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GKN PLC (GKN)

  Print      Mail a friend       Annual reports

Monday 01 March, 2004

GKN PLC

Final Results

GKN PLC
01 March 2004


For immediate release
1 March 2004


GKN preliminary results 2003

---------------------------                        --------  --------   --------
Financial Results
                                                     2003      2002   Increase/

                                                                      (decrease)
                      ---------------------------  --------  -------   ---------
                                                                      
Sales                                              £4,585m   £4,452m         3%
---------------------------                        --------  --------   --------
Profit before tax, goodwill amortisation and         
impairment and exceptional items                     £246m     £267m        (8%)
---------------------------                        --------  --------   --------
Profit before tax                                    £173m     £180m        (4%)
---------------------------                        --------  --------   --------
Net borrowings                                       £793m     £834m        n/a
---------------------------                        --------  -------- --------
Earnings per share before goodwill amortisation      22.8p     25.2p       (10%)
and impairment and exceptional items               --------  --------   --------
---------------------------
Earnings per share                                   13.8p     13.7p         1%
---------------------------                        --------  --------   --------
Dividend per share                                   11.6p     11.3p       2.7%
---------------------------                        --------  --------   --------

Business highlights

• Sales up 3% despite weakness in most major markets - strong growth in
automotive emerging markets

• Results impacted by £17 million increase in UK pension deficit charges
- underlying PBT broadly level excluding deficit cost

• £41 million reduction in net borrowings

• Dividend increase 2.7% to 11.6p per share

• Substantial new business wins across the Group

   o       Driveline - 29 new programmes

   o       Aerospace - $2 billion future business potential

   o       Powder Metallurgy - $150 million of new business

• Strategic initiatives launched to provide future benefits of £60
million a year by 2007



Kevin Smith, Chief Executive of GKN plc, commented:



'GKN's results in 2003, delivered in some difficult markets, confirm our
long-standing reputation for consistently high levels of operational and
financial management as well as our success in building strong positions in
automotive and aerospace markets.


'Our principal challenge in 2003 was declining light vehicle production in North
America, Western Europe and Japan and depressed conditions in civil aerospace.


'However we were able to take full advantage of the growth in automotive output
in emerging markets and the continued strength of military aerospace programmes.
Our Driveline business and AgustaWestland both delivered strong performances at
the top end of our expectations.


'We have also been successful in winning substantial new business from our
global customer base and there was strong order intake across the entire Group.
In Automotive, Driveline won more than 70% of all available new CVJ programmes,
Sinter Metals won $150 million of new orders and in Aerospace our technology has
won us positions on all the important new aircraft under development in Europe
and the US.


'Underlying profit before tax* was down on last year. The 8% reduction was
largely caused by increased UK pension deficit charges of £17 million, without
which we would have been close to last year.


'GKN's recognition of its pension fund obligations saw the Group contribute £44
million of cash in 2003 towards the deficit alone.  In spite of that our cash
performance was encouraging. Despite increased pension contributions we have
reduced net debt for the second successive year.'


(* Profit before tax, goodwill amortisation and impairment and exceptional
items)


Shaping up for the Future - A new direction for Driveline


GKN Driveline has been a consistently high performing business. During 2003 and
early 2004, we undertook a full review of our current Driveline manufacturing
and business footprint to assess its future suitability for our key global
markets.  As a result of this strategic review we have now decided to embark on
a programme of reorganisation which we are confident will provide a platform to
significantly improve the quality of earnings in our core Driveline business and
position us well to serve the future needs of our customers.


Our major markets of Western Europe and North America have provided little
overall market growth in recent years with intense competition amongst
manufacturers putting increased pressure on pricing and productivity.  In
contrast the emerging markets in South America, Asia and Eastern Europe are
providing strong growth in automotive production and we have continued to
successfully build our presence in all three regions, which also offer potential
to provide much lower cost sources of supply.





To take advantage of this opportunity we have developed a global manufacturing
strategy for our Constant Velocity Joint (CVJ) business which today represents
75% of our Driveline sales.  Over the next three years we will migrate about 20%
of our global production from high cost to low cost economies so that by 2007
over 50% of our CVJ manufacture will be sourced from low cost locations. This
will require a significant realignment of our manufacturing network.


Detailed plans are being prepared to deploy this strategy and will be announced
in due course.  We expect that the exceptional cash costs of restructuring in
Driveline will average around £35 million per year over the next three years,
with additional non-cash costs being likely in 2004.  Total exceptional costs,
which should not exceed £150 million, will be finalised as the detailed plans
are approved.  Any additional capital expenditure required should not increase
the Group's overall level of expenditure above the normal level of 110%-120% of
depreciation.


Although there will be little benefit from this strategy in 2004, by 2007 we
estimate full year profit benefits from completion of this exceptional
restructuring to be in the region of £40 million a year.


Supporting US Sinter recovery - and Realigning our cost base across the Group


Although our success in winning new orders in US Sinter should lead to a
resumption of growth in 2006, this recovery is at an early stage.  We intend to
support recovery and underpin its base by further reducing costs and focusing
activities on our areas of technological advantage.  Additional restructuring is
therefore expected in 2004.  Detailed plans are being developed and will be
announced in due course.


In addition, across the Group as a whole we intend to realign overhead
expenditure to better reflect the future shape of our business and reduce costs.


The cash costs of restructuring US Sinter and realigning our cost base across
the Group are expected to total some £30-£40 million, falling largely in the
next 12 months.  The impact of these actions on the carrying value of related
assets will be revisited as the detailed plans are developed.


In summary, by investing in reshaping Driveline, by supporting US Sinter
recovery and by realigning our cost base, we will build a stronger business in a
world which still offers excellent opportunities for growth.  The measures
outlined above will leave GKN well positioned to take full advantage of these
opportunities.  In total we estimate the exceptional cash cost of restructuring
over the next three years to be some £140 million, with some £90 million likely
to be charged to operating profit in 2004, together with any non-cash write-offs
required as the detailed plans are developed.  Our initial scenario planning
indicates that such charges might be in the region of £60-£80 million, broadly
shared equally between the two projects.  The cash flow impact in 2004 should be
some £50 million.  Benefits in 2004 will be small, but will incrementally rise
to an estimated £60 million a year by 2007 giving an overall cash payback of
just over three years.  The maximum cumulative cash outlay is likely to peak at
around £80 million in 2005, well within the funding capacity of the Group.


OUTLOOK


In contrast to the declines of recent years there is now a more positive outlook
for our major markets.  Automotive production is forecast to increase slightly
in North America whilst in Europe volumes are expected to be level or marginally
ahead of 2003. Continuing strong demand is expected in most of Asia Pacific. In
aerospace military demand looks set to remain strong with civil demand at its
cyclical low.


However, competitive pressures in all our markets are expected to remain
intense, exacerbated by increasing pressure from rising world raw material
prices.    The Group's global footprint means that the proportion of sales
exported from one currency region to another is relatively small but the fall in
the US dollar will affect approximately £150 million of exports from Europe to
the US as the hedging cover now in place is at lower average rates than in 2003.



Against that background, the Group expects to make further improvements in its
underlying operational performance although the overall result will be impacted
by the charge relating to UK pension deficit costs increasing from £23 million
to £40 million, as previously indicated.


Looking further ahead, GKN will continue to focus on its core strengths:
technology, exceptional customer service and performance and, with the benefits
of the strategic initiatives outlined above, the Group will continue to move
forward with confidence.



The full text of the Operating and Financial Review which will appear in the
Annual Report & Accounts together with Financial Statements and selected notes
extracted from the audited accounts is attached to this press release which may
be downloaded from www.gknplc.com.



Further enquiries:         GKN Corporate Communications
                           Tel: 020 7463 2354










Operating and Financial Review


GROUP ACTIVITIES


GKN is a global engineering business serving the automotive and aerospace
markets.


Automotive activities comprise GKN Driveline, Powder Metallurgy, and OffHighway
and AutoComponents.


Aerospace activities comprise Aerospace Services and AgustaWestland, a 50% joint
venture with Finmeccanica SpA.


STRATEGY


GKN is committed to providing long-term shareholder value by supplying
outstanding products and services to our global automotive and aerospace
customers to produce growth in sales and sustained profitability. This will be
achieved largely through a combination of organic development of our businesses
and selective acquisitions which add to our technological capabilities or
geographical presence or are in support of customer outsourcing programmes.


REVIEW OF OPERATIONS


In this review, in addition to the statutory measures of earnings, we have
included references to profit before goodwill amortisation and impairment and
exceptional items since we believe this shows most clearly the trend in
performance. In the segmental analysis the cost of the UK pension deficit, which
is material and cannot be readily attributed to the current Automotive or
Aerospace businesses, is shown separately. The segmental analysis of operating
profit for 2002 has been restated accordingly.


Group performance


Sales

Total sales, including our share of joint ventures and associates, were £4,585
million compared with £4,452 million in 2002, an increase of £133 million
(3.0%). Excluding the translational impact of currency, acquisitions and
divestments, underlying sales were 1.1% above last year.


Automotive sales of £3,036 million were £86 million (2.9%) above last year with
an underlying increase of 0.6%. As described below, 2003 was a year of weaker
market conditions in both Europe and North America which were compensated to
some extent by rapid growth in emerging markets, particularly China.


Aerospace sales of £1,549 million were £47 million (3.1%) higher than 2002.
Excluding the translational impact of currency, acquisitions and the share of
Alvis plc which was sold in the year, sales were broadly level with increases in
military being offset by further reductions in civil demand.


Operating profit (before goodwill amortisation and impairment and exceptional
items)

Operating profit before goodwill amortisation and impairment and exceptional
items of £302 million was £13million (4.1%) lower than 2002. The translational
impact of currency was £12 million positive but this was almost entirely offset
by £11 million negative impact from transactional effects. Net acquisitions and
divestments contributed £3 million. Total operating profit was also impacted by
an increase of £17 million in the charge for the UK pension deficit.


Automotive operating profit decreased by £6 million (3.0%) to £195 million.
Excluding translational currency effects, acquisitions and divestments the
decrease was £18 million (8.5%).


Aerospace profits improved from £120 million to £130 million. However, the 2002
figure for Aerospace was after charging an £11 million share of redundancy and
reorganisation costs in AgustaWestland. Adjusting for this, translational
currency impacts, and acquisitions and divestments, underlying profit reduced by
£4 million (3.0%).


As noted above, the charge to operating profit in respect of the UK pension
scheme deficit rose to £23 million from £6 million in 2002.


Goodwill amortisation and impairment

Amortisation of goodwill was £37 million (2002 - £37 million). An impairment
charge of £91 million (2002 - £11 million) has also been recognised in the year.
Most of this (£83 million) arose as a consequence of continued disappointing
performance in the US powder metal business with £8 million in Aerospace
Services following the normal annual review of asset carrying values.


Statutory operating profit

Operating profit after goodwill amortisation and impairment and exceptional
items was £174 million (2002 - £230 million), a 24.3 % decrease. There were no
exceptional items charged to operating profit in the year (2002 - £37 million).


Exceptional items

Exceptional profits arising on the sale or closure of businesses totalled £55
million (2002 loss - £2 million). This mainly related to profit on the disposal
of the Group's 29% shareholding in Alvis plc for a cash consideration of £73
million.


Interest

Net interest payable by subsidiaries was £56 million (2002 - £47 million).  This
planned increase was due to a combination of higher rates arising from the
Group's issue of bonds in 2002 (which lengthened the debt maturity profile) and
lower levels of balance sheet currency hedging.


Interest costs were covered 5.4 times (2002 - 6.6 times) by operating profit
before goodwill amortisation and impairment and exceptional items.


Profit before tax

Profit before tax, goodwill amortisation and impairment and exceptional items
was £246 million compared with £267 million in 2002, a decrease of 7.9%.


Statutory profit before tax was £173 million. This compared with the 2002 figure
of £180 million.


Taxation

Taxation decreased to £70 million from £77 million in 2002. The underlying rate
of tax expressed as a percentage of profit before goodwill amortisation and
impairment and exceptional items for the year was 31.3% compared with a 2002
figure of 30.0%, the increase being largely attributable to a reduction in
credits arising from the settlement of prior year tax liabilities.


The underlying rate in 2004 and beyond is still expected to show a modest,
progressive increase as a result of future changes in the geographical mix of
profits. There may, however, be some favourable impact from the satisfactory
resolution of outstanding tax issues.


The tax credit on exceptional items and goodwill impairment was £7 million (2002
tax credit - £3 million).


The effective tax rate based on profits after goodwill amortisation and
exceptional items was 40.5% (2002 - 42.8 %).


Earnings

Earnings per share before goodwill amortisation and impairment and exceptional
items were 22.8p compared with 25.2p in 2002, a reduction of 9.5% (after these
items the figure was 13.8p, little changed from the 2002 figure of 13.7p).


Dividend

A final dividend of 7.8p per share is proposed, payable on 21 May 2004 to
shareholders on the register at 30 April 2004.


Shareholders may choose to reinvest this dividend under the Dividend
Reinvestment Plan ('DRIP'). The closing date for DRIP mandates is 6 May 2004


Together with the interim dividend of 3.8p the total dividend for the year will
be 11.6p, an increase of 2.7% over the equivalent figure for last year. The
total dividend is covered 2.0 times by earnings before goodwill amortisation and
impairment and exceptional items (2002 - 2.2 times).


Cash flow

Operating cash flow, which GKN defines as cash inflow from operating activities
(£287 million) adjusted for capital expenditure (£162 million) and proceeds from
the disposal of fixed assets (£13 million), was again strong and this year's
figure of £138 million compared with £168 million in 2002.


Continuing tight management control led to a sound working capital performance
and lower capital expenditure. Before the cash outflow in respect of prior year
exceptional charges (£13 million), the increase in UK pension prepayment (£21
million) and one-off payments in respect of overseas pension obligations (£13
million) there was a cash outflow from working capital and post retirement
provisions of £19 million. After these items there was an outflow of £66
million.


Capital expenditure was £162 million (2002 - £213 million) and represented 89%
of depreciation (2002 - 120%). This was somewhat lower than expected as certain
large items of expenditure anticipated in 2003 will now take place in 2004.
Looking forward, it is expected that the normal level of capital expenditure to
depreciation will be closer to 110% - 120%.


Interest paid was £70 million compared with £56 million in 2002 since interest
on the bonds issued during that year was not paid until 2003.


Dividends from joint ventures and associates were £68 million (2002 - £45
million) with the major receipt being from AgustaWestland which has a policy of
100% distribution of earnings unless otherwise agreed by the shareholders. The
dividend received from AgustaWestland in 2003 was somewhat higher than its
normalised distribution, reflecting its strong profit and cash performance.


Tax paid totalled £63 million compared with £38 million in 2002 and reflected
the settlement of prior years' tax issues. The figure for 2004 is expected to be
somewhat lower.


The net impact of acquisitions and divestments was an inflow of £29 million
(2002 outflow - £75 million) leaving a net cash inflow for the year, before
dividend payments, of £118 million (2002 - £66 million). The major transactions
in the year were the sale of our 29% stake in Alvis plc for £73 million and the
acquisition of Pilkington's Aerospace transparency business for £36 million in
cash (in addition there were borrowings on acquisition of £6 million).


Net borrowings

At the end of the year the Group had net borrowings of £793 million (2002 - £834
million). These included the benefit of customer advances of £48 million (2002 -
£42 million), which are shown in short-term creditors in the balance sheet.
There were no net borrowings in joint ventures, which held net cash balances at
31 December 2003.


The reduction in net debt seen in the year was encouraging, reflecting the
continued focus on cash management throughout the Group.


Goodwill

At the year end the balance sheet showed goodwill of £340 million (2002 - £470
million) in relation to subsidiaries and a further £114 million (2002 - £114
million) within the equity value of joint ventures and associates. The
significant decrease in value of goodwill in respect of subsidiaries reflects
the £91 million impairment charge noted above.


Shareholders' equity

Shareholders' equity was £926 million at the end of the year compared with £950
million at the end of 2002. Retained profits were £16 million which were more
than offset by £41 million adverse impact of currency.



Divisional Performance

Automotive

By comparison with 2002, car and light vehicle production declined in both North
America and Western Europe by 3.2% and 0.7% respectively.  This was partially
offset by growth in the emerging markets of Asia Pacific where production rose
by some 19% to 7.9 million units. Notwithstanding these difficult markets and
pricing pressure which remained intense, sales revenue of £3,036 million was £86
million higher than 2002.  The favourable translational impact of currency was
£19 million and the full year impact of 2002 acquisitions added £58 million. The
impact of divestments was small at £10 million so that on a like for like basis
sales were 0.6% higher than in 2002.


Operating profit was £195 million, £6 million (3.0%) below 2002. The
translational impact of currency was £11 million favourable while net
acquisitions and divestments added £1 million. Excluding these factors profits
fell by £18 million (8.5%) but it should be noted that this result reflects the
transactional impact of currency which, by comparison with 2002, reduced profit
by some £7 million.  Some impact was seen from increased raw material costs,
particularly steel on which we spend some £500 million per annum, but since
these largely occurred late in the year their effect on 2003 was small.


GKN Driveline


Products and markets


GKN Driveline specialises in the manufacture of components for light vehicle
drivelines (defined as the components that transfer torque between a vehicle's
transmission and its driven wheels).  These components include geared components
(transfer cases, power transfer units and final drive units), torque management
devices and driveshafts (propshafts for longitudinal power transmission and
sideshafts for lateral transmission).


GKN Driveline is the global leader in the production of constant velocity
jointed (CVJ) products for use in light vehicle drivelines.  The majority of
CVJs are used in sideshafts for front wheel drive, rear wheel drive, and four
wheel drive vehicles; CVJ sideshafts are required for every driven axle with
independent suspension.  Some but not all longitudinal propshafts are also
fitted with CVJs.


In 2003, based on internal estimates, GKN Driveline companies produced in excess
of 42% of  CVJs for the global light vehicle market.  The market share of the
next largest producer was approximately 17%.  Nearly 24% of CVJs are produced by
vehicle manufacturers (VMs) for their own use through 'in-house' operations.
GKN Driveline manufactures CVJs and related products in 37 plants in 21
countries across all of the vehicle-producing regions of the world and has
enjoyed considerable success in the developing markets, with market shares of
some  80% in South America and  55% in the Asia Pacific region excluding Japan
and South Korea.


GKN Driveline is also a global leader in the market for torque management
devices (TMDs) and premium propshafts.  TMDs are mechanical or
electro-mechanical devices that improve vehicle performance and handling by
controlling the flow of torque to the driven wheels based on road conditions,
vehicle situation and driver intent.  GKN offers a wide range of TMD solutions
as both standalone and integrated devices to VMs and to certain Tier One
suppliers.  In 2002, GKN acquired a 33% stake in Tochigi Fuji Sangyo (TFS), a
Japanese manufacturer of TMDs and other driveline components.  We estimate that
in 2003 GKN and TFS together supplied approximately 18% of TMDs for light
vehicle applications on a global basis.  GKN Driveline is also one of the
largest suppliers of premium propshafts, which we define as those propshafts
with sophisticated joints, materials or other features.  We estimate that in
2003 premium propshafts represented approximately 32% of global light vehicle
propshaft demand, or some 9 million propshaft assemblies.  GKN Driveline's share
of this segment was in the region of 17%.


Sales by GKN Driveline of geared components are currently not significant but we
are involved in many active development projects on future vehicle programmes.
We expect above-market growth in power transfer units and final drive units as
VMs continue to introduce new 'crossover' vehicles that combine four wheel drive
with car-like dynamics and comfort.  GKN Driveline also operates an aftermarket
business, primarily in Europe, that serves distributors and service outlets with
a range of new and remanufactured driveline and other components.


The GKN Driveline business is managed globally to ensure effective use of
resources and capital.  Customers are served by global account teams that are
structured to reflect customer organisations, and all manufacturing and sourcing
decisions are reviewed from the perspective of global capacity and strategy.


2003 highlights


Sales in 2003 were £1,938 million (2002 - £1,826 million).


The full year impact of our 33% shareholding in TFS, which was acquired in 2002,
accounted for £50 million of the increase, the effect of translational currency
was £25 million favourable whilst  the net impact of other acquisitions and
divestments was £7 million negative, leaving the underlying increase at £44
million (2.4%). This overall increase was encouraging as it was achieved in the
face of lower vehicle production and significant pricing pressure in major
markets.


The pricing environment continued to be difficult. Productivity improvements
offset some of the price reductions but margins were also adversely affected by
higher steel prices and industrial action by the German metal workers' union in
Mosel. Overall, therefore, there was a slight reduction in operating margins
from 2002.


As part of the global strategy noted above, in August the division entered into
two joint ventures with Toyoda Manufacturing in Thailand which will manufacture
and supply driveshafts for a new vehicle for Toyota, beginning production in
August 2004.  In December 2003 we agreed, subject to regulatory approval, an
increase in our shareholding in Shanghai GKN Drive Shaft Company Ltd from 40% to
50%.


Orders won during the year confirm that there is unlikely to be any major change
in the division's market share in the period up to 2006, the latest date for
which reliable data is available.


There continued to be a high degree of focus on research and development and
during the year the division invested some £68 million, including expenditures
for product and process improvement, cost reduction and innovation. All these
costs were charged to operating profit during the year.


Powder Metallurgy


Products and markets


GKN Powder Metallurgy Division produces both metal powder and sintered products.
This combination, which is unique amongst the larger powder metallurgy companies
gives a competitive advantage through enhanced technology and a wide range of
capabilities.


Until November 2003, when a small Romanian company was acquired, powder
production was confined to the Hoeganaes operations in the USA.  Hoeganaes
largely serves the US market with approximately half of current production going
to GKN's own sintering companies and the remainder to third party customers.  It
is the largest producer of powder in North America with a 53% market share.
Hoeganaes' third party sales account for just over 10% of the division's sales.


GKN Sinter Metals manufactures components from metal powder, largely iron
although aluminium and other alloys are also used. The technology is essentially
substitutional and can result in significant cost savings by comparison with
cast or forged components requiring extensive subsequent machining. The largest
market is automotive where it is used to produce components, such as connecting
rods and gearbox components, which require less machining before use.


GKN's sintered component production takes place in North and South America,
Western Europe and India with the percentages being 59%, 38% and 3%
respectively. In a highly fragmented global market, GKN Sinter Metals has
approximately 16% share with the next largest company at 4%.  Over 50% of the
global market is represented by producers with less than 1% each.  In North
America, sales to DaimlerChrysler, Ford and General Motors account for some 70%
of turnover.


2003 highlights


2003 sales of £608 million were £24 million (3.8%) lower than 2002. £20 million
of the reduction was due to currency on translation so that on a like for like
basis sales were broadly level with last year. Sales improved in India, where
there was strong growth in automotive demand, and in continental Europe but were
offset by lower figures in North America, reflecting the weaker automotive
markets noted above exacerbated by the continued loss of market share by the
division's major customers. Operational improvements continued to be made but
the lower production levels seen during the year impacted the reported
performance of the US sintering business, though  Europe, the Rest of the World
and Hoeganaes remained satisfactory.


In view of the continuation of these market conditions, as noted in the
financial section of this review it was considered appropriate to make an
impairment charge of £83 million in respect of capitalised goodwill in the US
businesses. Plans for accelerating the recovery process are well advanced and
will be implemented in 2004.


During the year new business with an annualised value of approximately $150
million was won. $80 million of this was for the US business and will come on
stream from 2006 at which point annual US revenues can be expected to resume
growth.


In the early part of the year the creation of a dedicated Research and
Development centre in Germany was announced. This facility, which will be opened
in May 2004, aims to increase the speed of product development and, in
particular, improve the strength of sintered components.


As noted above, in November a small Romanian powder manufacturer was acquired.
This will broaden the division's production capacity, lead to lower material
costs in Europe and provide a basis for further development in Eastern Europe.
It is likely that further 'bolt-on' strategic acquisitions will be made in
developing markets.


OffHighway and AutoComponents (including Emitec)


Products and markets


The division comprises a number of smaller businesses which supply agricultural,
construction equipment and automotive customers with power take off equipment,
wheels, structural components, engine cylinder liners and metal substrates for
catalytic converters.  The European agricultural market has been relatively
depressed for some time and saw further falls in the early part of the year as a
consequence of a reduction in the level of farm incomes, uncertainty caused by
the new Common Agricultural Policy and a loss of confidence by farmers. Some
recovery was seen in the second half of the year but expectations for 2004
remain muted. In North America, after a slow start, there was some recovery in
the second half of the year but only back to the same level as 2002.  2004 is
also expected to remain around these levels.


In construction markets Europe was flat and is expected to remain so but North
America is likely to improve slightly in 2004 after a static 2003.


2003 highlights


Sales for the year of £490 million compared with £492 million in 2002.  Currency
translation was £14 million favourable and the full year impact of 2002
acquisitions was £5 million, leaving the underlying figure £21 million lower. In
addition to the weak market conditions noted above, this reduction reflected
lower sales by Emitec in the USA as a number of major contracts came to an end.
However, the division continued to generate cash and margins were substantially
maintained, notwithstanding these challenging conditions.


During the year the division completed the closure of the UK cabs business,
costs of which were provided in the 2002 accounts.


Aerospace


The civil aerospace market weakened further in 2003 with combined deliveries by
Airbus and Boeing decreasing from 684 aircraft in 2002 to 586 in 2003. Military
demand, however, remained firm and offset much of this decline. As a result,
sales for the year were £1,549 million compared with £1,502 million in 2002.
Overall, there was no translational impact of currency with reductions in
subsidiaries offset by increases in AgustaWestland and on a like for like basis,
excluding acquisitions and Alvis, sales were broadly level with last year.





Operating profit was £130 million, £10 million (8.3%) higher than 2002 although
the latter included £11 million of reorganisation costs in AgustaWestland. The
translational impact of currency was £1 million favourable while acquisitions
added £2 million. Excluding these factors together with the  2002 reorganisation
costs, profits decreased by £4 million largely as a consequence of the slightly
lower levels of activity in AgustaWestland.


Aerospace Services


Products and markets


GKN Aerospace Services manufactures structural components, assemblies and
systems for aircraft and aero-engine manufacturers, and provides a range of
engineering services, for both military and civil aerospace markets. Currently,
sales are 70% to military and 30% to civil markets.


At present, the aerostructures market is fragmented with most of the production
currently in-house by the aircraft manufacturers. We believe that as these
companies look to outsource this manufacturing and supply chain management
responsibility, additional growth opportunities will arise. In addition, our
leading position in advanced composite technologies will position us to benefit
from the accelerating trend toward increased composite usage on new military and
civil aircraft.


Overall, the market for civil aircraft is not expected to improve in 2004, with
no significant recovery expected until 2006. Military markets, however, remain
solid with the US defence budget expected to grow by some 4% annually to the end
of the decade.


2003 highlights


Sales of £559 million were exactly the same as in 2002. The effect of currency
on translation of sales revenue was £30 million negative, while the impact of
2002 and 2003 acquisitions was £16 million.  Eliminating these factors, sales
were £14 million (2.6%) higher than 2002.


Profits for the year of £23 million compared with £25 million in 2002. With some
two thirds of its sales and almost all of its operating profit generated in the
US, Aerospace Services operating profit was significantly impacted by the fall
in the US dollar against the pound with an adverse translational currency effect
of £4m.  This was partially offset by the £2 million contribution from
acquisitions. Half of this was from the Pilkington Aerospace business acquired
in  October 2003, which performed well in its first 3 months of GKN ownership.
Actions to integrate it and GKN's existing canopies business are proceeding
apace.


At constant exchange rates and excluding acquisitions, profits were level with
2002. The military side of the business continued to perform steadily,
particularly the St. Louis facility acquired from Boeing as an outsourcing in
2001, which successfully secured further contract life extensions on several of
its major programmes.  Costs were incurred on the supporting advanced design and
development work on the new Joint Strike Fighter (JSF) programme.


However the civil business, which over the last two years has successfully
reduced its costs base to significantly lower levels, saw further weakness in
its markets and also absorbed the costs of development work on new programmes
including on the A380 Airbus aircraft.


As part of the normal annual review of fixed asset carrying values, and in the
light of specific trading performance at one of our US operations, it was
considered appropriate to make a goodwill impairment charge of £8 million.



During the year, the division has been successful in winning business both for
Airbus and on the F-35 JSF.  At the end of the year the weighted average value
for GKN on the Airbus 380 was US$2.0 million per aircraft and on the JSF US$0.4
million whilst the estimated future value of our work on all US Department of
Defense programmes was US$6 billion.


The acquisition of the Pilkington Aerospace business, which was completed at the
beginning of October, positions the division as the market leader in military
transparencies and as a strong number two in the civil market.


AgustaWestland


Products and markets


AgustaWestland, which was formed as a 50/50 joint venture between GKN and
Finmeccanica SpA of Italy at the beginning of 2001, manufactures a range of
medium to heavy-lift helicopters and provides engineering support and training
services.  It is one of the world's largest helicopter suppliers by sales
revenue with approximately 80% being to military and 20% to civil markets.
Approximately 60% of current revenue reflects aircraft production and 40%
engineering support and training.  The company's market is largely defined by
national government budgets and programmes. The main global influence is US
Department of Defense spending, where there are a number of major programmes
which will be initiated in the next two or three years. In addition, there are
market opportunities for the company's products in both Europe and South East
Asia.


2003 highlights


GKN's share of sales revenue in 2003 of £876 million was £11 million above the
2002 figure. There was, however, a £30 million benefit from currency translation
and, excluding this, sales were £19 million (2.1%) lower, largely as a
consequence of the completion of the EH101 for the UK Ministry of Defence during
the early part of the year and the mix of production on other contracts.

Operating profit of £102 million was £9 million above last year's figure of £93
million, which contained an £11 million charge for the reorganisation of the
company's UK facilities. Excluding this and the £5 million favourable impact
from currency translation the profit was £7 million (6.4%) lower than last year.


Helicopter deliveries in the year included 7 EH101s and 25 Apaches. It is
expected that the final 6 Apaches for the UK army will be delivered in the first
half of 2004. The value of orders received during the year was £1.2 billion and
at the year end the order book stood at £4.4 billion. Looking forward, it is
anticipated that 2004 revenue and profit will be slightly lower than 2003 with
further reduction in 2005 before new programmes start to come on stream in 2006.

OTHER FINANCIAL MATTERS


Accounting policies

No new accounting policies have been adopted in the year.


Treasury management

GKN co-ordinates all treasury activities through a central function whose
purpose is to manage the financial risks of the Group as described below and to
secure short- and long-term funding at the minimum cost to the Group. The
central treasury function operates within a framework of clearly defined Board
approved policies and procedures, including permissible funding and hedging
instruments, exposure limits and a system of authorities for the approval and
execution of transactions. It operates on a cost centre basis and is not
permitted to make use of financial instruments or other derivatives other than
to hedge identified exposures of the Group. Speculative use of such instruments
or derivatives is not permitted, and none has occurred during the year.


The central treasury function prepares a formal twice-yearly report to the
Board, and prepares formal monthly reports for the Finance Director and other
senior executives of the Group. In addition, the gross and net indebtedness of
the Group is reported on a weekly basis to the Chief Executive and the Finance
Director, whilst liquidity, interest rate, currency and other financial risk
exposures are monitored daily. The central treasury function is subject to an
annual internal and annual external review of controls.


Funding and liquidity

The Group funds its operations through a mixture of retained earnings and
borrowing facilities, including bank and capital markets borrowings and leasing.
The relative proportions of equity and borrowings are governed by specific Board
approved parameters. These are designed to preserve prudent financial ratios,
including interest, dividend and cash flow cover, whilst also minimising the
overall weighted average cost of capital to the Group.


All the Group's borrowing facilities are arranged by the central treasury
function and the funds raised are then lent to operating subsidiaries on
commercial arm's-length terms. In some cases operating subsidiaries have
external borrowings, but these are supervised and controlled centrally. The
Group's objective is to maintain a balance between continuity of funding and
flexibility through borrowing at a range of maturities from both capital markets
and bank sources.


Bank borrowings are principally in the form of committed multi-currency
bilateral revolving credit facilities with a group of relationship banks, and
with a range of maturities from 364 days to four years. Borrowings under these
facilities are unsecured and were denominated in euro and Japanese yen at 31
December 2003.


Capital markets borrowing includes unsecured issues of £350 million 6.75% bonds
maturing in 2019 and £325 million 7% bonds maturing in 2012.


At the year-end the Group had committed borrowing facilities of £1,526 million,
of which £880 million was drawn. The weighted average maturity profile of the
Group's committed borrowings was 10.6 years.  This leaves the Group well placed
to fund its strategic growth plans and to withstand any sudden changes in
liquidity in the financial markets.


The Group also has access to substantial lines of uncommitted funds which are
used principally to manage day-to-day liquidity. Wherever practicable, pooling,
netting or concentration techniques are employed to minimise gross debt.


Risk management

The Group is exposed to a variety of market risks, including the effects of
changes in foreign currency exchange rates and interest rates. In the normal
course of business, the Group also faces risks that are either non-financial or
non-quantifiable, including country and credit risk.


The Group uses interest rate swaps, swaptions, forward rate agreements, netting
techniques and forward exchange contracts to manage the primary market exposures
associated with its underlying assets, liabilities and anticipated transactions.


Counterparty credit risk

The Group is exposed to credit-related losses in the event of non-performance by
counterparties to financial instruments. Credit risk is mitigated by the Group's
policy of only selecting counterparties with a strong investment graded
long-term credit rating, normally at least AA- or equivalent, and assigning
financial limits to individual counterparties.


Interest rate risk

The Group operates an interest rate policy designed to optimise interest cost
and reduce volatility in reported earnings. This policy is achieved by
maintaining a target range of fixed and floating rate debt for discrete annual
periods, over a defined time horizon. This is achieved partly through the fixed
rate character of the underlying debt instrument, and partly through the use of
straightforward derivatives (forward rate agreements, interest rate swaps and
swaptions).   The Group's current policy is to require interest rates to be
fixed for 30% to 70% of the level of underlying borrowings forecast to arise
over a 12-month horizon.


The timing of cash flows at the year end resulted in 76% of the Group's gross
financial liabilities at fixed rates of interest, however this was reduced below
the 70% ceiling during the first few weeks of 2004. The weighted average period
in respect of which interest has been fixed was 11.9 years.


Currency risk

The Group has transactional currency exposures arising from sales or purchases
by operating subsidiaries in currencies other than the subsidiaries' functional
currency. Under the Group's foreign exchange policy, such transaction exposures
are hedged once they are known, mainly through the use of forward foreign
exchange contracts. The level of hedges may be varied from time to time as the
volume of underlying trading also varies. Differences arising on such variations
are taken to the profit and loss account either as a credit or a charge.


The Group has a significant investment in overseas operations, particularly in
continental Europe, and the Americas. As a result, the sterling value of the
Group's balance sheet can be affected by movements in exchange rates. The Group
therefore seeks to mitigate the effect of these translational currency exposures
by matching the net investment in overseas operations with borrowings
denominated in their functional currencies, except where significant adverse
interest differentials or other factors would render the cost of such hedging
activity uneconomic. This is achieved by borrowing either directly (in either
the local domestic or eurocurrency markets), or indirectly through the use of
rolling annual forward foreign exchange contracts. Borrowings created through
the use of such contracts amounted to £597 million at 31 December 2003 and were
denominated in US dollars (64%) and euro (36%). These amounts are less than the
full value of the Group's balance sheet held in those currencies since, during
2003, the Board decided to restrict the level of hedging to ensure that the
Group's total level of borrowings would not be overly sensitive to any exchange
rate movement.


Pensions and post-retirement benefits

Pension costs in these accounts have been accounted for on an SSAP 24 basis. The
total charge to Group profit in respect of defined benefit schemes was £68
million (2002 - £49 million). The increase, which was predicted in last year's
annual report, arose largely as a consequence of the triennial valuation of the
UK scheme which took place during the course of the year and which is discussed
in more detail below and in note 5 to the financial information attached.
Because the valuation applied for only part of the year there will be a further
increase in the charge in 2004 when it is anticipated that the equivalent charge
for pensions and post-retirement liabilities will be in the region of £86
million, of which £40 million will be in respect of pension deficit charges in
the UK. It is not possible to give guidance beyond the current year as,
following the implementation of International Financial Reporting Standards
(IFRS) in 2005, the cost of pensions will be reported on a different basis.


In line with guidance from the Accounting Standards Board and because of the
uncertainty surrounding the eventual IFRS on pensions, the Group has not adopted
FRS 17 in the 2003 accounts, but is disclosing fully the effects had it done so.
These are shown in note 5 to the financial information attached which covers
both the balance sheet and profit and loss account impacts.


UK Pensions

Much of the external focus is on the Group's UK pension scheme which has
approximately 60,000 members of whom only 10% are currently in service with the
remainder either deferred or current pensioners. As a UK defined benefit scheme,
this is run on a funded basis with funds set aside in trust to cover future
liabilities to members. An actuarial valuation of the scheme was carried out
during the year which showed the aggregate funding on an ongoing basis was 69%.
As a consequence, the Group has raised its annual cash payment to the fund to
£54 million. This figure is expected to apply at least until the next valuation
in three years time and is £21 million higher than in 2002 (which had already
been increased by £10 million in anticipation of the review). Employees have
also increased their contributions to reflect the higher cost of providing
future benefits.


Under SSAP 24 the charge to profit for the UK scheme was £33 million (2002 - £17
million), analysed as £10 million in respect of current service and £23 million
in respect of the deficit. Because of the materiality of the deficit and since
it relates in large part to employees of companies which are no longer part of
the Group, it is shown separately in the segmental analysis to enable underlying
performance to be better understood. Prior year figures have been restated
accordingly.


Overseas Pensions

The charge for overseas post-retirement benefits under SSAP 24 was £35million
and the charge for 2004 is expected to remain at around this level.


During 2003 the Group took advantage of its good cash position and 'bought out'
an unfunded pension obligation in one of its European companies.


FRS 17 also values post-retirement benefits outside the UK, including those
countries where schemes are unfunded and it is already the practice to provide
for the liability in the balance sheet.

The principal regions involved are the US and continental Europe and the
detailed assumptions underlying the FRS 17 additional net liabilities in those
territories, of £37 million and £28 million respectively, are set out in the
note to the accounts.


Summary

In total, at 31 December 2003 on the FRS 17 basis, there was a net additional
liability on all pension/post-retirement obligations of £563 million (2002 -
£527 million) in addition to the net £138 million (2002 - £157 million) already
included in long-term liabilities/prepayments on the balance sheet. This net
liability arises after a deferred tax credit of £203 million (2002 - £202
million) which, it should be noted, is restricted by the forecast availability
of UK taxable profits.


Joint Ventures

The equity value of joint ventures will also be affected by the implementation
of FRS 17 and the adjustment at the end of 2003 would have reduced shareholders'
funds by £54 million (2002 - £58 million).


International Financial Reporting Standards

The European Union requires all listed companies to report under International
Financial Reporting Standards (IFRS) for accounting periods commencing on or
after 1 January 2005 with prior year comparatives on the same basis.


In 2002 the Group initiated a project to review the requirements of IFRS,
recommend appropriate accounting policies for consideration by the Audit
Committee, and identify their impact on Group results and Balance Sheet. The
project operates under a steering committee chaired by the Group Finance
Director and consisting of divisional finance directors together with other
senior employees with responsibility for external and internal reporting and
systems development and implementation.


A number of working parties containing representatives from line and central
financial management were established to consider all IFRS requirements. With
the exception of those considering areas where standards have not yet been
finalised all working parties have identified the key areas of difference
between IFRS and current UK GAAP which will affect the Group.


Work is continuing on developing appropriate policies. Once this is completed
the systems requirements will be finalised, appropriate training programmes will
be established and an estimate of the impact on the Group's reported results
evaluated.  With several accounting standards still to be finalised, it is too
early to predict the results of this evaluation although it is already clear
that the adoption of IFRS will undoubtedly introduce more volatility into
company accounts in general.


Financial resources and going concern

At 31 December 2003 the Group had available, but undrawn, committed borrowing
facilities totalling £646 million.


Having assessed the future funding requirements of the Group, the Directors are
of the opinion that it is appropriate for the accounts to be prepared on a going
concern basis.


Cautionary statement


This press announcement contains forward looking statements that are subject to
risk factors associated with, amongst other things, the economic and business
circumstances occurring from time to time in the countries and sectors in which
the Group operates. It is believed that the expectations reflected in these
statements are reasonable but they may be affected by a wide range of variables
which could cause actual results to differ materially from those currently
anticipated.









APPENDICES


These appendices do not form the statutory accounts of the Group.  The statutory
accounts for the year ended 31 December 2002 have been filed with the Registrar
of Companies and contained an unqualified audit report.  The audited results for
2003 were approved by the Board on 27 February 2004 and have been agreed with
the auditors.

                                                                       Page
                                                                       number
GKN consolidated financial information

Consolidated profit and loss account for the year ended
31 December 2003                                                            19

Consolidated balance sheet at 31 December 2003                              20

Statement of total recognised gains and losses                              21

Reconciliation of movement in shareholders' equity                          21

Movement in net debt                                                        21

Consolidated cash flow statement for the year ended 31 December 2003      22-23

Segmental analysis                                                          24

Notes                                                                     25-30





Consolidated Profit and Loss Account
For the year ended 31 December 2003
                            ----------------------------------------------------

                                                       Continuing operations
                                                                 2003     2002
                                               Notes               £m       £m
           ----------------------------------- ------      ---  -------  -------
Sales
Subsidiaries                                                    3,334    3,305
Share of joint ventures                                         1,064    1,051
Share of associates                                               187       96
-----------------------------------------                       -------  -------
                                                                4,585    4,452
--------------------------------------------------------------  -------  -------
Operating profit
Subsidiaries:
                                                                -------  -------
      Before goodwill amortisation and impairment and             168      196
      exceptional items
      Goodwill amortisation                                       (31)     (31)
      Goodwill impairment                                         (91)     (11)
      Exceptional items                            2                -      (37)
                                                                -------  -------
      Total subsidiaries                                           46      117
                                     
Share of joint ventures:                                        -------  -------
      Before goodwill amortisation                                129      116
      Goodwill amortisation                                        (6)      (6)
                                                                -------  -------
      Total share of joint ventures                               123      110
Share of associates                                                 5        3
----------------------------------------                   ---  -------  -------
Total operating profit                                            174      230
Exceptional items
Profits less losses on sale or closure of businesses:

      Subsidiaries                                 2               (4)      (2)
      Associated company                           2               59        -
----------------------------------------                   ---  -------  -------
Profit before interest and taxation                               229      228
Net interest payable:
      Subsidiaries                                                (56)     (47)
      Share of joint ventures and associates                        -       (1)

 ---- --------------------------------------                    -------  -------
Profit on ordinary activities before taxation                     173      180
Taxation                                                          (70)     (77)
----------------------------------------                   ---  -------  -------
Profit on ordinary activities after taxation                      103      103
Minority interests - equity                                        (2)      (3)
----------------------------------------                   ---  -------  -------
Earnings of the year                                              101      100
Dividends                                          3              (85)     (83)
-----------------------------------             ------
                                                                -------  -------
Transfer to reserves                                               16       17
----------------------------------------                   ---  -------  -------

Earnings per share - p                             4             13.8     13.7
-----------------------------------             ------     ---  -------  -------
Diluted earnings per share - p                     4             13.7     13.6
-----------------------------------             ------     ---  -------  -------
                            ----------------------------------------------------

Results before goodwill amortisation and impairment
and exceptional items
Operating profit - £m                                             302      315
Profit before tax - £m                                            246      267
Earnings per share - p                             4             22.8     25.2
 ----       ----------------------------------  ------     ---  -------  -------



Consolidated Balance Sheet
At 31 December 2003
                   --------------------------------------    -------    -------
                                                              2003       2002
                                                                £m         £m
                   --------------------------------------    -------    -------
Fixed assets
Intangible assets - goodwill                                   340        470
Tangible assets                                              1,329      1,374
--------------------------------------                       -------    -------
                                                             1,669      1,844
                   --------------------------------------    -------    -------
Investments
        Joint ventures:
        Share of gross assets                                1,201      1,198
        Share of gross liabilities                            (944)      (972)
   ---- -------------------------------------                -------    -------
                                                               257        226
        Associates                                              29         39
        Other investments                                        6         17
   ---- -------------------------------------                -------    -------
                                                               292        282
--------------------------------------                       -------    -------
Total fixed assets                                           1,961      2,126
--------------------------------------                       -------    -------
Current assets
Stocks                                                         487        488
Debtors                                                        630        561
Cash at bank and in hand                                       131        105
--------------------------------------                       -------    -------
                                                             1,248      1,154
--------------------------------------                       -------    -------
Creditors: amounts falling due within one year
Short-term borrowings                                          (36)       (43)
Creditors                                                     (760)      (772)
Taxation payable                                              (166)      (182)
Dividend payable                                               (57)       (56)
--------------------------------------                       -------    -------
                                                            (1,019)    (1,053)
 --------------------------------------                      -------    -------
Net current assets                                             229        101
--------------------------------------                       -------    -------
Total assets less current liabilities                        2,190      2,227
Creditors: amounts falling due beyond one year
Term loans and obligations under finance leases               (887)      (894)
Provisions for liabilities and charges                        (361)      (373)
--------------------------------------                       -------    -------
Net assets                                                     942        960
--------------------------------------                       -------    -------

Capital and reserves
Called up share capital                                        367        366
Share premium account                                           14         13
Revaluation reserve                                             40         45
Other reserves                                                 (96)       (81)
Profit and loss account                                        601        607
--------------------------------------                       -------    -------
Equity interest                                                926        950
Minority interest - equity                                      16         10
--------------------------------------                       -------    -------
                                                               942        960
--------------------------------------                       -------    -------



Statement of total recognised gains and losses
For the year ended 31 December 2003
                    ----------------------------------------  --------  --------
                                                                2003      2002
                                                                  £m        £m
                    ----------------------------------------  --------  --------
Earnings of the year
Subsidiaries                                                       5        26
Share of joint ventures                                           92        71
Share of associates                                                4         3
----------------------------------------                      --------  --------
                                                                 101       100
Currency variations                                              (41)      (43)
Other reserve movements                                           (1)       (4)
----------------------------------------                      --------  --------
Total recognised gains and losses of the year                     59        53
----------------------------------------                      --------  --------

Earnings of the year on an historical cost basis are not materially different
from those reported above.

Reconciliation of movements in shareholders' equity
For the year ended 31 December 2003
                            
                                                                2003      2002
                                                                  £m        £m
----------------------------------------                      --------  --------
Total recognised gains and losses of the year                     59        53
Dividends                                                        (85)      (83)
Issue of Ordinary Shares net of costs                              2        12
Formation of AgustaWestland                                        -        (2)
----------------------------------------                      --------  --------
Total decrease                                                   (24)      (20)
Shareholders' equity at 1 January                                950       970
----------------------------------------                      --------  --------
Shareholders' equity at 31 December                              926       950
----------------------------------------                      --------  --------

Movement in net debt
For the year ended 31 December 2003
                    
                                                                2003      2002
                                                                  £m        £m
----------------------------------------                      --------  --------
Increase/(decrease) in cash                                       28       (74)
Increase in liquid resources and financing                         6        60
----------------------------------------                      --------  --------
Cash inflow/(outflow) before use of liquid resources and          34       (14)
financing
Currency variations                                               13        66
Net proceeds of Ordinary Share issues                              2         9
New finance leases                                                (1)        -
Subsidiaries acquired and sold                                    (7)      (10)
----------------------------------------                      --------  --------
Total decrease                                                    41        51
Net borrowings at 1 January                                     (834)     (885)
----------------------------------------                      --------  --------
Net borrowings at 31 December                                   (793)     (834)
----------------------------------------                      --------  --------




Consolidated cash flow statement
For the year ended 31 December 2003
                  
                                                                2003      2002
                                                                  £m        £m
 -----------------------------------------                     -------   -------
Net cash inflow from operating activities (note a)               287       361
-----------------------------------------                      -------   -------
Dividends from joint ventures and associates                      68        45
-----------------------------------------                      -------   -------
Returns on investments and servicing of finance
Interest received                                                 17        22
Interest paid                                                    (70)      (56)
Dividends paid to minority interests                              (1)       (1)
-----------------------------------------                      -------   -------
                                                                 (54)      (35)
-----------------------------------------                      -------   -------
Taxation
United Kingdom                                                     -         -
Overseas                                                         (63)      (38)
-----------------------------------------                      -------   -------
                                                                 (63)      (38)
-----------------------------------------                      -------   -------
Capital expenditure and financial investment
Purchase of tangible fixed assets                               (162)     (213)
Sale of tangible fixed assets                                     13        20
Investment loans and capital contributions                        (4)        1
Other financial investments                                        4         -
-----------------------------------------                      -------   -------
                                                                (149)     (192)
 -----------------------------------------                     -------   -------
Acquisitions and disposals
Purchase of subsidiaries                                         (45)      (47)
Purchase of joint ventures and associates                         (1)      (37)
Sale of subsidiaries                                               2         9
Sale of associated company                                        73         -
-----------------------------------------                      -------   -------
                                                                  29       (75)
-----------------------------------------                      -------   -------
Equity dividends paid                                            (84)      (80)
-----------------------------------------                      -------   -------

Cash inflow/(outflow) before use of liquid resources and          34       (14)
financing                                                      -------   -------
-----------------------------------------

Management of liquid resources
Increase in short-term loans and deposits                        (32)      (61)
Decrease in short-term loans and deposits                         28        53
-----------------------------------------                      -------   -------
                                                                  (4)       (8)
-----------------------------------------                      -------   -------
Financing
Net proceeds of Ordinary Share issues                              2         9
Proceeds of other term borrowings                                497     1,402
Repayment of other term borrowings                              (498)   (1,460)
Finance leases                                                    (3)       (3)
-----------------------------------------                      -------   -------
                                                                  (2)      (52)
-----------------------------------------                      -------   -------
Increase/(decrease) in cash                                       28       (74)
-----------------------------------------                      -------   -------




(a)   Net cash inflow from operating activities
      For the year ended 31 December 2003
   
                                                             2003         2002
                                                               £m           £m
   ------------------------------------                     -------     --------
      Operating profit                                         46          117
      Depreciation                                            182          177
      Goodwill amortisation                                    31           31
      Impairment of goodwill                                   91           11
      Profit on sale of tangible fixed assets                  (5)          (6)
      Impairment of tangible fixed assets                       2            4
      Decrease/(increase) in stocks                             4           (5)
      Increase in debtors                                     (43)         (10)
      (Decrease)/increase in creditors                        (24)          44
      (Decrease)/increase in provisions                        (3)           8
      Increase/(decrease) in customer advances                  9           (4)
      Exceptional items (note 2)                               (3)          (6)
      ------------------------------------                  -------     --------
      Net cash inflow from operating activities               287          361
      ------------------------------------                  -------     --------

Note:
      Included in cash inflow from operating activities is expenditure of £13
      million (2002- £52 million)
      in respect of operating exceptional items.


Segmental analysis
----------------------------------------------------
                              ------------       --- -----------       --- ------------
                              Sales                  Operating profit      Net operating
                              ------------           *                     assets
                                                     -----------           ------------
                                        -------       -------               -------  -------
                                2003     2002          2003    2002          2003     2002
                                  £m       £m            £m      £m            £m       £m
        ---------------------  -------  -------  ---  -------  ------  ---  -------  -------
By business
Automotive:
      Subsidiaries             2,775    2,746           168     177         1,333    1,290
      Joint ventures             162      161            26      23            83       85
      Associates                  99       43             1       1            45       41
 ---- -------------------      -------  -------  ---  -------  ------  ---  -------  -------
                               3,036    2,950           195     201         1,461    1,416
        ---------------------  -------  -------  ---  -------  ------  ---  -------  -------
Aerospace:
      Subsidiaries               559      559            23      25           347      353
      Joint ventures             902      890           103      93           383      243
      Associates                  88       53             4       2             -       (6)
 ---- -------------------      -------  -------  ---  -------  ------  ---  -------  -------
                               1,549    1,502           130     120           730      590
 ----     -------------------  -------  -------  ---  -------  ------  ---  -------  -------
UK pension deficit                 -        -           (23)     (6)            -        -
---------------------          -------  -------  ---  -------  ------  ---  -------  -------
Sub-total                      4,585    4,452           302     315         2,191    2,006
      Goodwill amortisation        -        -          (128)    (48)            -        -
      and impairment
      Exceptional items            -        -             -     (37)            -        -
 ---- -------------------      -------  -------  ---  -------  ------  ---  -------  -------
Group total                    4,585    4,452           174     230         2,191    2,006
---------------------          -------  -------  ---  -------  ------  ---  -------  -------
By region of origin
Europe:
      Subsidiaries             1,801    1,687           133     129           902      837
      Joint ventures             947      933           108      99           410      272
      Associates                  88       53             4       2             -       (6)
 ---- -------------------      -------  -------  ---  -------  ------  ---  -------  -------
                               2,836    2,673           245     230         1,312    1,103
 ----     -------------------  -------  -------  ---  -------  ------  ---  -------  -------
Americas:
      Subsidiaries             1,244    1,349            42      54           681      724
      Joint ventures              46       62             8      10            27       32
 ---- -------------------      -------  -------  ---  -------  ------  ---  -------  -------
                               1,290    1,411            50      64           708      756
 ----     -------------------  -------  -------  ---  -------  ------  ---  -------  -------
Rest of the World:
      Subsidiaries               289      269            16      19            97       82
      Joint ventures              71       56            13       7            29       24
      Associates                  99       43             1       1            45       41
 ---- -------------------      -------  -------  ---  -------  ------  ---  -------  -------
                                 459      368            30      27           171      147
 ----     -------------------  -------  -------  ---  -------  ------  ---  -------  -------
UK pension deficit                 -        -           (23)     (6)            -        -
---------------------          -------  -------  ---  -------  ------  ---  -------  -------
                                                                                     -------
                               4,585    4,452           302     315         2,191    2,006
 ----     -------------------  -------  -------  ---  -------  ------  ---  -------  -------
*     Operating profit for 2002 has been re-analysed to show separately the 
      charge in respect of the UK pension deficit, most of which relates to 
      businesses which are no longer part of the Group.
Notes:
  1   The analyses of operating profit by business and by region of origin 
      include an allocation of costs incurred in the United Kingdom other than 
      the pension deficit noted above.
  2   Intra-group sales between businesses and regions are not significant.
  3   Operating profit/(loss) after charging goodwill amortisation and 
      impairment and exceptional items is analysed by business as follows: 
      Automotive £89 million (2002 - £143 million), Aerospace £108 million 
      (2002 - £93 million) and UK pension deficit £(23)million 
      (2002 - £(6)million) and by region of origin as follows: 
      Europe £212 million (2002 - £192 million), Americas £(66) million 
      (2002 - £19 million) and Rest of the World £28 million 
      (2002 - £25 million).
  4   Net operating assets are analysed as follows:
                                                                            2003      2002
                                                                              £m        £m
      Tangible fixed assets                                                1,329     1,374
      Stocks                                                                 487       488
      Debtors                                                                623       551
      Creditors - short-term                                                (759)     (770)
                                                                           -------   -------
      Total subsidiaries                                                   1,680     1,643
      Net operating assets of joint ventures and associates                  511       363
                                                                           -------   -------
                                                                           2,191     2,006
                                                                           -------   -------



 1.  Basis of preparation
     The financial information comprises the consolidated profit and loss
     account, consolidated balance sheet and consolidated cash flow statement
     and notes thereto which have been extracted from the audited financial
     statements.

     There have been no changes in accounting policy in the year.

     The exchange rates used for the currencies most important to the Group's
     operations are:
     --------------------------------------------------
                                                                  --------    -------
                                                                  £1=euro     £1=US$
                                                                  --------    -------
     2003 average                                                      1.45      1.64
     2002 average                                                      1.59      1.50
     2003 year-end                                                     1.42      1.79
     2002 year-end                                                     1.53      1.61
     --------------------------------------                          --------   -------

 2.  Exceptional items
     --------------------------------------------------
                                                                                -------
                                                                        2003     2002
                                                                          £m       £m
  --------------------------------------                              --------  -------
     a)    Operating exceptional items
           Asset impairments                                               -      (14)
           Redundancy costs                                                -      (15)
           Other                                                           -       (8)
                                                                                 -------
                                                                           -      (37)
--------------------------------------                                 --------  -------

     Operating exceptional items in 2002 arose from the substantial downturn in 
     civil aviation markets and uncertainties surrounding North American vehicle
     production levels which were apparent in the second half of 2001, as a 
     result of which the Group took steps to reduce capacity in a number of
     Aerospace and Automotive plants. A reassessment was also made of the 
     carrying value of certain Aerospace assets.

     These actions resulted in a charge to operating profit of £106 million in 
     2001 and a further £37 million in 2002 in respect of actions which had not 
     been announced by 31 December 2001 and could not, therefore, be accrued.  
     The cash outflow from these and earlier actions was £13 million in 2003,
     £52 million in 2002 and £27 million in 2001.
                            --------------------------------------    --------  -------
                                                                        2003     2002
                                                                          £m       £m
                            --------------------------------------    --------  -------
     b)    Non-operating exceptional items - Profits less losses
           on sale or
           closure of businesses

     i)    Subsidiaries                                                   (4)      (2)
     ----  -------------------------------------                       -------  -------

     ii)   Sale of shares in associated company - Alvis plc               59        -
     ----  -------------------------------------                       -------  -------

     There was no goodwill previously written off to reserves on the businesses 
     sold or closed during the year.

     Losses on sale of subsidiaries includes provisions relating to a small 
     operation where divestment was ongoing at the date these accounts were 
     signed and completion is expected in the first quarter of the year.

     There was a £3 million cash outflow in 2003 in respect of a prior year 
     business closure.



 3.  Dividends

                                                                 2003     2002
                                                                   £m       £m
                                                                -------  -------
                                                                         
     Equity dividends
     Interim (paid 30 September 2003) 3.8p per share (2002 -       28       27
     3.7p per share)
     Final 7.8p per share (2002 - 7.6p per share)                  57       56
     ----------------------------------------                   -------  -------
                                                                   85       83
                                                                -------  -------

 4.  Earnings per share
     Earnings per share for 2003 are based on earnings of the year of £101
     million (2002 - £100 million) and calculated on the weighted average number
     of  733.0 million shares in issue and ranking for dividend
     (2002 - 729.2 million shares).  Diluted earnings per share, which takes
     into account options over GKN plc shares, is calculated on the weighted 
     average number of  736.1 million (2002 - 734.6 million) shares.

     Earnings per share before goodwill amortisation and impairment and
     exceptional items, which the Directors consider gives a useful additional 
     indication of underlying performance, is calculated on the earnings of the 
     year adjusted as follows:

                                          ----------          -----------
                                          Earnings             Earnings per
                                          ----------           share
                                                               -----------
  
                                           2003    2002          2003     2002
                                             £m      £m             p        p
           ------------------------------  ------  ------  --- -------  -------
     Earnings of the year                   101     100          13.8     13.7
     Included in operating profit:
     Goodwill amortisation                   37      37           5.0      5.1
     Goodwill impairment                     91      11          12.4      1.4
     Exceptional items                        -      37             -      5.1
     Non-operating exceptional items        (55)      2          (7.5)     0.3
     Deferred tax attributable to            (9)      -          (1.2)       -
     goodwill impairment
     Tax attributable to exceptional          
     items                                    2      (3)          0.3     (0.4)
     -------------------------------        -----  ------  ---  -------  -------
     Earnings before goodwill
     amortisation and impairment and
     exceptional items                      167     184          22.8     25.2
     ------------------------------        ------  ------  ---  -------  -------





 5.  Post-retirement benefits

     The Group's pension arrangements comprise various defined benefit and 
     defined contribution schemes throughout the world.

     In the UK, pension arrangements are made through an externally funded 
     defined benefit scheme. An independent actuarial valuation of the scheme 
     was carried out as at April 2003 using the projected unit method. The 
     market value related basis assumed a yield pre-retirement of 7.5% per 
     annum, which exceeded the annual rate of increases in pensionable salaries 
     by 3.4% (2.65% in respect of future service) with a yield post-retirement 
     of 5% per annum (4.75% in respect of future service), which exceeded 
     pension increases by 2.4% (2.15% in respect of future service). The
     aggregate market value of the assets at the valuation date was £1,297 
     million and the aggregate funding level on an ongoing basis was 69%.

     Company contributions in the year to the UK scheme totalled £54 million 
     (2002 - £33 million) compared with the regular cost in accordance with the 
     application of SSAP 24 of £10 million (2002 - £11 million). The total 
     charge to operating profit was £33 million (2002 - £17 million). There were
     no curtailment costs charged against exceptional items in respect of 
     closure of businesses (2002 - £3 million). A cumulative advance payment of 
     £93 million is included in long-term debtors (2002 - £72 million).

     In certain overseas companies funds are retained within the business to 
     provide for retirement obligations. The annual charge to provide for these 
     obligations, which is determined in accordance with actuarial advice or
     local statutory requirements, amounted to £35 million (2002 - £31 million).

     The Group operates a number of retirement plans which provide certain 
     employees with post-retirement healthcare benefits. The liability for 
     providing these benefits is recognised on an actuarial basis and included 
     in post-retirement and other provisions.  The principal actuarial 
     assumptions for the main UK plan as at December 2000, the date of the last 
     review, were that the discount rate would be 7% per annum and that medical
     costs would initially increase by 8%  per annum for three years falling to 
     4.5% over the next five years.

     The Group operates a number of small defined contribution schemes outside 
     the United Kingdom. The charge to the profit and loss account in the year 
     was £4 million (2002 - £4 million). There were no outstanding or prepaid
     contributions at the balance sheet date.

     The following information is given in accordance with the transitional 
     arrangements of FRS 17

     Actuarial assessments of all the principal defined benefit post-retirement 
     plans were carried out as at 31 December 2003.
     The major assumptions used were:
      ---------------  ----  ------    -------  ---  ----  ------    -------  ---  ----  ------  -------
                                        2003                          2002                        2001
                                 -------------                 -------------               -------------
                              ------                        ------  ------        ------  ------  ------
                      UK      USA     Europe        UK      USA     Europe        UK      USA     Europe
                          %       %        %            %       %        %            %       %      %
      ---------------  ------  ------   ------  ---  ------  ------   ------  ---  ------  ------ ------
     Rate of increase   4.3     3.5      3.0          3.9     3.5      3.0          4.0     3.5    3.0
     in salaries
     Rate of increase
     in pensions in
     payment            2.8     2.5      1.5          2.4     2.5      2.0          2.5     2.5    2.0
     Discount rate      5.4     6.0      5.5          5.5     6.5      5.5          6.0    7.25    6.0
     Inflation          2.8     2.4      1.5          2.4     2.4      2.0          2.5     2.5    2.0
     assumption        ------  ------   ------  ---  ------  ------   ------  ---  ------  ------ ------
     ---------------
     Rate of
     increases in
     medical costs:
     initial/         9.5/    8.5/    n/a           8.0/    8.5/    n/a           8.0/    9.0/    n/a
     long-term        4.3     5.0     ------    --- 3.9     5.0     ------    --- 4.5     5.0     ------
     ---------------  ------  ------                ------  ------                ------  ------

     In the UK the rate of increase in medical costs is assumed to be fixed for 
     the next three years and thereafter tapers down over a further five years 
     to the long-term rate.  In the US the rate is assumed to reduce by 0.5 
     percentage points per annum over a seven year period.







 5.  Post-retirement benefits continued
     The fair value of the assets in the schemes and the expected rates of 
     return were:
     -------------------------------------------------
                    -------------          --- -------------              --- --------------
                    UK                         USA                            Europe
                    -------------              -------------                  --------------
                                 --------      --------                       -------      --------
                    Long-term                  Long-term                      Long-term
                    rate of                    rate of                        rate of
                    return                     return                         return
                    expected    Value          expected    Value              expected    Value
                            %        £m                %            £m                %        £m
      -------------     -------  --------  ---    --------       -------  ---     -------  --------
     At 31 December
     2003
     Equities             7.5       941              8.5            84                -         -
     Bonds                4.8       417              5.0            33              4.5         9
     Property             7.0        70                -             -                -         -
     Cash                 4.0        18              3.5             1                -         -
     Other assets         5.4        42                -             -              5.5        11
     -------------      -------  --------  ---    --------       -------  ---     -------  --------
                                  1,488                            118                         20
      -------------     -------  --------  ---    --------       -------  ---     -------  --------

     At 31 December
     2002
     Equities             7.5       794              8.5            67                -         -
     Bonds                4.6       414              5.0            32                -         -
     Property             7.0        59                -             -                -         -
     Cash                 4.0        37              3.5             4                -         -
     Other assets         5.4        33                -             -              6.0         7
     -------------      -------  --------  ---    --------       -------  ---     -------  --------
                                  1,337                            103                          7
      -------------     -------  --------  ---    --------       -------  ---     -------  --------

     At 31 December
     2001
     Equities             7.5       951              8.5            92                -         -
     Bonds                5.2       390              6.4            31                -         -
     Property             7.0        54                -             -                -         -
     Cash                 4.0        27              4.2             4                -         -
     Other assets         5.9        40              5.9             3              7.0         4
     -------------      -------  --------  ---    --------       -------  ---     -------  --------
                                  1,462                            130                          4
      -------------     -------  --------  ---    --------       -------  ---     -------  --------

     The overall position in respect of funded defined benefit pension schemes, 
     unfunded pension obligations and other post-retirement provisions is:
     --------------------------  ------  -------  ---  ---  ---  ----  ------------  ---
                                                31 December 2003                            31
                                                --------------------                        December
                                                         ------    -------            ------
                                                UK       USA       Europe                         2002
                                                                                      Total
                                                    £m        £m                 £m    £m           £m
                     --------------------------   ------    ------            ------- ------     --------
     Total market value of assets                1,488       118                 20   1,626        1,447
     Present value of post-retirement           (2,037)     (252)              (241) (2,530)      (2,333)
     liabilities                                  ------    ------            ------- ------     --------
     --------------------------                                                       
     Gross deficit                                (549)     (134)              (221)   (904)        (886)

     Related deferred tax credit                   131        52                 20     203          202
     --------------------------                   ------    ------            ------- ------     --------
     Net post-retirement liability                (418)      (82)              (201)   (701)        (684)

     Post-retirement liability already included     13        45                173     231          229
     in balance sheet
     SSAP 24 prepayment                            (93)        -                  -     (93)         (72)
     --------------------------                   ------    ------            ------- ------     --------
     Additional liability                         (498)      (37)               (28)   (563)        (527)
     --------------------------                   ------    ------            ------- ------     --------
                                                                                      

     If the net post-retirement liability of £563 million set out above were to 
     be recognised in the financial statements, together with deferred tax, net 
     assets and the profit and loss reserve would be as follows:
     ---------------------------------------------------
                                                                        ---------          ---------
                                                                        31 December        31 December
                                                                                    2003          2002
                                                                                      £m            £m
                                   ------------------------------------          ---------     ---------
     Net assets per balance sheet                                                    942           960
     Net post-retirement liability already included in balance sheet                 138           157
     ------------------------------------                                        ---------     ---------
     Net assets excluding net post-retirement liability                            1,080         1,117
     Net post-retirement liability under FRS 17                                     (701)         (684)
     ------------------------------------                                        ---------     ---------
     Net assets including net post-retirement liability                              379           433
     ------------------------------------                                        ---------     ---------
     Profit and loss reserve                                                         601           607
     Additional net post-retirement liability                                       (563)         (527)
     ------------------------------------                                        ---------     ---------
     Profit and loss reserve including net post-retirement liability                  38            80
     ------------------------------------                                        ---------     ---------



 5.  Post-retirement benefits continued
     Analysis of the amounts that would be charged to operating profit of
     subsidiaries
     ----------------------------------------------------
                                                                      ------   ------
                                                                      2003     2002
                                                                        £m       £m
                        -------------------------------------------   ------   ------
     Current service cost                                              (30)     (30)
     Past service cost                                                  (1)       -
     -------------------------------------------                      ------   ------
     Total operating charge                                            (31)     (30)
     -------------------------------------------                      ------   ------

     Analysis of the amounts that would be (charged)/credited to other
     finance income of subsidiaries                                            ------
     ------------------------------------------------
                                                                               ------
                                                                      2003     2002
                                                                        £m       £m
                        -------------------------------------------   ------   ------
     Expected return on pension scheme assets                           92      105
     Interest on pension scheme liabilities                           (129)    (121)
     -------------------------------------------                      ------   ------
     Net charge                                                        (37)     (16)
     -------------------------------------------                      ------   ------

     Total net charge to profit before tax under FRS 17                (68)     (46)
     Actual charge to profit before tax for the year                   (68)     (48)
     -------------------------------------------                      ------   ------
     Difference                                                          -        2
     -------------------------------------------                      ------   ------

     History of experience gains and losses that would be recognised in the 
     statement of total recognised gains and losses
                                                    2003
                   --------------------------------------- ------   ------   ------
                                                           UK       USA      Europe
                   --------------------------------------- ------   ------   ------
     Difference between the expected and the actual return on scheme assets
     Amount - £m                                              116       13        -
     Percentage of scheme assets                              7.8%    11.4%       -
     Experience gains and losses on scheme liabilities
     Amount - £m                                               13       (7)      (3)
     Percentage of the present value of scheme                0.6%    (2.7%)   (1.3%)
     liabilities
     Effect of changes in assumptions underlying the
     present value of scheme liabilities
     Amount - £m                                             (149)     (18)      (1)
     Percentage of the present value of scheme               (7.3%)   (7.4%)      -
     liabilities                                             ------   ------   ------
     ---------------------------------------
     Total amount which would have been recognised in the statement of total
     recognised gains and losses
     Amount - £m                                              (20)     (12)      (4)
     Percentage of the present value of scheme               (1.0%)   (4.7%)   (1.5%)
     liabilities                                             ------   ------   ------
     ---------------------------------------

                                                    2002
                   ---------------------------------------   ------   ------   ------
                                                              UK     USA      Europe
                   ---------------------------------------   ------   ------   ------
     Difference between the expected and the actual return
     on scheme assets
     Amount - £m                                             (251)     (28)       -
     Percentage of scheme assets                            (18.8%)  (27.2%)      -
     Experience gains and losses on scheme liabilities
     Amount - £m                                              (89)      (8)       -
     Percentage of the present value of scheme               (4.7%)   (3.4%)      -
     liabilities
     Effect of changes in assumptions underlying the
     present value of scheme liabilities
     Amount - £m                                              (80)     (24)      (5)
     Percentage of the present value of scheme               (4.2%)  (10.2%)   (2.4%)
     liabilities                                             ------   ------   ------
     ---------------------------------------
     Total amount which would have been recognised in the statement of total
     recognised gains and losses
     Amount - £m                                             (420)     (60)      (5)
     Percentage of the present value of scheme              (22.2%)  (25.5%)   (2.4%)
     liabilities                                             ------   ------   ------
     ---------------------------------------

     Movement in scheme gross deficits during year
     ----------------------------------------------------
                                                   ------  ------   ------     ------
                                                   UK      USA      Europe    Total
                                                      £m       £m       £m       £m
                ----------------------------------  ------   ------   ------   ------
     Gross deficit at 1 January 2003                (551)    (132)    (203)    (886)
     Current service cost                            (13)     (10)      (7)     (30)
     Contributions                                    54       13       20       87
     Other net expenses                              (19)      (8)     (12)     (39)
     Actuarial loss                                  (20)     (12)      (4)     (36)
     Currency variations                               -       15      (15)       -
     ----------------------------------             ------   ------   ------   ------
     Gross deficit at 31 December 2003              (549)    (134)    (221)    (904)
     ----------------------------------             ------   ------   ------   ------



 6.  AgustaWestland
     The Group's share of AgustaWestland's results and net assets was as
     follows:
     --------------------------------------------------
                                                                 2003     2002
                                                                   £m       £m
                                                                -------  -------
     Sales                                                        876      865
     ----------------------------------------                   -------  -------

     Operating profit before goodwill amortisation and            102      104
     restructuring costs
     Restructuring costs                                            -      (11)
     Goodwill amortisation                                         (6)      (5)
     ----------------------------------------                   -------  -------
     Operating profit                                              96       88
     Net interest                                                   -       (2)
     ----------------------------------------                   -------  -------
     Profit before tax                                             96       86
     Taxation                                                     (24)     (29)
     ----------------------------------------                   -------  -------
     Profit after tax                                              72       57
     ----------------------------------------                   -------  -------

     Fixed assets                                                 183      186
     Current assets                                               860      861
     ----------------------------------------                   -------  -------
                                                                1,043    1,047
     Liabilities due within one year                             (489)    (602)
     Liabilities due beyond one year                             (385)    (305)
     ----------------------------------------                   -------  -------
                                                                  169      140
                      ----------------------------------------  -------  -------

     The restructuring costs of £11 million in 2002 arose from the consolidation
     of AgustaWestland's UK operation onto its Yeovil site and the closure of 
     the Weston-super-Mare facility.








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