Final Results

RNS Number : 2054N

Renold PLC

08 June 2010

 



Renold plc

("Renold" or "the Company")

 

Preliminary results for the year ended 31 March 2010

Renold, a leading international supplier of industrial chains and torque transmission products, today announces its preliminary results for the year ended 31 March 2010.

Financial Summary

	2010 £m		2009 £m
Revenue	156.1		194.7
Operating (loss)/profit	(4.8)		7.6
Operating (loss)/profit before exceptional items	(2.1)		10.0
(Loss)/profit before tax	(13.6)		2.9
Other information:
Basic (loss)/earnings per share	(8.0)p		2.8p
Basic and diluted adjusted (loss)/earnings per share  (adjusting for the after tax effects of exceptional items and the IAS 19 finance charge)	(1.4)p		7.3p

Highlights

·      Annualised cost reductions of £13.0 million achieved as planned

·    Net debt reduced by £19.3 million as a result of fund-raising

·    Sales and order intake increased from 2^nd to 3^rd quarter and improved further in 4^th quarter

·    Returned to operating profit before exceptional items in second half year

·    Well placed for recovery with diverse markets and geographies and lower cost base

Matthew Peacock, Chairman of Renold, said:

"As a result of the global economic crisis the Group experienced a difficult year. However, with a significantly lower cost base and stronger balance sheet we look forward to delivering improved results as the economic climate recovers. Our present sales and order run-rate give us grounds for optimism."

8 June 2010

Enquiries

Renold plc	Tel: [phone]
Bob Davies, Group Chief Executive
Peter Bream, Group Finance Director
Singer Capital Markets	Tel: [phone]
James Maxwell
Shaun Dobson
College Hill	Tel: [phone]
Adam Aljewicz
Mark Garraway

NOTES FOR EDITORS

Renold is a global leader in the manufacture of industrial chains and also manufactures a range of torque transmission products which are sold throughout the world to a broad range of original equipment manufacturers and distributors. The Company has a well deserved reputation for quality that is recognised worldwide. Its products are used in a wide variety of industries including manufacturing, transportation, energy, steel and mining.

Further information about Renold can be found on their website at: www.renold.com

Chairman's letter

Renold agile and able to grow

Overview

In this, my fourth year as Chairman of your Board, I report on the year ended 31 March 2010, a period in which the global economic crisis resulted in the Group experiencing a very challenging business environment.

Group sales decreased by 20% to £156.1 million, with a significant proportion of that decrease due to customer destocking. This drop in activity levels resulted in an operating loss before exceptional items of £2.1 million and a loss before tax of £13.6 million (2009 - profit of £2.9 million). The second half year benefited from both improved activity levels and the impact of the majority of the cost cuts and this resulted in a small operating profit before exceptional items for this six month period. We are now seeing sales and order intake increase significantly and our current run rate gives me grounds for optimism that as the economy recovers, we will be a major beneficiary.

In December 2009 we strengthened the Group's balance sheet by raising £26.9 million net of expenses via a placing and open offer of 142.5 million shares at 20 pence per share. Subsequently the Group's net debt at 31 March stands at £17.9 million (2009 - £37.2 million).

The global downturn and the different phasing of sales and cost reductions masks the progress made in reducing the cost base of operations. A full £13 million planned reduction in these costs was achieved by year end and this positions the Group well for the future.

Strategy

The business has emerged from the last year in a strong position. The cost reduction targets were delivered to plan and the reduced cost base will be maintained going forward.

A significant proportion of the reduction in sales was the result of customer destocking and as this effect is diminishing we will see sales reflecting underlying levels of demand in our end markets. In our traditional markets our focus is on increasing market share by infilling product areas in which we are under represented. Markets in Asia and the Americas, where our businesses are less established, offer considerable opportunities to grow market share as well as opportunities to achieve higher rates of sales growth in these faster growing economies. Our facilities in China and India give us access to new regions which account for circa 30% of the global market. In addition, now that we are physically present in these low-cost markets, we are in an excellent position to expand our highly regarded product range into them. We estimate that an annual industrial chain market of circa £400 million⁽¹⁾ exists in new territories where we have a current market share of less than 1%.

Our business covers a broad range of customers in diverse geographies and sectors which, by reducing exposure to any single market, normally provides for less business volatility.

Following the acquisitions in China and India, we closed our Polish facility. This was completed in August 2009 and we continue to evaluate and optimise our manufacturing footprint.

^[1] Source: management estimate.

Financing

In July 2009 we reached agreement to enter into a new three year credit facility with The Royal Bank of Scotland plc and Fortis Bank S.A./N.V. Interest rates were in line with market rates at the time of the transaction but these rates reflected comparatively higher margins over Libor compared to historical rates. In December 2009, with the support of our major shareholders, we successfully raised £26.9 million net of expenses through a firm placing and placing and open offer of 142.5 million shares at 20 pence per share. £11 million from this fund-raising was used to repay and cancel the term loan under this facility with the remainder being used to reduce net debt levels and increase headroom. The Group is now well funded for the future.

Your Board

I would particularly like to thank the Board for their support and contribution this year. For the Non-Executive Directors, it has required a considerable commitment of time. For the Executive Directors, it has required a single-minded commitment to rapid and difficult changes. In January 2010 we appointed Ian Griffiths to the Board. Ian has extensive Board and operational engineering and manufacturing experience which make him particularly well suited and he is welcomed to the Renold team.

Subsequent to the year end, Peter Bream has advised the Board that he intends to leave Renold in order to accept a position with another company. I should like to thank Peter for his contribution to the improvements over the last four years in the strategic position and the financial performance of Renold. A process to appoint a finance director is ongoing and an announcement will be made in due course.

Outlook

Our brand is strong and we are competitive in all segments of the price/performance pyramid. The prime focus for 2010/11 is to ensure a robust return to profit and to capture and realise growth opportunities. The final quarter of 2009/10 revealed an encouraging trend in sales growth which has continued into 2010/11. Whilst sales visibility is still unclear, the strong start to the year leaves the Company well placed to deliver upon expectations.

Matthew Peacock

Chairman

Chief Executive's review

During Renold's 130 year history we have weathered a number of recessions and believe we have emerged from this one in a strong position.

Overview

Against the backdrop of the global economic crisis last year the business faced many challenges but, following decisive management actions we delivered on the restructuring targets we set at the start of the year which meant by the second half year we made an operating profit before exceptional items.

The first half of the year was subject to very difficult market conditions and resulted in an operating loss before exceptional items of £2.1 million for the full year. We aggressively cut our cost base and achieved a 27% reduction in headcount and by the year end we achieved ongoing savings of £13 million. As a temporary response to reduced levels of activity reduced hours of working were implemented in most facilities and agreement was reached to implement a 10% reduction in pay for all members of the Board, the senior management team and most staff with effect from 1 April 2009 until February 2010.

These actions significantly reduced our cost base and, although they only partially mitigated the impact of the reduced contribution resulting from lower sales revenues, resulted in a small operating profit before exceptional items being generated in the second half year.

Capital expenditure was constrained during the year but given the low sales demand the need for additional expenditure was also reduced. However, essential maintenance, health and safety and projects with a short payback period were approved and, following the fund-raising in December 2009, approval was given for a Group-wide enterprise resource planning (ERP) project which will facilitate further cost and inventory reductions.

Our belief is that the reduction in demand we experienced in the year was the result of both reduced demand from end-customers but also significantly the result of destocking as all businesses responded to uncertain future demand levels and pressure on working capital. In the second half of the year we saw a gradual and progressive improvement in trading conditions as destocking started to end. We are not anticipating restocking in the near term but the end to destocking alone will have a materially positive impact on future results.

The £26.9 million (net of expenses) fund-raising in December 2009 has significantly reduced net debt and will save £2 million per annum in interest costs. The improved strength of the balance sheet also means we can fund growth.

The ongoing integration of our operations in China and India enables us to optimise low cost manufacturing opportunities and also increases access to those markets and other lower cost product opportunities.

Our employees deserve recognition and thanks for their acceptance and support for the cost reduction measures which were necessary during the year. I believe their continued efforts and their commitment will be reflected in next year's results.

Renold Chain

Renold Chain was severely impacted by the global recession not only for underlying demand reduction but also by destocking by both our distribution and OEM customers. The resultant year on year reduction in sales was approximately 29% (28% at constant exchange rates). We acted quickly to mitigate the financial losses. Headcount reduction was initiated in the third quarter of 2008/09 and was largely complete by the fourth quarter of 2008/9. The Polish facility was closed down in 2009/10. In order to further improve customer focus we realigned Chain into three geographical regions. These are Europe, the Americas including India, China and Australasia. All these regions were impacted but specific countries including Australia, India and South Africa suffered far less than most from the recessionary pressures.

By the summer of 2009 the sales decline had bottomed out. A steady increase in orders started in the third quarter of 2009/10 and gathered pace in the fourth quarter and this improvement is expected to continue in the near term. There is little evidence of restocking but customers are reporting they are no longer destocking or at least have a specific date when they expect to start placing orders that matches their own demand level. Encouragingly we believe we have been able to take market share during this downturn. This has been apparent within the large US distribution market and also our Chinese facility acquired in 2007 has won business from other Chinese competitors. Our Indian business (acquired in September 2008) contributed for a full year and benefited from the strong Indian market particularly towards the end of the year.

Market penetration

Within the chain industry Renold is recognised as a global market leader with excellent brand recognition and a reputation for delivering technical solutions. This is something we have earned over the years of trading and is an invaluable asset to achieve the growth plans for the coming year. Despite being market leader in Europe, as well as Australasia and India, there are areas of the European market where we are under-represented and part of the restructuring programme this year was aimed at being able to increase our penetration of these areas. Similarly we are one of the top three suppliers in North America. We have relocated manufacturing of some products into our existing facility in Morristown, Tennessee, which is aimed at gaining market share and a more efficient use of working capital.

Technical innovation

Despite the relative maturity of the industry, our work with key customers has resulted in a number of new solutions to old problems. We have developed Smart Chain technology to measure system dynamics, enabling improvements to drive efficiency which enables real cost reduction for our customers. Additionally we have maintained our initiative to produce a wider range of engineering solution products aimed at specific applications. This includes lubrication free chains, which contribute to both lower maintenance costs and a cleaner environment. Our engineers use state of the art 3D design technology connected to a global engineering system, enabling teams to work round the clock on time critical projects.  To further increase our support of the customer, this system is being linked to the new Group-wide ERP system that will be introduced during this year.

Renold Torque Transmission

Renold Torque Transmission provides engineering couplings, gearboxes and loose gears products to specific targetedmarkets. Whilst some of these markets have seen a downturn this was less marked than in the Chain Division. This is primarily because of the lack of inventory in the system but also because of large mass transit contracts which continued unaffected by the recession. The routes to market for Renold Torque Transmission products are less diverse than Chain and projects have longer cycles. This led to the recessionary pressures not only being less severe but impacting later in the financial year.

Power generation has continued to be a strong industry sector over the last year.  Renold Torque Transmission supplies to most markets in the sector.  For example, we supply torsionally flexible couplings for use in variable speed fans in new power stations built in India, and for station upgrades in the US.  We also provide gear boxes for preheaters in new stations in India and China, as well as worm and wheel gear sets for coal pulverisers around the world.

Temporary power is often provided using diesel generator sets and this is a growing market. Our technology has been successful in these applications and we now supply couplings to some of the largest companies in the industry. The growth in this sector is expected to continue in the coming year. Our couplings have helped provide power to the Vancouver Winter Olympics and will help with this summer's FIFA World Cup in South Africa.

We also supply product into the renewable energy market with our sprag clutches being used in wind turbines and our gear couplings in power generating waste processing plants.

The supply of couplings and gear boxes for use in mass transmit propulsion systems has kept the people movement sector strong for Renold Torque Transmission this year.  New contracts have been won and the pipeline is robust.  Additionally, our gears products are used extensively in escalator drives for demanding applications by London Underground and New York City Transit Authority.

Investment in additional capacity and capability in South Africa has enabled us to provide a comprehensive service to our local customers, primarily mines, for gear boxes and couplings.  This business has been strong in the refurbishment and repair of gear boxes and has not been impacted by the slowdown elsewhere in the world.

Going forward, the recovery in the oil, mineral extraction and metals processing industries should provide an increase in demand for all Renold Torque Transmission products.

Going forward

Our torque transmission products are largely bespoke and part of long term projects. Consequently in the downturn our Torque Transmission business was more robust than the Chain business because of these longer term contracts and the support of infrastructure spending. The Chain business is a more economically sensitive business which, despite a broad geography and wide range of products and end markets, suffered significantly from the move to reduce the level of inventory in the system.  The Chain business is a mix of OEM and maintenance applications which cover both relatively competitive, high volume products and highly specialised, high margin, lower volume products.

The financial statements include for the first time separate reporting of these two segments which should provide additional clarity both as to the value in our existing businesses but also the opportunity. The financial returns from the Chain business at the current levels are unacceptable but much has been done in reducing the cost base. This, in conjunction with high operational gearing, will both capture the upturn in market volumes and allow the integration and addition of new lines within the existing capacity and under the Renold umbrella.

Implementing the changes to our business model in the last two years has been challenging but essential to weather the recession. The majority of the £13 million reduction to the cost base is expected to be retained even allowing for this year's sales growth. The market share gains made this year and the opportunities provided by our relatively new Chinese and Indian facilities position us well to take advantage of the recovery. Renold exits the downturn with a lean, well financed business, which will facilitate market share growth.

Robert Davies

Chief Executive

Finance Director's review

Our performance

Overview

The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Revenue

Revenue for the year ended 31 March 2010 decreased by 20% to £156.1 million compared to the preceding year. Revenue in the second half year, at £80.6 million, was 7% higher than in the first half year. At constant exchange rates, sales for the full year were down 25% on the preceding year and sales in the second half year were down 21% on the same period for the year ended 31 March 2009.

Operating result

The operating loss before exceptional items was £2.1 million (2009 - profit of £10.0 million). The second half year generated an operating profit before exceptional items of £0.2 million (2009 - second half year profit of £4.0 million). This deterioration in the full year result was a consequence of lower sales levels.

Exceptional operating items resulted in a £2.7 million charge for the year ended 31 March 2010 (2009 - £2.4 million). These costs were incurred to accommodate the lower activity levels resulting from the global recession.

Financing costs

Total net financing costs increased to £8.8 million (2009 - £4.7 million). Net finance costs excluding exceptional refinance costs and IAS 19 charges fell to £2.2 million (2009 - £2.9 million). All of the remaining costs (£0.2 million) associated with the rebanking in February 2007 and the exceptional costs (£2.8 million) associated with the refinancing during the year ended 31 March 2010 have been expensed. The net interest cost on pension plan balances and the expected return on pension plan assets was a charge of £3.8 million (2009 - £1.8 million) principally as a consequence of the assumption of lower expected investment returns on lower opening pension plan asset balances.

Result before tax

The loss before tax and before exceptional items was £8.1 million (2009 - profit of £5.3 million). Loss before tax after exceptional items was £13.6 million (2009 - profit of £2.9 million).

Taxation

The tax credit of £3.9 million (2009 - charge of £0.8 million) represented an effective rate of approximately 29% compared to 28% for the year ended 31 March 2009.

Group results for the financial period

The loss for the financial year ended 31 March 2010 was £9.7 million (2009 - profit £2.1 million); the basic loss per share and the diluted loss per share was 8.0p (2009 - earnings 2.8p). The basic adjusted loss per share and diluted adjusted loss per share was 1.4p (2009 - earnings 7.3p).

Balance sheet

Net assets at 31 March 2010 were £44.8 million (2009 - £40.1 million). The net liability for retirement benefit obligations was £56.8 million (2009 - £44.1 million) after allowing for a net deferred tax asset of £16.2 million (2009 - £11.0 million). Of the £73.0 million net retirement benefit obligation before deferred tax, £21.2 million arises in respect of non-UK unfunded schemes, which are not required to be prefunded.

Cash flow and borrowings

Operating cash inflow was £0.9 million (2009 - £1.1 million). Payment for purchase of property, plant and equipment was £3.3 million (2009 - £5.5 million). Group net borrowings at 31 March 2010 were £17.9 million (2009 - £37.2 million) comprising cash and cash equivalents of £7.3 million (2009 - £11.3 million) and borrowings, including preference stock, of £25.2 million (2009 - £48.5 million).

Net borrowings at 31 March 2010 were lower than at 31 March 2009 principally as a result of the £26.9 million net inflow from the share issue in December 2009.

Share issue

In December 2009, the Group raised £26.9 million after expenses through the completion of a firm placing and placing and open offer of 142,500,000 new ordinary shares at 20 pence per share.

Bank facility

On 13 July 2009, the Group reached agreement to enter into a three year bank facility with the existing syndicate members led by The Royal Bank of Scotland plc, with Fortis Bank S.A./N.V. as a participant and the key terms of this new facility were effective from 13 August 2009. The key terms were a Multi Revolving Credit Facility (MRCF) of £20.0 million and a Multi Currency Term-Loan Facility (MTLF) of £11.0 million, with both facilities expiring on 30 June 2012.

This facility was amended in December 2009 following the successful share issue with the repayment and cancellation of the £11.0 million MTLF and certain financial and non-financial covenants were relaxed. The remaining £20.0 million MRCF is the Group's principal credit facility although the Group also benefits from numerous overseas facilities. At 31 March 2010 the Group had unused committed credit facilities totalling £20.5 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. The Group maintains a mix of short and medium term facilities to ensure that it has sufficient available funds for ongoing operations. A major exposure of the Group earnings and cash flows relates to currency risk on its sales and purchases made in foreign (non-functional) currencies. To reduce such risks, these transactions are covered primarily by forward foreign exchange contracts. Such commitments generally do not extend more than 12 months beyond the balance sheet date, although exceptions can occur where longer term projects are entered into. To manage foreign currency exchange risk on the translation of net investments, certain Dollar denominated borrowings taken out in the UK to finance US acquisitions had been designated as a hedge of the net investment in US subsidiaries. At 31 March 2010, this hedge has been determined to be ineffective and revised arrangements have been put in place. The carrying value of these borrowings at 31 March 2010 was £8.5 million (2009 - £9.1 million).

Borrowings issued at variable rates expose the Group to cash flow interest rate risk and borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group reviews the mix of fixed rate and floating rate debt and, during the year, had interest rate swaps to manage part of this exposure.

At 31 March 2010, the Group had 4% (2009 - 3%) of its gross debt at fixed interest rates.  However, the intention is to enter into further interest rate swaps to increase the proportion of debt at fixed rate. Cash deposits are placed short term with banks where security and liquidity are the primary objectives. The Group has no significant concentrations of credit riskwith sales made to a wide spread of customers, industries and geographies. Policies are in place to ensure that credit risk on individual customers is kept to a minimum.

Pensions

The management of the Group's UK pension schemes continued to be a focus and action was taken. All schemes were closed to new entrants in 2002. However, the continued growth of the deficit due to longevity and the performance of the financial markets required action to limit our future anticipated risk. Pensions will continue to be an area of pro-active management.

Accordingly, we closed the Renold Supplementary Pension Scheme (RSPS) and the Jones & Shipman plc Retirement Benefit Plan (J&S) to future accrual from 1 August 2008. After a full consultation process, the main pension scheme, the Renold Group Pension Scheme (RGPS), was also closed to future accrual on 1 June 2009. The new arrangement is the Renold Personal Pension Plan, a defined contribution plan which is administered by Fidelity International.

The gross pension assets and liabilities and resulting gross and net deficits are as follows:

	2010			2009
	Assets £m	Liabilities £m	Deficit £m	Assets £m	Liabilities £m	Deficit £m
UK schemes - funded	147.7	(197.4)	(49.7)	130.7	(157.8)	(27.1)
Overseas schemes
- funded	17.5	(19.6)	(2.1)	15.6	(21.6)	(6.0)
- unfunded	-	(21.2)	(21.2)	-	(22.0)	(22.0)
	165.2	(238.2)	(73.0)	146.3	(201.4)	(55.1)
Deferred tax asset			16.2			11.0
Net deficit			(56.8)			(44.1)

During the year ended 31 March 2010, the assets of the funded schemes improved by £18.9 million, but this was more than offset by an increase in the valuation of funded liabilities by £37.6 million due to a reduction in the discount rate of 1.3% for the UK schemes and 0.6% for the overseas schemes and consequently the net deficit of the funded schemes increased by £18.7 million.

The overseas deficit comprises £2.1 million at 31 March 2010 (2009 - £6.0 million) in respect of funded defined benefit schemes and £21.2 million (2009 - £22.0 million) relating principally to the unfunded German scheme which, as is common in Germany, is a "pay as you go" scheme that is not required to be prefunded. There is no obligation for deficit funding payments for this type of scheme.

There are three UK defined benefit pension schemes: (i) the main scheme, which is the RGPS; (ii) the RSPS; and (iii) the J&S. The status of these schemes at 31 March 2010 is summarised below:

As at 31 March 2010	RGPS £m	RSPS £m	J&S £m	Total £m
IAS 19 liabilities	(129.5)	(33.8)	(34.1)	(197.4)
Market value of assets	92.2	24.1	31.4	147.7
Deficit/surplus on IAS 19 basis	(37.3)	(9.7)	(2.7)	(49.7)
Annual deficit reduction payment (based on funding valuations)	1.6	0.5	-	2.1
Total members (approximately)	4,852	113	998	5,963

The assets and liabilities in the balance sheet include a net £1.5 million asset at 31 March 2010 (2009 - £nil) in respect of a closed South African defined benefit pension scheme. The Group has recognised that element of the pension surplus within that scheme which it expects to be repaid to the Group after expected additional payments to pensioner members are taken into account.

Principal risks and uncertainties

Risk is inherent in our business activities. We take steps at both a Group and subsidiary level to understand and evaluate potential risks and uncertainties which could have a material impact on our performance in order to mitigate them. Accordingly, a risk aware environment is promoted and encouraged throughout the Group. Details of the principal risks and uncertainties are set out below.

External market

Economic and political risks

We operate in 20 countries and sell to customers in many more. While benefiting from the opportunities and growth in these diverse territories, we are necessarily exposed to the economic, political and business risks associated with international operations such as a global recession, sudden changes in regulation, imposition of trade barriers and wage controls, security risk, limits on the export of currency and volatility of prices, taxes and currencies. Our diversified geographic footprint mitigates against exposure within any one country in which we operate, although we are still exposed to global events.

In particular, as we have recently experienced, the risk from global recession is significant. The recession has resulted in both lower orders and less forward visibility of, and greater volatility in, future orders as industries react to the global downturn by destocking and reducing output. We take actions with the objective of reducing costs and cash outflow whilst maintaining flexibility. Like many other companies, despite these actions the financial performance and position of the Group has been adversely affected. The Group is now better positioned in the event of a second global recession but would not be immune to the effect.

Raw material prices

The Group's profit and cash flows are impacted by the price of its principal raw material, steel, which in recent years has seen considerable price volatility driven by global market conditions outside the control of the Group. Where contractually possible, we pass price increases on to our customers but this ability is, to some extent, dependent upon market conditions. There may be periods of time in which the Group is not fully able to recover increases in the cost of raw materials due to the weakness in demand for its products or the action of its competitors. During periods in which prices of raw materials fall, the Group may face demands from its customers to reduce its prices or experience a fall in demand for its products whilst customers delay orders in anticipation of price reductions. All of these factors could have a material adverse effect on the Group's business, financial condition, prospects, customer retention and results of operations.

Operational

Operational problems

The Group's profits and cash flows are dependent on the continued use of its various facilities. Operational risks include equipment failure, failure to comply with applicable regulations and standards, raw materials supply disruptions, labour force shortages, events impeding or increasing the cost of transporting the Group's products and natural disasters. Any disruption of the manufacturing processes can result in delivery delays, interrupt production or even lead to a full cessation of production. If production is interrupted, customers may decide to purchase products from other suppliers. The Group has insurance cover to mitigate the impact of a number of these risks.

ERP system implementation

The Group is presently implementing a global ERP system to replace numerous legacy systems. This change is expected to improve customer service and to facilitate further cost and inventory reduction.  However, an unsuccessful implementation could seriously impede the Group's operations with results which could have a material adverse effect on the Group's business, financial condition, prospects, customer retention and results of operations. To mitigate this risk the Group is making extensive use of external consultants, the implementation is taking place in phases and a thorough project plan is in place with agreed milestones reviewed by the Board.

Health, safety and the environment

Revision of environmental legislation in various countries takes time and we monitor this at a local level in order to anticipate the effect on our businesses and customers. Unforeseen legislative changes may increase manufacturing costs but we believe that they can also drive change to make operations more efficient.

Product liability and warranty claims

As a result of the nature of the products manufactured, we face the inherent business risk of exposure to product failure and warranty claims in the event that a product fails. In order to mitigate these risks, where possible, we maintain product liability insurance. In order to mitigate the risk of warranty claims for property damage or consequential losses, we have adopted a policy of contractually limiting liability, where possible.

Financial

Liquidity

In the present economic climate, all companies face risk in relation to the availability of debt to fund their ongoing operations. In order to manage this risk, the Group maintains a mix of short and medium term facilities to ensure that it has sufficient funds available. During the year ended 31 March 2010 the Group entered into a new facility with its main lenders. This facility was amended following the successful share issue which raised £26.9 million net of expenses in December 2009. Cash deposits are placed short term with banks where security and liquidity are the primary objectives.

Foreign exchange risk

The Group has operations in 20 countries and sells into many more with the result that two forms of currency risk, transactional and translational exposure, arise.

• Transactional exposure: A major exposure of the Group earnings and cash flows relates to currency risk on its sales and purchases made in foreign (non-functional) currencies. To reduce such risks, these transactions are covered primarily by forward foreign exchange contracts or cash flow hedges. Such commitments generally do not extend more than 12 months beyond the balance sheet date, although exceptions can occur where longer term projects are entered into.

• Translational exposure: Translational exposure arises due to exchange rate fluctuations in the translation of the results of overseas subsidiaries into Sterling. To manage foreign exchange currency risk on the translation of net investments, certain Dollar denominated borrowings taken out in the UK to finance US acquisitions had been designated as a hedge of the net investment in US subsidiaries. These have been determined as ineffective at 31 March 2010 and revised arrangements have been put in place.

Interest rates

Borrowings at variable rates expose the Group to cash flow interest rate risk and borrowings at fixed rates expose the Group to fair value interest rate risk. The Group reviews the mix of fixed and floating debt and intends to use interest rate swaps to manage part of this exposure.

Pensions

Estimates of the amount and timing of future funding obligations for the Group's pension plans are based upon a number of assumptions including future long term corporate bond yields, the actual and projected performance of the pension plan assets, legislative requirements and increased longevity of members. In the year ended 31 March 2010, decreased bond yields have increased the deficit. The Group continually reviews risks in relation to the Group's pension schemes and takes action to mitigate them where possible. While the Group is consulted by the trustees on the investment strategies of its pension plans, the Group does not have direct control over these matters, as trustees are responsible for the pension strategy.

 

Consolidated Income Statement

for the year ended 31 March 2010

	Note		2010		2009
			£m		£m
Revenue	2		156.1		194.7
Operating costs			(160.9)		(187.1)
Operating (loss)/profit			(4.8)		7.6
Operating (loss)/profit before exceptional items			(2.1)		10.0
Exceptional items	3		(2.7)		(2.4)
Operating (loss)/profit			(4.8)		7.6
Financial costs			(15.7)		(16.0)
Financial revenue			9.7		11.3
Exceptional refinancing costs	3		(2.8)		-
Net financing costs	4		(8.8)		(4.7)
(Loss)/profit before tax			(13.6)		2.9
Taxation	5		3.9		(0.8)
(Loss)/profit for the financial year			(9.7)		2.1
Attributable to:
Owners of the parent			(9.6)		2.1
Minority interests			(0.1)		-
			(9.7)		2.1
(Loss)/earnings per share	6
Basic (loss)/earnings per share			(8.0)p		2.8p
Diluted (loss)/earnings per share			(8.0)p		2.8p
Adjusted (loss)/earnings per share*			(1.4)p		7.3p
Diluted adjusted (loss)/earnings per share*			(1.4)p		7.3p

* Adjusted for the after tax effects of exceptional items and the IAS 19 charge.

Consolidated Balance Sheet

as at 31 March 2010

	Note	2010 £m		2009 £m
ASSETS Non-current assets
Goodwill		23.5		24.5
Other intangible assets		1.6		1.1
Property, plant and equipment		49.9		51.1
Investment property		2.1		2.2
Other non-current assets		0.4		0.4
Deferred tax assets		22.9		14.2
		100.4		93.5
Current assets
Inventories		42.9		46.4
Trade and other receivables		28.3		37.1
Retirement benefit surplus		1.5		-
Current tax asset		-		0.7
Cash and cash equivalents		7.3		11.3
		80.0		95.5
TOTAL ASSETS		180.4		189.0
LIABILITIES
Current liabilities
Borrowings		(13.4)		(44.4)
Trade and other payables		(33.0)		(37.6)
Current tax		(0.2)		-
Derivative financial instruments		(0.2)		(2.9)
Provisions		(0.6)		(2.9)
		(47.4)		(87.8)
NET CURRENT ASSETS		32.6		7.7
Non-current liabilities
Borrowings		(11.3)		(3.6)
Provisions		(0.5)		(0.5)
Preference shares		(0.5)		(0.5)
Trade and other payables		(0.5)		(0.5)
Deferred tax liabilities		(0.9)		(0.9)
Retirement benefit obligations		(74.5)		(55.1)
		(88.2)		(61.1)
TOTAL LIABILITIES		(135.6)		(148.9)
NET ASSETS		44.8		40.1
EQUITY
Issued share capital	7	26.4		19.3
Share premium account		29.4		9.6
Currency translation reserve		7.0		7.6
Other reserves		0.9		(1.9)
Retained earnings		(20.7)		3.9
Equity attributable to equity holders of the parent		43.0		38.5
Minority interests		1.8		1.6
TOTAL SHAREHOLDERS' EQUITY		44.8		40.1

Approved by the Board on 7 June 2010 and signed on its behalf by:

Matthew Peacock                   Robert Davies

Chairman                                  Director

Consolidated Statement of Comprehensive Income

for the year ended 31 March 2010

	2010 £m		2009 £m
(Loss)/profit for the year	(9.7)		2.1
Other comprehensive income/(expense):
Reclassification of losses on cash flow hedges to the income statement	0.1		0.5
Net gains/(losses) on cash flow hedges	2.7		(1.8)
Foreign exchange translation differences	1.2		3.4
Foreign exchange differences on borrowings	-		(2.6)
Foreign exchange differences on loans forming part of the net investment in foreign operations	(1.8)		8.1
Actuarial losses on retirement benefit obligations	(21.5)		(22.3)
Actuarial gain on retirement benefit obligation - restriction removed	1.5		-
Tax on components of other comprehensive income	4.9		4.6
Other comprehensive expense for the year, net of tax:	(12.9)		(10.1)
Total comprehensive expense for the year, net of tax	(22.6)		(8.0)
Attributable to:
Owners of the parent	(22.5)		(8.0)
Minority interest	(0.1)		-
	(22.6)		(8.0)

Consolidated statement of changes in equity

For the year ended 31 March 2010

	Share capital £m	Share premium account £m	Retained earnings £m	Currency translation reserve £m	Other reserves £m	Minority interests £m	Total equity £m
At 1 April 2008	17.5	6.3	19.1	(1.3)	(0.6)	-	41.0
Profit for the year	-	-	2.1	-	-	-	2.1
Other comprehensive income	-	-	(17.7)	8.9	(1.3)	-	(10.1)
Total comprehensive income for the year	-	-	(15.6)	8.9	(1.3)	-	(8.0)
Proceeds from share placing	1.8	3.5	-	-	-	-	5.3
Associated costs of placing	-	(0.2)	-	-	-	-	(0.2)
Employee share options:
- value of employee services	-	-	0.4	-	-	-	0.4
Minority interests arising on acquisition	-	-	-	-	-	1.6	1.6
At 31 March 2009	19.3	9.6	3.9	7.6	(1.9)	1.6	40.1
Loss for the year	-	-	(9.6)	-	-	(0.1)	(9.7)
Other comprehensive income	-	-	(15.1)	(0.6)	2.8	-	(12.9)
Total comprehensive income for the year	-	-	(24.7)	(0.6)	2.8	(0.1)	(22.6)
Proceeds from share placing	7.1	21.4	-	-	-	-	28.5
Associated costs of placing	-	(1.6)	-	-	-	-	(1.6)
Employee share options:
- value of employee services	-	-	0.1	-	-	-	0.1
Proceeds from minority interests	-	-	-	-	-	0.3	0.3
At 31 March 2010	26.4	29.4	(20.7)	7.0	0.9	1.8	44.8

Consolidated statement of cash flows

for the year ended 31 March 2010

	2010 £m		2009 £m
Cash flows from operating activities
Cash generated from operations (Note 8)	0.9		1.1
Income taxes refunded/(paid)	1.0		(1.7)
Net cash from operating activities	1.9		(0.6)
Cash flows from investing activities
Acquisition of subsidiary undertaking	(0.5)		(5.6)
Purchase of property, plant and equipment	(3.3)		(5.5)
Purchase of intangible assets	(0.9)		(0.3)
Proceeds on disposal of property, plant and equipment	-		1.7
Proceeds from minority interests capital injection	0.3		-
Interest received	-		0.1
Net cash from investing activities	(4.4)		(9.6)
Cash flows from financing activities
Financing costs paid	(5.6)		(2.5)
Proceeds from borrowings	3.0		4.8
Repayment of borrowings	(24.0)		(4.6)
Issue of ordinary shares	26.9		5.1
Payment of finance lease liabilities	(0.1)		(0.1)
Net cash from financing activities	0.2		2.7
Net decrease in cash and cash equivalents	(2.3)		(7.5)
Net cash and cash equivalents at beginning of year	8.6		14.2
Effects of exchange rate changes	(0.4)		1.9
Net cash and cash equivalents at end of year	5.9		8.6

Notes to the accounts

1(a) Basis of preparation

The preliminary statement was approved by the Board on 7 June 2010. The preliminary statement does not represent the full consolidated financial statements of Renold plc and its subsidiaries which will be delivered to the Registrar of Companies following the annual general meeting. The audited consolidated financial statements of Renold plc for the year ended 31 March 2010 have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.

The preliminary financial statements have been prepared on a consistent basis using the accounting policies set out in the Renold plc annual report for the year ended 31 March 2009. The financial information for the year ended 31 March 2009 has been extracted from the Renold plc annual report for that year as filed with the Registrar of Companies.

The 2009 and 2010 financial statements both carry unqualified audit reports which do not contain an emphasis of matter reference and do not contain a statement under section 237(2) or 237(3) of the Companies Act 1985 or section 498(2) or 498(3) of the Companies Act 2006.

1(b). Basis of preparation - Going Concern

The financial statements have been prepared on a going concern basis. In determining the appropriate basis of preparation of the financial statements, the Directors are required to consider whether the Group can continue in operational existence for the foreseeable future.

The Directors have assessed the future funding requirements of the Group and the Company and compared them to the level of available borrowing facilities. The assessment included a detailed review of financial forecasts, financial instruments and hedging arrangements for at least the twelve month period from the date of signing the accounts and a review of cash flow projections. Recognising the impact of the global recession, the Directors considered a range of potential scenarios within the key markets the Group serves and how these might impact on the Group's cash flow, facility headroom and banking covenants. The Directors also considered what mitigating actions the Group could take to limit any adverse consequences. The Group's forecasts and projections, taking account of reasonably possible scenarios show that the Group should be able to operate within the level of its borrowing facilities and covenants.

Having undertaken this work, the Directors are of the opinion that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the annual report and accounts.

2. Segmental information

For management purposes, the Group is organised into business units according to the nature of their products and services. Having considered the management reporting and organisational structure of the Group the Directors have concluded that the Company has two reportable operating segments as follows:

·            The Chain segment manufactures and sells power transmission and conveyor chain and also includes sales of Torque Transmission product through Chain National Sales Centres (NSCs);

·            The Torque Transmission segment manufactures and sells torque transmission products such as gearboxes and couplings used in power transmission.

No operating segments have been aggregated to form the above reportable segments.

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. The Chief Operating Decision Maker (CODM) for the purposes of IFRS - Operating Segments is considered to be the Board of Directors.  Segment performance is evaluated based on operating profit and loss and is measured consistently with operating profit and loss in the consolidated financial statements. However, Group financing (including finance costs and finance income), retirement benefit obligations and income taxes are managed on a Group basis and are not allocated to operating segments.

Transfer prices between operating segments are on an arm's length basis in a manner similar to transactions with third parties.

Year ended 31 March 2010	Chain £m		Torque Transmission £m		Adjustments and eliminations £m		Consolidated £m
Revenue
External customer	111.2		44.9		-		156.1
Inter-segment	0.4		5.3		(5.7)		-
Total revenue	111.6		50.2		(5.7)		156.1
Operating (loss)/profit  before exceptional items	(7.4)		3.0		2.3		(2.1)
Exceptional operating costs	(2.2)		(0.3)		(0.2)		(2.7)
Segment operating (loss)/profit	(9.6)		2.7		2.1		(4.8)
Net financing costs							(8.8)
Loss before tax							(13.6)
Other disclosures
Inventories	33.8		9.1		-		42.9
Capital expenditure	3.3		0.9		-		4.2
Depreciation and amortisation	4.1		0.9		-		5.0

i.    Inter-segment revenues are eliminated on consolidation;

ii.    Segment operating results do not include certain Head Office income of £2.1 million;

iii.   Capital expenditure consists of additions to property, plant and equipment, and intangible assets;

iv.   Included in Chain external sales is £9.7 million of Torque Transmission product sold through the Chain NSCs. The Torque Transmission businesses may use the Chain NSC framework in countries where it does not have its own presence. Where this occurs Torque Transmission represents a low proportion of total sales for the NSC.

v.    The measure of segment assets reviewed by the CODM is inventories.

 

Year ended 31 March 2009	Chain £m		Torque Transmission £m		Adjustments and eliminations £m		Consolidated £m
Revenue
External customer	142.1		52.6		-		194.7
Inter-segment	0.2		7.3		(7.5)		-
Total revenue	142.3		59.9		(7.5)		194.7
Operating profit before exceptional items	2.2		6.3		1.5		10.0
Exceptional operating costs	(2.1)		(0.2)		(0.1)		(2.4)
Segment operating profit/(loss)	0.1		6.1		1.4		7.6
Net financing costs							(4.7)
Profit before tax							2.9
Other disclosures
Inventories	36.5		9.9		-		46.4
Capital expenditure	3.9		1.9		-		5.8
Depreciation and amortisation	3.8		0.9		-		4.7

i.    Inter-segment revenues are eliminated on consolidation;

ii.    Segment operating results do not include certain Head Office income of £1.4 million;

iii.   Capital expenditure consists of additions to property, plant and equipment, and intangible assets;

iv.   Included in Chain external sales is £13.1 million of Torque Transmission product sold through the Chain NSCs. The Torque Transmission businesses may use the Chain NSC framework in countries where it does not have its own presence. Where this occurs Torque Transmission represents a low proportion of total sales for the NSC.

v.    The measure of segment assets reviewed by the CODM is inventories.

The operations of the Group are based in four main geographical areas.  The UK is the home country of the parent company, Renold plc.  The main operations in the principal territories are as follows:

·    United Kingdom

·    Rest of Europe

·    US

·    Other countries

The sales analysis in the table below is based on the location of the customer; the analysis of non-current assets is based on the location of the assets:

Revenues from external customers	2010 £m		2009 £m
United Kingdom	14.7		19.9
Rest of Europe	44.3		63.9
US	47.7		61.5
Other countries	49.4		49.4
	156.1		194.7

All revenue relates to the sale of goods.

No individual customer, or group of customers, represents more than 10% of Group revenue (2009 - none).

Non-current assets (excluding deferred tax and other non-current assets)	2010		2009
	£m		£m
United Kingdom	12.5		11.5
Rest of Europe	15.8		17.6
US	26.3		28.2
Other countries	22.5		21.6
	77.1		78.9

Non-current assets consist of goodwill, other intangible assets, property, plant and equipment and investment property.

3 - Exceptional items

	2010 £m		2009 £m
Included in operating costs
Reorganisation and redundancy costs	2.7		2.4
	2.7		2.4

Exceptional costs associated with the restructuring of the Group's manufacturing and distribution facilities have originated as follows: UK £1.2 million (2009 - £0.5 million), Germany £0.1 million (2009 - £0.6 million), Poland £0.7 million (2009 - £0.6 million) and other countries £0.7 million (2009 - £0.7 million).

	2010 £m		2009 £m
Included in financing costs
Costs associated with refinancing	2.8		-
	2.8		-

Exceptional refinancing costs include professional fees of £1.5 million, warranty waiver fee of £0.3 million, bank arrangement fee of £0.6 million, and the fair value of the warrants over shares of £0.4 million.

4 - Net financing costs

	2010			2009
	£m	£m		£m	£m
Financial costs:
Interest payable on bank loans and overdrafts	(2.6)			(2.8)
Costs associated with refinancing - old arrangement	(0.2)			(0.2)
Interest cost on financial liabilities not at fair value through the income statement		(2.8)			(3.0)
Interest cost on pension plan balances		(12.9)			(13.0)
		(15.7)			(16.0)
Exceptional financing costs:
Costs associated with refinancing		(2.8)			-
Total financing costs		(18.5)			(16.0)
Financial revenue:
Interest receivable on bank deposits and cash equivalents	-			0.1
Interest income on financial assets not at fair value through the income statement		-			0.1
Ineffectiveness on net investment hedge		0.6			-
Expected return on pension plan assets		9.1			11.2
Total financial revenue		9.7			11.3
Net financing costs		(8.8)			(4.7)

5 - Taxation

Analysis of tax (credit)/charge in the year

	2010 £m		2009 £m
United Kingdom
UK corporation tax at 28% (2009 - 28%)	0.2		0.2
Less: double taxation relief	(0.2)		(0.2)
	-		-
Overseas taxes
Corporation taxes	(0.2)		0.9
Current income tax (credit)/charge	(0.2)		0.9
Deferred tax
UK - origination and reversal of temporary differences	(0.5)		0.2
Overseas - origination and reversal of temporary differences	(3.2)		(0.3)
Total deferred tax credit	(3.7)		(0.1)
Tax (credit)/ charge on (loss)/profit on ordinary activities	(3.9)		0.8

	2010 £m		2009 £m
Tax on items taken directly to equity
Deferred tax on pension plan balances	4.9		5.5
Deferred tax on other direct movements on reserves	-		(0.9)
Tax charge in the statement of other comprehensive income	4.9		4.6

Factors affecting the Group tax charge for the year

The Group's tax charge in future years will be affected by the profit mix, effective tax rates in the different countries where the Group operates and utilisation of tax losses.  No deferred tax is recognised on the unremitted earnings of overseas subsidiaries.

The tax assessed for the year is more than (2009 - the same as) the standard rate of corporation tax in the UK of 28% (2009 - 28%).  The differences are explained below:

	2010		2009
	£m		£m
(Loss)/profit on ordinary activities before tax	(13.6)		2.9
Tax on ordinary activities at 28% (2009 - 28%)	(3.8)		0.8
Effects of:
Permanent differences	0.6		0.2
Overseas tax rate differences	(0.5)		0.4
Utilisation of brought forward unrecognised tax losses	(1.2)		(0.6)
Other temporary differences	1.2		0.2
Adjustments in respect of prior periods	(0.2)		(0.2)
Total tax (credit)/charge	(3.9)		0.8

6 - (Loss)/earnings per share

(Loss)/earnings per share are calculated by reference to the (loss)/earnings for the year and the weighted average number of shares in issue during the year as follows:

	2010			2009
	(Loss)/ earnings £m	Weighted average number of shares (Thousands)	Per share amount (p)	Earnings £m	Weighted average number of shares (Thousands)	Per share amount (p)
Basic EPS
(Loss)/earnings attributed to ordinary shareholders	(9.7)	120,520	(8.0)	2.1	74,363	2.8
Effect of dilutive securities:
Employee share options	-		-	-	17	-
Diluted EPS	(9.7)	120,520	(8.0)	2.1	74,380	2.8

Adjusted EPS
Basic EPS	(9.7)	120,520	(8.0)	2.1	74,363	2.8
Effect of exceptional items, after tax:
Redundancy and restructuring	2.5		2.1	2.0		2.7
Exceptional financing costs	2.8		2.3	-		-
Net finance costs arising on pension plan assets	2.7		2.2	1.3		1.8
Adjusted EPS	(1.7)	120,520	(1.4)	5.4	74,363	7.3
Inclusion of the dilutive securities, shown above, in the calculation of adjusted EPS does not change the amounts shown above (2009 - no change).

Warrants over 3,500,000 ordinary shares of 5 pence each issued during the year ended 31 March 2010 have been excluded from the EPS calculation above on the grounds that these are anti-dilutory.

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.

7 - Called up share capital

	Authorised				Issued
	2010 £m		2009 £m		2010 £m		2009 £m
Equity interests
Ordinary shares of 25 pence each	-		23.1		-		19.3
Ordinary shares of 5 pence each	-		-		11.0		-
Deferred shares of 20 pence each	-		-		15.4		-
	-		23.1		26.4		19.3

At 31 March 2010, the issued ordinary share capital comprised 219,564,703 ordinary shares of 5 pence each (2009 - 77,064,703 ordinary shares of 25 pence each).

On 9 December 2009, each issued ordinary share of 25 pence was subdivided and converted into one ordinary share of 5 pence and one deferred share of 20 pence. The deferred shares have no voting or dividend rights.

On 10 December 2009, 87,500,000 new ordinary shares of 5 pence each were issued through a placing and open offer and 55,000,000 new ordinary shares of 5 pence each were issued through a firm placing raising £28.5 million gross (£26.9 million after transaction expenses). The new shares rank parri passu with the existing ordinary shares.

At the 2009 annual general meeting, new articles of association of the Company were adopted whereby the requirement for the Company to have an authorised share capital has been removed.

During the year the Company issued no ordinary shares (2009 - 42,509 ordinary shares of 25 pence each) for a cash consideration of £nil (2009 - £23,319) by the exercise of options under the Company's share option schemes.

8 - Additional cash flow information

Reconciliation of (loss)/profit before tax to net cash flows from operations:

	2010 £m		2009 £m
Cash generated from operations:
(Loss)/profit before taxation	(13.6)		2.9
Depreciation and amortisation	5.0		4.7
Loss/(profit) on plant and equipment disposals	0.5		(0.7)
Equity share plans	0.1		0.4
Net finance costs	8.8		4.7
Decrease in inventories	4.0		3.4
Decrease in receivables	8.6		3.8
Decrease in payables	(5.3)		(13.0)
Decrease in provisions	(2.2)		(2.0)
Movement on pension plans	(5.1)		(3.9)
Movement in derivative financial instruments	0.1		0.8
Cash generated from operations	0.9		1.1

Reconciliation of net increase/(decrease) in cash and cash equivalents to movement in net debt:

	2010 £m		2009 £m
Decrease in cash and cash equivalents	(2.3)		(7.5)
Change in net debt resulting from cash flows	21.0		(0.2)
Foreign currency translation differences	0.6		(5.6)
Change in net debt during the period	19.3		(13.3)
Net debt at start of year	(37.2)		(23.9)
Net debt at end of year	(17.9)		(37.2)
Net debt comprises:
Cash and cash equivalents	7.3		11.3
Total borrowings	(25.2)		(48.5)
	(17.9)		(37.2)

 

END

 

 

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