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  Print      Mail a friend       Annual reports

Tuesday 27 February, 2007


Final Results

27 February 2007

For immediate release

GKN plc 2006 Preliminary Results Announcement

                                      As reported          As reported excluding
                                       under IFRS         items in note (1) below
Group results summary              2006    2005   Change    2006    2005    Change
                                     £m      £m       £m      £m      £m
   Sales                          3,634   3,648     (14)   3,634   3,648         -
   Trading profit (1)               242     229       13     242     229        6%
   Operating profit                 203      98      105     242     229        6%
   Share of joint ventures           17      10        7      17      10       70%
   Net financing costs             (38)    (35)      (3)    (38)    (35)        9%
   Profit before tax                182      73      109     221     204        8%
   Profit after tax                 177      59      118     204     164       24%
   Earnings per share - p          25.0     7.7    17.3p    28.8    22.3       29%

                                    2006     2005   Change
                                       p        p
   Proposed full year dividend      12.8     12.2       5%
   per share


(1)    Figures exclude the impact of restructuring and impairment charges,
amortisation of non-operating intangible assets arising on business
combinations, profits and losses on the sale or closures of businesses and
changes in the fair value of derivative financial instruments.

Business highlights

   • Sales broadly level; (1)Profit before tax up 8%; (1)Earnings per share
    up 29%
   • Aerospace delivers 11% increase in sales, 30% increase in trading profit
   • Powder Metallurgy trading profit more than doubles; US Sinter operations
    return to profit
   • OffHighway sales up 7%; trading profit up 15%
   • Driveline profits lower - significant new business wins support future
   • Dividend increased by 5% to 12.8p reflecting the Board's continuing

Sir Kevin Smith, Chief Executive of GKN plc, commented:

'Our performance in 2006 shows GKN making excellent progress with results ahead
of expectations and major milestones achieved which will help secure sustainable

'Aerospace grew sales by 11%, profits by 30% and moved into double digit

'US Sinter moved back into profit and overall Powder Metallurgy margins more
than doubled to above 5%.

'Our confidence in the future is also being reinforced by high levels of new
business wins. Driveshafts won 75% by volume of all new available programmes,
Sinter's new business wins were up 30% and Aerospace brought in orders worth
$850 million.

'Acquisitions have secured technology leadership in aerospace titanium
structures, increased our exposure to the civil aviation sector, provided an
entry into the China offhighway market and enlarged our presence in the
construction sector.

'We continue the rapid development of our business in high growth markets with
three new plants becoming operational in China and two new plants in India.

'Our strategic restructuring plan launched in 2004 has now moved into its final
phase and will conclude this year.

'We have entered 2007 with our four major businesses - Driveline, Powder
Metallurgy, OffHighway and Aerospace - in great shape and all well positioned to
drive growth.'

2007 Outlook

The outlook for our major markets is positive, despite some uncertainty around
the strength of North American automotive demand.

Forecasts for the global automotive market remain mixed with overall growth in
2007 production projected at 3-4%. Within this, Western European output is
forecast to be broadly unchanged and North American demand is also expected to
be at a similar level to 2006, although slightly down in the first half. Good
growth is expected in emerging markets including China and India, which
represent a growing percentage of the Group's sales.

OffHighway demand in North America is slightly down on last year although
sentiment appears to be improving; European markets and the mining and heavy
construction sectors generally are expected to be good.

Aerospace markets in all sectors are expected to remain strong.

Raw material input costs remain volatile, but the Group is not expecting them to
make a major impact on 2007 performance compared to 2006.

Against this background, in 2007 the Group expects to see further improvement in
its Automotive businesses and continuing growth in OffHighway and Aerospace.
Driveline will benefit from the successful restructuring programme which should
allow it to recover much of the ground lost in 2006. Powder Metallurgy and
Aerospace should see good top line growth helped by a strong backlog of booked
business. Performance in our retained Other Automotive businesses should also
improve. The acquisitions made in 2006 are integrating well and will also
contribute to revenue and profit growth in 2007.

Overall, we expect the Group to see another year of good progress, with the high
level of business wins in 2006 supplemented by further bolt-on acquisitions
giving us confidence for this year and beyond.

Further Enquiries

GKN Corporate Communications

Tel:+44 (0)20 7463 2354

This press release may be downloaded from

Measurement and reporting of performance

In this press release, in addition to statutory measures of profit, we have made
reference to profits and earnings excluding the impact of:

o              strategic restructuring and impairment charges,

o              amortisation of non-operating intangible assets arising on
business combinations,

o              profits and losses on sale or closure of businesses, and

o              changes in the fair value of derivative financial instruments,

since we believe they show more clearly the underlying trend in business

Trading profit is defined as operating profit before any of the above. The 2005
trading profit of the Group and the Driveline division has been re-aligned with
the current year definition and adjusted by £1 million in respect of the
amortisation of non-operating intangible assets which arose on businesses
acquired in 2004 and 2005 which had not been separately identified on the
grounds of materiality when reporting the 2005 results.

Where appropriate, reference is also made to results excluding the impact of
both 2005 and 2006 acquisitions, divestments and changes in status as well as
the impact of currency translation on the results of overseas operations.

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

                Average        Year End
             2006    2005    2006    2005

Euro           1.47    1.46    1.48    1.46
US Dollar      1.84    1.82    1.96    1.72

The approximate impact on trading profit of a 1% movement in the average rate is
Euro - £1.1 million, US Dollar - £0.4 million.

In our internal performance reporting we aggregate our share of sales and
trading profits of joint ventures with those of subsidiaries. This is
particularly important in assessing sales and profit progress in our Driveline
and Other Automotive businesses where significant activity takes place in joint
ventures. Reference to these combined figures is made, where appropriate, as
'management sales and management trading profits'.

Group Activities

GKN is a global engineering business serving the automotive, off-highway and
aerospace markets. The bulk of our sales are made to vehicle or aircraft
manufacturers or, in Aerospace, to other major tier one suppliers. We operate in
three different business areas:

Automotive activities comprise GKN Driveline, Powder Metallurgy and Other
Automotive companies which supply a variety of components, largely to vehicle
manufacturers in the global car and light vehicle markets.

OffHighway designs and manufactures steel wheels and driveline systems for the
global agricultural, construction and industrial machinery market.

Aerospace activities are concentrated on the production of airframe and engine
structures, components and assemblies for both military and civil aerospace

The Group has operations in over 30 countries with 37,000 employees in
subsidiary companies and a further 3,500 in joint ventures.

Changes in the composition of the Group

Results for the year contain a full twelve month contribution from QDS Henschen,
the OffHighway business which was acquired in November 2005, and GKN Driveline
Mexico which changed in status from joint venture to subsidiary in January 2005.

During 2006 OffHighway acquired Cramer Kupplung GmbH (in January) and Hytecomp
AB in June for a total of £2 million, Rockford Powertrain Inc (Rockford) in
August for £29 million and Liuzhou Steel Rim Factory in November for £6 million.
In September, Aerospace acquired Stellex Aerostructures Corporation (Stellex)
for £93 million.

At the beginning of March the Group ceased its involvement in the management of
Fujiwa Machinery Industry (Kunschan) Company Ltd (Fujiwa), a non-core subsidiary
of GKN Driveline Torque Technology KK, and agreed to dispose of its 60%
shareholding for £15 million which was received in the year.

Group performance

Management sales (subsidiaries and joint ventures) £3,842 million (2005 - £3,823

Combined sales of subsidiaries and share of joint ventures totalled £3,842
million compared with £3,823 million in 2005. Excluding the impact of currency,
acquisitions and divestments the increase was £38 million (1.0%) with good
demand in Driveline's Chinese operations and strong growth in Chassis Systems
Ltd and Emitec, both of which form part of our Other Automotive activities.

Sales of subsidiaries £3,634 million (2005 - £3,648 million)

Sales of subsidiaries were £3,634 million compared with £3,648 million in 2005,
a reduction of £14 million. Excluding the impact of currency translation,
acquisitions and divestments there was an increase of £2 million.

In Automotive businesses, sales of £2,608 million compared with £2,711 million a
year earlier, largely reflecting the negative impact of currency (£23 million),
the net impact of divestments, acquisitions and changes in status (£33 million)
as well as weakness in demand during the third quarter in both North America and
Western Europe which extended into the fourth quarter in North America.
Underlying sales were down by £47 million (1.8%)

OffHighway sales improved to £331 million from £310 million in 2005. The impact
of both 2005 and 2006 investments was £25 million and, excluding these and the
adverse impact of currency (£2 million), sales were slightly lower in largely
static agricultural markets in both Europe and North America.

Aerospace sales increased to £695 million from £627 million in 2005. The impact
of Stellex which was acquired in September was £21 million and, excluding this
and currency (£4 million negative), the improvement was £51 million with strong
demand in both civil and military markets and a number of new programmes coming
on stream.

Management trading profit (subsidiaries and joint ventures) £263 million (2005 -
£243 million)

The aggregated trading profit of subsidiaries and our share of joint ventures
was £263 million, an increase of £20 million (8.2%). The impact of currency,
acquisitions and divestments was small and excluding these factors the increase
was £19 million (8.0%) reflecting good growth in joint venture profits as a
consequence of higher sales. Margin improved to 6.8% (2005 - 6.4%).

Trading profit of subsidiaries £242 million (2005 restated - £229 million)

Group trading profit was £242 million compared with £229 million in 2005, an
increase of £13 million (5.7%). The currency impact on the translation of
overseas profits was small at £1 million negative. There was a net benefit of £2
million from 2005 and 2006 acquisitions and divestments and excluding these
factors the increase was £12 million (5.4%).

Automotive companies' trading profit totalled £161 million compared with £165
million in 2005. The impact of currency was nil whilst the net effect of
divestments and changes in status was £4 million negative. Excluding these
factors profits were flat reflecting benefits of the previously announced
strategic restructuring actions and other continuing productivity improvements
offset by weak trading performance and reorganisation costs in Other Automotive
subsidiaries. The margin of trading profit to sales was 6.2% (2005 - 6.1%).

OffHighway profit improved to £23 million from £20 million in 2005 with all of
the increase coming from acquisitions. Excluding these and minor currency
impacts, profits were £1 million lower, reflecting the sales pattern noted
above. Margin was 6.9% compared with 6.5% in 2005.

Aerospace profit rose to £70 million from £54 million in 2005, largely as a
result of the higher sales noted above and further productivity improvements.
Margin improved to 10.1% from 8.6% in 2005.

Corporate and unallocated costs of £12 million (2005 - £10 million) represent
stewardship, legacy, governance and compliance costs relating to the overall
Group rather than individual businesses.

The overall margin of subsidiaries was 6.7% compared with 6.3% in 2005.

Restructuring and impairment costs £74 million (2005 - £98 million)

During the year the Group neared the end of the strategic restructuring
announced in the first quarter of 2004. This involved moving some 20% of
Driveline production capacity from high cost, low growth economies to the low
cost, high growth emerging markets of Eastern Europe, South America and Asia
Pacific, together with further cost reductions and infrastructure changes in
Powder Metallurgy in support of the recovery of that business and overhead cost
reductions elsewhere in the Group. Costs charged in the year totalled £63
million (2005 - £77 million) with £37 million (2005 - £46 million) in Driveline,
£24 million (2005 - £28 million) in Powder Metallurgy and £2 million (2005 - £3
million) elsewhere.

The announcements of the concluding actions under the programme were deferred
until early 2007. Those announcements have now been made and will result in a
final charge to profit of approximately £37 million in 2007. This will bring the
total cost of the programme to £277 million (including some £100 million of
impairment charges) compared with the original estimate and the extension
announced in December 2005 of some £260 million. The final expected benefits
from the total programme of some £73 million per annum are slightly above those
originally envisaged. Due to the timing of these actions the full annualised
benefit will now be realised slightly later with approximately 75% having been
achieved by the end of 2006.

In addition, within our Automotive portfolio we have recognised an impairment of
£11 million (2005 - £21 million) as current year performance and future
projections were insufficient to support the carrying value of goodwill within
one of the Asia Pacific Driveline businesses. The 2005 impairment charge covered
a similar goodwill write-down of £11 million, and the £10 million impairment of
the Sheepbridge UK cylinder liner fixed asset base.

Amortisation of non-operating intangible assets arising on business combinations
£3 million (2005 restated - £1 million)

In accordance with IFRS 3, the Group has recognised intangible assets arising on
businesses acquired in 2005 and 2006. The amortisation of non-operating
intangible assets (e.g. customer relationships, trademarks and intellectual
property rights) increased during the year as a result of the 2006 acquisitions
of Stellex and Rockford.

Profits and losses on sale or closure of businesses £5 million (2005 - £1

The profit on sale of businesses of £5 million (2005 - £1 million) arose from
the disposal of the Group's controlling interest in Fujiwa for a consideration
of £15 million, all of which was received in cash in the year. The 2005 profit
of £1 million related to earn out profits of a prior year divestment.

Changes in the fair value of derivative financial instruments £33 million credit
(2005 - £33 million charge)

The Group enters into foreign exchange contracts to hedge much of its
transactional exposure, including that between Group companies. At 1 January
2006 the net fair value of such instruments was a liability of £14 million and
at the end of 2006 the figure was an asset of £27 million.

Transactional hedge accounting has been applied to a small proportion of these
transactions in 2006 and not at all in 2005. Where transactional hedging has not
been applied, the difference of £39 million has been credited (2005 - £43
million charged) separately as a component of operating profit. This has been
partially offset by the reduction in value of £5 million (2005 - £9 million
credit) in embedded derivatives in Aerospace supply contracts and £1 million
(2005 - £1 million credit) in commodity hedges in Powder Metallurgy leaving a
net credit of £33 million (2005 - charge £33 million).

Operating Profit £203 million (2005 - £98 million)

Operating profit of £203 million compared with £98 million in 2005, reflecting
the movements discussed above.

Post-tax earnings of joint ventures £17 million (2005 - £10 million)

The increase of £7 million in the Group's share of post-tax earnings of joint
ventures arose largely at the pre-tax level as a consequence of improved
profitability in Driveline's Chinese joint ventures which benefited from higher
market demand; at Chassis Systems, the joint venture established with Dana in
2002, which is now running at full production; and at Emitec, where sales
improved as a consequence of the legal requirement in Germany to retrofit
particulate filters to diesel powered vehicles.

Financing costs £38 million (2005 - £35 million)

Interest payable totalled £57 million (2005 - £61 million) and arose mainly on
the £675 million bonds and £30 million debenture in issue. This was offset
somewhat by interest receivable of £23 million (2005 - £48 million) which arose
on short-term deposits together with the benefits of lower borrowing costs on
foreign currency debt instruments used to hedge the Group's overseas
investments. The year-on-year movement mainly reflected the contribution of £200
million to the UK pension scheme at the end of March, the increased cost of
borrowing in US dollars and the costs of second half acquisitions.

Other net financing costs of £4 million (2005 - £22 million) related to
post-employment benefits. The reduction of £18 million was mainly a result of
the injection of £200 million into the UK pension scheme noted above, combined
with a higher level of assets in the fund at the beginning of 2006. Details of
the assumptions used in calculating post employment costs and income is provided
in note 12 in the appendix to this press release.

Profit before tax

Total profit before tax excluding restructuring and impairment charges,
amortisation of non-operating intangible assets arising on business
combinations, profits and losses on sale or closures of businesses and changes
in the fair value of derivative financial instruments of £221 million was £17
million higher than the £204 million (as restated) in 2005. After including
these items, the figure for the year was a profit of £182 million (2005 - £73


The tax charge, on underlying profits of subsidiaries of £204 million (2005 -
£194 million) (i.e. before restructuring, impairment, amortisation of
non-operating intangible assets arising on business combinations, profits or
losses on sale or closures of businesses and changes in the fair value of
derivative financial instruments), was £17 million (2005 - £40 million)
representing an 8.3% rate (2005 - 20.6%). The significant reduction in rate is
due to a deferred tax credit arising on pensions (compared with a charge in
2005) combined with the benefits of recognising previously unrecognised deferred
tax assets which were partly offset by a reduction in the impact of prior years'

GKN's tax strategy is aimed at creating a sustainable cash tax charge (which
excludes deferred taxes and movements in provisions for uncertain tax positions
and tax relating to restructuring, impairment charges and sale of businesses)
that balances the shareholders' interest of minimising tax payments with the
need to comply with the tax laws for each country in which we operate. In 2006
the cash tax charge was 19% and looking forward for the next two years it is
likely that it will be at a similar level as we continue to make use of prior
years' tax losses, incentives and deductions in the various countries in which
we operate.

For 2007 and beyond, the reported tax rate is likely to be volatile, being
influenced by the possible recognition of currently unrecognised deferred tax
assets and the settlement of prior year items. These unrecognised, potential
deferred tax assets principally relate to brought forward tax losses and pension
deductions in the UK and US which, due to the structure of the Group and the
geographic mix of profitability, have so far not been seen as realisable for tax

The total effective tax rate of subsidiaries was 3.0% (2005 - 22.2%).

Discontinued operations

There were no discontinued operations in the period.

On 16 January 2007 the Group announced its intention to withdraw from the
manufacture of cylinder liners in Europe which is carried out by GKN Sheepbridge
Stokes. The company accounted for approximately 80% of the 2006 Other Automotive
segment result and its closure represents the cessation of a separate major line
of business for this segment. The costs of closure together with the results to
the date the business ceases will be separately identified in the 2007 financial

Minority interests

Largely as a result of the sale of Fujiwa (in which there was a 40% minority
interest) and the start up losses in the Chinese cylinder liner business (where
there is a 41% minority interest) the share of profit relating to minority
interests was nil compared with £4 million in 2005.

Earnings per share

Earnings per share were 25.0p (2005 - 7.7p). Before restructuring and impairment
charges, amortisation of non-operating intangible assets arising on business
combinations, profits and losses on sale or closures of businesses and changes
in the fair value of derivative financial instruments, the figure was 28.8p
(2005 restated - 22.3p).

Cash Flow

Operating cash flow, which GKN defines as cash generated from operations (£117
million; 2005 - £308 million) adjusted for capital expenditure (£230 million;
2005 - £229 million) and proceeds from the disposal of fixed assets (£13
million; 2005 - £9 million), was £100 million outflow compared with £88 million
inflow in 2005. Included within the 2006 figure is the £200 million contribution
to the UK pension scheme.

The outflow on working capital and provisions totalled £3 million (2005 - £15
million inflow) largely reflecting inventory increases relating to restructuring

Capital expenditure (on tangible and intangible assets) totalled £230 million
(2005 - £229 million). Of this, £197 million (2005 - £206 million) was on
tangible assets representing property, plant and equipment and was 1.4 times
(2005 - 1.5 times) the depreciation charge. This higher than normal ratio
largely reflected the final stages of investment in emerging markets under the
Group's strategic restructuring programme and is expected to reduce somewhat in
2007 as this programme is completed.

Expenditure on intangible assets totalled £33 million (2005 - £23 million) and
mainly reflected initial non-recurring costs on Aerospace programmes following
high levels of business activity which will underpin future performance.

Net interest paid totalled £33 million compared with £14 million in 2005 with
the increase largely due to a combination of the £200 million paid into the UK
pension scheme in March 2006, the increased cost of borrowing in US dollars and
the cash outflow relating to businesses acquired in the second half of the year.

Tax paid in the year was £31 million (2005 - £35 million).

Dividends received from joint ventures totalled £7 million (2005 - £6 million).

Free Cash Flow

Free cash flow, which is cash flow excluding acquisitions, share buybacks and
currency translation but including capital expenditure and dividends paid, is a
key performance indicator of the Group. Free cash flow for the year was an
outflow of £246 million (2005 - £41 million) mainly due to the £200 million
additional contribution to the UK pension scheme (2005- £nil) and £57 million
(2005 - £36 million) of expenditure on strategic restructurings. The Group's
balance sheet remains strong and with continued recovery in our businesses it is
anticipated that, following completion of the restructuring in 2007, cash
generation should improve markedly.

Acquisitions and Divestments

The net expenditure on acquisitions and divestments in the year was £113 million
(2005 - £50 million) with the main elements relating to Rockford and Stellex.

Share buyback

During the year the Group completed the share buyback programme of £100 million
initiated in October 2004, spending £40 million in purchasing 13.4 million
shares. The shares have not been cancelled and 38.7 million shares were held in
treasury at 31 December 2006.

Net borrowings

At the end of the year the Group had net debt of £426 million (2005 - £65
million). This included the benefit of £33 million (2005 - £50 million) customer
advances in the Aerospace businesses which are shown in creditors in the balance
sheet. The Group's share of funds in joint ventures was £3 million (2005 - £5
million borrowings).

Pensions and post-employment obligations

GKN operates a number of defined benefit and defined contribution pension
schemes together with retiree medical arrangements across the Group. The total
charge to trading profit in respect of current and past service costs of defined
benefit schemes and retiree medical arrangements was £40 million (2005 - £35
million), whilst other net financing charges included in net financing costs
were £4 million (2005 - £22 million).

The decrease in other net financing charges reflects the higher return on
pension scheme assets from the increased level of assets at the start of 2006
and the £200 million contribution made to the UK pension scheme. Further
information including asset, liability and mortality assumptions used is
provided in note 12 in the appendix to this press release.

UK pensions

The UK defined benefit scheme is considered to be relatively mature since fewer
than 5,000 of its 54,700 members are currently in service. 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. Other than the £200 million contribution in
March 2006, no further deficit payments were made in 2006. During 2007 an
actuarial valuation of the scheme as at April 2007 will take place and a
recovery plan for any deficit will be agreed by the Company and Trustees of the
scheme once the valuation has been completed, superseding the previous schedule
of contributions.

The charge relating to the UK defined benefit scheme reflected in trading profit
in respect of current and past service costs was £19 million (2005 - £16
million), whilst other net financing credits included in net financing costs
were £12 million (2005 - £5 million charge).

The deficit at £174 million (2005 - £449 million) was significantly lower than
that at the end of 2005 as a result of the £200 million contribution noted
above, returns on higher asset values at the beginning of 2006 and the
beneficial impact from higher yields discounting future liabilities. These were
partially offset by a 20 basis point increase in inflation assumptions and
strengthening longevity assumptions. Because of the size and profile of the
scheme, longevity is reviewed annually against actual experience. During the
year the assumption for the rate of future improvement in longevity was
strengthened to beyond 'short cohort'.

Overseas pensions

The principal countries involved are the USA, Germany and Japan.

The charge to trading profit in respect of current and past service costs was
£19 million (2005 - £17 million), whilst other net financing charges included in
net financing costs were £12 million (2005- £13 million).

The reduction in the deficit of £35 million to £310 million (2005 - £345
million) was largely as a result of the lower net present value of liabilities
from increases in discount rates and higher than expected return on assets
together with the favourable translation impact from the weaker US Dollar.

Retiree Medical

GKN operates retiree medical arrangements in the Americas and has a closed
scheme in the UK.

The charge to trading profit in respect of current and past service costs was £2
million (2005 - £2 million), whilst other net financing charges included in net
financing costs were £4 million (2005 - £4 million).

The deficit at £76 million (2005 - £91m) was £15 million lower largely due to
currency translation benefits and a higher discount rate.


In total, at 31 December 2006 the deficit was £561 million (2005 - £885 million)
for the reasons stated above.

Shareholders' equity

Shareholders' equity at the end of 2006 was £892 million compared with £875
million at the end of 2005.

Proposed dividend

A final dividend of 8.7p per share is proposed, payable on 9 May 2007 to
shareholders on the register at 20 April 2007.

Shareholders may choose to reinvest this dividend under the Dividend
Reinvestment Plan ('DRIP'). The closing date for DRIP mandates is 24 April 2007.

Together with the interim dividend of 4.1p, the total dividend for the year will
be 12.8p, an increase of 4.9% over the equivalent figure for last year. The cash
cost to the Group is some £90 million. The dividend is covered 2.3 times (2005 -
1.8 times) by management earnings (i.e. before the impact of restructuring and
impairment charges, amortisation of non-operating intangible assets arising on
business combinations, profits and losses on sale or closures of businesses and
changes in the fair value of derivative financial instruments). Had the 2005 tax
rate of 21% applied in 2006, the dividend would have been covered 2.0 times by

Operating Review by business



Approximately 70% of GKN's combined sales of subsidiaries and joint ventures are
to the world's passenger car and light vehicle markets and production in these
markets is a key driver of Group performance. The global trend in production
from 1990 through to a forecast for the period 2007-11 depicts a compound annual
growth rate of 2.8%.

Within this global picture, future growth is likely to vary significantly by
region with generally stable production in the mature markets of Western Europe,
North America and Japan and strong increases in the emerging markets of Asia
Pacific, South America and Eastern Europe. This pattern was evident in 2006.

Western Europe

In Western Europe overall production in 2006 was 15.8 million compared with 16.0
million in 2005, a reduction of approximately 1%, most of which occurred in the
third quarter of the year. There were increases in Italy (16%) and Germany (2%)
but those were more than offset by reductions in France (7%) and the UK (8%).

North America

North American production in 2006 was 15.3 million, a reduction of 2.5% from the
15.7 million in 2005. Within the overall figure there was again a significant
change in market share with DaimlerChrysler, Ford and General Motors continuing
to lose market share to foreign manufacturers.

Emerging markets

Asia Pacific (excluding Japan where the year on year increase in production was
3% to 10.8 million vehicles) showed very significant growth. In China,
production of 6.6 million vehicles was 26% above 2005, while production in India
rose by 11% to 1.6 million. China now produces more vehicles than Germany, the
largest European market.

In Brazil, the production increase of 2.5% was also ahead of that in the more
mature markets noted above.

Market trends in 2007

The current view of Global Insight Inc, a leading economic forecaster, is for
similar conditions to prevail in 2007 with Western Europe and North American
production essentially flat, a more modest increase of 15% in China and
improvements in India and Brazil at 11% and 6% respectively.

GKN Driveline

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 include geared components (transfer
cases, power transfer units and final drive units), torque management devices
(TMDs) and driveshafts (propshafts for longitudinal power transmission and
sideshafts for lateral transmission). The Driveline segment comprises GKN
Driveline Driveshafts (GKN Driveshafts), GKN Driveline Torque Technology Group
(TTG) and other smaller Driveline businesses.

The customer base is broad and includes virtually all major vehicle manufactures
on a world wide basis.

GKN Driveshafts

GKN Driveshafts 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 2006, based on internal estimates, GKN Driveshafts' businesses, including its
joint ventures, produced approximately 40% of CVJs for the global light vehicle
market. The market share of the next largest independent producer is estimated
to be less than half this level with around 24% of CVJs produced by VMs'
(Vehicle Manufacturers) in-house operations. The strong order win rate achieved
during the year continues to underpin our market share.

GKN Driveshafts manufactures CVJs and related products in 21 countries across
all major vehicle producing regions of the world and has enjoyed considerable
success in developing markets, with strong market shares of some 84% in South
America and 51% in the developing Asia Pacific region (excluding Japan and South

GKN Driveshafts 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 2006 premium propshafts represented
approximately 37% of global light vehicle propshaft demand, or some 11 million
propshaft assemblies. GKN Driveshafts' share of this segment was in the region
of 21%.

Torque Technology Group

TTG develops and manufactures a broad range of driveline products which deliver
power to a vehicle's wheels and manage that power to control the dynamic
performance of the vehicle.

The TTG product range includes geared components and TMDs. Geared components
include products enabling the distribution of power on all wheel drive/four
wheel drive (AWD/4WD) and two wheel drive (2WD) vehicles and include power
take-off units (PTUs), final drive units (FDUs) and differentials. TMDs are
mechanical (passive) or electro-mechanical (active) devices that improve vehicle
performance and handling by controlling the flow of torque throughout the

Geared components, which are sold principally in the Asia Pacific region but
increasingly in the Americas and Europe, currently account for approximately
half of TTG's annual sales. Our products are well positioned to benefit from
continued growth above overall market levels as VMs increasingly introduce new
'crossover' vehicles that combine four wheel drive with car-like dynamics,
comfort and improved fuel economy. We also see substantial opportunities for
continued development of our differentials business.

GKN offers a complete range of TMD solutions as both stand-alone and integrated
devices to VMs and to certain Tier One suppliers. We estimate that in 2006 GKN
supplied approximately 14% of TMDs for light vehicle applications globally.
Sales volumes of our electronically controlled coupling devices (ETM and EMCD)
are expected to increase progressively, building upon our established passive
product range which includes the Viscodrive and Super LSD product families.

Other Driveline businesses

Other Driveline businesses operate manufacturing plants, warehouses and service
facilities throughout Europe and provide a comprehensive range of new and
remanufactured sideshafts and other components for the passenger vehicle
aftermarket. They also provide services to repair and replace heavy truck and
other industrial propshafts, as well as engineering, producing and selling low
volume, highly specialised propshafts and driveline components for non
automotive applications such as industrial, marine, defence and all terrain

2006 Highlights

Driveline subsidiaries' sales in the year totalled £1,906 million compared with
£1,993 million in 2005. The negative impacts of currency translation and
acquisitions and changes in status in 2005 were both small at £17 million and £3
million respectively while the divestment of Fujiwa, the Chinese non-core
casting business, in February led to a reduction of £30 million. The underlying
decrease of £37 million (1.9%) was mainly a consequence of weak third quarter
demand in a number of major markets and lower US production in the fourth
quarter. The strength of business wins over the last two years should support
the resumption of top line growth in 2008.

Against this reduction, the share of joint venture sales (which are not
consolidated in the Group Income Statement but are set out in note 8 to this
press release) was £113 million compared with £104 million in 2005, with the
underlying increase £9 million (8.7%). This arose mainly in the Chinese
companies where revenue rose by some 26% fuelled by growth in the overall
market. The combined underlying sales of Driveline subsidiaries and joint
ventures fell by £26 million (1.3%).

Trading profit of subsidiaries of £140 million compared with £155 million in
2005. Excluding the impact of currency, acquisitions and divestments, the
reduction was £11 million (7.3%), all of which arose in the second half of the
year as a result of the sales reductions noted above and a spike in raw material
costs. Return on sales in the year was 7.3% (2005 - 7.8%) compared with the
target of 7% to 9%. Although limited improvement is expected in 2007, the
restoration of top line growth in Driveshafts, new business wins in TTG and the
benefit of prior years' restructuring actions are expected to result in stronger
improvement in future years.

The share of trading profit of joint ventures increased by £2 million, with
improvement in China offset by some reduction in Taiwan where sales fell sharply
in a weak market. Divisional profit of subsidiaries and joint ventures reduced
to £153 million from £166 million in 2005, with the underlying decrease £9
million (5.6%).

Charges in the year in respect of the strategic restructuring programme
announced in 2004 to move productive capacity from high cost, low growth mature
markets, to lower cost, high growth emerging markets totalled £37 million (2005
- £46 million). The final stage of the programme was announced in early 2007 and
the cost of approximately £29 million will be charged in the 2007 accounts.

Capital expenditure on tangible assets in the year totalled £98 million (2005 -
£115 million) and was 1.3 times (2005 - 1.5 times) depreciation. This reduction
largely reflected the phasing of spending relating to the restructuring
programme and a further fall, to around 1.2 times, is anticipated in 2007.

The division continued to invest significantly in research and development and
spent £63 million (2005 - £71 million) in the year, all except £1 million of
which was charged to operating profit. The reduction resulted from a
restructuring of the engineering development function following a regional
re-alignment and the introduction of an advanced global design software package.
In GKN Driveshafts there was continued interest in the crosstrackTM and
countertrackTM CV jointed half shafts which were launched in 2005. The first
production contract for Chrysler commenced in the year and a number of other
programmes are expected to begin in 2007. In TTG there was significant progress
in the development of Electronic Torque Vectoring (ETV) which enhances vehicle
safety and security by managing the application of torque to the driven wheel.
ETV units will be fitted to a volume programme which will be launched in 2008, a
joint development programme has been agreed with a technology led customer and a
strategic partnership has been established with a view to integrating ETV with
ESP (Electronic Stability Program).

As noted above, TTG completed the disposal of non-core operations in China and
the closure of a facility in Japan, bringing to a close the major restructuring
envisaged when Tochigi Fuji Sangyo was acquired in 2004. The costs of these
actions have been absorbed in trading profit. Although the disposal of the
Chinese operation is temporarily margin dilutive, this has been more than offset
in the period by the £5 million profit on sale which is reported separately in
the Income Statement.

During the year, GKN Driveshafts won some 75% of all available (i.e. externally
sourced) CVJ driveshaft business which represents approximately 57% of the total
available market, i.e. including in-house manufacture. This win rate underpins
the anticipated restoration of top line growth from 2008 onwards. Similarly, TTG
won new business worth £55 million at annualised rates, providing a sound base
for future growth.

Powder Metallurgy

Products and markets

GKN's Powder Metallurgy business has two elements: GKN Sinter Metals which
produces sintered components and GKN Hoeganaes which produces metal powders.
They are largely iron based, although growth is also being seen in the use of
aluminium and other alloys.

GKN Sinter Metals

Although market statistics are somewhat imprecise due to the significant number
of small producers, GKN estimates that it has in the region of 16% global market
share in the sintered product business with sales mainly to major automotive and
industrial original equipment manufacturers and first tier suppliers.

Component production takes place in the Americas, Europe, South Africa and Asia
Pacific with the highest sales growth rates for 2007 in the Americas and the
Asia Pacific region. GKN Sinter Metals is significantly larger than any of its
competitors and as such is well placed to drive technology leadership in product
and process through the leverage of global resources. This global manufacturing
footprint continues to develop with the establishment of further operations in
India and China to support new business secured in both local and other markets.

GKN Hoeganaes

GKN Hoeganaes produces principally ferrous based metal powder, the raw material
for ferrous based sintered components. It is the largest producer of metal
powder in North America with more than 50% market share. It has also continued
its development outside the US, particularly through growth in Europe due to
increased usage by GKN's own sintering companies in this region. Approximately
50% of powder produced by Hoeganaes is shipped to external customers, mainly in
the USA, and accounts for some 13% of the Powder Metallurgy division's sales.

Growth in the powder metallurgy market is expected to continue, fuelled
primarily by substitution for cast or forged components. External forecasts for
the sintered component market anticipate an increase from approximately $6
billion in 2005 to around $9 billion in 2015, a compound annual growth rate of
some 4%. In addition, technology advances are expected to open up new product
applications which should lead to growth above this level.

2006 Highlights

Sales in the year were £582 million compared with £588 million in 2005, with the
reduction all due to the adverse impact of currency on translation. North
American sales were significantly weaker as a result of market share reductions
of major customers and, in particular, their production cut-back in the third
and fourth quarters of the year. These reductions were fully compensated by
increased sales in Europe and the Rest of the World with new programmes coming
on stream from a variety of automotive and other industrial customers. As a
consequence, the geographical balance of the division has moved with some 54% of
Sinter Metals' and 48% of the total divisional sales arising outside North
America. This trend appears likely to continue, particularly as emerging market
demand increases.

Notwithstanding the flat overall sales, trading profit improved to £31 million
from £12 million in 2005. This was as a result of additional margin from the
improved volumes in Sinter Europe, combined with improved operating efficiencies
and lower overhead costs in the US Sinter business which moved into profit in
the year following four years of losses. There was also increased profitability
at Hoeganaes as steel scrap prices moderated somewhat compared with 2005 and
from the benefit of some favourable copper and nickel contracts. The divisional
margin for the year was 5.3% compared with 2.0% in 2005. We expect to see
further progress in 2007 from sales revenue increases as a result of business
wins in earlier periods.

Restructuring costs and asset impairment in 2006 totalled £24 million (2005 -
£28 million), which related to the closure of three North American and one UK
plant. At the same time two new plants were opened in China. One final closure
has been announced in February 2007 leading to a charge of some £8 million in
the year and this will accelerate the benefits arising from this programme.

Capital expenditure on tangible fixed assets in the period totalled £49 million
(2005 - £43 million) with depreciation of £28 million (2005 - £27 million). The
ratio of 1.8 times (2005 - 1.6 times) was again higher than normal, as new
capacity was installed both in emerging markets and ahead of new manufacturing
programmes in North America and Europe. A significant reduction to around 1.2
times is estimated for 2007.

Expenditure on research and development totalled £5 million (2005 - £6 million)
with a heavy emphasis on increasing density and improving surface finish of
sintered components through advances in both material and production technology.
As a consequence a number of components are under test with customers and, if
successful, have the potential to open up new product segments to the business.

Once again there were significant new business wins in the year in all regions
which totalled approximately £120 million at annualised rates and support the
targeted sales growth of 6% to 8% from 2007 onwards.

Other Automotive

Products and markets

Our Other Automotive subsidiary activities, which are predominantly UK based,
but with facilities in the US and China, manufacture structural components,
chassis and engine cylinder liners for the passenger car, sports utility vehicle
(SUV) and light vehicle and truck markets in Western Europe and the US.
Customers include vehicle manufacturers and engine makers. We also have 50%
stake in Chassis Systems Ltd (CSL) which manufactures structural components for
Land Rover in the UK and in Emitec which manufactures metallic substrates for
catalytic converters in Germany and the USA.

2006 Highlights

Sales of subsidiaries in the year of £120 million were £10 million (7.7%) below
2005, primarily reflecting lower sales in automotive and truck markets.

The share of sales of joint ventures increased from £67 million to £92 million
as CSL moved into full production and Emitec benefited from higher demand in
Germany. The combined sales of subsidiaries and joint ventures were £212 million
compared with £197 million in 2005 with an underlying increase of £16 million

There was a trading loss for the year in subsidiaries of £10 million compared
with £2 million loss in 2005. This largely related to GKN Sheepbridge Stokes,
our UK cylinder liner business, and included £3 million of redundancy and
re-organisation costs as well as start-up losses in the recently formed Chinese
cylinder liner operation. These were partially offset by profits of £4 million
on property disposals within the segment. Underlying trading profit in both the
UK cylinder liner and structural component companies also declined, with the
impact of lower sales levels exacerbated by energy cost increases.

Losses at GKN Sheepbridge Stokes remained intractable and in January 2007 the
closure of this business was announced, leading to our complete withdrawal from
cylinder liner manufacture in Europe. It is expected that closure will be
completed by September 2007 and that trading losses and closure costs will total
approximately £10 million.

The Chinese business ended the year close to break even and is expected to move
into modest profit in 2007.

Within joint ventures, trading profit showed a sharp increase from £3 million to
£8 million as a consequence of the sales increases noted above. Taking joint
ventures and subsidiaries together, there was a trading loss of £2 million (2005
- profit £1 million).


Products and markets

OffHighway designs and manufactures steel wheels and driveline systems for the
global agricultural, construction and industrial machinery sectors. During 2006,
approximately 55% of its sales were to the agricultural market, 29% to the
construction equipment market and the balance to the industrial machinery
market. The wheels operation accounts for over 50% of divisional revenue and has
around a 30% market share in North America and 50% in Western Europe. In power
take-off (PTO) shafts, which account for around 25% of sales, market shares are
29% and 50% in those regions.

Major customers include John Deere, Case New Holland and Caterpillar with a
large percentage of sales going to a wide range of component users.


In Europe (40% of divisional sales), the overall agricultural machinery market
in 2006 was essentially level with 2005, with German demand remaining strong and
France showing the first signs of recovery.

In North America (15% of divisional sales) markets softened somewhat during the
year as farm incomes fell as a consequence of lower government support and
sharply higher input costs.

Industry forecasts for 2007 are for stable European demand across all product
groups but some further reduction in North America driven by lower demand for
tractors and combine harvesters. However, US commodity prices, in particular
corn, are relatively strong and this may support demand.


The European construction machinery market remained solid throughout the year
with no sign of any major changes in the short term.

In the US, demand for heavy construction equipment for mining and road building
was strong throughout the year. In the light construction market, however,
following a good first half, second half demand declined as a result of the
reduction in the US house building programme. Looking to 2007, some further
weakening appears possible in housing related equipment with level demand

Industrial Machinery

This sector (16% of divisional sales) includes products for the material
handling and other industries. Demand in 2006 was flat and the outlook for 2007
is for little or no change.

2006 Highlights

Sales in the year were £331 million compared with £310 million in 2005. There
was a £2 million reduction from currency translation and a benefit of £25
million from 2005 and 2006 acquisitions. The small underlying decrease of £2
million (0.6%) mainly reflected the softer agricultural market conditions noted

Trading profit of £23 million was £3 million above 2005 with all of the
improvement from acquisitions. The underlying result was £1 million below last
year reflecting a modest increase in the wheels business on slightly higher
sales, and a lower result in driveline systems which suffered more from decline
in North American demand.

Margin in the year increased to 6.9% from 6.5% in 2005.

In line with its strategy, the division made a number of acquisitions during the
year. The most significant of these was Rockford which was completed on 2
August. Rockford, which is US based, will give greater exposure to the world's
construction markets. Other small European acquisitions were Cramer (1 January),
and HyteComp (1 June). In November, as part of the strategy to expand our global
footprint, Liuzhou Wheels in China was acquired. In total, acquisitions in the
year contributed £20 million of sales and are expected to generate revenue of
approximately £50 million in 2007.

Capital expenditure on tangible fixed assets of £10 million (2005 - £10
million), was 1.3 times (2005 - 1.3 times) depreciation.

Top line growth is expected in 2007 from the full year impact of 2006
acquisitions, a number of business wins during the year and opportunities
provided by greater exposure to the construction industry.


Products and markets

GKN Aerospace is a global first-tier supplier of airframe and engine structures,
components, assemblies and engineering services to aircraft prime contractors
and operates in three main product areas, aerostructures, propulsion systems and
special products. At the end of 2006, the split of business was approximately
50% aerostructures, 30% propulsion systems and 20% special products. The
aftermarket business spans all three and equates to approximately 15% of overall

As a leader in the design and manufacture of advanced composites, transparencies
and complex metal structures at the component and assembly level, GKN Aerospace
serves all the major airframe and engine OEMs. Products and services are
provided to both fixed wing and rotary wing manufacturers, with some 60% of
sales in the US. Following the acquisition in September of Stellex, which
brought increased exposure to the civil market, current annualised sales are
approximately 58% to military and 42% to civil customers.

The overall aerospace market was buoyant, with sustained strength in both the
military and civil sectors. Airbus and Boeing delivered in aggregate 832
aircraft in 2006, up from 668 in 2005. The civil sector is firmly into an
upswing and is likely to experience strong short-term growth. Military demand is
largely driven by US defence spending and is likely to remain solid. Good growth
also exists in the business aircraft, light jet and rotorcraft markets.

Within these markets, there is continuing growth in demand for lightweight
materials and advanced composites and complex titanium structures.

2006 Highlights

Aerospace sales were £695 million compared with £627 million in 2005. The impact
of currency on translation was £4 million negative while acquisitions added £21
million. The underlying increase of £51 million was 8.2% above 2005 and arose as
a consequence of the overall strong markets and a number of new programmes
coming into production.

Trading profit of £70 million was £16 million higher than 2005. Excluding the
benefit from acquisitions of £2 million and the negative impact of currency of
£1 million, the underlying increase of £15 million was 28.3% above 2005 as a
result of higher sales and further productivity improvements. The aerostructures
businesses performed well, helped by strong growth in composite sales, with the
engine nacelles business also showing good growth. Transparencies were also
strong due to high demand for military spares.

Margins improved to 10.1% (2005 - 8.6%) in line with the target margin for the

In September 2006 the division acquired Stellex Aerostructures, a US based
manufacturer of complex metal structure components. The acquisition increases
our exposure to the civil aircraft market and brings with it significant
positions on the Boeing 787 and 777 as well as the Lockheed Martin F35 (JSF). It
contributed £21 million to sales in the year.

Capital expenditure on tangible assets in the year was £30 million (2005 - £32
million) which represented 1.4 times (2005 - 1.5 times) depreciation.

Capital expenditure on intangible assets totalled £27 million (2005 - £17
million) reflecting the high level of investment in new programmes.

In 2006, a number of new and incremental programmes were secured with Boeing,
Northrop Grumman, Airbus, Lockheed Martin, Spirit Aerospace, Rolls Royce and the
US Air Force which will support sustained growth.

On the A400M GKN Aerospace Cowes shipped the first two development sets of the
advanced technology composite primary wing spars to the wing final assembly line
at Airbus Filton. GKN's turnover on this programme, which has 177 orders from
the partner nations plus a significant export potential, is £1 million an

Going forward into 2007 the division continues to pursue a balanced portfolio
and a number of new programs are also being viewed as significant growth
opportunities. The launch of the A350XWB, the naval UCAS and the CH53X are all
examples of such additional opportunities.

Programme expansion is key in securing growth. During 2006, ship set values were
expanded on a number of key strategic programmes including the Boeing B787 and
Lockheed Martin F35 (JSF).

On the Boeing 787, with help from the Stellex acquisition, the ship set value
has almost doubled to $1.8 million per aircraft with product participation that
includes the ice protection system, floor structure assemblies, cabin windows,
titanium structures and engine cases. Similarly on the Lockheed Martin F35
(JSF), GKN Aerospace now has more than $1.8 million per aircraft derived from
airframe components, engine products and canopy.

Strong positioning over a broad range of aircraft and engine programmes provides
the opportunity for solid growth in future.

Cautionary Statement

This press release contains forward looking statements which are made in good
faith based on the information available to the time of its approval. It is
believed that the expectations reflected in these statements are reasonable but
they may be affected by a number of risks and uncertainties that are inherent in
any forward looking statement which could cause actual results to differ
materially from those currently anticipated.


These appendices do not form the statutory accounts of the Group. The statutory
accounts for the year ended 31 December 2005 have been filed with the Registrar
of Companies and contained an unqualified audit report. The audited results for
2006 were approved by the Board on 26 February 2007 and have been agreed with
the auditors.


GKN Consolidated financial information

Consolidated Income Statement for the year ended 31 December         24

Consolidated Statement of Recognised Income and Expense              25

Consolidated Balance Sheet at 31 December 2006                       26

Consolidated Cash Flow Statement for the year ended 31               27
December 2006

Note 1 - Segmental analysis                                        28-30

Notes 2-12                                                         31-43

Consolidated Income Statement
For the year ended 31 December 2006
                                                                    2006     2005
                                                           Notes      £m       £m

Sales                                                        1     3,634    3,648

    Trading profit                                           1       242      229
    Restructuring and impairment charges                     2       (74)     (98)
    Amortisation of non-operating intangible assets          3        (3)      (1)
    arising on business

    Profits and losses on sale or closures of businesses     3         5        1
    Changes in fair value of derivative financial            3        33      (33)
Operating profit                                             1       203       98

Share of post-tax earnings of joint ventures                 8        17       10

    Interest payable                                                 (57)     (61)
    Interest receivable                                               23       48
    Other net financing charges                                       (4)     (22)
Net financing costs                                          4       (38)     (35)
Profit before taxation                                               182       73

Taxation                                                     5        (5)     (14)
Profit after taxation for the year                                   177       59

Profit attributable to minority interests                              -        4
Profit attributable to equity shareholders                           177       55
                                                                     177       59
All activities in 2006 and 2005 were from continuing

Earnings per share - p                                       6
Basic                                                                25.0      7.7
Diluted                                                              24.9      7.6

Dividends per share - p                                      7
Interim dividend per share                                            4.1      4.0
Final dividend per share                                              8.7      8.2

* Components of Operating profit in the comparative results have been reanalysed
to conform with 2006 presentation.

Consolidated Statement of Recognised Income and Expense
For the year ended 31 December 2006
                                                                     2006     2005
                                                                       £m       £m
Currency variations                                                  (124)      77
Derivative financial instruments:
   Transactional hedging                                                1        -
   Translational hedging                                               43      (23)
Unrealised loss arising on change in status of equity                   -       (3)
accounted investments
Actuarial gains/(losses) on post-employment obligations
including tax:
   Subsidiaries                                                        40      (49)
   Joint ventures                                                       -       (1)
Deferred tax on non-qualifying assets                                   -        1
Amounts arising from the acquisition of minority interest               -        4
Net (losses)/profits not recognised in the income                     (40)       6
Profit for the year                                                   177       59
Total recognised income for the year                                  137       65
Adjustment in respect of the adoption of IAS 39                         -       17
                                                                      137       82

Total recognised income for the year attributable to:
   Equity shareholders                                                138       58
   Minority shareholders                                               (1)       7
                                                                      137       65

   Consolidated Balance Sheet

   At 31 December 2006
                                                                    2006       2005

                                                         Notes        £m         £m
   Non-current assets
   Intangible assets   - goodwill                                    245        241
                       - other                                       111         54
   Property, plant and equipment                                   1,354      1,364
   Investments in joint ventures                           8          83         81
   Other receivables and investments including loans to               24         21
   joint ventures
   Deferred tax assets                                     9         114        172
                                                                   1,931      1,933
   Current assets
   Inventories                                                       470         467
   Trade and other receivables                                       520        566
   Derivative financial instruments                                   32         12
   Cash and cash equivalents                                         342        724
                                                                   1,364      1,769
   Assets held for sale                                                -         38
   Total assets                                                    3,295      3,740
   Current liabilities
   Borrowings                                                        (39)       (47)
   Derivative financial instruments                                  (11)       (34)
   Trade and other payables                                         (743)      (795)
   Current income tax liabilities                                    (93)      (109)
   Provisions                                                        (66)       (57)
                                                                    (952)    (1,042)
   Liabilities associated with assets held for sale                    -        (16)
                                                                    (952)    (1,058)
   Non-current liabilities
   Borrowings                                                       (729)      (734)
   Deferred tax liabilities                                9         (63)       (60)
   Trade and other payables                                          (29)       (24)
   Provisions                                                        (53)       (78)
   Post-employment obligations                             12       (561)      (885)
                                                                  (1,435)    (1,781)
   Total liabilities                                              (2,387)    (2,839)

   Net assets                                                        908        901

   Shareholders' equity
   Ordinary share capital                                            371        370
   Share premium account                                              25         23
   Retained earnings                                                 589        493
   Other reserves                                                    (93)       (11)
   Total shareholders' equity                                        892        875
   Minority interest - equity                                         16         26
   Total equity                                                      908        901

   * Restated to reflect the 2006 presentation of Treasury shares within equity

Consolidated Cash Flow Statement
For the year ended 31 December 2006
                                                                 2006       2005
                                                     Notes         £m         £m
Cash flows from operating activities
Cash generated from operations                         11         117        308
Interest received                                                  25         48
Interest paid                                                     (58)       (62)
Tax paid                                                          (31)       (35)
Dividends received from joint ventures                              7          6
                                                                   60        265
Cash flows from investing activities
Purchase of property, plant and equipment and                    (230)      (229)
intangible assets
Proceeds from sale of property, plant and equipment                13          9
Acquisition of subsidiaries (net of cash acquired)               (126)       (51)
Proceeds from sale of subsidiaries and businesses                  13          1
(net of cash disposed)
Investment loans and capital contributions                          1          2
                                                                 (329)      (268)
Cash flows from financing activities
Net proceeds from issue of ordinary share capital                   3         10
Purchase of treasury shares                                       (40)       (30)
Net proceeds from borrowing facilities                             48          8
Finance lease payments                                             (1)        (3)
Repayment of borrowings                                           (14)       (29)
Dividends paid to shareholders                         7          (88)       (86)
Dividends paid to minority interests                               (1)         -
                                                                  (93)      (130)

Currency variations on cash and cash equivalents                   (7)         3
Movement in cash and cash equivalents                            (369)      (130)
Cash and cash equivalents at 1 January                            697        827
Cash and cash equivalents at 31 December               11         328        697

All cash flows arise from continuing operations. Cash inflows from government
capital grants of £3 million (2005: £4 million) have been offset against
purchases of property, plant and equipment and intangible assets.

For the purposes of presenting the cash flow statement the components of cash and
cash equivalents are offset. A reconciliation between the cash flow statement and
balance sheet presentation is shown in note 11.

  Notes to the Press Release
  For the year ended 31 December 2006

1 Segmental analysis
  The Group is managed by type of business. Segmental information is provided having regard to the nature of the
  goods and services provided and the markets served.
  Primary reporting format - business segments
                                                    Powder       Other                         Corporate &
  For the year ended 31         Notes Driveline Metallurgy  Automotive  OffHighway  Aerospace  Unallocated   Total
  December 2006
                                            £m          £m          £m          £m         £m           £m      £m
  Sales                                  1,906         582         120         331        695            -   3,634

  EBITDA                                   218          60          (5)         31         95          (12)    387
  Depreciation and impairment              (75)        (28)         (5)         (8)       (21)           -    (137)
  Amortisation of intangible                (3)         (1)          -           -         (4)           -      (8)
  Trading profit/(loss)                    140          31         (10)         23         70          (12)    242
  Restructuring                   2        (37)        (24)          -           -          -           (2)    (63)
  Other impairments               2        (11)          -           -           -          -            -     (11)
  Amortisation of business        3         (1)          -           -          (1)        (1)           -      (3)
     non-operating intangibles
  Profits and losses on sale or   3          5           -           -           -          -            -       5
  closures of
  Changes in fair value of        3         11          (1)          -           2         21            -      33
  derivative financial
  Operating profit/(loss)                  107           6         (10)         24         90          (14)    203
  Share of post-tax earnings of             12           -           5           -          -            -      17
  joint ventures

  Segment assets
  Goodwill                                  62          24           -          35        124            -     245
  Investments in joint ventures             61           -          21           1          -            -      83
  Derivative financial                       7           -           -           1         24            -      32
  Operating assets                       1,180         496          59         206        532            6   2,479
  Other unallocated assets
    -  Cash and cash                         -           -           -           -          -          342      342
    -  Deferred tax assets                   -           -           -           -          -          114      114
  Total assets                           1,310         520          80         243        680          462   3,295
  Segment liabilities
  Derivative financial                      (1)          -           -           -         (8)          (2)    (11)
  Operating liabilities                                                                                          -
    -  Post-employment                    (342)        (33)        (25)        (50)      (102)          (9)   (561)
    -  Other                              (453)       (115)        (35)        (84)      (160)         (44)   (891)
  Other unallocated liabilities
    -  Borrowings                            -           -           -           -          -         (768)   (768)
    -  Current tax liabilities               -           -           -           -          -          (93)    (93)
    -  Deferred tax liabilities              -           -           -           -          -          (63)    (63)
  Total liabilities                       (796)       (148)        (60)       (134)      (270)        (979) (2,387)

  Other segment items
  Capital expenditure
  (including acquisitions)
        - Property, plant and               98          49           7          10         30            -      194
        - Intangible assets                  3           1           -           2         27            -       33
  Other non-cash expenses                     2          1           -           -          1            1       5
  (share-based payments)

  All business segments shown above are continuing. EBITDA is earnings before interest, tax, depreciation and

1 Segmental analysis (continued)
  Primary reporting format - business segments
                                           Powder       Other                         Corporate &
  For the year ended   Note Driveline  Metallurgy  Automotive  OffHighway  Aerospace  Unallocated   Total
  31 December 2005
                                   £m          £m          £m          £m         £m           £m       £m
  Sales                         1,993         588         130         310        627            -   3,648
  EBITDA                          237          40           5          28         80          (10)    380
  Depreciation and                (79)        (27)         (7)         (8)       (21)           -    (142)
  impairment charges
  Amortisation of                  (3)         (1)          -           -         (5)           -      (9)
  intangible assets
  Trading profit                  155          12          (2)         20         54          (10)    229
  Restructuring         2         (46)        (28)          -          (2)         -           (1)    (77)
  Other impairments     2         (11)          -         (10)          -          -            -     (21)
  Amortisation of       3          (1)          -           -           -          -            -      (1)
  business combination
  Profits and losses    3           -           -           -           -          1            -       1
  on sale or closures
  Changes in fair       3         (22)          1           -          (1)       (11)           -     (33)
  value of derivative

  Operating profit/                75         (15)        (12)         17         44          (11)     98

  Share of post-tax                  9          -           1           -          -            -      10
  earnings of joint

  Segment assets
  Goodwill                         79          27           -          25        110            -     241
  Investments in joint             64           -          16           1          -            -      81
  Derivative financial              4           1           -           1          6            -      12
  Operating assets              1,287         508          79         169        459            8   2,510
  Other unallocated
    -  Cash and cash                -           -           -           -          -          724      724
    -  Deferred tax                 -           -           -           -          -          172      172

  Total assets                  1,434         536          95         196        575          904   3,740

  Segment liabilities
  Derivative financial            (10)          -           -          (2)       (12)         (10)    (34)
    -  Post-employment           (397)        (70)       (102)        (75)      (226)         (15)   (885)
    -  Other                     (481)       (107)        (41)        (68)      (146)        (127)   (970)
  Other unallocated
    -  Borrowings                   -           -           -           -          -         (781)   (781)
    -  Current tax                  -           -           -           -          -         (109)   (109)
    -  Deferred tax                 -           -           -           -          -          (60)    (60)

  Total liabilities              (888)       (177)       (143)       (145)      (384)      (1,102) (2,839)

  Other segment items
  Capital expenditure
  -  Property, plant              115          43          14          10         32            -     214
  and equipment
  -  Intangible assets              5           -           -           1         17            -      23
  Other non-cash                    -           -           -           -          -            1       1

  All business segments shown above are continuing.
  Intra-group sales, which are priced on an 'arms length' basis between segment and regions are not
  significant. The analyses of operating profit by business includes an allocation, based on their nature,
  of costs incurred centrally in the United Kingdom, United States of America and Germany. Unallocated
  costs represent corporate expenses. Segment assets comprise all non-current and current assets as per
  the Balance Sheet but exclude deferred tax assets and cash and cash equivalents. Segment liabilities
  include trade and other payables, provisions and post-employment obligations but exclude borrowings and
  taxation liabilities. Cash and cash equivalents and borrowings are not allocated to specific segments as
  these resources are managed centrally and no business in any segment has sufficient autonomy to manage
  these resources. Segment capital expenditure is the total cost incurred during the year to acquire
  segment assets that are expected to be used for more than one year.

   Secondary reporting format - by geographical region

                                              Sales        Segment assets     Capital
                                            2006    2005      2006   2005     2006  2005
                                              £m      £m        £m     £m       £m    £m
   Continuing operations

   Europe                                  1,664   1,622     1,307  1,278      112   115
   Americas                                1,512   1,479     1,153  1,123       83    81
   Rest of the World                         458     547       373    435       32    41
   Corporate and Unallocated                   -       -       462    904        -     -
                                           3,634   3,648     3,295  3,740      227   237

   The sales analysis in the above table is based on the location of the customer.

2 Restructuring and
  impairment charges
                                       2006                               2005
                                             Other                              Other
                        Restructuring  Impairments  Total  Restructuring  Impairments  Total
                                   £m           £m     £m             £m           £m     £m
  Restructuring and
  impairment charges
     Goodwill                       -          (11)   (11)             -          (11)   (11)
     Tangible fixed                (1)           -     (1)           (35)         (10)   (45)
  asset impairments/
     Other asset                   (1)           -     (1)            (1)           -     (1)
                                   (2)         (11)   (13)           (36)         (21)   (57)
     Redundancy costs             (35)           -    (35)           (28)           -    (28)
  including post
     Other                        (26)           -    (26)           (13)           -    (13)
  reorganisation costs
                                  (63)         (11)   (74)           (77)         (21)   (98)


  During 2006 the Group continued to deploy its strategic reorganisation programme, first
  announced in March 2004, that involves the migration of Driveline production capacity from
  high cost to low cost / high growth economies, actions in support of the recovery in Powder
  Metallurgy and the realignment and reduction of production capacity, overhead and
  infrastructure costs in other areas of the business. Charges recognised in the year in
  respect of this programme amount to £63 million (2005: £77 million) which comprises asset
  impairment charges of £2 million (2005: £36 million), redundancy costs, including pension
  past service charges and curtailment credits, of £35 million (2005: £28 million net of
  post-employment curtailments, £5 million) and other reorganisation costs of £26 million
  (2005: £13 million). Pension past service charges and curtailment credits amount to a £3
  million charge in 2006. An analysis by segment and description of the charges is set out

                                                          2006                          2005
                                   impairments                 Reorganisation
                                    reversals      Redundancy           costs   Total    Total
                                           £m              £m              £m      £m       £m
  Driveline                                 3              21              13      37       46
  Powder Metallurgy                        (1)             14              11      24       28
  OffHighway                                -               -               -       -        2
  Corporate                                 -               -               2       2        1
                                            2              35              26      63       77

  Restructuring charges in Driveline in 2006 arise primarily from the continuation of the
  plant closures announced in North America and Western Europe in 2005, continued reductions
  in the level of fixed cost headcount primarily in European plants and initial charges
  recognised on the announced cessation of the Driveshaft operations in a Driveline European
  plant. Redundancy costs provided for represent charges for contractual severance and other
  employee related exit benefits and post-employment augmentations and curtailments.
  Reorganisation costs include charges in respect of onerous lease, property and other
  contracts, incremental costs borne by the Group as a consequence of dedicated restructuring
  and transition teams and equipment relocation costs attributable to the transfer of
  equipment between closing facilities and continuing operations and incremental premium
  freight and product homologation costs. Asset impairment charges are in respect of the
  irrecoverable value of plant and machinery not transferable to other facilities or
  recoverable from disposal; write-downs of property, surplus to requirements as a
  consequence of the restructuring, to estimated realisable value and the impairment of
  dedicated consumable inventories that will not be utilised by the operation in the period
  up to closure and or cessation of operations.

  Powder Metallurgy charges arise as a consequence of the Board approved closure of five
  plants. Charges comprise the cost of redundancies, contractual severance payments and other
  employee related obligations where irrevocable external announcements had been made in the
  year. Reorganisation costs comprise surplus property costs, incremental transition team
  costs and equipment relocation and maintenance charges attributable to transfers to
  continuing facilities. As a consequence of detailed restructuring actions taken in 2006
  asset impairments recognised in 2005 have been reversed as alternative productive use has
  been found for certain plant and equipment not originally envisaged or anticipated.

  Charges in respect of the Corporate operations primarily represents onerous lease and other
  contract provisions recognised resulting from the announced closure of the Group's current
  London office and centralisation of headquarters operations in one principal facility.

  The cash outflow in 2006 in respect of the Group's strategic reorganisation programme
  amounts to £57 million (2005: £36 million).

  2005 restructuring charges comprise asset impairments (£36 million); redundancy charges
  (£28 million) and reorganisation costs (£13 million). The analysis of 2005 restructuring by
  segment is set out in note 1.

  Other impairments

  In addition to impairment charges borne as a consequence of strategic reorganisation
  activities, an £11 million (2005: £11 million) impairment charge has arisen in 2006
  relating to the write down of goodwill at a Driveline business where as a consequence of
  current and future trading performance and projections specific to a customer relationship
  sufficient doubt exists over the recoverability. The impairment review was carried out with
  reference to both value in use and fair value recoverabilities. The remaining £10 million
  impairment in 2005 related to property, plant and equipment in the UK cylinder liner
  business within the Other Automotive segment where, during 2005, a decision was made to
  transfer certain production to a new Chinese facility. This fact and continued declining
  profitability led to the significant impairment charge.

 3 Amortisation of non-operating intangible assets arising on business

   In establishing the fair value of assets and liabilities arising on business
   combinations the Group identifies the fair values attributable to intangible
   assets. The intangible assets recognised include operating intangibles,
   predominantly computer software, and non-operating intangibles being the value
   in respect of brands and trademarks, intellectual property rights, customer
   contracts and relationships and proprietary technology rights and know-how. All
   intangibles recognised on business combinations are amortised over the expected
   useful economic lives.

   The amortisation of non-operating intangible assets is separately identified as
   a component of operating profit on the face of the Income Statement. The
   analysis below sets out the amortisation charge in the year by category of
   non-operating intangible asset.
                                                                    2006     2005
                                                                      £m       £m
   Brands/trademarks                                                   -        -
   Intellectual property rights                                        1        1
   Customer contracts and relationships                                1        -
   Proprietary technology rights and know-how                          1        -
                                                                       3        1

   Profits and losses on sale or closures of businesses
                                                                    2006     2005
                                                                      £m       £m
   Fujiwa China                                                        5        -
   Other                                                               -        1
                                                                       5        1

   On 2 March 2006 final approval was received from the Taiwanese authorities to
   transfer the Group's 60% shareholding in Fujiwa to its business partner, Lioho
   Corporation. At this point the Group's control of and active participation in
   the Fujiwa business ceased. The net cash inflow arising on disposal is set out

   Net assets disposed                                                         19
   Minority interests                                                          (8)
   Cumulative translation adjustment                                           (1)
   Surplus arising on disposal                                                  5

   Consideration receivable net of attributable expenses                       15

   In the period to disposal Fujiwa contributed £5 million (2005: £34 million) to
   group sales, £1 million (2005: £4 million) to group trading profit and £nil
   million (2005: £5 million) to cash generated from operations.

   The Other profit recognised in 2005 reflects the cash receipt in respect of a
   contingent earnout arrangement on the 2004 disposal of an Aerospace business.

   Changes in the fair value of derivative financial

   IAS 39 requires derivative financial instruments to be valued at the balance
   sheet date and any difference between that value and the intrinsic value of the
   instrument to be reflected in the balance sheet as an asset or liability. Any
   subsequent change in value is reflected in the Income Statement unless hedge
   accounting is achieved. Such movements do not affect cash flow or the economic
   substance of the underlying transaction. In 2006 the Group used transactional
   hedge accounting in a limited number of instances. The Group did not attempt to
   achieve transactional hedge accounting in 2005. As a consequence, and to assist
   year on year comparison, the change in value continues to be identified as a
   separate element of operating profit.

   4 Net financing costs
                                                                      2006    2005
                                                                        £m      £m
     Interest payable
        Short-term bank and other borrowings                            (3)     (6)
        Other loans repayable within five years                         (5)     (5)
        Loans repayable after five years                               (48)    (49)
        Finance leases                                                  (1)     (1)
                                                                       (57)    (61)
     Interest receivable
        Short-term investments, loans and deposits                      23      48
                                                                        23      48
     Other net financing charges
        Expected return on pension scheme assets                       136     118
        Interest on post-employment obligations                       (140)   (140)
                                                                        (4)    (22)
     Net financing costs                                               (38)    (35)

     Included above in interest receivable in 2005 are amounts earned in respect of
     an interest rate swaption of £1 million. This arrangement ended in 2005.

5    Taxation
                                                                       2006   2005

     Analysis of charge in year                                          £m     £m
     Current tax
        Current year                                                     38     39
        Utilisation of previously unrecognised tax                       (2)     -
        losses and other assets
        Adjustments in respect of prior years                            (3)     6
        Net movement on provisions for uncertain tax                    (15)   (29)
                                                                         18     16
     Deferred tax
        Origination and reversal of temporary                             9      6
        Tax on change in fair value of derivative                         2     (6)
        financial instruments
        Utilisation of previously unrecognised tax                       (7)     -
        losses and other assets
        Other changes in unrecognised deferred tax                      (21)    10
        Changes in tax rates                                              -      -
        Adjustments in respect of prior years                             4    (12)
                                                                        (13)    (2)
     Total tax charge for the year                                        5     14

     Overseas tax included above                                         15     28

     Tax in respect of restructuring and impairment charges included in total
     charge for the year
        Current tax                                                      (6)    (8)
        Deferred tax                                                     (8)   (12)
                                                                        (14)   (20)

     Details of the effective tax rate for the Group and the underlying events and
     transactions affecting this and the tax charge are given in the narrative of
     this Press Release on pages 8 and 9.

                                                                       2006    2005
     Tax on items included in equity                                     £m     £m
     Deferred tax on post-employment obligations                         67      6
     Deferred tax on non-qualifying assets                                -     (1)

                                                         2006          2005
     Tax reconciliation                                    £m      %     £m      %
     Profit before tax                                    182            73
        Less share of post-tax earnings of joint          (17)          (10)
     Profit before tax excluding joint ventures           165            63

     Tax calculated at 30% standard UK corporate tax       49    30%     19    30%
     Differences between UK and overseas corporate tax      7     4%      2     3%
     Non-deductible and non-taxable items                  (1)   (1%)     3     5%
     Utilisation of previously unrecognised tax losses     (9)   (5%)     -      -
     and other assets
     Other changes in unrecognised deferred tax assets    (21)  (13%)    10    16%
     Changes in tax rates                                   -      -      -      -
     Deferred tax (credit)/charge in respect of            (6)   (4%)    15    24%
     post-employment obligations
     Current year tax charge on ordinary activities        19    11%     49    78%
     Net movement on provision for uncertain tax          (15)   (9%)   (29)  (46%)
     Adjustments in respect of prior years                  1     1%     (6)  (10%)
     Total tax charge for the year                          5     3%     14    22%

  Earnings per share

  Basic earnings per share

  Basic earnings per share are calculated by dividing the profit attributable to equity
  shareholders by the weighted average number of ordinary shares in issue during the period,
  excluding ordinary shares purchased by the Company and held as treasury shares.

  Diluted earnings per share

  Diluted earnings per share are calculated by adjusting the weighted average number of
  ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares.
  The Company has only one category of dilutive potential ordinary shares; share options.

  The calculation is performed for the share options to determine the number of shares that
  could have been acquired at fair value (determined as the average market share price of the
  Company's shares) based on the monetary value of the subscription rights attached to
  outstanding share options. The number of shares calculated as above is compared with the
  number of shares that would have been issued assuming the exercise of the share options.

  Earnings per share are
  computed as follows:

                                             2006                                2005
                                Earnings   Weighted   Earnings  Earnings  Weighted  Earnings
                                            average  per share             average        per
                                             number                         number     share
                                          of shares                              of
                                      £m          m          p        £m         m          p
  Total Company
  Basic eps:
  Profit attributable to equity      177      708.8       25.0        55     718.1       7.7
  Dilutive securities:
  Dilutive potential ordinary          -        2.1       (0.1)        -       5.1      (0.1)
  Diluted eps                        177      710.9       24.9        55     723.2       7.6

  Adjusted earnings per share - total Company
  Earnings per share before restructuring and impairment charges, amortisation of
  non-operating intangibles arising on business combinations, profits and losses on sale or
  closures of businesses and the changes in fair value of derivative financial instruments,
  which the Directors consider gives a useful additional indicator of underlying performance,
  is calculated on earnings for the year adjusted as follows:

                                                             2006           2005 (Restated)
                                                            £m         p        £m         p
  Profit attributable to equity                            177      25.0        55       7.7
  Charges / (credits) included
  in operating profit:
    Restructuring and                                       74      10.5        98      13.6
    impairment charges
    Amortisation of non-operating intangibles on             3       0.4         1       0.1
    business combinations
    Profits and losses on sale or                           (5)     (0.7)       (1)     (0.1)
    closures of businesses
    Changes in fair value of derivative                    (33)     (4.7)       33       4.6
    financial instruments
  Taxation on charges/(credits) included in operating      (12)     (1.7)      (26)     (3.6)
  profit (note 5)
  Adjusted earnings attributable to                        204      28.8       160      22.3
  equity shareholders (£m)
  Diluted adjusted earnings per share attributable to               28.7                22.1
  equity shareholders

7 Dividends
                                                                              2006      2005
                                                                                £m        £m
  Equity dividends paid in the
  Previous year final : 8.2p (2005: 8.0p) per share                             59        58
  Current year interim : 4.1p (2005: 4.0p) per share                            29        28

  In addition, the Directors are proposing a final dividend in respect of the financial year
  ended 31 December 2006 of 8.7p per share, £61 million. It will be paid on 9 May 2007 to
  shareholders who are on the register of members at close of business on 20 April 2007.

8  Joint ventures

                                                                     2006     2005
   Group share of results of joint ventures                            £m       £m
   Sales                                                              208      175
   Operating costs and other income                                  (187)    (161)
   Net financing costs                                                 (1)      (1)
   Profit before taxation                                              20       13
   Taxation                                                            (3)      (3)
   Share of post-tax earnings                                          17       10

   The segmental analysis of the Group's share of joint ventures' sales and trading
   profit is set out below:

                                                      2006              2005
                                                         Trading           Trading
                                                 Sales    Profit    Sales   Profit
                                                    £m        £m       £m       £m
   Driveline                                       113        13      104       11
   Other Automotive                                 92         8       67        3
   OffHighway                                        3         -        4        -
                                                   208        21      175       14

                                                                     2006     2005

                                                                       £m       £m
   At 1 January                                                        81       94
   Share of profits retained                                           10        4
   Change in status                                                     -      (24)
   Actuarial loss on post-employment obligations,                       -       (1)
   including deferred tax
   Currency variations                                                 (8)       8
   At 31 December                                                      83       81

   Group share of net assets
   Non-current assets                                                  60       67
   Current assets                                                      81       80
   Current liabilities                                                (42)     (50)
   Non-current liabilities                                            (16)     (16)
                                                                       83       81

   The joint ventures have no significant contingent liabilities to which the group
   is exposed and nor has the group any significant contingent liabilities in
   relation to its interest in the joint ventures other than bank guarantees.

9  Deferred tax

   Deferred tax is calculated in full on temporary differences under the liability method.

                                                                             2006    2005
   Amounts recognised on the balance                                           £m      £m
   Deferred tax assets                                                        114     172
   Deferred tax liabilities                                                   (63)    (60)
                                                                               51     112

   Deferred tax assets and liabilities are only offset where there is an enforceable right
   of offset and there is an intention to settle the balances net. All of the deferred tax
   assets were available for offset against deferred tax liabilities and hence the net
   deferred tax asset at 31 December 2006 was £51 million (2005: £112 million).

   The movement on deferred tax is as shown
                                                                             2006    2005
                                                                               £m      £m
   At 1 January                                                               112     122
   Adjustment in respect of adoption                                            -      (3)
   of IAS 39
   Subsidiaries acquired and sold                                              (7)     (4)
   Properties sold                                                              -       -
   (Charge)/credit for the year:
         Income Statement                                                      14        2
         Equity                                                               (67)     (5)
   Currency variations                                                         (1)      -
   At 31 December                                                              51     112

   The movements in deferred tax assets and liabilities (prior to the offsetting of
   balances within the same jurisdiction as permitted by IAS 12) during the period are
   shown below:

                                                    Pensions   Tax losses   Other   Total
   Deferred tax assets                                    £m           £m      £m      £m
   At 1 January 2006                                     163           15      28     206
   Credited to income statement                            6            7       -      13
   (Charged) to equity                                   (67)           -       -     (67)
   Subsidiaries acquired                                   -            -       -       -
   Currency variations                                     -           (2)      -      (2)
   At 31 December 2006                                   102           20      28     150

                                                         Accelerated tax
                                                            depreciation   Other    Total
  Deferred tax liabilities                                            £m      £m       £m
  At 1 January 2006                                                  (86)     (8)     (94)
  (Charged) / credited to income                                      (2)      3        1
  Subsidiaries acquired                                               (7)      -       (7)
  Currency variations                                                  1       -        1
  At 31 December 2006                                                (94)     (5)     (99)

  Unrecognised deferred tax assets

  Deferred tax assets have not been recognised in relation to certain taxable losses
  and other temporary differences on the basis that their future economic benefit is
  uncertain. The gross and tax values of these unrecognised assets together with any
  expiry dates where relevant is shown below. The tax value of the assets has been
  calculated using tax rates enacted or substantially enacted at the balance sheet

                               2006                             2005
                         Tax value  Gross                 Tax value  Gross
                                £m     £m  Expiry period         £m     £m  Expiry period
  Tax losses - with            160    451   2019 to 2026        164    492   2019 to 2025
  expiry - national
  Tax losses - with             48    877   2007 to 2026         51    954   2006 to 2025
  expiry - local
  Tax losses - without         112    355                        98    293
  Other temporary               50    163                        59    172
  Unrecognised deferred        370  1,846                       372  1,911
  tax assets

  Included above are tax losses of £732 million with a tax value of £111 million (2005:
  £820 million with a tax value of £127 million) that are so severely restricted for
  future use that management believes they are very unlikely to be utilised.

  Deferred tax assets totalling £82 million (2005: £123 million) have been recognised
  relating to territories where tax losses have been incurred in the year. It is
  anticipated that future profitability arising from restructuring and other actions will
  result in their realisation.

  No deferred tax is recognised on the unremitted earnings of overseas subsidiaries except
  where the distribution of such profits is planned. If the earnings were remitted in full
  tax of £25 million (2005: £15 million) would be payable.

   10 Acquisitions

      The Group completed 5 acquisition in 2006, all of which were accounted for using
      the purchase accounting method. The two primary acquisitions were Stellex
      Aerostructures, a specialist in the manufacture of complex metal structural
      components for the aerospace industry and Rockford Powertrain, a producer of high
      speed driveshafts operating primarily in the construction and mining industry.
      Other acquisitions were the Liuzhou Wheel Rim factory, Cramer Kupplung GmbH and
      Hytecomp AB, all of which are OffHighway businesses.

      The table below sets out details of the fair value of assets acquired and
      resulting goodwill.

                                                    Stellex Rockford    Other     Total
                                                         £m       £m       £m        £m

      Intangible fixed assets                           26       18        -        44
      Property, plant and equipment                     21        2        4        27
      Inventories                                       19        9        3         31
      Trade and other receivables                        7        5        2        14
      Trade and other payables                          (6)      (6)       -       (12)
      Current and deferred tax                          (2)      (6)       -        (8)
      Provisions and contingencies                       -       (4)       -        (4)
      Borrowings                                         -        -       (3)       (3)
      Cash and cash equivalents                          1        1        -         2
      Fair value of net assets acquired                 66       19        6        91
      Fair value of consideration:
      -   cash & expenses                               93       28        7        128
      -   deferred consideration                         -        1        1          2
      Goodwill arising on acquisition                   27       10        2        39

      The significant acquisitions contributed £36 million to Group sales and £5
      million to Group Trading Profit with £21 million and £2 million arising in
      Aerospace and £15 million and £3 million in OffHighway. The contributions to 2006
      results includes the £1 million unwind of fair value uplift recognised on
      acquired inventory at Stellex and Rockford.

      Both primary acquisitions were earnings accretive in the year, and generated
      cashflow from operations after capital expenditure of £2 million.

      The table below sets out the non-operating intangible assets recognised on
      current year acquisitions:

                                                                     Stellex  Rockford
                                                                          £m        £m

      Brands/trademarks                                                    -         3
      Proprietary technological know-how                                   4         3
      Customer contracts/relationships                                    22        12
                                                                          26        18

11  Cash flow reconciliations
                                                                   2006      2005
    Cash generated from operations                                   £m        £m
    Operating profit                                                203        98
    Adjustments for:
    Profits and losses on sale or closure of                         (5)       (1)
    Amortisation of non-operating intangible                          3         1
    assets arising on business combinations
    Changes in fair value of derivative                             (33)       33
    financial instruments
    Impairment of fixed assets                                        1        50
    Impairment of goodwill                                           11        11
    Depreciation and amortisation                                   145       146
    Amortisation of capital grants                                   (3)       (2)
    Net profits on sale of fixed assets                              (3)       (1)
    Charge for share-based payments                                   5         1
    Movement in post-employment obligations                        (204)      (43)
    Changes in working capital and provisions                        (3)       15
                                                                    117       308

    Movement in net debt
                                                                   2006      2005
                                                                     £m        £m
    Net movement in cash and cash equivalents                      (369)     (130)
    Net movement in borrowings                                      (36)       21
    Currency variations on borrowings                                34       (23)
    Finance leases                                                    1         2
    Subsidiaries acquired and sold                                    9         -
    Movement in year                                               (361)     (130)
    Net (debt)/funds at beginning of year                           (65)       65
    Net debt at end of year                                        (426)      (65)

    Reconciliation of cash and cash equivalents
                                                                   2006      2005
                                                                     £m        £m
    Cash and cash equivalents per cash flow at                      328       697
    31 December
    Add: bank overdrafts included within 'current liabilities         14       30
    - borrowings'
    Less: cash and cash equivalents within                            -        (3)
    'assets held for sale'
    Cash and cash equivalents per balance sheet                     342       724
    at 31 December

12   Post-employment obligations
                                                                                 2006      2005
     Post-employment obligations as at the year end comprise:                      £m        £m
     Pensions     - funded                                                       (217)     (514)
                  - unfunded                                                     (268)     (278)
     Medical      - funded                                                        (28)      (33)
                  - unfunded                                                      (48)      (60)
                                                                                 (561)     (885)

     Pensions and medical - funded
     The Group's pension arrangements comprise various defined benefit and defined contribution
     schemes throughout the world. A number of retirement plans are operated which provide
     certain employees with post-employment medical benefits.

     In the UK, pension arrangements are made through an externally funded defined benefit
     scheme. In the USA and the Rest of the World there are a number of externally funded
     defined benefit schemes while in certain companies in Europe funds are retained within the
     business to provide for post-employment obligations.

(a)  Defined benefit schemes - measurement and assumptions
     Independent actuarial valuations of all defined benefit scheme assets and liabilities were
     carried out at 31 December 2006. The present value of the defined benefit obligation, the
     related current service cost and the past service cost were measured using the projected
     unit credit method. Key assumptions were:

                                                             UK   Americas        Europe     ROW
                                                              %          %             %       %
     Rate of increase in pensionable salaries               4.1        3.5          2.50     2.0
     Rate of increase in payment and deferred               3.2        2.0          1.75     n/a
     Discount rate                                          5.1        5.9          4.70     2.5
     Inflation assumption                                   3.1        2.5          1.75     1.0
     Rate of increases in medical costs:
        initial/long term                                  8.0/   10.0/5.0           n/a     n/a
     Rate of increase in pensionable salaries               4.3        3.5           2.5     2.0
     Rate of increase in payment and deferred pensions      2.9        2.0           1.5     n/a
     Discount rate                                         4.75       5.50          4.25    2.25
     Inflation assumption                                   2.8        2.5           1.5     1.0
     Rate of increases in medical costs:
        initial/long term                                  9.5/   10.0/5.0           n/a     n/a

     The underlying mortality assumptions for the major schemes are as follows:

     United Kingdom
     Such is the size and profile of the UK scheme that data on the scheme's mortality
     experience is collected and reviewed annually. Mortality assumptions are based on PA92
     (Year of Birth) tables with a +3 year age adjustment to reflect actual scheme experience.
     At the recent review, the rate of improvement in longevity was strengthened to a point
     beyond that of short cohort. The key current year mortality assumptions for the scheme are
     that a male aged 65 lives for a further 18.5 years, whilst a male aged 40 is expected to
     live a further 20 years after retiring at 65. The impact of this change in assumptions has
     increased the scheme deficit by £38 million.

     In the USA, RP-2000 tables scaled to 2006 continued to be used whilst in Germany the
     RT2005-G tables were again used. In the USA the longevity assumption for a male aged 65 is
     that he lives a further 18.1 years whilst in Germany for a further 17.7 years. The
     longevity assumption for a USA male currently aged 40 is that he also lives for a further
     18.1 years once attaining 65 years, with the German equivalent assumption being 17.7 years.
     These assumptions are based solely on the prescribed tables and do not reflect actual GKN

     Assumption sensitivity analysis

     The impact of a one percentage point movement in the primary assumptions on the key
     defined benefit net obligations as at 31 December 2006 is set out below:
                                                         UK   Americas       Europe     ROW
                                                         £m         £m           £m      £m
     Discount rate +1%                                  282         36           35       2
     Discount rate -1%                                 (382)       (45)         (44)     (2)
     Rate of inflation +1%                              276          -           26       -
     Rate of inflation -1%                             (280)         -          (27)      -
     Rate of increase in medical                          2          9            -       -
     costs +1%
     Rate of increase in medical                         (2)        (7)           -       -
     costs -1%

     A one percentage point increase in the assumption on healthcare benefits would increase
     the total service and interest cost by £1 million (2005: £1 million) and the liability
     by £11 million (2005: £13 million). A one percent decrease in the assumption on
     healthcare benefits would reduce the total service and interest cost by £nil million
     (2005: £1 million) and the liability by £9 million (2005: £10 million).

(b) Defined benefit schemes - reporting

    The amounts recognised in the Income Statement are:
                                                              2006                       2005
                                                               £m                          £m
                                             Trading Profit
                                                    Redundancy   Restructuring
                                          Employee   and other             and
                                           benefit  employment      impairment
    Included within operating profit       expense     amounts         charges   Total  Total

    Current service cost                       (38)          -               -     (38)   (33)
    Past service cost                           (1)         (1)              -      (2)    (4)
    Settlement/curtailments                      1          (1)             (3)     (3)    15
                                               (38)         (2)             (3)    (43)   (22)
    Included within net financing
    Expected return on pension scheme                                              136    118
    Interest on post-employment                                                   (140)  (140)
                                                                                    (4)   (22)

    The past service cost of £2 million included in trading profit (2005: £2 million) arises
    primarily from early retirements in the UK together with the equalisation of benefits at a
    Driveline facility in Germany. The settlement/curtailment credit of £1 million arises from
    further structural change to retiree medical benefit arrangements in the United States,
    whilst the charge of £4 million largely represents the cost of downsizing two UK
    businesses in the Automotive portfolio. The prior year £15 million settlement/curtailment
    credit arose from the closure of a Driveline facility in Europe (£5 million), the exit
    from a multi-employer defined benefit scheme in Japan (£7 million) and the structural
    changes to retiree medical benefit arrangements in the United States of America (£3

    The amounts recognised in respect of funded obligations in the balance sheet are:
                                                    31 December 2006              31 December
                                            UK   Americas  Europe     ROW   Total         2005
                                            £m         £m     £m      £m      £m           £m
    Present value of funded             (2,361)      (265)   (15)    (19) (2,660)      (2,666)
    Fair value of plan assets            2,187        196     19      13   2,415        2,119
    Net obligation recognised in the      (174)       (69)     4      (6)   (245)        (547)
    balance sheet

    Cumulative actuarial gains and losses recognised in equity are as
                                                                             2006        2005
                                                                               £m          £m
    At 1 January                                                              (90)        (46)
    Net actuarial gains/(losses) in year                                      107         (44)
    At 31 December                                                             17         (90)

    The defined benefit obligation is analysed between funded and unfunded schemes
    as follows:
                                                                             2006        2005
                                                                               £m          £m
    Funded                                                                 (2,660)     (2,666)
    Unfunded                                                                 (316)       (338)
                                                                           (2,976)     (3,004)

    The fair value of the assets in the schemes and the expected rates of
    return were:
                                  UK           Americas          Europe            ROW
                           Long-term        Long-term       Long-term        Long-term
                             rate of          rate of         rate of          rate of
                              return           return          return           return
                            expected  Value  expected Value  expected  Value  expected Value
                                   %     £m         %    £m         %     £m         %    £m
    At 31 December 2006
    Equities                     7.5  1,093       8.5   134         -      -       7.1     7
    Bonds                        4.9    687       5.0    53         -      -       1.9     4
    Property                     6.8    109         -     -         -      -         -     -
    Cash/short-term              5.1    265       3.8     9         -      -         -     -
    Other assets                 5.1     33         -     -       5.0     19       1.3     2
                                      2,187             196               19              13

    At 31 December 2005
    Equities                     7.5  1,076       8.5   118         -      -       5.9     6
    Bonds                        4.4    607       5.0    47         -      -       2.5     4
    Property                     6.7     98         -     -         -      -         -     -
    Cash/short-term              4.5     98       4.2     5         -      -         -     -
    Other assets                 4.7     36         -     -       4.7     20       1.0     4
                                      1,915             170               20              14

    The expected return on plan assets is a blended average of projected long-term returns
    for the various asset classes. Equity returns are developed based on the selection of
    the equity risk premium above the risk free rate which is measured in accordance with
    the yield on government bonds. Bond returns are selected by reference to the yields on
    government and corporate debt as appropriate to the plan's holdings of these instruments
    all other asset classes returns are determined by reference to current experience. The
    actual return on plan assets was £185 million (2005: £307 million).

(c) Defined contribution schemes
    The Group operates a number of small defined contribution schemes outside the United
    Kingdom. The charge to Income Statement in the year was £9 million (2005: £6 million).

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