other net financing charges of £11 million (2011: £8 million) have increased due to lower returns on scheme assets relative to the interest cost on scheme liabilities. The deficit of all schemes at 30 June 2012 was £926 million, a £58 million increase over 31 December 2011 (£868 million deficit). The UK deficit of £322 million was £50 million higher than the 31 December 2011 year end figure of £272 million. The change was mainly due to the change in discount rate used from 4.7% to 4.6%. On 1 April 2012 the Group transferred the assets and liabilities of its defined benefit pension scheme of the hourly paid workers at GKN Aerospace’s St. Louis facility to the International Association of Machinists and Aerospace Workers (‘IAM’) National Pension Fund. As a result there was a net pension scheme curtailment benefit of £35 million. The post-employment obligations of overseas businesses, which is mostly the unfunded schemes in Germany, was largely unchanged at £604 million (31 December 2011: £596 million) and reflected the positive impact of exchange rates (£17 million) more than offset by a decrease of 120 bps in the European discount rate to 3.7%. Contributions for the six months across the Group totalled £42 million (2011: £34 million). In addition, the Group paid £30 million from the Pension partnership to the UK Pension scheme in June 2012. Net assets Net assets of £1,578 million were £46 million lower than the December 2011 year end figure of £1,624 million. The decrease includes profit attributable to equity shareholders of £224 million offset by adverse currency movements of subsidiaries of £66 million, actuarial losses in respect of post-employment obligations of £121 million and distributions to both equity shareholders and noncontrolling interests of £92 million. Funding and liquidity At 30 June 2012, UK committed bank facilities were £755 million. Within this there are committed revolving credit facilities of £675 million. At 30 June 2012, drawings against the revolving credit facilities were £297 million. Capital market borrowings at 30 June 2012 were the £350 million 6.75% bonds maturing in October 2019. The outstanding £176 million 7% 2012 unsecured bond was repaid in the period. In addition to the above, adequate new banking facilities have been arranged in relation to the proposed acquisition of Volvo Aero. 13 GKN plc Half Year Report 2012 INTERIM MANAGEMENT REPORT continued Financial resources and going concern At 30 June 2012, the Group had gross borrowings of £802 million (31 December 2011: £694 million) and cash and deposits of £212 million (31 December 2011: £156 million) resulting in net borrowings of £590 million (31 December 2011: £538 million). The Directors have assessed the future funding requirements of the Group and compared them to the level of committed available borrowing facilities. The assessment included a review of both divisional and Group financial forecasts, for the 15 months from the balance sheet date. The forecasts show that the Group will have a sufficient level of headroom in the foreseeable future and the Directors have assessed that the likelihood of breaching covenants in this period is remote. Having undertaken this work, the Directors are of the opinion that the Group has sufficient committed resources to fund its operations for the foreseeable future and so determine that it is appropriate for the financial statements to be prepared on a going concern basis. 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 2011 annual report. Overall macro-economic and political uncertainty, Eurozone instability, US budget priorities, and inflation in Asian and other economies continue to influence the macro environment, and to varying degrees are manifested in uneven growth geographically which could adversely impact Group results. Additional risks noted in the annual report include changes in customer demand; customer concentration; highly competitive markets; technology advancements; changes in the legal, regulatory, political and socio-economic conditions of the countries of operation; supply chain disruption; volatile input costs; product quality issues; inadequate safety processes; lack of technical capability and management depth; effectiveness of acquisition integration; pension deficit volatility; foreign exchange risk; and operating internationally in environments subject to complex tax laws. A more detailed explanation of the principal risks and uncertainties, together with the mitigating actions in place, can be found in pages 36 and 37 of the 2011 annual report. 14 GKN plc Half Year Report 2012 INTERIM MANAGEMENT REPORT continued Outlook Although the macroeconomic environment remains uncertain, the Group’s broad exposure to global markets and strong customer positions mean that GKN should make good progress in 2012, helped by the full year contribution from the acquisitions in 2011 of Getrag Driveline Products and Stromag. In automotive, external forecasts suggest that global light vehicle production in the second half will be lower than the first half, but should reach approximately 81 million vehicles for the whole of 2012, an increase of nearly 5%. The strongest annual growth is expected in Japan and North America with a decline in Europe. Against this background, GKN Driveline is expected to show good year-on-year improvement, although the rate of growth will slow slightly due to stronger second half 2011 comparators as the effects of the Japanese tsunami unwind. GKN Powder Metallurgy expects sales to be lower than the first half reflecting normal seasonality and weaker European markets. In aerospace, civil aircraft production is expected to continue to grow, as both Airbus and Boeing increase production. This should more than offset the effects of lower production of US military aircraft. The performance of GKN Land Systems should continue to show an improvement, benefiting from the expected on-going strength in European and North American agricultural equipment markets partially offset by weaker European industrial markets. Sales in the second half are expected to show a reduction when compared with the first half, due to normal seasonal patterns. For the year as a whole, free cash flow is expected to exceed 2011’s £147 million, before the impact of the Volvo Aero acquisition which is expected to complete around the end of the third quarter. In the final quarter of 2012, Volvo Aero is expected to achieve a profit from its trading activities but have a negative impact on the Group’s reported profit due to integration costs and acquisition accounting adjustments. In 2013, the first full year of ownership, Volvo Aero’s contribution is expected to be earnings enhancing. 15 GKN plc Half Year Report 2012 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 2011 Annual Report that could do so. The Directors of GKN plc are listed in the GKN annual report for 2011; however since the publication of the annual report Mr. R. D. Brown has retired from the Board. Approved by the Board of GKN plc and signed on its behalf by: Mike Turner Chairman 30 July 2012 16 GKN plc Half Year Report 2012 CONSOLIDATED INCOME STATEMENT FOR THE HALF YEAR ENDED 30 JUNE 2012 Notes Sales Trading profit Change in value of derivative and other financial instruments Amortisation of non-operating intangible assets arising on business combinations Pension scheme curtailment Gains and losses on changes in Group structure 3,254 2,799 5,746 1b 264 18 198 18 419 (31) (16) 35 - (10) 4 (22) 8 301 210 374 23 20 38 (27) 5 (13) (35) (21) 2 (9) (28) (47) 5 (19) (61) 289 202 351 (53) 236 (27) 175 (45) 306 2 10 12 224 236 3 11 14 161 175 6 21 27 279 306 14.4 14.3 10.4 10.4 18.0 17.9 4 10 5 6 Interest payable Interest receivable Other net financing charges Net financing costs 7 Profit before taxation Taxation Profit after taxation for the period 8 Profit attributable to other non-controlling interests Profit attributable to the Pension partnership Profit attributable to non-controlling interests Profit attributable to equity shareholders Earnings per share - pence Continuing operations - basic Continuing operations - diluted 17 Full year 2011 £m 1a Operating profit Share of post-tax earnings of joint ventures Unaudited First half First half 2011 2012 £m £m GKN plc Half Year Report 2012 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE HALF YEAR ENDED 30 JUNE 2012 Notes Profit after taxation for the period Currency variations – Subsidiaries Arising in period Reclassified in period Currency variations – Joint ventures Arising in period Reclassified in period Derivative financial instruments – transactional hedging Arising in period Reclassified in period Actuarial gains and losses on post-employment obligations Subsidiaries Joint ventures Taxation Other comprehensive income/(expense) Total comprehensive income for the period Total comprehensive income for the period attributable to: Equity shareholders Other non-controlling interests Pension partnership Non-controlling interests 18 10 8 Unaudited First half First half 2011 2012 £m £m 175 236 Full year 2011 £m 306 (64) (2) 4 - (31) (4) (1) - (2) (2) 3 (2) - 1 - (1) - (121) 3 (185) 51 29 12 42 217 (277) 56 (256) 50 39 2 10 12 51 203 3 11 14 217 23 6 21 27 50 GKN plc Half Year Report 2012 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE HALF YEAR ENDED 30 JUNE 2012 Non-controlling interests Pension partnership Other £m £m Share capital £m Capital redemption reserve £m Share premium account £m Retained earnings £m Other reserves £m Shareholders’ equity £m At 1 January 2012 159 298 9 760 26 1,252 344 28 1,624 Profit for the period - - - 224 - 224 10 2 236 Notes Total equity £m Other comprehensive income/(expense) - - - (119) (66) (185) - - (185) Share-based payments for the period - - - 3 - 3 - - 3 Share options exercised - - - 2 - 2 - - 2 Distribution from Pension partnership 10 - - - - - - (30) - (30) Purchase of non-controlling interests to UK Pension scheme 14 - - - (1) - (1) - (9) (10) Dividends paid to equity shareholders 9 - - - (62) - (62) - - (62) At 30 June 2012 (unaudited) 159 298 9 807 (40) 1,233 324 21 1,578 At 1 January 2011 159 298 9 788 59 1,313 346 28 1,687 Profit for the period - - - 161 - 161 11 3 175 - - - 41 1 42 - - 42 - - - 3 - 3 - - 3 - - - - - - (23) - (23) Other comprehensive income/(expense) for the period Share-based payments Distribution from Pension partnership to UK Pension scheme 10 Purchase of own shares by Employee - - - (5) - (5) - - (5) - - - (54) - (54) - - (54) At 30 June 2011 (unaudited) 159 298 9 934 60 1,460 334 31 1,825 At 1 January 2011 159 298 9 788 59 1,313 346 28 1,687 Profit for the period - - - 279 - 279 21 6 306 - - - (223) (33) (256) - - (256) - - - 6 - 6 - - 6 - - - - - - (23) - (23) Share Ownership Plan Trust Dividends paid to equity shareholders 9 Other comprehensive income/(expense) for the period Share-based payments Distribution from Pension partnership to UK Pension scheme 10 Purchase of own shares by Employee Share Ownership Plan Trust Dividends paid to equity shareholders Dividends paid to non-controlling interests At 31 December 2011 9 - - - (5) - (5) - - (5) - - - (85) - (85) - - (85) - - - - - - - (6) (6) 159 298 9 760 26 1,252 344 28 1,624 19 GKN plc Half Year Report 2012 CONSOLIDATED BALANCE SHEET AT 30 JUNE 2012 Notes 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 12 Current assets Inventories Trade and other receivables Current tax assets Derivative financial instruments Other financial assets Cash and cash equivalents 11 Total assets Liabilities Current liabilities Borrowings Derivative financial instruments Trade and other payables Current tax liabilities Provisions 11 Non-current liabilities Borrowings Derivative financial instruments Deferred tax liabilities Trade and other payables Provisions Post-employment obligations 10 Total liabilities Net assets Shareholders' equity Share capital Capital redemption reserve Share premium account Retained earnings Other reserves 16 16 Non-controlling interests Total equity 20 Unaudited 30 June 30 June 2011 2012 £m £m 31 December 2011 £m 523 419 1,775 128 38 22 195 3,100 347 208 1,672 122 29 23 186 2,587 534 424 1,812 147 37 21 224 3,199 786 1,156 10 5 212 2,169 5,269 699 909 5 18 4 480 2,115 4,702 749 962 16 5 156 1,888 5,087 (72) (27) (1,399) (155) (52) (1,705) (223) (11) (1,185) (118) (40) (1,577) (228) (30) (1,308) (138) (46) (1,750) (730) (59) (70) (121) (80) (926) (1,986) (3,691) 1,578 (435) (49) (62) (114) (66) (574) (1,300) (2,877) 1,825 (466) (72) (96) (120) (91) (868) (1,713) (3,463) 1,624 159 298 9 807 (40) 1,233 345 1,578 159 298 9 934 60 1,460 365 1,825 159 298 9 760 26 1,252 372 1,624 GKN plc Half Year Report 2012 CONSOLIDATED CASH FLOW STATEMENT FOR THE HALF YEAR ENDED 30 JUNE 2012 Unaudited Notes Cash flows from operating activities Cash generated from operations Interest received Interest paid Tax paid Dividends received from joint ventures 11 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 Acquisitions of subsidiaries (net of cash acquired) Acquisition of other investments Proceeds from sale of businesses (net of cash disposed and fees) Proceeds from sale of joint ventures Investment in joint ventures Cash flows from financing activities Distribution from Pension partnership to UK Pension scheme Purchase of own shares by Employee Share Ownership Plan Trust Proceeds from exercise of share options Purchase of non-controlling interests Proceeds from borrowing facilities Repayment of other borrowings Finance lease payments Net returns from deposit Dividends paid to shareholders Dividends paid to non-controlling interests Currency variations on cash and cash equivalents Movement in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 5 10 14 11 9 11 21 First half 2012 £m First half 2011 £m Full year 2011 £m 215 2 (27) (24) 41 207 175 3 (17) (13) 34 182 500 5 (48) (38) 35 454 (131) 4 (22) (2) - (109) 1 (23) 2 (4) (236) 1 (46) 8 (450) (4) (1) 1 (1) (152) 8 (1) (126) 5 8 (4) (718) (30) (23) (23) 2 (9) 272 (181) (1) (62) (9) (5) 84 (5) (54) (3) (5) 115 (10) 4 (85) (6) (10) (8) 38 145 183 3 56 421 477 (2) (276) 421 145 GKN plc Half Year Report 2012 NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS FOR THE HALF YEAR ENDED 30 JUNE 2012 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; automotive, aerospace 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. Revenue from services, inter segment trading and royalties is not significant. a) Sales Automotive Powder Driveline Metallurgy £m £m FIRST HALF 2012 (unaudited) Subsidiaries Joint ventures Aerospace £m Land Systems £m 1,515 149 1,664 465 465 770 770 489 23 512 1,206 127 1,333 435 435 723 723 421 23 444 2,432 246 2,678 845 845 1,481 1,481 805 42 847 5,851 117 - - 38 155 Other businesses Management sales Less: Joint venture sales Income statement – sales FIRST HALF 2011 (unaudited) Subsidiaries Joint ventures Other businesses Management sales Less: Joint venture sales Income statement – sales FULL YEAR 2011 Subsidiaries Joint ventures Acquisitions Subsidiaries Other businesses Management sales Less: Joint venture sales Income statement – sales Total £m 3,411 48 3,459 (205) 3,254 2,935 53 2,988 (189) 2,799 106 6,112 (366) 5,746 Inter segment sales Subsidiary segmental sales gross of inter segment sales are; Driveline £1,543 million (first half 2011: £1,234 million, full year 2011: £2,491 million), Powder Metallurgy £465 million (first half 2011: £438 million, full year 2011: £851 million), Aerospace £770 million (first half 2011: £723 million, full year 2011: £1,481 million) and Land Systems £490 million (first half 2011: £422 million, full year 2011: £805 million). 22 GKN plc Half Year Report 2012 NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2012 1 Segmental analysis (continued) b) Trading profit Automotive Powder Land Driveline Metallurgy Aerospace Systems £m £m £m £m FIRST HALF 2012 (unaudited) Trading profit before depreciation and amortisation Depreciation of property, plant and equipment Amortisation of operating intangible assets Trading profit – subsidiaries Trading profit/(loss) – joint ventures 157 (62) (2) 93 28 121 63 (16) 47 47 109 (18) (4) 87 (1) 86 58 (8) (1) 49 3 52 125 (52) (2) 71 23 94 54 (15) 39 39 100 (17) (2) 81 (1) 80 43 (7) 36 3 39 255 103 208 77 (107) (3) 145 46 191 (31) 72 72 (34) (5) 169 (3) 166 (13) (1) 63 5 68 7 (3) - - 4 (5) Other businesses Gallatin temporary plant closure Corporate and unallocated costs Management trading profit Less: Joint venture trading profit Income Statement – trading profit FIRST HALF JUNE 2011 (unaudited) Trading profit before depreciation and amortisation Depreciation of property, plant and equipment Amortisation of operating intangible assets Trading profit – subsidiaries Trading profit/(loss) – joint ventures Other businesses Gallatin temporary plant closure Corporate and unallocated costs Management trading profit Less: Joint venture trading profit Income Statement – trading profit FULL YEAR 2011 Trading profit before depreciation, impairment and amortisation Depreciation and impairment of property, plant and equipment Amortisation of operating intangible assets Trading profit – subsidiaries Trading profit/(loss) – joint ventures Acquisitions Trading profit – subsidiaries Acquisition related charges Other businesses Gallatin temporary plant closure Corporate and unallocated costs Management trading profit Less: Joint venture trading profit Income Statement – trading profit Total £m 306 1 2 (16) 293 (29) 264 252 2 (23) (7) 224 (26) 198 497 11 (8) 3 3 (19) (16) 468 (49) 419 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. Corporate and unallocated costs in the first half 2012 include £4 million of transaction costs related to the recently announced acquisition of Volvo Aerospace (see note 16) and £2 million of transaction costs on the potential divestment of the Wheels business. In the first half 2011, corporate and unallocated costs included a £2 million credit for a pension scheme curtailment. During the first half of 2012, GKN Driveline and GKN Land Systems exited their operations in Uruguay. Closure costs incurred of £2 million are offset by previous currency variations of £2 million reclassified from other reserves. Trading profit in the first half of 2011 included a one-off charge of £23 million in relation to the temporary plant closure at Gallatin. 23 GKN plc Half Year Report 2012 NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2012 1 Segmental analysis (continued) c) Goodwill, fixed assets and working capital - subsidiaries only Automotive Powder Driveline Metallurgy £m £m Land Aerospace Systems £m £m Total £m FIRST HALF 2012 (unaudited) Property, plant and equipment and operating intangible assets Working capital Net operating assets Goodwill and non-operating intangible assets Net investment 950 131 1,081 310 1,391 306 111 417 28 445 499 102 601 273 874 138 98 236 186 422 1,893 442 FIRST HALF 2011 (unaudited) Property, plant and equipment and operating intangible assets Working capital Net operating assets Goodwill and non-operating intangible assets Net investment 881 139 1,020 82 1,102 309 109 418 28 446 455 63 518 283 801 111 76 187 54 241 1,756 387 FULL YEAR 2011 Property, plant and equipment and operating intangible assets Working capital Net operating assets Goodwill and non-operating intangible assets Net investment 982 77 1,059 321 1,380 313 100 413 29 442 479 56 535 282 817 142 73 215 196 411 1,916 306 d) Reconciliation of segmental property, plant and equipment and operating intangible assets to the Balance Sheet Unaudited First half First half Full year 2012 2011 2011 £m £m £m Segmental analysis – property, plant and equipment and operating intangible 1,893 assets 1,756 1,916 797 447 828 Segmental analysis – goodwill and non-operating intangible assets (523) Goodwill (347) (534) 19 18 19 Other businesses 8 Corporate assets 6 7 2,194 Balance Sheet – property, plant and equipment and other intangible assets 1,880 2,236 e) Reconciliation of segmental working capital to the Balance Sheet Segmental analysis – working capital Other businesses Accrued net financing costs Restructuring provisions Deferred and contingent consideration Government refundable advances Corporate items Balance Sheet – inventories, trade and other receivables, trade and other payables and provisions 24 Unaudited First half First half 2012 2011 £m £m 442 387 7 9 (18) (24) (7) (21) (29) (28) (43) (41) (28) (54) 324 228 Full year 2011 £m 306 11 (21) (10) (29) (42) (36) 179 GKN plc Half Year Report 2012 NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2012 2 Basis of preparation These half year condensed consolidated financial statements for the six months ended 30 June 2012 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services 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 2011. These financial statements do not constitute statutory accounts. A copy of the audited consolidated statutory accounts for the year ended 31 December 2011 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 2011. The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective. The Group has adopted relevant amendments to standards with no material impact on its results, assets and liabilities. As outlined in the audited consolidated financial statements for the year ended 31 December 2011 the impact of other accounting developments is being assessed. Estimates, judgements and assumptions The Group’s significant accounting policies are set out in audited consolidated financial statements for the year ended 31 December 2011. 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 including the valuation of the Pension partnership plan asset, derivative and other financial instruments, taxation and impairment of non-current assets. The details of the principal estimates, judgements and assumptions are set out in notes 24, 26, 4c, 21, 6 and 12 of the audited consolidated financial statements for the year ended 31 December 2011 as updated in notes 4 (change in value of derivative and other financial instruments), 8 (Taxation) and 10 (Post-employment obligations) of these financial statements. Date of approval These financial statements were approved by the Board of Directors on Monday 30 July 2012. 25 GKN plc Half Year Report 2012 NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2012 3 Adjusted performance measures (a) Reconciliation of reported and management performance measures FIRST HALF 2012 (unaudited) As reported £m 3,254 Sales Exceptional Joint and non- Management ventures trading items basis £m £m £m 205 3,459 264 18 29 - (18) 293 - (16) 35 301 29 16 (35) (37) 293 23 (29) 1 (5) Interest payable Interest receivable Other net financing charges Net financing costs Profit/(loss) before taxation (27) 5 (13) (35) 289 - 13 13 (23) (27) 5 (22) 266 Taxation Profit/(loss) for the period Profit attributable to non-controlling interests Earnings Earnings per share - pence (53) 236 (12) 224 14.4 - 13 (10) 10 - (40) 226 (2) 224 14.4 Trading profit Change in value of derivative and other financial instruments Amortisation of non-operating intangible assets arising on business combinations Pension scheme curtailment Operating profit Share of post-tax earnings of joint ventures FIRST HALF 2011 (unaudited) As reported £m 2,799 Sales Exceptional Joint and non- Management ventures trading items basis £m £m £m 189 2,988 198 18 26 - (18) 224 - (10) 4 210 26 10 (4) (12) 224 20 (26) 1 (5) Interest payable Interest receivable Other net financing charges Net financing costs Profit/(loss) before taxation (21) 2 (9) (28) 202 - 9 9 (2) (21) 2 (19) 200 Taxation Profit/(loss) for the period Profit attributable to non-controlling interests Earnings Earnings per share - pence (27) 175 (14) 161 10.4 - (1) (3) 11 8 0.5 (28) 172 (3) 169 10.9 Trading profit Change in value of derivative and other financial instruments Amortisation of non-operating intangible assets arising on business combinations Gains and losses on changes in Group structure Operating profit Share of post-tax earnings of joint ventures FULL YEAR 2011 For the year ended 31 December 2011, management sales were £6,112 million, management trading profit was £468 million, management profit before tax was £417 million and management earnings per share was 22.6 pence. 26 GKN plc Half Year Report 2012 NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2012 3 Adjusted performance measures (continued) (b) Summary by segment FIRST HALF 2012 (unaudited) Driveline Powder Metallurgy Aerospace Land Systems Other businesses Corporate and unallocated costs Gallatin temporary plant closure Sales £m 1,664 465 770 512 48 3,459 3,459 Trading profit £m 121 47 86 52 1 (16) 291 2 293 Sales £m 1,333 435 723 444 53 2,988 2,988 Trading profit £m 94 39 80 39 2 (7) 247 (23) 224 Sales £m 2,678 845 1,481 847 106 117 38 6,112 6,112 Trading profit £m 191 72 166 68 3 4 (1) (16) 487 (19) 468 Margin 7.3% 10.1% 11.2% 10.2% 8.4% 8.5% FIRST HALF 2011 (unaudited) Driveline Powder Metallurgy Aerospace Land Systems Other businesses Corporate and unallocated costs Gallatin temporary plant closure Margin 7.1% 9.0% 11.1% 8.8% 8.3% 7.5% FULL YEAR 2011 Driveline Powder Metallurgy Aerospace Land Systems Other businesses Getrag (Driveline) Stromag (Land Systems) Corporate and unallocated costs Gallatin temporary plant closure 27 Margin 7.1% 8.5% 11.2% 8.0% 8.0% 7.7% GKN plc Half Year Report 2012 NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2012 4 Change in value of derivative and other financial instruments Unaudited First half First half 2012 2011 £m £m 18 24 (1) (2) 17 22 Forward currency contracts (not hedge accounted) Embedded derivatives Commodity contracts (not hedge accounted) Net gains and losses on intra-group funding Arising in period Reclassified in period Change in value of derivative and other financial instruments 5 1 1 18 Full year 2011 £m (29) (3) (1) (33) (4) (4) 18 2 2 (31) Unaudited First half First half 2012 2011 £m £m Full year 2011 £m Gains and losses on changes in Group structure Profits and losses on sale or closure of businesses Business sold – GKN Aerospace Engineering Services Profit on sale of joint venture - 4 4 4 4 8 On 27 January 2012 the Group sold its 49% share in a joint venture company, GKN JTEKT (Thailand) Limited for cash consideration of £1 million, realising neither a profit or loss. 6 Share of post-tax earnings of joint ventures Sales Operating costs Trading profit Net financing costs Profit before taxation Taxation Share of post-tax earnings - before exceptional and non-trading items Exceptional and non-trading items Share of post-tax earnings Unaudited First half First half 2012 2011 £m £m 205 189 (176) (163) 29 26 29 26 (5) (5) 24 (1) 23 Full year 2011 £m 366 (317) 49 (1) 48 (8) 21 (1) 20 40 (2) 38 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 2011: £nil, full year 2011: £1 million). 7 Other net financing charges Unaudited First half First half 2012 2011 £m £m 72 77 (83) (85) (11) (8) (2) (1) (13) (9) Expected return on scheme assets Interest on post-employment obligations Post-employment finance charges Unwind of discounts Other net financing charges 28 Full year 2011 £m 153 (170) (17) (2) (19) GKN plc Half Year Report 2012 NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2012 8 Taxation The tax charge for the period is based on an estimate of the Group’s expected annual effective rate of tax for 2012 based on tax legislation substantively enacted at 30 June 2012 applied to taxable profit for the period ended 30 June 2012. Unaudited First half First half 2012 2011 £m £m 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 Full year 2011 £m Deferred tax (47) 1 2 (14) (58) 5 (37) 2 (1) (8) (44) 17 (82) 10 1 (22) (93) 48 Total tax charge for the period (53) (27) (45) Analysed as: Tax in respect of management profit Current tax Deferred tax (58) 18 (44) 16 (97) 37 (40) (28) (60) (13) 1 4 11 (13) 1 15 (53) (27) (45) Unaudited First half First half 2012 2011 £m £m Full year 2011 £m Tax in respect of items excluded from management profit Current tax Deferred tax Total tax charge for the period Tax included in other comprehensive income Deferred tax on post-employment obligations Deferred tax on foreign currency gains and losses on intra-group funding Current tax on post-employment obligations Current tax on foreign currency gains and losses on intra-group funding (9) 1 11 3 3 10 (1) 12 30 1 24 1 56 Management tax rate The tax charge arising on management profits of subsidiaries of £242 million (first half 2011: £179 million, full year 2011: £377 million) was £40 million (first half 2011: £28 million charge, full year 2011: £60 million charge) giving an effective tax rate of 17% (first half 2011: 16%, full year 2011: 16%). Deferred tax asset recognition There is a net £5 million (first half 2011: £17 million, full year 2011: £48 million) deferred tax credit to the Income Statement in the period, primarily relating to the recognition of previously unrecognised tax losses, largely in the UK. 29 GKN plc Half Year Report 2012 NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2012 8 Taxation (continued) Changes in UK tax rate On 21 March 2012 the UK Government announced further reductions to the mainstream rate of UK Corporation tax from April 2012 to 24%, falling to 22% by 2014. The reduction to 24% was substantively enacted on 26 March 2012, with the result that the UK deferred tax asset was valued at 24% at 30 June 2012. As further reductions to reach the anticipated 22% are enacted, there will be a corresponding reduction in the value of UK deferred tax assets since deferred tax is measured at the prevailing tax rate. As a large part of the potential UK deferred tax asset currently remains unrecognised, there is not expected to be a material impact on the Group’s effective tax rate. 9 Dividends An interim dividend of 2.4 pence per share has been declared by the Directors and will be paid on 24 September 2012 to shareholders on the register at 10 August 2012. Based on the number of shares ranking for dividend at 30 June 2012, the interim dividend is expected to absorb £37 million. On 10 July 2012, an additional 70,000,000 new ordinary shares were admitted to trading following the placing announcement of 5 July 2012. These shares will also rank for dividend and are expected to absorb a further £2 million. During the period £62 million (first half 2011: £54 million, full year 2011: £85 million) was paid in respect of dividends to equity shareholders. 30 GKN plc Half Year Report 2012 NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2012 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 2012. Movement in post-employment obligations during the period: Unaudited First half First half Full Year 2012 2011 2011 £m £m £m (868) (600) (600) At 1 January Businesses acquired (12) (20) (19) (38) Current service cost 35 4 4 Curtailments/settlements 1 Past service cost (11) (8) (17) Interest/expected return on assets (121) 29 (277) Actuarial gains and losses 42 34 67 Contributions/benefits paid 17 (14) 4 Currency variations (926) (574) (868) At end of period Post-employment obligations as at the period end comprise: Pensions Medical Unaudited 30 June 30 June 31 December 2012 2011 2011 £m £m £m (418) (139) (443) (437) (376) (355) (24) (17) (22) (47) (42) (48) (926) (574) (868) - funded - unfunded - funded - unfunded UK Americas £m £m (322) (172) (56) (144) (272) (221) At 30 June 2012 - unaudited At 30 June 2011 - unaudited At 31 December 2011 Europe £m (410) (353) (352) ROW £m (22) (21) (23) Total £m (926) (574) (868) Assumptions Actuarial assessments of the major defined benefit retirement plans were carried out as at 30 June 2012. The major assumptions used were: UK Americas Europe ROW % % % % At 30 June 2012 – unaudited 4.00 3.50 2.50 Rate of increase in pensionable salaries 3.10 1.75 n/a Rate of increase in payment and deferred pensions 4.60 4.20 3.70 1.65 Discount rate 3.00 2.50 1.75 n/a Inflation assumption Rate of increase in medical costs: 6.0/5.4 8.0/5.0 n/a n/a Initial/long term At 30 June 2011 – unaudited Rate of increase in pensionable salaries 4.35 3.50 2.50 Rate of increase in payment and deferred pensions 2.85 2.00 1.75 n/a Discount rate 5.40 5.50 5.10 1.75 Inflation assumption 3.35 2.90 1.75 0.75 Rate of increase in medical costs: Initial/long term 6.5/6.0 9.0/5.0 n/a n/a At 31 December 2011 Rate of increase in pensionable salaries 4.00 3.50 2.50 Rate of increase in payment and deferred pensions 3.10 2.00 1.75 n/a Discount rate 4.70 4.50 4.90 1.65 Inflation assumption 3.00 2.50 1.75 n/a Rate of increase in medical costs: Initial/long term 6.0/5.4 8.5/5.0 n/a n/a The yield used to calculate the UK discount rate at 30 June 2012 was based on AA corporate bonds with duration weighted to the UK pension scheme’s liabilities. Based on actuarial advice, this is considered to give better consistency with the estimated term of the pension scheme’s obligations. Previously the Group used a yield on the Corporate AA 15 years + iBoxx index. No adjustments to mortality assumptions have been made in the period for the UK and German schemes to those used as at 31 December 2011. The UK scheme assumption is based on S1NA (year of birth) mortality tables allowing for medium cohort projections with a minimum improvement of 1% and in Germany RT2005-G tables were again used. In the US, PPA 2012 tables were used as these became available in the period. 31 GKN plc Half Year Report 2012 NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2012 10 Post-employment obligations (continued) Assumption sensitivity analysis The impact of a one percentage point movement in the primary assumptions on the defined benefit net obligations as at 30 June 2012 is set out below: UK £m 393 (453) (400) 335 Discount rate +1% Discount rate -1% Rate of inflation +1% Rate of inflation -1% Americas £m 37 (45) - Europe £m 64 (83) (54) 45 ROW £m 5 (5) - UK deficit funding and funding arrangement with Trustee The last scheme specific funding valuation was as at April 2010 which revealed a deficit of £49 million. Under the 2010 Recovery Plan a first potential funding payment may become payable in Q1 2014 depending on asset performance in the 3 years to 5 April 2013. If required, the amount payable in 2014 will be capped at £14 million. During the period the Group has paid £30 million (first half 2011: £23 million) to the UK Pension scheme through the Pension partnership. Pension scheme curtailment On 1 April 2012 the Group transferred the assets and liabilities of its defined benefit pension scheme of the hourly paid workers at GKN Aerospace’s St. Louis facility to the International Association of Machinists and Aerospace Workers (‘IAM’) National Pension Fund. The IAM National Pension Fund has over 1,750 participating employers with over £5 billion of investment assets under management, and as at 31 December 2011 it was in a net surplus position. From this date the members associated with this pension scheme are part of a multi-employer pension arrangement and as the total assets are not capable of separate determination the Group will account for its future obligations as if it were part of a defined contribution scheme. The post-employment obligation was actuarially assessed at 31 March 2012 and the current service cost, other pension financing charge, actuarial gains and losses and contributions were recorded to this date consistent with other defined benefit pension schemes in the Group. At 31 March 2012, the scheme had an IAS 19 deficit of £55 million (31 December 2011: £68 million), which has subsequently been de-recognised from the balance sheet. The Group has a remaining obligation of £20 million being the principal amount payable to the IAM National Pension Fund over 4 years. This obligation is included in the Group’s net post-employment obligation of £926 million. The net pension scheme curtailment of £35 million has been recognised in the Income Statement, including related professional fees. 32 GKN plc Half Year Report 2012 NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2012 11 Cash flow notes Unaudited First half 2012 £m 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 Change in value of derivative and other financial instruments Amortisation of government capital grants Net profits 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 other borrowings and deposits Finance leases 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 First half Full year 2011 2011 £m £m 301 210 374 105 7 92 4 191 1 10 16 (18) (1) 3 (57) (56) (216) 131 215 10 (18) (1) (4) 3 (19) (58) (141) 97 175 22 31 (1) (3) (8) 6 (34) (60) (109) 80 500 38 (91) 1 (52) (538) (590) 56 (79) (23) (151) (174) (276) (109) (2) (387) (151) (538) 212 (29) 183 480 (3) 477 156 (11) 145 During the period the Group has repaid its outstanding £176 million 7% 2012 unsecured bond, along with £5 million of other borrowings. Restructuring cash outflow in respect of previous restructuring plans amounts to £3 million (first half 2011: £22 million, full year 2011: £31 million) and proceeds from sale of fixed assets, which were made available for disposal as a result of the restructuring, were £nil million (first half 2011: £1 million, full year 2011: £2 million). 33 GKN plc Half Year Report 2012 NOTES TO THE HALF YEAR CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE HALF YEAR ENDED 30 JUNE 2012 12 Property, plant and equipment (unaudited) During the six months ended 30 June 2012 the Group asset additions were £113 million (first half 2011: £94 million). Additions through business combinations were £nil (first half 2011: £nil). Assets with a carrying value of £nil million (first half 2011: £1 million) were disposed of during the six months ended 30 June 2012. 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 2012 amounted to £109 million (30 June 2011: £107 million) and the Group's share not provided by joint ventures amounted to £25 million (30 June 2011: £2 million). Intangible assets with a carrying value of £nil were realised in the first half of 2012 (first half 2011: £nil). During the period a total of 1,630,827 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 £2 million (first half 2011: less than £1 million). On 27 January 2012 the Group purchased the non-controlling interest of 49% in GKN Driveline JTEKT Manufacturing Limited for total consideration of £10 million, comprising cash paid of £9 million and £1 million deferred. The Group now owns 100% of the equity share capital of this company. 15 Contingent assets and liabilities (unaudited) Since 2003 the Group has been involved in litigation with HMRC in respect of various advance corporation tax payments made and corporate tax paid on certain foreign dividend receipts which, in its view, were levied by HMRC in breach of the Group’s EU community law rights. The main case has been appealed both to the UK Supreme Court (on effective remedies) and to the Court of Justice for Europe (CJEU) (for further guidance on breach of community law). The UK Supreme Court gave its decision in June 2012 which was broadly positive for the Group’s claims in respect of the application of time limits. However, the CJEU is not due to give its judgment until September 2012, which will then be referred back 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 2012 or 30 June 2011. At 30 June 2012 the Group had no contingent liabilities in respect of bank and other guarantees (30 June 2011: £nil). In the case of certain businesses, performance bonds and customer finance obligations have been entered into in the normal course of business. 16 Post balance sheet events (unaudited) On 5 July 2012, the Group announced its agreement to acquire Volvo Aero (the aero engine division of AB Volvo) based in Sweden, Norway and the USA. The acquisition enterprise value is £633 million comprising £513 million of equity value (consideration) together with an anticipated Volvo Aero pension settlement (£50 million) and working capital refinancing (£70 million). The Group have entered into forward foreign exchange contracts to fix the Sterling value of the foreign currency denominated equity consideration that is expected to become payable when the transaction completes during the third quarter of the year, subject to regulatory approvals. The proposed acquisition will be funded by debt of £500 million and gross proceeds of £140 million from an additional 70,000,000 new ordinary shares admitted to trading on 10 July 2012. 34 GKN plc Half Year Report 2012 Independent review report to GKN plc Introduction We have been engaged by the Company to review the condensed consolidated financial statements in the Half year report for the six months ended 30 June 2012 which comprise the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Condensed Consolidated Statement of Changes in Equity, Consolidated Balance Sheet, Consolidated Cash Flow Statement and related notes. 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. Directors' responsibilities The Half year report 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 Services Authority. As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed consolidated financial statements included in this Half year report have been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union. Our responsibility 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 the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, 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. Scope of review 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 half year 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. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated financial statements in the Half year report for the six months ended 30 June 2012 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 Services Authority. PricewaterhouseCoopers LLP Chartered Accountants Birmingham 30 July 2012 Notes a) The maintenance and integrity of the GKN plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the condensed consolidated financial statements since they were initially presented on the website. b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 35 GKN plc Half Year Report 2012 Contact details Corporate Centre PO Box 55 Ipsley House Ipsley Church Lane Redditch Worcestershire B98 0TL Tel: +44 (0)1527 517715 Fax: +44 (0)1527 517700 London Office 50 Pall Mall London SW1Y 5JH Tel: +44 (0)20 7930 2424 Fax: +44 (0)20 7930 3255 email: information@gkn.com Website: www.gkn.com Registered in England No. 4191106 Registrar Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA Tel: 0871 384 2962 (+44 121 415 7039 from outside UK) Fax: 0871 384 2100 (+44 1903 702424 from outside UK) Websites: www.equiniti.com www.shareview.co.uk 36