Final Results

Renold PLC 19 July 2006 19 July 2006 RENOLD plc 2006 PRELIMINARY RESULTS Renold plc, a leading international supplier of industrial chains and related power transmission products today announces its preliminary results for the year ended 31 March 2006. Summary • A year of progress, implementing a strategic shift to focus on the core Industrial Power Transmission business, while improving profitability and reducing the cost base. • Revenue from continuing operations increased by 8% at £155.0 million (2005: £143.2 million). • Continuing operations' operating profit improved significantly at £5.4 million (2005: £0.4 million). • Continuing operations' operating profit (before exceptional items) increased to £6.8 million (2005: £4.6 million). • Continuing operatings' pre-tax profit of £1.8 million (2005: pre-tax loss £1.8 million). • Basic earnings per share from continuing operations 0.4p (2005: loss per share 0.4p). Adjusted earnings per share from continuing operations of 1.7p (2005: 3.8p) (adjusted for the after tax effects of exceptional items). • Proposed sale of Machine Tools and Automotive businesses announced. Proceeds will be used to reduce debt. • Discontinued operations' operating loss (after £12.8 million impairment charge) was £13.8 million (2005:profit £0.6 million). • Board proposed not to pay a dividend for 2005/06 and future dividend policy will be considered in light of the results from the re-focused and downsized business. Prospects Roger Leverton, Chairman of Renold plc, said today: 'Overall, the economic environment continues positive although concerns remain over the negative impact of escalating raw material and energy costs. That said, the refocused business, with a reduced cost base, is better positioned to show further progress during 2006/07.' RENOLD plc Chairman: Roger Leverton Preliminary Results for the Financial Year ended 31 March 2006 FINANCIAL SUMMARY 2006 2005 (2) (1), (2) £m £m Continuing operations: Revenue 155.0 143.2 Operating profit 5.4 0.4 Operating profit before exceptional items 6.8 4.6 Profit before tax and exceptional items 3.2 2.4 Profit/(loss) before tax 1.8 (1.8) Discontinued operations: (Loss)/profit from discontinued operations including impairment charges (13.9) 0.2 Other information: Basic and diluted (loss) per share - Group (19.6)p (0.1)p Basic and diluted earnings/(loss) per share - continuing operations 0.4p (0.4)p Dividends paid per ordinary share 4.5p Group capital expenditure 6.6 7.6 Group net debt 20.7 17.0 (1) The figures for 2005 have been restated following the adoption of International Financial Reporting Standards. (2) The results for continuing operations in both years report the Group's performance, excluding the activities of the Automotive and Machine Tools businesses, which have been reported as discontinued operations. CHAIRMAN'S STATEMENT Overview It has been a year of progress towards returning the Group to its Power Transmission core competency and improving profitability and future prospects for the business. In line with the Board's strategic direction for the Group in targeting a more tightly focused business with a substantially lower cost base and a reduced level of borrowings, the Group announced the proposed sale of its Machine Tools and Automotive businesses, the proceeds of which will be used to reduce bank debt. In the light of these proposed sales, the results of the Group show separately the results of the continuing Group businesses. There were unprecedented steel price increases in the second half of last year and the pressures on the Group were compounded by a continuing weakness of the US Dollar. Where steel represents the major part of raw material costs, a vigorous programme of sales price increases and cost reduction was implemented and this has resulted in improved margins and profitability of the ongoing Industrial Power Transmission business. Continuing operations' profitability improved, reaching an operating profit before exceptional items of £6.8 million compared with £4.6 million in 2005. This result reflected strong sales growth in North America but with weaker market conditions persisting in Europe until the later part of the year. Development of the Group's activities in China continued with further contracts won. Continuing operations recorded a pre-tax profit of £1.8 million compared with a pre-tax loss of £1.8 million in 2005. All figures take account of the new International Financial Reporting Standards and comparative numbers have been restated as appropriate. After an impairment charge of £12.8 million relating to discontinued operations, the Group loss for the year was £13.6 million compared with a loss of £0.1 million in 2004/05. Group net borrowings, excluding preference shares, ended the year at £20.2 million compared with £17.0 million the previous year. It is intended that proceeds from the sale of the Machine Tools and Automotive businesses will substantially reduce the level of debt going forward. Dividend Given this year of transition the Board believes it is prudent to recommend that no dividend be paid for the year. The Board will consider future dividend policy in the light of results from the re-focused business. Board Changes Tony Brown, Finance Director, and Geoffrey Newton, Company Secretary, both plan to retire following the 2006 AGM. Both are long-term employees of the Company and we thank them for their unstinted contribution over many years. Peter Bream joined the Board on 1 July, 2006 and will replace Tony Brown as Finance Director effective from the 2006 AGM. Peter Bream is an experienced accountant having been Finance Director of Provalis plc, a UK listed company, prior to his appointment. Keith Brown, Company Solicitor, will replace Geoffrey Newton as Company Secretary in a new combined role. Prospects Overall, the economic environment continues positive although concerns remain over the negative impact of escalating raw material and energy costs. That said, the refocused business, with a reduced cost base, is better positioned to show further progress during 2006/07. CHIEF EXECUTIVE'S REVIEW Improved trading during the second half enabled the Group to achieve progress in the operating results for all the businesses last year. In 2004/05 the dramatic and rapid increase in steel prices severely impacted costs. This year steel prices have been stable and some small reductions have been seen; however, steel costs are still at least 40% higher than at the start of 2004/05. These increases have now been substantially offset by increased selling prices and cost reductions. Despite the need to pass on the increased cost of steel, sales growth was achieved. The increases in freight, utility and other energy related costs are a concern going forward. The strategy of reducing our dependence on manufacturing in the traditional areas of Europe and the US continued with the establishment of facilities in Poland, Malaysia and China. Increasingly these will provide the cost platform that will protect the existing business base and allow sales penetration into markets and countries where Renold has not traditionally been strong. These facilities will serve both local and international markets during the forthcoming year. Further investment in the sales teams has also been made in these and other growing markets. The strategy of focusing on the core Industrial Power Transmission business was taken forward with the announcement in June of the proposed sale of the Automotive and Machine Tools businesses. The Automotive business, despite some improvement in the second half, continued to be unprofitable and to consume cash. Renold was a relatively small player in the automotive supply industry compared with the size of its major competitors. Double digit sales growth, over the past few years, driven by technical excellence, demanded significant continued investment. INA-Schaeffler KG, with over €5.0 billion sales in the automotive segment and manufacturing locations in many parts of the world, including Europe, USA and China, is in a better position to serve this market. The Automotive manufacturing and design facilities are based in Calais and St Simeon in France and Morristown, Tennessee, in the US. Automotive product manufacturing in Einbeck, Germany, has been transferred to St Simeon. The Machine Tools business has little overlap with the core businesses but is cyclical and, at times, has a high demand for cash. The business operates from self-contained sites in Rochdale (Holroyd/Edgetek) and Leicester (Jones & Shipman). A production cell for loose gears will transfer from the Machine Tools business to the adjacent Renold Gears site after completion of the proposed transaction. Following these proposed divestitures, Renold will be a more focused Group. Going forward it will have the ability to invest more heavily in the Industrial Power Transmission business and will accelerate changes to the manufacturing footprint and development of sales, particularly in the USA, China, Eastern Europe and South America. OPERATIONS REVIEW The Group going forward is focused on its Industrial Power Transmission business, which forms one business segment. The activities of the segment include the manufacture and sale of chain, gear and coupling products, which are sold through the Group's worldwide sales operations to a broad range of original equipment manufacturers and distributors. The key performance indicators which are used to monitor performance are financial, including rate of sales growth, margin, material costs (particularly steel), payroll costs, working capital performance and net debt. The Group's performance against these key indicators is noted in the comments which follow. Other non-financial performance indicators are used but vary on a business by business basis. Chain _____ The industrial chain business recovered well in the second half resulting in an improved performance compared with last year. Steel prices declined slightly but still remained 40% higher than at the start of 2004/05. Passing these cost increases on to customers was an essential, but time consuming, feature of the year. This process was managed in a way that allowed the majority of customers to be retained and it was pleasing to see that organic sales growth was achieved during this difficult period. The full impact of steel price increases was not recovered by increased pricing alone but the shortfall was substantially made up by cost reduction achievements. Europe Renold is the leading supplier of Industrial Chain in Europe and this position was maintained during the year. Excluding price increases, sales were relatively flat during the early part of the year but increased towards the end of the year. Germany in particular started to show signs of recovery following a lengthy period of flat sales. The first new factory for many years was established in Goleniow, close to Szczecin, in Poland. The first chain was assembled in November. Phase 1 of this project was to transfer the assembly of special, low volume products from the Einbeck and Manchester facilities. This phase is nearly complete with over 60 new jobs already being established in Poland. An infrastructure is now being established which will allow the second phase to begin. This will include direct shipments to customers and will provide products in response to the demands of the local market. Phase 2 was originally scheduled to start at the end of 2006/ 07 but is being initiated six months ahead of plan. This facility is being managed by the Einbeck team who have done an excellent job of establishing the facility ahead of schedule and within budget. The local Government in Goleniow have been particularly supportive and have contributed to this success. The creation of this new facility was timely as the demand on the Einbeck facility increased at the end of the fourth quarter and is ongoing into 2006/07. This demand has been met by modest capital investments and efficiency improvements. The transfer of Automotive product to the SAF factory at St Simeon, in June 2006, will allow a further increase in capacity with little additional investment. The European Distribution Centres project made good progress in the year. This project is aimed at improving customer service by reducing lead times and increasing stock availability. The UK and German distribution centres are now established on a common software platform and have started to ship direct to customers. This will be rolled out across all European selling companies during the forthcoming year. A total of 94 redundancies were made following the announcement of the closure of the facility in Burton. This work has been transferred to Poland, Manchester or outsourced. The initial planning application for redevelopment of the Burton site was rejected but an appeal has been lodged which is expected to be heard before the end of 2006. During the year 18 job losses were announced at the Seclin manufacturing facility in France. Americas The US achieved good growth with sales up by over 13% compared with the previous year. This growth came from all segments of the business but sales through distribution were particularly strong. Sales to the two largest US Power Transmission Distributors, Motion and AIT, increased significantly. This increase in market share has moved Renold into the top three Industrial Chain manufacturers in the US. Despite the need to increase prices, following the increase in steel costs, the OEM segment also grew. Orders increased for new products introduced over the last few years - Synergy (the world's leading transmission chain), Syno (lubrication free/dry to the touch chain) and the latest introduction XXL. This new product allows performance features to be achieved in chain that would normally need to be one size larger. This innovation has the real potential for OEM's to save size, weight and cost. During the coming year the manufacture of certain products, which are sold mainly in North America, will be moved to the manufacturing facility in Morristown, Tennessee. This facility has progressed well with the introduction of Lean manufacturing and has completed a number of joint Lean events with customers during the year. South American sales are now led by a local Sales Manager focused on the region. Starting from a relatively small base, the benefits of this focus are already being seen, with orders substantially increased. Additional resources will be added in the forthcoming year and, to fully realise the potential of the region, consideration will be given to adding a manufacturing facility the following year. Asia Pacific Progress continues to be made in China with additional sales resources being added. All product groups are sold in China but the largest order, at over £1.5 million, came from a steel mill for large spindles for the Couplings business. Increasingly Renold chain products are being recognised for their exceptional performance and capabilities. Markets such as power generation, metals, glass and printing machines provided good order intake. In total, orders from China increased by 50%, albeit from a relatively low base, and, going forward, strong growth is again expected in the coming year. To accelerate this growth the intent is to start manufacturing products in China, primarily to serve the local market. During the second half a lease was taken on 3000 square metres of manufacturing space close to Shanghai. This is currently being refurbished and the product will be manufactured in this location during 2006/07. In addition to this facility a new sales office, located in the centre of Shanghai, will be opened during the year. In addition to China, a new manufacturing facility will be opened in Malaysia in 2006/07. This will initially assemble chain for the palm oil industry but is expected to expand to satisfy the demands of other local customers. Gears _____ Gears operations have been consolidated under a single management team. Loose gears were already sold through the Gears sales team but the manufacturing responsibility was transferred from the Machine Tools & Rotors Division to the adjacent facility in Milnrow close to Manchester. The facility in South Africa was also consolidated into this grouping. South Africa, with sales of £4.5 million, manufactures, maintains and overhauls gearboxes from its base in Johannesburg and sells a range of other power transmission products. Growth in the year came mainly from China, Germany and the USA. This success is based on providing creative design solutions for specific customer problems. A good example of this is an innovative Compact Escalator Direct Drive unit for a major European manufacturer. The Apprentice Training School is located in the Gears Milnrow facility. Given the importance of key technicians to the Group, it is planned that this will be retained by Renold following the divestiture of Machine Tools. Couplings _________ It was a good year for this product group with orders up on the previous year. The growth came mainly from North America for the power generation and marine industries and from China for steel mills. Sales are underpinned by the large multi-year Mass Transit contract for Alstom/New York City. This runs until 2008 and over £2 million worth of shipments are scheduled for 2006/07. There are further customer options to extend the contract beyond 2008. A licensing agreement was reached with David Brown that permits Renold to offer both couplings and gearboxes for Mass Transit applications. This significantly increases the available market size for Renold products. Multi-year contracts for over £30 million are currently being bid on. The strong order performance and ongoing Alstom contract positions this product group well for another strong year. FINANCIAL REVIEW Overview The financial statements of the Group, including restated comparatives, have been prepared in accordance with International Financial Reporting Standards (IFRS). The principal differences arising from the transition to IFRS from UK Generally Accepted Accounting Practice were set out in a press release dated 23 November 2005 and details are also included in the notes to the consolidated financial statements. As required under IFRS, the results of discontinued businesses are reported on one line in the income statement. Discontinued Businesses As announced in June 2006, the Group is at an advanced stage of negotiation for the sale of the business and certain assets of both the Automotive and Machine Tools businesses. Further information on these disposals is reported in the Chief Executive's Review. As a consequence the Automotive and Machine Tools businesses are accounted for as discontinued operations in the financial statements. Turnover The turnover of continuing operations increased by 8% to £155.0 million, at constant exchange rates the increase was 6%. North America exhibited strong growth, up 17%, with Continental Europe up 4%, but the UK only 2% higher; elsewhere growth in the Far East was partially offset by a reduction in Australia. Sales in the second half-year, at £79.1 million were 4% higher than the first half. Operating Profit Operating profit before exceptional items was £6.8 million up 48% on 2004/5. Operating profit in the second half year was £4.2 million representing a 5.3% return on sales, compared with £2.6 million in the first half or 3.4%. This demonstrates a further recovery in margins resulting from the pricing and cost actions taken following the rapid steel price increase in 2004 and early 2005, which depressed profitability particularly in the second half of the 2004/05 year. Exceptional costs were £1.4 million, compared with £4.2 million in 2004/05, and related to redundancy and restructuring costs incurred mainly in the European chain operations. Financing Costs Net interest cost rose to £2.2 million (2004/05: £1.9 million), there were costs of £0.7 million relating to the renegotiation of banking facilities, and a fair value gain on derivatives of £0.3 million. The net of interest costs on pension balances and the expected return on pension plan assets was a charge of £1.0 million (2004/05: £0.3 million). Profit Before Tax Profit before tax and before exceptional items was £3.2 million compared with £2.4 million last year. Profit before tax after exceptional items was £1.8 million compared with a loss of £1.8 million in 2004/05. Taxation The tax charge of £1.5 million (2004/05: £1.5 million credit) for the year represented higher than a normal percentage of the profit before tax mainly due to losses, including redundancy and restructuring costs, arising in subsidiaries where it is considered unlikely that they will be recovered in the foreseeable future. Discontinued Operations As noted above the Automotive and Machine Tools businesses have been reported as discontinued operations with a loss, before disposal impairment charges, of £1.1 million in the year compared with a profit of £0.2 million in 2004/05. Details of the results of the discontinued operations are given in note 4 of the Preliminary Financial Statements. Results For The Financial Period The loss for the year was £13.6 million (stated after disposal impairment charges of £12.8 million) compared with £0.1 million in 2004/05; the basic and diluted loss per share was 19.6p (2004/05: 0.1p loss). The basic and diluted earnings per share from continuing operations was 0.4p (2004/05: loss 0.4p). Balance Sheet Net assets at 31 March 2006 were £40.6 million (2004/05: £56.1 milllion) after an impairment charge of £12.8 million in relation to discontinued operations, details of which are shown in note 6(b) of the Preliminary Financial Statements. The liability for retirement benefit obligations was £53.9 million (2004/05: £53.2 million) before allowing for a deferred tax asset of £12.7 million (2004/ 05: £14.3 million). Cash Flow And Borrowings Cash inflow from continuing operations was £4.7 million (2004/05: £8.6 million); there was a net cash outflow of £2.7 million for redundancy and restructuring costs in the year (2004/05: £4.9 million inflow). Cash inflow from discontinued operations was £1.7 million (2004/05: £2.0 million outflow). Payment for purchase of property, plant and equipment was £6.7 million (2004/05: £7.7 million), of which £2.9 million (2004/05: £3.9 million) related to discontinued activities. Proceeds of disposals, including the sale of leasehold improvements at the Bredbury factory site totalled £3.2 million. Group net borrowings at 31 March 2006 were £20.7 million (2005: £17.0 million) comprising cash and cash equivalents £17.8 million (2005: £24.5 million) and borrowings of £38.5 million (2005: £41.5 million). Treasury And Financial Instruments The Group treasury policy, approved by the directors, is to manage its funding requirements and treasury risks without undertaking any speculative risks. A major exposure of the Group relates to currency risk on its sales and purchases made in foreign (non-functional) currencies, and to reduce such risks these transactions are covered, as commitments are made, primarily by forward foreign exchange contracts. Such commitments generally do not extend more than six months beyond the balance sheet date, although exceptions can occur where longer-term projects are entered into. Interest rate swaps have been used to fix interest rates on certain Group borrowings. At 31 March 2006 the Group had 31% of its gross debt at fixed interest rates. Cash deposits are placed short-term with banks where security and liquidity are the primary objectives. Certain dollar denominated borrowings taken out in the UK to finance the acquisition of the Jeffrey Chain Corporation in 2000 have been designated as a hedge of the net investment in US subsidiaries, the fair value of these borrowings was £5.4 million at 31 March 2006 (31 March 2005: £4.6 million). Pensions Information on the Group's pension schemes is set out in note 7 to the Preliminary Financial Statements, including the key assumptions used by the actuary in arriving at the IAS 19 funding position. This year, for the first time, information has been provided in the note on the mortality assumptions used for the main UK schemes. The gross pension deficits before taxation are as follows: 2006 2005 Assets Liabilities Deficit Assets Liabilities Deficit £m £m £m £m £m £m UK Schemes - funded 162.7 195.6 32.9 142.4 177.2 34.8 Overseas Schemes - funded 15.5 17.9 2.4 12.4 12.1 (0.3) - unfunded 18.6 18.6 18.7 18.7 ________________________________ ________________________________ 178.2 232.1 53.9 154.8 208.0 53.2 ________________________________ ________________________________ During the year the assets of the funded schemes rose by £23.4 million due mainly to the return on assets exceeding the expected return by £16.2 million, and to UK deficit reduction payment of £3.1 million made in the year. The funding deficit did not materially change, however, as liabilities increased by £21.5 million due to actuarial losses caused primarily by a reduction in bond rates, with that used for discounting UK liabilities falling from 5.4% to 5.0%. The overseas deficit comprises £2.4 million in respect of defined benefit schemes, and £18.6 million relating principally to the unfunded German scheme which, as is common in Germany, is a 'pay as you go' scheme which does not require to be pre-funded. There is no obligation for deficit funding payments for this type of scheme. The key issues for the Group are those relating to the UK schemes, further details of which are given below: There are three UK defined benefit pension schemes, the main scheme which is the Renold Group Pension Scheme (RGPS), the Renold Supplementary Pension Scheme (RSPS), and the Jones & Shipman Retirement Benefit Scheme (J&S). As at 31.3.06 RGPS RSPS J&S Total £m £m £m £m IAS 19 liabilities 125.9 30.9 38.8 195.6 Market value of assets 102.2 23.6 36.9 162.7 Deficit on IAS 19 basis 23.7 7.3 1.9 32.9 Annual deficit reduction payment (based on funding valuations) 2.2 0.7 0.2 3.1 Total members (approximately) 6,200 120 1,080 7,400 of which active are 625 20 70 715 For the UK schemes, the sensitivity to change in bond yields has been estimated assuming that the value of bond and annuity assets would change in line with the change in yields, but that the equity values would be unchanged; for a 0.5% increase in bond yields the UK deficit would reduce by some £12 million; for a 0.5% reduction in bond yields the UK deficit would increase by some £14 million. The UK schemes' assets at 31 March 2006 were invested 48% in equities and 52% in bonds. Using the expected rates of return on the different asset groups, the weighted average rate of expected return is 6.3%. This rate is used in determining the amount of expected return on plan assets shown as income in the profit and loss account. If the same 6.3% rate were to be used to discount the past service liabilities, rather than the corporate bond rate required by IAS 19, then the value of UK scheme liabilities would reduce to £160.3 million compared with assets of £162.7 million. The sensitivity of the UK schemes to change in projected mortality has also been estimated; an increase in the post retirement mortality rate of 15%, broadly equivalent to a change of one year in life expectancy at age 65, would reduce the projected deficit by £7 million; conversely, a reduction in the post retirement mortality rate of 15% would increase the deficit by £7 million. The mortality projections used for the RGPS make allowance for a higher mortality rate than that of the standard PA92 table as a mortality review carried out at the time of the last valuation indicated that this would be appropriate. The deficits in the UK schemes are being funded over the remaining service lives of active members at the rate of £3.1 million per year in total. These deficit reduction payments were established at the most recent actuarial valuations as at April 2004 for the RGPS and SPS, and at April 2003 for the J&S scheme. Funding rates will be revised following the next triennial valuations which will incorporate the new Scheme Specific Funding requirements. Annual Report to be published 31 July 2006 Annual General Meeting 19 September 2006 Annual Report: This preliminary announcement does not form the Group's statutory financial statements. The figures shown in this release have been extracted from the Group's full financial statements which have been prepared under accounting standards adopted by the European Union. These financial statements will be delivered to the Registrar of Companies. The financial statements for the year ended 31 March 2005, which were prepared under UK GAAP, have been delivered to the Registrar of Companies. The 2005 and 2006 financial statements both carry an unqualified audit report. The preliminary announcement was approved by the Board on 19 July 2006. For further information, please contact: Bob Davies, Chief Executive 19 July 2006 telephone: 020 7067 0700 Tony Brown, Finance Director Renold plc Thereafter telephone: 0161 498 4500 Terry Garrett/Stephanie Badjonat Weber Shandwick Square Mile Telephone: 020 7067 0700 RENOLD PLC PRELIMINARY RESULTS Consolidated Income Statement for the year ended 31 March 2006 Notes 2006 2005 £m £m Continuing operations: Revenue 1 155.0 143.2 Operating costs (149.6) (142.8) ________ ________ Operating profit 5.4 0.4 ======== ======== Operating profit before exceptional items 6.8 4.6 Exceptional items (1.4) (4.2) ________ ________ Operating profit 5.4 0.4 ======== ======== Financial expenses (14.1) (11.8) Financial income 10.5 9.6 ________ ________ Net financing costs 2 (3.6) (2.2) ======== ======== Profit/(loss) before tax 1.8 (1.8) Taxation 3 (1.5) 1.5 ________ ________ Profit/(loss) for the financial year from continuing operations 0.3 (0.3) ======== ======== Discontinued operations: (Loss)/profit for the financial year from discontinued operations 4 (13.9) 0.2 ________ ________ (Loss) for the financial year (13.6) (0.1) ======== ========= Earnings per share 5 Basic and diluted (loss) per share (19.6)p (0.1)p Basic and diluted earnings/(loss) per share from continuing operations 0.4p (0.4)p Consolidated Statement of Recognised Income and Expense for the year ended 31 March 2006 2006 2005 £m £m (Loss) for the year (13.6) (0.1) ________ ________ Net income/(expense) recognised directly in equity: Foreign exchange translation differences 1.1 0.1 Gains on fair value of hedging net investments in foreign operations 1.1 Actuarial (losses) on retirement benefit obligations (5.3) (15.9) Tax on items taken directly to equity 1.7 4.6 ________ ________ Total expense recognised directly in equity (1.4) (11.2) ________ ________ Total recognised income and expense for the year (15.0) (11.3) Change in equity following adoption of IAS 39 (0.2) ________ ________ Total recognised income and expense (15.2) (11.3) ======== ========= Consolidated Balance Sheet as at 31 March 2006 Notes 2006 2005 £m £m ASSETS Non-current assets Goodwill 17.1 15.7 Other intangible fixed assets 0.2 0.5 Property, plant and equipment 38.2 64.2 Other non-current assets 0.3 0.4 Deferred tax assets 18.4 17.0 ________ ________ 74.2 97.8 ________ ________ Current assets Inventories 36.5 47.3 Trade and other receivables 25.8 41.7 Derivative financial instruments 0.2 Cash and cash equivalents 17.8 24.5 ________ ________ 80.3 113.5 Asset held for sale 6 3.4 Assets of discontinued operations 6 37.1 ________ ________ 120.8 113.5 ________ ________ TOTAL ASSETS 195.0 211.3 ________ ________ LIABILITIES Current liabilities Borrowings (12.4) (28.5) Trade and other payables (31.3) (45.5) Provisions (0.4) (11.7) Current tax liabilities (0.7) (1.0) ________ ________ (44.8) (86.7) Liabilities directly associated with discontinued operations 6 (28.1) ________ ________ (72.9) (86.7) ________ ________ NET CURRENT ASSETS 47.9 26.8 ________ ________ Non-current liabilities Borrowings (25.6) (13.0) Derivative financial instruments (0.1) Preference shares (0.5) Trade and other payables (0.7) (0.9) Deferred tax liabilities (0.7) (1.4) Retirement benefit obligations 7 (53.9) (53.2) ________ ________ (81.5) (68.5) ________ ________ TOTAL LIABILITIES (154.4) (155.2) ________ ________ NET ASSETS 40.6 56.1 ======== ======== EQUITY Issued share capital 17.4 17.9 Share premium 6.0 6.0 Other reserves 2.7 0.5 Retained earnings 14.5 31.7 ________ ________ TOTAL SHAREHOLDERS' EQUITY 8 40.6 56.1 ======== ======== Consolidated Cash Flow Statement for the year ended 31 March 2006 2006 2005 £m £m Cash flows from operating activities (Note 9) Cash generated from operations - continuing 4.7 8.6 Cash generated/(absorbed) by operations - discontinued 1.7 (2.0) ________ ________ 6.4 6.6 Income taxes paid (1.7) (1.0) ________ ________ Net cash from operating activities 4.7 5.6 ________ ________ Cash flows from investing activities Purchase of property, plant and equipment (6.7) (7.7) Purchase of intangible assets (0.2) (0.3) Proceeds on disposal of property, plant and equipment 3.2 Purchase of subsidiary (0.1) Cash acquired on purchase of subsidiary 9.7 Interest received 0.1 ________ ________ Net cash from investing activities (3.7) 1.7 ________ ________ Cash flows from financing activities Financing costs paid (3.3) (2.2) Increase in borrowings 6.9 2.4 Issue of ordinary shares 0.1 Payment of finance lease liabilities (0.1) (0.1) Equity dividends paid (3.2) ________ ________ Net cash from financing activities 3.6 (3.1) ________ ________ Net increase in cash and cash equivalents 4.6 4.2 Net cash and cash equivalents at beginning of year 4.8 0.6 Effects of exchange rate changes 0.2 __________ _________ Net cash and cash equivalents at end of year 9.6 4.8 ========== ========= Notes to the consolidated financial statements 1. Segmental information Primary reporting format - business segment The Group's continuing activities are in one class of business, Industrial Power Transmission. During the year the Group's former segments, Automotive and Machine Tools, have been classified, and accounted for, as disposal groups. The consolidated income statement for continuing operations therefore relates wholly to the Industrial Power Transmission business. Segment assets and liabilities The tables shown below provide an analysis of the distribution of assets and liabilities between continuing and discontinued activities, and how they relate to the former business segments. Reconciliation of segment assets to consolidated total assets: 2006 2005 £m £m Assets allocated to segments: - Industrial Power Transmission 116.6 115.8 - Automotive 36.1 - Machine Tools 17.6 ________ ________ 116.6 169.5 Unallocated corporate assets 1.7 0.3 Cash and cash equivalents 17.8 24.5 Deferred tax 18.4 17.0 ________ ________ 154.5 211.3 Asset held for sale 3.4 Assets of discontinued operations 37.1 ________ ________ Consolidated total assets 195.0 211.3 ======== ======== Reconciliation of segment liabilities to consolidated total liabilities: Liabilities allocated to segments: - Industrial Power Transmission (86.3) (81.8) - Automotive (25.4) - Machine Tools (3.7) ________ ________ (86.3) (110.9) Unallocated corporate liabilities (0.4) Preference shares (0.5) Derivative financial instruments (0.1) Borrowings (38.0) (41.5) Current and deferred tax (1.4) (2.4) ________ ________ (126.3) (155.2) Liabilities directly associated with assets of discontinued operations (28.1) ________ ________ Consolidated total liabilities (154.4) (155.2) ======== ======== Secondary reporting format - geographical segments The operations of the Group are based in six main geographical areas. The UK is the home country of the parent. The main operations in the principal territories are as follows: United Kingdom Germany France Rest of Europe United States and Canada Other countries The sales analysis in the table below is based on the location of the customer; the analysis of assets and capital expenditure is based on the location of the assets: Revenue Segment assets Capital expenditure 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m United Kingdom 20.4 20.0 29.5 50.4 1.6 2.0 Germany 14.6 14.2 19.5 18.9 1.7 2.1 France 7.4 7.5 5.9 41.2 0.1 5.7 Rest of Europe 28.2 26.7 6.7 6.0 0.1 0.1 North America 57.2 48.8 41.2 40.0 0.8 0.7 Other countries 27.2 26.0 13.8 13.0 0.2 0.2 _______ _______ _______ ______ _______ _______ 155.0 143.2 116.6 169.5 4.5 10.8 Unallocated assets 37.9 41.8 Asset held for sale 3.4 Discontinued operations 37.1 2.1 _______ _______ _______ ______ _______ _______ 155.0 143.2 195.0 211.3 6.6 10.8 ======= ======= ======= ====== ======= ======= Included within capital expenditure shown for France in 2005 is an amount of £3.2m in respect of property, plant and equipment additions arising through business combinations. In accordance with IFRS 5, comparative geographical data for revenue has been restated to reflect only continuing activities of the Group. The geographical analysis of segment assets and capital expenditure at 31 March 2005 remains as presented for the Group at that date. 2. Net financing costs 2006 2005 £m £m £m £m Financial expenses: Interest payable on bank loans and overdrafts (2.3) (2.0) Interest cost on pension plan balances (11.1) (9.8) Costs associated with refinancing (0.7) _______ ______ (14.1) (11.8) Financial income: Interest receivable on bank deposits and cash equivalents 0.1 0.1 Expected return on pension plan assets 10.1 9.5 Fair value gains on derivative instruments 0.3 _______ _______ 10.5 9.6 ______ ________ Net financing costs (3.6) (2.2) ======== ======== 3. Taxation Analysis of tax charge/(credit) in the year 2006 2005 £m £m United Kingdom UK corporation tax at 30% (2005 - 30%) 0.5 0.7 Less: double taxation relief (0.5) (0.7) _______ _________ Overseas taxes Corporation taxes 1.3 1.0 _______ _________ Total current tax 1.3 1.0 _______ _________ Deferred tax United Kingdom 0.3 (1.6) Overseas (0.4) (0.9) _______ _________ Total deferred tax (0.1) (2.5) _______ _________ Tax charge/(credit) on loss on ordinary activities 1.2 (1.5) ======== ========= Analysed as: Continuing 1.5 (1.5) Discontinued (0.3) _______ _________ 1.2 (1.5) ======== ========= 4. Discontinued operations The Group has announced the proposed disposal of its Automotive and Machine Tools businesses. The results of these discontinued businesses are set out below: 2006 2005 Automotive Machine Total Automotive Machine Total Tools discontinued Tools discontinued £m £m £m £m £m £m External revenue 49.3 20.8 70.1 35.3 18.5 53.8 __________________________________ _____________________________________ Operating (loss)/profit before exceptional items (1.6) 0.1 (1.5) (1.2) (1.2) Redundancy, restructuring and impairment of plant and equipment 0.7 (0.2) 0.5 (6.9) (6.9) Negative goodwill arising on acquisition 11.3 11.3 Impairment of goodwill (2.6) (2.6) __________________________________ _____________________________________ Operating(loss)/profit (0.9) (0.1) (1.0) 3.2 (2.6) 0.6 Net financing costs (0.3) (0.1) (0.4) (0.3) (0.1) (0.4) __________________________________ _____________________________________ (Loss)/profit before tax (1.2) (0.2) (1.4) 2.9 (2.7) 0.2 Taxation 0.5 (0.2) 0.3 __________________________________ _____________________________________ (Loss)/profit after tax (0.7) (0.4) (1.1) 2.9 (2.7) 0.2 ================================== ===================================== Impairment on classification as disposal groups (9.1) (3.7) (12.8) Taxation __________________________________ Net impairment on classification as disposal groups (9.1) (3.7) (12.8) __________________________________ (Loss)/profit for the year on discontinued operations (9.8) (4.1) (13.9) 2.9 (2.7) 0.2 ================================== ===================================== In 2005/2006 a gear making operation was transferred to Industrial Power Transmission. Previously the activities of this operation had been reported as part of the Machine Tools businesses, having been physically located within the main UK Machine Tools facility. The turnover for this operation in 2006 was £1.9 million, with an operating profit of £0.2 million. The cash flows attributed to discontinued operations comprise: 2006 2005 £m £m From operating activities 1.7 (2.0) From investing activities (2.8) 5.7 From financing activities (0.5) (0.1) ======== ======== In 2005 the cash inflow from investing activities reflects cash acquired with the purchase of Sachs Automotive France SAS (£9.7 million), offset by cash outflows arising from the purchase of property, plant and equipment in that year. 5. Earnings per share Earnings per share is calculated by reference to the earnings for the year and the weighted average number of shares in issue during the year as follows: 2006 2005 restated Earnings Weighted Per- Earnings Weighted Per- £m average share £m average share number of amount number of amount shares Pence shares Pence Thousands Thousands Basic EPS Earnings attributed to ordinary shareholders (13.6) 69,350 (19.6) (0.1) 69,328 (0.1) Effect of dilutive securities: Employee share options 63 332 _______________________________________________________________________ Diluted EPS (13.6) 69,413 (19.6) (0.1) 69,660 (0.1) ======================================================================= Earnings per share from continuing operations: Basic EPS (13.6) 69,350 (19.6) (0.1) 69,328 (0.1) Post tax loss/(profit) from discontinued operations 1.1 1.6 (0.2) (0.3) Impairment on classification as disposal groups 12.8 18.4 _______________________________________________________________________ Basic EPS from continuing operations 0.3 69,350 0.4 (0.3) 69,328 (0.4) ======================================================================= Earnings per share from discontinued operations: Post tax (loss)/profit from discontinued operations (1.1) 69,350 (1.6) 0.2 69,328 0.3 Impairment on classification as disposal groups (12.8) (18.4) _______________________________________________________________________ Basic EPS from discontinued operations (13.9) 69,350 (20.0) 0.2 69,328 0.3 ======================================================================= Inclusion of the dilutive securities, shown above, does not change the amounts shown for basic EPS for both continuing and discontinued operations. Adjusted EPS for continuing activities: Basic EPS from continuing operations 0.3 69,350 0.4 (0.3) 69,328 (0.4) Effect of exceptional items, after tax: Redundancy and restructuring costs 0.9 1.3 2.9 4.2 _______________________________________________________________________ Adjusted EPS 1.2 69,350 1.7 2.6 69,328 3.8 ======================================================================= Inclusion of the dilutive securities, shown above, in the calculation of adjusted EPS does not change the amounts shown of 1.7p (2005 - 3.8p). The adjusted earnings per share numbers have been provided in order to give a useful indication of underlying performance by the exclusion of exceptional items. 6. Assets classified as held for sale and associated liabilities (a) Asset held for sale 2006 2005 £m £m Property 3.4 ========= ========= As announced during the year, the Group is in the process of selling the former Burton-upon-Trent factory site in the United Kingdom and accordingly the asset has been reclassified from property, plant and equipment. (b) Discontinued operations As announced on 6 June 2006, the Board is in advanced negotiations to dispose of the Automotive business. It was also announced on 26 June 2006 that Renold was at an advanced stage of negotiation for the disposal of the Machine Tools business. These announcements are in line with the Board's strategy to focus on the Group's core activity of the manufacture and the sale of Industrial Power Transmission products. Further details on the background leading to the negotiations for the disposal of these businesses is set out in the Chief Executive's Report. The Automotive and Machine Tools business segments have been accordingly accounted for as disposal groups and balance sheet assets and liabilities have been reclassified and disclosed separately on the balance sheet as discontinued operations. A summary of the trading results of the disposal groups is shown in note 4. Set out below is a summary of the net assets of the disposal groups as at 31 March 2006: Automotive Machine Tools Carrying Impairment Carrying Impairment Carrying value value value of before before disposal impairment impairment groups after impairment £m £m £m £m £m Non-current assets Intangible assets 0.2 (0.2) Property, plant and equipment 13.8 (9.1) 4.0 (3.5) 5.2 Current assets Inventory 7.2 7.4 14.6 Trade and other receivables 10.7 6.6 17.3 ____________________________________________________________________ 31.7 (9.1) 18.2 (3.7) 37.1 =================================================================== Following the classification as discontinued operations, the net assets have been re-evaluated on a 'fair value less costs to sell' basis and, as shown in the table above, an impairment of the assets has been recognised. In accordance with IFRS 5, the impairment has been allocated on a pro rata basis to the non-current assets. This allocation is solely for the purposes of preparing the financial statements in accordance with relevant international accounting standards. It should not be interpreted as being representative of values assigned to the assets by the vendor or purchaser in the context of a sale and purchase agreement. In assessing the fair value, less costs to sell, it was not considered appropriate to take into account any consideration that could be contingent on future performance and incorporated in current negotiations by way of deferred consideration. The net liabilities directly associated with assets of the disposal groups are as follows: Automotive Machine Total £m Tools £m £m Current liabilities Trade and other payables (16.2) (6.7) (22.9) Provisions (2.9) (2.9) Non-current liabilities Trade and other payables (0.4) (0.4) Retirement benefit obligations (1.7) (1.7) Deferred tax liabilities (0.2) (0.2) ____________________________________ (21.2) (6.9) (28.1) ==================================== 7. Pensions The Group operates a number of pension schemes throughout the world covering many of its employees. The principal funds are those in the United Kingdom: the Renold Group Pension Scheme ('RGPS'); the Jones & Shipman plc Retirement Benefits Plan (1971) and the Renold Supplementary Pension Scheme 1967 ('RSPS'). These three schemes are funded schemes of the defined benefit type with assets held in separate trustee administered funds. The Renold Group Money Purchase Pension Scheme is a defined contribution type scheme and membership is available to all new employees, the main defined benefit schemes having been closed to new employees in 2002. As a result of the Schemes' closure the age profile of the active membership is increasing, and consequently current service cost is likely to increase, as members of the Schemes approach retirement. Overseas employees participate in a variety of different pension arrangements of the defined contribution or defined benefit type, funded in accordance with local practice. The most recent actuarial valuations of the Renold Group Pension Scheme and the Renold Supplementary Pension Scheme 1967 were at 5 April 2004. The valuations of both schemes used the projected unit method and were carried out by Barnett Waddingham, professionally qualified actuaries. The last valuation of the Jones & Shipman plc Retirement Benefits Plan (1971) was in April 2003, by William M Mercer Limited, who were the former actuarial advisors to the Group. For all defined benefit schemes operated by the Group the disclosures in the accounts are based on the most recent actuarial valuations. Where material, these have been updated to the balance sheet date by qualified independent actuaries. The disclosures provided below are presented on a weighted average basis where appropriate. The principal financial assumptions used to calculate scheme liabilities as at 31 March 2006 are presented below. The assumptions adopted by the schemes' actuaries represent the best estimates chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice. UK Overseas 2006 2005 2006 2005 Rate of increase in pensionable salaries 3.4% 3.3% 2.9% 2.8% Rate of increase in pensions in payment and deferred pensions 2.8% 2.6% 1.8% 1.8% Discount rate 5.0% 5.4% 5.2% 5.6% Inflation assumption 2.9% 2.8% 2.2% 2.2% Expected return on plan assets 6.3% 6.5% 8.0% 8.5% The predominant defined benefit obligation for funded schemes within the Group resides in the UK (£195.6 million of the £213.5 million Group obligation for funded schemes). In addition to the assumptions shown above, mortality assumptions have a significant bearing on the calculated obligation. In the determination of the UK defined benefit obligation, as at 31 March 2006, the post-retirement mortality assumptions are based on the PA92 series tables published by the UK Actuarial Profession. The post-retirement mortality rates used for the Renold Group Pension Scheme (which represents the principal defined benefit obligation) are based on projections to calendar year 2020 for non-pensioners and 2004 for current pensioners reduced by 10% for non-pensioners and female pensioners and 20% for male pensioners. This reduction to mortality rates reflects the results of mortality experience carried out by the actuary as part of the actuarial valuation as at 5 April 2004. The expected long-term rates of return and market values of assets of the principal defined benefit schemes of the Group, together with the present value of scheme liabilities, are shown below. It should be noted that the market values of the schemes' assets are stated as at the Group's year end. It is not intended to realise the assets in the short-term and the value may therefore be subject to significant change before being realised. The present values of the schemes' liabilities are derived from cash flow projections over long periods and are thus inherently uncertain. The fair values of plan assets were: UK Overseas Total 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m Equities 78.2 71.6 9.2 7.0 87.4 78.6 Bonds 84.5 70.8 3.8 4.2 88.3 75.0 Other 2.5 1.2 2.5 1.2 ____________________________________________________________ Total market value of assets 162.7 142.4 15.5 12.4 178.2 154.8 Present value of scheme liabilities (195.6) (177.2) (36.5) (30.8) (232.1) (208.0) _____________________________________________________________ Deficits in schemes (32.9) (34.8) (21.0) (18.4) (53.9) (53.2) ============================================================ Pension commitments Pension obligations: The movement in the present value of the defined benefit obligation is as follows: 2006 2005 UK Overseas Total UK Overseas Total £m £m £m £m £m £m Opening obligation (177.2) (30.8) (208.0) (154.0) (28.6) (182.6) Current service cost (2.1) (0.7) (2.8) (2.0) (0.7) (2.7) Interest cost (1) (9.5) (1.7) (11.2) (8.2) (1.7) (9.9) Contributions by plan participants (0.8) (0.2) (1.0) (0.9) (0.1) (1.0) Actuarial gains and losses (15.2) (6.3) (21.5) (20.4) (20.4) Gains on curtailments 0.1 0.3 0.4 Liabilities extinguished on settlements 1.0 1.0 Benefits paid 8.1 2.3 10.4 8.3 1.5 9.8 Business combination (0.8) (0.8) Exchange adjustment (1.1) (1.1) (0.4) (0.4) Relating to disposal groups 1.7 1.7 ____________________________________________________________ Closing obligation (195.6) (36.5) (232.1) (177.2) (30.8) (208.0) ============================================================ (1) 'Interest cost' includes £0.1 million (2005 - £0.1 million) in respect of discontinued operations. The total defined benefit obligation can be analysed as follows: Obligations related to funded pension plans (195.6) (17.9) (213.5) (177.2) (12.1) (189.3) Obligations related to unfunded pension plans (18.6) (18.6) (18.7) (18.7) ____________________________________________________________ (195.6) (36.5) (232.1) (177.2) (30.8) (208.0) ============================================================ Pension assets: The movement in the present value of the defined benefit plan assets is as follows: 2006 2005 UK Overseas Total UK Overseas Total £m £m £m £m £m £m Opening assets 142.4 12.4 154.8 133.0 10.6 143.6 Expected return on plan assets 9.1 1.0 10.1 8.7 0.8 9.5 Actuarial gains and losses 14.5 1.7 16.2 3.3 1.2 4.5 Assets distributed on settlement (0.9) (0.9) Contributions by the employer 4.9 0.6 5.5 4.8 0.3 5.1 Contributions by plan participants 0.8 0.2 1.0 0.9 0.1 1.0 Benefits paid (8.1) (1.3) (9.4) (8.3) (0.5) (8.8) Exchange adjustment 0.9 0.9 (0.1) (0.1) ____________________________________________________________ Closing assets 162.7 15.5 178.2 142.4 12.4 154.8 ============================================================ Balance sheet reconciliation: Plan obligations (195.6) (36.5) (232.1) (177.2) (30.8) (208.0) Plan assets 162.7 15.5 178.2 142.4 12.4 154.8 ____________________________________________________________ Retirement benefit obligation (32.9) (21.0) (53.9) (34.8) (18.4) (53.2) ============================================================ The net amount of actuarial gains and losses taken to the statement of recognised income and expense is as follows: 2006 2005 £m £m Actuarial gains and losses arising on scheme obligations (1) (21.5) (20.4) Actuarial gains and losses arising on scheme assets 16.2 4.5 _________ ________ Net actuarial gains and losses (5.3) (15.9) ========= ======== (1) 'Actuarial gains and losses arising on scheme obligations' includes a gain of £0.1 million (2005 - nil) relating to discontinued operations. An analysis of amounts charged to operating costs is set out below: 2006 2005 £m £m Operating costs - continuing Current service cost (2.8) (2.6) Gains on curtailments 0.1 Liabilities extinguished on settlements 1.0 Assets distributed on settlements (0.9) ________ ________ (2.6) (2.6) Amounts relating to discontinued operations Current service cost (0.1) Gains on curtailments 0.3 ________ _________ Total cost of retirement benefits (2.3) (2.7) ======== ========= The cumulative amount of actuarial losses recognised in equity since 4 April 2004 was £21.2 million (2005 - £15.9 million). Of this amount £nil (2005 - loss £0.1 million) related to discontinued operations. The Group expects to contribute approximately £5.7 million to defined benefit schemes in the year to 31 March 2007. As a result of the deficits in the main UK schemes, it has been agreed with the actuaries and trustees that, under existing arrangements, annual lump sum payments of £2.2 million will be paid to the RGPS scheme, £0.7 million to the RSPS scheme and £0.2 million to the Jones & Shipman scheme over the average remaining service lives of members, being fifteen, twelve and fifteen years respectively. The Group operates a number of defined contribution schemes. The cost for the period was £0.5 million (2005 - £0.6 million). There were outstanding contributions in creditors of £nil (2005 - £0.1 million) at the balance sheet date. 8. Statement of changes in shareholders' equity Share Share Retained Currency Hedging Total capital premium earnings translation reserve equity account reserve £m £m £m £m £m £m At 3 April 2004 17.9 6.0 46.6 70.5 Loss for the year (0.1) (0.1) Foreign exchange translation difference (0.4) 0.5 0.1 Actuarial gains and losses (15.9) (15.9) Dividends (3.2) (3.2) Tax on items recognised directly in equity 4.6 4.6 Employee share options: - value of employee services 0.1 0.1 __________________________________________________________________ As at 31 March 2005 17.9 6.0 31.7 0.5 56.1 Effect of adoption of IAS 32 and IAS 39 (0.6) (0.2) (0.8) ___________________________________________________________________ At 1 April 2005 restated 17.3 6.0 31.5 0.5 55.3 Loss for the year (13.6) (13.6) Foreign exchange translation difference 1.1 1.1 Actuarial gains and losses (5.3) (5.3) Gains on fair value of hedging net investments in foreign operations 1.1 1.1 Tax on items recognised directly in equity 1.7 1.7 Employee share options: - value of employee services 0.2 0.2 - proceeds from shares issued 0.1 0.1 ___________________________________________________________________ At 31 March 2006 17.4 6.0 14.5 1.6 1.1 40.6 =================================================================== 9. Reconciliation of profit/(loss) before tax to net cash flows from operations 2006 2005 £m £m Cash generated from operations: Continuing operations: Profit/(loss) before taxation 1.8 (1.8) Depreciation and amortisation 5.4 6.0 Equity share plans 0.2 0.1 Net finance costs 3.6 2.2 (Increase)/decrease in inventories (1.8) 0.2 (Increase) in receivables (0.4) (4.1) Increase in payables 2.7 5.2 (Decrease)/increase in provisions (2.7) 4.9 Movement on pension schemes (3.8) (4.1) Movement in derivative financial instruments (0.3) ________ ________ Cash generated from continuing operations 4.7 8.6 ________ ________ Discontinued operations (Loss)/profit before taxation (1.4) 0.2 Depreciation and amortisation 3.1 2.8 Plant and equipment impairment 0.8 Goodwill impairment 2.6 Negative goodwill release (11.3) (Gain) on plant and equipment disposals (0.1) Net finance costs 0.4 0.4 (Increase) in inventories (0.6) (0.2) Decrease/(increase) in receivables 0.2 (1.8) Increase/(decrease) in payables 5.3 (1.5) (Decrease)/increase in provisions (5.7) 6.8 Movement on pension schemes (0.3) ________ ________ Cash generated/(absorbed) by discontinued operations 1.7 (2.0) ________ ________ ________ ________ Cash generated from operations 6.4 6.6 ======== ======== 10. Explanation of the transition to International Financial Reporting Standards (IFRS) Details of the impact of the transition to IFRS have been provided on the Group's website (www.renold.com) in two separate statements entitled 'Update on IFRS' and 'Renold plc IFRS Restatement'. These statements can be found on the 'Investors - Investor Relations' page of the Website, under the 'Useful Information' sub-section. However, in order to provide a summary of the key issues and changes to the financial statements (covered in greater detail in the statements provided on the website), this note explains the impact of the transition to IFRS. The Group previously prepared its financial statements under UK Generally Accepted Accounting Principles ('UK GAAP'). European Law requires that all listed companies prepare consolidated financial statements in accordance with IFRS. The relevant Regulation applies to all accounting periods beginning on or after 1 January 2005. This determines that the 'transition date' for Renold plc is 4 April 2004, being the start of the earliest period of comparative information. Guidance on the transition to IFRS is provided in IFRS 1 ('First Time Adoption of IFRS'). This standard allows exemptions from the application of certain IFRSs to assist in the transition process. The principal exemptions adopted by Renold can be summarised as; (1) Business combinations prior to the date of transition are not restated. Accordingly, the carrying value of goodwill was not adjusted at the transition date. (2) IAS 32 and 39, the international standards on financial instruments, are adopted only with effect from 1 April 2005 and therefore 2005 comparative information covered by these standards remains stated in accordance with UK GAAP. (3) Cumulative translation differences for foreign operations that are recognised separately in equity under IFRS are deemed to be reset to zero at the transition date. (4) Freehold properties have been measured on a fair value basis at the date of transition and this valuation is treated as the deemed cost of the respective properties. (5) The international standard in respect of Share Based Payments (IFRS 2) only applies to awards made after 7 November 2002 and which vest after 1 January 2005. The tables below provide a high level summary to put into context the relative importance of the main financial adjustments that arise following the adoption of IFRS. These tables show the change in the comparative period's income statement, the balance sheet at the date of transition (4 April 2004), the comparative balance sheet at 31 March 2005 and the opening balance sheet as adjusted for the adoption of IAS 32 and 39. A cross reference is given where appropriate at the head of each column to the narrative which sets out the background to the adjustment. The effect of the transition to IFRS on the income statement for the year ended 31 March 2005 is as follows: UK Negative Goodwill Depreciation Employee Share- Taxation IFRS GAAP goodwill benefits based released payments £m £m £m £m £m £m £m £m (a) (b) (c) (d) (e) (f) Revenue 197.0 197.0 Operating costs (excluding goodwill and exceptional items) (193.3) (0.1) (0.1) (0.1) (193.6) ________________________________________________________________________________________ Operating profit before goodwill and exceptional items 3.7 (0.1) (0.1) (0.1) 3.4 Goodwill amortisation and impairment (3.6) 1.0 (2.6) Exceptional items (4.3) 4.5 0.2 ________________________________________________________________________________________ Operating profit (4.2) 4.5 1.0 (0.1) (0.1) (0.1) 1.0 Net financing costs (2.6) (2.6) __________________________________________________________________________________________ Loss before tax (6.8) 4.5 1.0 (0.1) (0.1) (0.1) (1.6) Tax 1.6 (0.1) 1.5 __________________________________________________________________________________________ Loss for the financial period (5.2) 4.5 1.0 (0.1) (0.1) (0.1) (0.1) (0.1) ========================================================================================== The effect of the transition to IFRS on the balance sheet at 4 April 2004 is as follows: UK Property at Proposed Employee Taxation IFRS GAAP deemed cost dividends benefits £m £m £m £m £m £m (c) (g) (d) (f) Total assets 183.4 15.2 (4.0) 194.6 Total liabilities (125.5) 2.1 (0.5) (0.2) (124.1) _________________________________________________________________ Net assets 57.9 15.2 2.1 (0.5) (4.2) 70.5 ================================================================= Share capital and reserves 51.9 15.2 2.1 (0.5) (4.2) 64.5 Share premium 6.0 6.0 ________________________________________________________________ Total equity 57.9 15.2 2.1 (0.5) (4.2) 70.5 ================================================================ The effect of the transition to IFRS on the balance sheet at 31 March 2005 is as follows: UK Property at Goodwill Employee Share-based Taxation IFRS GAAP deemed cost benefits payments £m £m £m £m £m £m £m (c) (a)/(b) (d) (e) (f) Total assets 195.5 15.2 5.5 (4.9) 211.3 Total liabilities (155.2) (1.0) 1.0 (155.2) _______________________________________________________________________________ Net assets 40.3 15.2 5.5 (1.0) (3.9) 56.1 =============================================================================== Share capital and reserves 34.3 15.2 5.5 (1.0) (0.1) (3.9) 50.0 Share premium 6.0 0.1 6.1 _______________________________________________________________________________ Total equity 40.3 15.2 5.5 (1.0) (3.9) 56.1 =============================================================================== The effect of adopting IAS 32 and 39 at 1 April 2005 is as follows: IFRS Reclassification Deferred Recognition Adjustment IFRS (Pre IAS 32 of preference tax of financial to trade (post IAS 32 and 39) shares net of instruments receivable and 39) fair value provisions adjustment £m £m £m £m £m £m (i) (i) (i) (i) Total assets 211.3 0.1 0.1 211.5 Total liabilities (155.2) (0.5) (0.5) (156.2) __________________________________________________________________________________ Net assets 56.1 (0.5) 0.1 (0.5) 0.1 55.3 ================================================================================== Share capital and reserves 50.0 (0.5) 0.1 (0.5) 0.1 49.2 Share premium 6.1 6.1 __________________________________________________________________________________ Total equity 56.1 (0.5) 0.1 (0.5) 0.1 55.3 ================================================================================== (a) Following an acquisition in March 2005 the UK GAAP balance sheet retained an amount of £4.5 million in respect of the surplus of fair value of assets acquired over the consideration paid ('negative goodwill'). Following a review of the acquisition accounting for the purposes of IFRS adoption it was concluded that no revision was necessary to the existing amount £4.5 million. However, IFRS requires the immediate recognition in the income statement of negative goodwill arising on acquisition, and hence this amount has been transferred to income for the period. (b) Under UK GAAP capitalised goodwill was amortised over its estimated economic life, subject to the immediate recognition of any identified impairment. Under IFRS goodwill is not subject to amortisation but is tested annually for impairment. In the year to 31 March 2005 an impairment charge of £2.4 million was made in the UK GAAP accounts. Therefore, as illustrated in the table, the adoption of IFRS has given rise to an improvement in the reported result of £1.0 million, representing the net reversal of amortisation charges made under the former UK GAAP policy. (c) The revaluation of the Group's freehold properties noted above resulted in an increase in the deemed cost of £15.2 million over the carrying value retained under UK GAAP. The associated impact on the annual depreciation charge is an increase of £0.1 million. (d) In the UK GAAP financial statements for 2005 Renold accounted for pensions in accordance with FRS 17 ('Retirement benefits') which in most respects is similar to the respective international standard IAS 19 ('Employee Benefits'). However, a number of technical differences have given rise to revisions in the former FRS 17 disclosure. IAS 19 also introduces more prescriptive guidance on the treatment of other employee benefits. The total impact of adopting IAS 19 has increased the charge to income by £0.1 million. The recognition of certain Jubilee and other potential service related awards, together with the revisions to FRS 17, resulted in additional liabilities of £0.5 million at 4 April 2004 and £1.0 million at 31 March 2005. (e) In respect of share options granted by the Company no charge to income was required under UK GAAP because the exercise price was the same as the option price at the date of grant. Following the adoption of IFRS it was necessary to recognise a charge of £0.1 million due to the requirement to adopt a fair value assessment of the options granted. (f) The net effect of IFRS adjustments on the taxation charge for the year was £0.1 million. The primary change to the balance sheet deferred tax provision results from additional liabilities recognised in respect of the property revaluation noted under (c) above. (g) Under UK GAAP the final dividend for the 31 March 2004 year was provided in the results for that year; under IFRS the final dividend can only be recognised as a liability in the year it is declared. Consequently the 2004 final dividend provision has been reversed. (No final dividend was declared in 2005). (h) Not shown in the tables above, because there is no impact on net assets, is the reclassification from property, plant and equipment to intangible assets of software that is not an integral part of the related hardware. The reclassifications were £0.4 million and £0.3 million in the 4 April 2004 and 31 March 2005 balance sheets respectively. (i) As permitted under IFRS 1 the Group has adopted IAS 32 and 39 prospectively from 1 April 2005. These standards set out the accounting rules surrounding the recognition, measurement, disclosure and presentation of financial instruments. As a result of adopting these standards net assets were reduced by £0.8 million on 1 April 2005. There were three principal areas explaining this change. Firstly, preference shares (£0.5 million stated at fair value) were formerly shown as part of Shareholders' Funds but under IFRS definitions these have been reclassified and disclosed as liabilities. Secondly, derivative financial instruments (£0.3 million) have been recognised as assets and liabilities measured at fair value. This adjustment results mainly from the interest rate swap taken out by the Group in relation to its US dollar borrowing costs. Net assets were increased by £0.1 million following the reassessment of trade receivable provisions on a basis consistent with the criteria established by IAS 39. A deferred tax asset of £0.1 million was recognised as a result of these changes. As indicated at the time of publishing the detailed transitional statements, accounting practice surrounding IFRS is continuing to evolve. In response to developing practice it has been deemed appropriate to reflect certain minor revisions of a presentational nature. These changes have not altered the post-transition net equity previously reported at 4 April 2004 or 31 March 2005. The adoption of IFRS has no impact on the actual cash flows of the underlying businesses. However, IAS 7 ('Cash Flow Statements') introduces revised definitions that in turn lead to a revised presentation. The change in presentation is illustrated in the IFRS statements on the Group's website. This information is provided by RNS The company news service from the London Stock Exchange

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