Renold Regulatory News (RNO)

Renold plc

("Renold" or the "Group")

Preliminary results for the year ended 31 March 2014

Renold, a leading international supplier of industrial chains and related power transmission products, today announces its preliminary results for the year ended 31 March 2014, together with an update on the progress of the Turnaround Phase of the Group's strategic plan.

Performance highlights

· Adjusted earnings per share increased 129% to 3.2 pence

· Underlying adjusted operating profit increased 56% to £11.1m

· Successful delivery of capacity reduction project, generating annualised savings of £3.2m from June 2014

· Operating cash flow before exceptional items increased 27% to £12.1m driven by improved profitability and gains in the working capital ratio

· Self-financed £7.2m current year cash cost of the Bredbury closure project

· RoS% growth driven by contribution margin gains, focus on high added value products and overhead reductions

Robert Purcell, Chief Executive of Renold plc, said:

"The increase in adjusted operating profit and adjusted earnings per share, without the benefit of sales growth, emphasises the value accessible through self-help measures. We remain focused on creating a continuous improvement culture in all of our locations and activities to deliver intelligent and sustainable reductions in our cost base. Towards the end of the new financial year we expect to turn our attention to the second phase of our strategic plan, the Organic Growth phase."

27 May 2014

ENQUIRIES:

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 reputation for quality that is recognised worldwide. Its products are used in a wide variety of industries including manufacturing, transportation, energy, metals and mining.

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

Chairman's statement

"The Group is making excellent progress in the first phase of our strategic plan. The successful delivery of the complex capacity reduction project in the Chain division is a major milestone in significantly lowering our breakeven point."

Overview

The past year has seen a huge amount of activity within the business, both above and below the surface. Above the surface, we successfully delivered a significant improvement in the Group's underlying adjusted operating profit[3] against a backdrop of a small decline in revenue. Below the surface we successfully executed a large scale and complex project to reduce the excess manufacturing capacity in the Chain division. That project is on time to complete in the first quarter of the new financial year and will deliver significant recurring savings. In addition, the senior operational management team was strengthened during the year with a number of new key hires made to further support the Executive team in driving forward the pace of change.

Re-engineering our future

The Bredbury closure project has been a major undertaking for the Group. It involved the relocation of manufacturing operations representing just under 12% of the Chain division's external revenue. The project required the coordination of five of the six major chain production facilities with particular focus on the closing site in Bredbury and the principal recipient sites in Germany, the USA and China. I am pleased to report that the project is on time and on budget.

Elsewhere other key initiatives were undertaken which included some changes in the senior management team and recruitment to some newly created posts that fill capability gaps in the Group such as Product Management, Business Systems and Global Chain Manufacturing. We have continued our focus on improving existing or developing new business processes and, in particular, have rolled out new processes for hazard identification within our health and safety programme.

Our Balance Sheet

Close management of our pension liabilities remains a key priority for the Board as we seek to re-build our balance sheet. The merger of the three UK defined benefit pension schemes was completed successfully in June 2013 with overall scheme membership reduced by 26% as 1,316 eligible members took the option to have their benefits paid out in full. Elsewhere, one of our three defined benefit schemes in the USA moved into surplus in January 2014, following strong performance by US equity assets, and we have now started the termination process which will fully de-risk this scheme for the Group. In South Africa, the surplus pre-tax funds of £1.4m were returned to the Group during the year.

The Group will continue to focus on measures to reduce our exposure to defined benefit pension obligations and is well placed to benefit from the anticipated rise in interest and discount rates over the coming years.

Net debt and working capital have continued to be closely managed throughout the year. The Group took on the cash flow burden of the Bredbury closure project, which had a total expenditure of £7.2m, and still delivered net debt only £2.0m higher than at the start of the year. In parallel, the Group also managed to improve its average working capital ratio[4] to 17.7% (2013: 19.0%).

The Board and Our People

In a year of significant change initiatives within the Group, I am grateful for the extra time and commitment that the members of the Board have made available to support the Executive team. The Board has been closely involved in the governance of the major projects and further evolution of the strategic plan.

I would also like to take this opportunity to place on record my heartfelt thanks to all of Renold's employees. Change is always a challenge for any organisation and our staff responded positively and proactively in all locations. I would like to record my appreciation of the professionalism of our staff in delivering projects that, in some cases, ultimately led to a loss of employment. Their continued commitment is critical to our future success.

Dividend

The Group has significant opportunities for investment in new capital equipment that will materially enhance our performance and support the delivery of our strategic objectives. In the current year the Board has therefore decided not to recommend the payment of a dividend but this will remain under review as performance continues to improve.

Outlook

The difficult conditions in some of our markets have moderated somewhat over the course of the year with some showing signs of modest growth. Overall, the external picture remains subdued. Hence our focus remains on internal improvement. Self-help remains our watch word as we aim to create and embed a continuous improvement philosophy in all aspects of our business, whether front line sales and service, manufacturing or support functions. We are challenging all of our people to make their activities more productive and more efficient.

While we currently remain firmly focused on the turnaround phase of our strategic plan, the Executive team is starting to turn its attention to the next phase which we anticipate will begin to deliver organic growth towards the end of the new financial year. The foundations we put in place during the turnaround phase of the strategic plan will be key enablers for robust and sustainable growth in the future, whether organic or through acquisition.

Renold enjoys a hard earned global reputation for high quality products and engineering. Our customers have demanding application requirements which we serve via a wide range of bespoke and high quality standard products. We remain well placed to leverage these key strengths with continuous improvement in business processes and disciplines that should deliver steady annual increases in earnings and shareholder value in future years.

Mark Harper

Chairman

Chief Executive's Review

Our performance

"We delivered a successful first year in the turnaround phase of our strategic plan. The results were characterised by a 129% increase in adjusted earnings per share that were driven primarily by the 56% increase in underlying adjusted operating profit. The £7.2m current year cash cost of the capacity reduction project was self-financed with only a small rise in net debt."

Executive summary

The year was marked by a number of significant achievements in the first phase of our turnaround plan. Our focus has been on self-help measures and these have delivered a 56% increase in underlying adjusted operating profit in the current year whilst laying strong foundations for further growth in the new financial year.

The complex project to reduce excess capacity in our Chain division saw completion of the closure of the Bredbury facility soon after the end of the financial year. Whilst project activity at the recipient sites continues during the first quarter of the new financial year, we expect to deliver three quarters of the annualised savings of £3.2m in the new financial year.

The underlying revenue picture was mixed across the world with local macro-economic conditions being the principal drivers of the overall 2% fall. The Americas and India both delivered good growth while European economies were mixed with the net revenue result being broadly flat. Underlying Australasian revenues were down 7.6%. The commodity dependent Australian market was particularly weak, down 15.2%.

Underlying revenue in Torque Transmission fell 6% as a major mass transit contract wound down and demand in extractive industries softened.

The increase in adjusted operating profit and adjusted earnings per share without the benefit of sales growth emphasises the value accessible through our self-help measures. We remain focused on creating a continuous improvement culture in all of our locations and activities to deliver intelligent and sustainable reductions in our cost base. As these initiatives take root, towards the end of the new financial year we expect to turn our attention to the second phase of our strategic plan, the Organic Growth phase.

Renold Chain performance review

Renold Chain is a global market leading supplier of differentiated and value added chain products for a wide variety of end use applications. We create innovative solutions for our customers, who want to reduce costs and lead times and deal with increasingly challenging working environments. The Renold name is known in the industry for quality and performance.

Underlying external revenue of £139.6m was virtually flat, being 0.2% behind the prior year. The regional picture was more mixed and reflected differences in local macro-economic conditions. The Americas and India delivered good growth of 5.3% and 4.7% respectively. Performance was also mixed within Europe itself, with an overall fall of £1.0m (1.7%) being caused by a £1.1m (12.4%) fall in our French business with broadly flat performance in other territories. Underlying revenue in Australasia fell £1.8m (7.6%), wholly explained by the £2.2m (15.2%) fall in Australia itself, which was impacted by a slowdown in activity within the natural resources sector. Our Chinese Chain business focuses on supporting other Group companies and its own direct external sales saw a small decline.

Underlying order intake grew by 1.4% with the first half ahead 0.5% and the second half 2.2% ahead (the latter being against a relatively weak second half in the prior year). At a regional level, European underlying order intake was up 1.8% and in the Americas it was up 5.3%. Similar to the underlying revenue picture, the position was much weaker in Australasia where underlying order intake was down 11.6% with Australia itself down 16.6%. The smaller regions of China and India, in terms of externally focused activity, both delivered growth. The profile of our order intake (and hence our revenue profile also) has become more stable during the year with less reliance being placed on large one off orders which can have an adverse impact by disrupting our production processes.

The Book to Bill ratio in the Chain division finished the year at 100.4% indicating that the absolute level of underlying order intake was higher than the absolute level of revenue during the year. A result around 100% for this key metric suggests relatively flat sales with a result over 100% suggesting sales growth in the future. The Chain division delivered a result over 100% for five out of the six months in the second half.

Contribution margins, being the margin after all variable production costs, improved during the year. In part this was due to more predictable manufacturing activity following the reduction in large stocking orders which allowed for a lowering of overtime and other inefficient production costs and also reduced under- utilisation in the period which would have followed a stocking order. Direct labour costs were adverse to the prior year by 0.8% of revenue and this was largely due to additional activity undertaken during the transfer of production from the Bredbury facility to sister sites where the extra labour and labour inefficiencies were treated as normal operating costs. Once the recipient sites have fully absorbed the Bredbury production load, a key task will be to deliver a second phase of operational efficiencies that will flow from the operating leverage at those sites.

Underlying net overheads were reduced by £2.5m in the year. Gross savings of £3.0m were offset by an additional £0.5m of depreciation on one of our ERP systems. Overhead reductions in the year were delivered by all Chain regions with the exception being India where overheads were flat. The overall gains in the year were part of the global effort to streamline our processes and structures and are part of our continuous improvement effort.

As a result of continuing reductions in overheads and measures to improve our contribution margins, adjusted operating profit rose 44% to £9.9m (2013: £6.9m), delivering a Return on Sales of 7.1% (2013: 4.9%). With the exception of Australasia, all Chain regions delivered an increase in absolute levels of adjusted operating profit and also Return on Sales ratio irrespective of whether their underlying sales grew, were flat, or declined. Australasia and Australia itself faced an additional challenge during the year of a rapidly depreciating foreign exchange rate for the Australian dollar which fell by 24% against sterling and 21% against the Euro which are two of the principal trading currencies for Australia itself and the Renold Chain business in total. This currency change is inevitably having an inflationary impact on input costs which we have taken action to recover with a combination of price rises and overhead reductions.

Capacity reduction project

The single largest initiative undertaken by the Group during the year was the closure of the Bredbury Chain manufacturing facility and transfer of production to sister facilities around the world. Prior to its closure the Bredbury facility produced chain that accounted for approximately 12% of all Renold external chain sales globally. The transfer of this production to three main recipient sites was a major and complex undertaking and hence it was managed by a dedicated external project manager with full time support from a number of internal personnel. The project also benefitted from additional oversight from a steering committee chaired by the Group Chief Executive and a monitoring committee of the Board.

The project involved the transfer of over 70 pieces of existing equipment as well as the sourcing of new and re-conditioned equipment in local markets at the recipient sites. In Germany and the USA building works were required to modify existing work areas and to create additional space. In total, the production of approximately 17,000 part numbers was re-located with the requirement for those same items to have bills of materials and routings transferred to the recipient sites.

The expected benefits from phase one of the project, which represents the difference in overhead and cost bases before and after the project, are in the region of £3.2m on an annualised basis. The recipient sites have also been set an additional phase two challenge to address once the production process transfer is complete and bedded down. That second challenge is to deliver operating efficiencies by leveraging the additional throughput brought about by the transfer project and these benefits are targeted to start flowing in the second half of the new financial year.

Renold Torque Transmission performance review

Our Torque Transmission Division is an international manufacturer of high integrity torque transmitting products used where public safety or assured plant operation is critical. Renold's products are integral, but generally unseen, in different facets of daily life from gearboxes driving heavy duty, high rise escalators in London and New York subway systems to shaft couplings in power generation plants ensuring uninterrupted supply.

Underlying external revenue of £44.4m was 5.9% behind the prior year. The majority of the £2.8m underlying fall in revenue arose from the wind down of a major mass transit contract that came to an end in the first quarter with a year on year reduction of £2.7m in the current year. In addition, revenues were negatively impacted by a downturn in the mineral extraction and processing sector as both the equipment manufacturers and the end user markets continued to reduce their demand during the first half of the year. The rate of revenue decline slowed slightly during the second half of the year as key geographical markets showed some signs of bottoming out though this has taken longer than first estimated.

In contrast to the revenue picture, underlying order intake for the year experienced a modest fall of 0.3% with the first half reduction of 2.3% being almost offset by year on year growth of 2.1% in the second half. The upturn in order intake was less oriented towards the large mass transit contracts which tended to have lower margins in the past, and four of the seven operating units posted growth in underlying order intake in the second half. Investment in power generation in Asian markets returned at the start of year, whilst the metals industry improved slightly. The marine market, which has seen very weak demand for several years, is now showing early signs of recovery. We are aiming to enhance our prospects with the development of new products that have contributed to new orders, for example, in escalator products in both Europe and America.

The stronger finish to the year, with fourth quarter orders ahead by 4.7%, brought the book to bill ratio for the year to 98%. A result close to 100% for this key metric suggests sales should level off in the short term if the rate of order intake is maintained. In absolute terms the underlying external order intake was £0.8m below the equivalent revenue figure in the year.

Contribution margins, being the margin after all variable production costs, improved during the year (as was the case in the Chain division). In part this was the result of the lower margin mass transit business that came to an end during the year but it was also supported by focusing more sales effort on the higher performance products in the portfolio. Other production cost ratios such as labour were relatively flat compared to the prior year, leaving further benefits to be pursued as we implement more efficient manufacturing processes and techniques.

Underlying net overheads in the division were reduced by £0.9m before an additional £0.3m charge in respect of the depreciation of the Group's ERP system. These savings were the result of a number of initiatives in each location rather than one major restructuring project. The overall gains in the year were part of the global effort to streamline our processes and structures and are part of our continuous improvement effort which applies as much in the Torque Transmission business as it does in the Chain division.

The combination of the gains in contribution margins and ongoing overhead reductions led to a healthy increase in the adjusted net operating margin of 1.9% to 13.1%. The absolute level of adjusted operating profit also rose by £0.8m to £6.1m before the impact of the additional ERP depreciation of £0.3m. This was achieved despite the reduction in external revenue of £2.8m and operating margin gains were spread over four of the seven units within the division. The gains in contribution margin extended to five of the seven operating units and net operating margin gains were delivered in four of the units. However, our South African business did encounter difficulties throughout the year with a range of external issues such as the macro-economic situation, particularly in the mining sector where investment and maintenance spend has been negatively impacted by industrial unrest, and also a significant 25.9% reduction in the value of the South African Rand against sterling and 23.0% against the Euro.

During the year the Divisional management team itself has changed. At the start of the second half of the year the new leadership was tasked with halting the revenue decline, improving business efficiency and laying the foundations to deliver future growth within the framework of the Group's strategic plan. Key changes to senior management within the division were made with new leaders appointed in South Africa and North America. Both businesses are engaged in change programmes which will impact on every part of their operation. Likewise the UK businesses are undergoing organisational changes that will position them well to deliver the Group's strategic plan. Our ongoing commitment to invest in R & D and the latest manufacturing technology in all of Torque Transmission's facilities will continue to provide solutions with lasting benefits for Renold and its customers.

Robert Purcell

Chief Executive

Finance Director's review

"The Group successfully delivered a complex and significant plant closure project against a background of improving margins, working capital reductions and close management of our cash resources. In parallel, long term benefits were secured for our cost of capital and medium term pension funding costs."

Overview

We have delivered a number of key steps to support our strategic objective of strengthening our balance sheet, improving our ability to generate free cash flow and reducing our exposure to legacy pension cash costs. We were also able to continue improvements in our average working capital ratio, achieving a reduction for the fourth year in succession. During the year, the Group completed the restructuring of our internal capital structure. This optimises the benefits of the re-financing in 2012/13 and will further reduce our cost of debt in 2014/15. The completion of the UK pension scheme merger in June 2013 achieves an annual cash flow saving of £1.0m with a full year's benefit in 2014/15.

Orders and revenue

Order intake during the year was almost identical to revenue with the underlying ratio of orders to revenue (book to bill) being 99.8% (2013: 97.2%). As expected, the first half had a slower start with underlying orders £0.3m below underlying revenue (2013: orders £5.1m below revenue). In the second half orders exceeded revenue by £2.0m (2013: orders £0.8m below revenue). As set out in the divisional performance review, Chain and Torque Transmission experienced mixed performance in the two halves of the year.

Group revenue for the year decreased by 3.3% to £184.0m. On an underlying basis, excluding the impact of foreign exchange, the decrease was lower at 1.6% (£3.0m). The Chain Division was virtually flat year on year with a 0.1% fall in underlying revenue. Torque Transmission therefore accounted for the overall drop in Group revenue with a divisional fall of 5.9%.

Operating result

The business uses underlying measures of orders and sales in its daily reporting and activities. This metric retranslates the prior year orders and sales to the current year foreign exchange rates to give a more meaningful comparison of performance. The same is also true for operating profit and earnings measures which are stated on an adjusted basis that strips out the impact of exceptional items, foreign exchange, the administration costs of legacy pension schemes and pension financing charges as these adjusted items are deemed to better reflect the performance of the ongoing business. These are shown in the table below:

The Group generated £5.1m of adjusted operating profit in the first half (2013: £3.6m) and £6.0m in the second half (2013: £3.6m) with a full year result of £11.1m (2013: £7.2m). The second half result was achieved on 2.6% (£2.4m) lower underlying revenue than the first half. This reflects improving margin outcomes and ongoing cost reduction activity as we continue to lower our breakeven point. The year on year reduction in net overheads of £3.4m was achieved against the headwind of £0.8m of additional depreciation on the ERP system which began to depreciate in the fourth quarter of the prior year. All Chain regions and the Torque Transmission division contributed to this reduction in overheads as set out in the divisional performance reviews.

Changes in foreign exchange rates resulted in operating charges of £0.4m in the year. All else being equal, there would be a further reduction of £0.5m in operating profit if the year end exchange rates had applied throughout the year.

Exceptional items

The exceptional charges of £11.8m (2013: £12.3m) were predominantly driven by the closure of the Bredbury facility and are detailed in Note 3 with additional narrative in the Chain performance review.

Financing costs

External net interest costs in the year were £1.8m (2013: £2.9m). The decrease on the prior year was the result of the restructuring of the Group's internal capital structure following the re-financing in the prior year of the Group's principal borrowing facilities. The annual charge includes £0.3m in respect of amortisation of the re-financing costs paid in 2012 which are being expensed over the four year term of the facility.

Net IAS 19 finance charges were £2.8m (2013: £2.5m), the net movement being due to lower interest rates on a higher opening liability figure. All figures in respect of pension financing costs have been restated in accordance with the changes to the relevant accounting standard (IAS 19 Employee Benefits) and the impact of that change is set out in more detail in the Accounting Policies section to the financial statements. In the current year, the actual return on assets was £1.5m higher than the return used in the interest calculation as specified in IAS19. The difference appears as a gain in the Statement of Other Comprehensive Income.

Result before tax

Profit before tax and exceptional items was £5.9m (2013: £0.6m restated). The loss before tax after exceptional items was £5.9m (2013: loss of £11.9m restated).

Taxation

The current year tax charge of £4.8m (2013: tax credit of £0.1m) is made up of a current tax charge of £1.2m (2013: charge of £0.7m) and a deferred tax charge of £3.6m (2013: credit of £0.8m). The Group cash tax paid was much lower at £0.9m (2013: £0.7m) and the difference is due to the utilisation of tax losses and other tax assets in various parts of the Group.

Group results for the financial period

Loss for the financial year ended 31 March 2014 was £10.7m (2013: loss of £11.8m restated) and the basic and diluted loss per share 4.9p (2013: loss 5.4p for both). The basic and diluted adjusted earnings per share was 3.2p (2013: earnings 1.4p).

Balance sheet

Net assets at 31 March 2014 were £18.1m (2013: £31.0m). The net liability for retirement benefit obligations was £49.3m (2013: £56.3m) after allowing for a net deferred tax asset of £15.6m (2013: £13.2m). Overseas schemes now account for £18.8m (38%) of the post tax pension deficits and £16.3m of this is in respect of the German scheme which is not required to be prefunded.

Cash flow and borrowings

Net cash generated from operations was £6.1m (2013: £8.2m). Capital expenditure was increased to £7.1m (2013: £4.9m), largely due to £2.1m of capital expenditure incurred on the Bredbury closure project. Further gains were made in working capital management with reductions equivalent to £2.4m.

These gains were despite a planned increase in safety stock as part of the Bredbury closure project.

Group net borrowings at 31 March 2014 of £24.8m were £2.0m higher than the opening position of £22.8m comprising cash and cash equivalents of £6.7m (2013: £9.8m) and borrowings (which include £0.5m of preference stock) of £31.5m (2013: £32.6m).

Debt facility and capital structure

The Group's primary banking facility is for a four year term, maturing in October 2016. The facility comprises a committed £41m Multi-Currency Revolving Credit Facility (MRCF), and an additional £8m of ancillary facilities. These facilities have been provided by Lloyds Bank plc and Svenska Handelsbanken AB.

The principal covenants are the Net Debt/Adjusted EBITDA ratio (calculated on a rolling 12 months basis), which has been set at a maximum of 2.5 times until maturity, and Adjusted EBITDA/ Interest cover which is required to be greater than 4.0 times until maturity. The Net Debt/Adjusted EBITDA ratio as at 31 March 2014 is 1.5 times (2013: 1.9 times), based on the period end net debt of £24.8m (2013: net debt £22.8m). The Adjusted EBITDA/interest as at 31 March 2014 is 8.7 times (2013: 4.2 times). The Group also benefits from numerous other smaller overseas facilities totaling £3.4m.

At 31 March 2014 the Group had unused credit facilities totaling £9.0m and cash balances of £6.7m. Total Group credit facilities amounted to £44.4m with £41.0m being committed.

Treasury and financial instruments

The Group's treasury policy, approved by the Directors, is to manage its funding requirements and treasury risks without undertaking any speculative risks.

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 2014 this hedge was fully effective. The carrying value of these borrowings at 31 March 2014 was £5.2m (2013: £6.4m).

The impact of transactional foreign exchange gains and losses during the year was a loss of £0.4m which is included in the operating profit result. This was primarily driven by the appreciation in the value of sterling purchases in overseas locations such as Australia and India as well as the impact of the Euro appreciating against the US dollar.

At 31 March 2014, the Group had 2% (2013: 2%) of its gross debt at fixed interest rates. Cash deposits are placed short term with banks where security and liquidity are the primary objectives. The Group has no significant concentrations of credit risk, with 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.

Pension's assets and liabilities

The Group is responsible for a number of defined benefit pension schemes which it accounts for in accordance with IAS 19 Employee benefits. Changes to IAS 19 have taken effect for 2014 reporting, with the prior year comparative figures being restated. Details of the impact of these changes are outlined in the Accounting Policies section.

The Group's retirement benefit obligations decreased from £69.5m (restated - £56.3m net of deferred tax) at 31 March 2013 to £64.9m (£49.3m net of deferred tax) at 31 March 2014. One of the Group's U.S. pension schemes has moved into surplus during the year and since the year end the formal termination process has begun to wind up the scheme, secure member benefits and hence fully de-risk it from the Group's perspective at minimal additional cost.

The aggregate expense of administering the pension schemes was £0.6m (2013: £1.3m) which is now included in operating costs but is excluded in arriving at adjusted operating profit. Exceptional pension merger and asset backed funding costs of £nil (2013: £0.7m) were incurred to complete a project initiated in the second half of the prior year. This has led to a £1.0m reduction in annualised cash costs in the UK with effect from the end of the first quarter of the current financial year.

UK pension schemes merger and asset backed funding structure

Agreement was reached at the end of the last financial year to merge the three UK schemes into the Renold Supplementary Pensions Scheme (subsequently renamed as the Renold Pension Scheme 'RPS'). The merger was completed on 26 June 2013, with 1,316 members taking wind-up lump sums to the value of £10.4m and, as a result, a small settlement gain of £0.5m was recognised. The remaining assets of the Renold Group Pensions Scheme and J&S Retirement Benefit Plan were transferred into the RPS and full wind-up of those schemes was triggered on 27 June 2013. The merged scheme had 3,635 members as at 31 March 2014 compared to 5,118 at the start of the year.

The merged UK pension funds are underpinned by a 25 year asset backed partnership structure which provides annual cash contributions of £2.5m to the pension fund, with annual increases linked to RPI and capped at 5%. The contribution includes the first £0.5m of annual scheme operating expenses each year with the Company meeting any excess expense costs. The detailed structure and mechanics of the merger and underpinning asset backed funding structure are set out in Note 18 to the accounts. The triennial actuarial valuation of the RPS as at 5 April 2013 was completed following the year end and no additional contributions in excess of those generated by the asset backed funding structure are currently required.

The new arrangements do not have a substantive net impact on the Group's tax position.

The Group has a mix of UK (82% of gross liabilities) and overseas (18%) defined benefit pension obligations as shown below.

Summary

The focus for the management team remains on steady and continuous improvement in our day to day business processes and performance. We are working to support this activity with initiatives to improve our working capital management, including adding stock or resources to support business development activity. Separately, we aim to ensure that the legacy issues the Group faces are ring fenced as much as possible from the day to day operation of the business to ensure they are neither a distraction nor a hindrance. The improvements in our cost of debt and pension liability management represent a series of successful outcomes in delivering our strategic goal of strengthening our balance sheet.

Brian Tenner

Finance Director

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 summarised below and set out in more detail in the Annual Report.

Risks relating to external factors

We operate in 18 countries and sell to customers in over 100. While benefitting 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.

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 affect on the Group's business, financial condition, prospects, customer retention and results of operations. In recent years, the majority of unmitigated cost increases have been passed on to customers.

Risks relating to internal factors

A strategy which does not match the Group's circumstances, capabilities or potential will fail to create shareholder value. The Group is developing a new strategy to deliver a turnaround in performance and to make that performance more stable and less exposed to revenue volatility. Unless successfully implemented, the Group will continue to experience volatile results and weak levels of cash generation. These are basic requirements to allow the delivery of sustainable and consistent growth in shareholder value.

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.

The pressure to maintain short lead times, requires the Group to significantly enhance our own working capital management processes and detailed plans are in place to achieve this.

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. While four locations are now actively using the new system, the risk continues that an unsuccessful implementation at an individual site could seriously impact the Group's business, financial condition, prospects, customer retention and results of operations. In any event, a temporary increase in operating costs is inevitable in any major change process. 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.

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.

Risk relating to treasury and financial matters

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. Cash deposits are placed short term with banks where security and liquidity are the primary objectives.

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

Ÿ 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.

Ÿ 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 have been designated as a hedge of the net investment in US subsidiaries.

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 has the option to use interest rate swaps to manage part of this exposure but in the current environment has not elected to do so.

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. 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, it does not have direct control over these matters, as trustees are responsible for the strategy.

Consolidated income statement for the year ended 31 March 2014

Consolidated statement of comprehensive income for the year ended 31 March 2014

Approved by the Board on 27 May 2014 and signed on its behalf by:

Mark Harper Robert Purcell

Chairman Chief Executive

Consolidated statement of changes in equity for the year ended 31 March 2014

Consolidated statement of cash flows for the year ended 31 March 2014

Notes to the Financial Information

1(a) Basis of preparation

The preliminary statement was approved by the Board on 27 May 2014. 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 2014 have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.

The preliminary statement has been prepared on a consistent basis using the accounting policies set out in the Renold plc annual report for the year ended 31 March 2013 with the exception of the change in accounting policy below as a result of the implementation of IAS 19R "Employee benefits". The financial information for the year ended 31 March 2013 has been extracted from the Renold plc annual report for that year as filed with the Registrar of Companies and restated for the impact of the change in accounting policy. The impact of this change is explained in detail below.

The 2013 and 2014 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.

The change in accounting policies did not have an impact on the statement of cash flows or on the adjusted earnings per share.

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. 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.

1(c) Responsibility Statement of the Directors in respect of the Annual Report and Accounts

We confirm that to the best of our knowledge:

· the accounts, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and

· the directors' report includes a fair review of the development and performance of the business and the position of the issuer and undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

2. Segmental information

For management purposes, the Group is organised into two reportable operating segments 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 Renold plc 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 Companies (NSC's);

· 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 decisionsabout resource allocation and performance assessment. The Chief Operating Decision Maker (CODM) for the purposes of IFRS 8: 'Operating Segments' is considered to be the Board of Directors of Renold plc. 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.

The Board reviews the performance of the business using information presented at consistent exchange rates ('underlying'). The prior year results have been restated using this year's exchange rates as follows:

i. Inter-segment revenues are eliminated on consolidation.

ii. Included in Chain external sales is £7.6m (2013: £8.8m) 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.

iii. The measures of segment assets reviewed by the CODM is total working capital, defined as inventories and trade and other receivables less trade and other payables. Working capital is also measured as a ratio of rolling annual sales.

iv. Capital expenditure consists of additions to property, plant and equipment, and intangible assets (including through acquisitions).

The UK is the home country of the parent company, Renold plc. The principal operating territories and sales analysis is shown below (based on the location of the customer). The analysis of non-current assets is based on the location of the assets are as follows:

All revenue relates to the sale of goods and services. No individual customer, or group of customers, represents more than 10% of Group revenue (2013: none).

Non-current assets consist of goodwill, other intangible assets, property, plant and equipment, investment property and investment in jointly controlled entities. Other non-current assets and deferred tax assets are not included above.

3. Exceptional items

Bredbury factory closure costs include redundancy costs of £2.6m and £2.7m of other project costs incurred during the closure of the manufacturing facility and transfer of production to other Renold plants. The costs above include £1.1m expected to be incurred during the next financial year. The Bredbury onerous lease provision is based on a discounted cash flow (using the risk free rate of 3.35%) of the remaining committed payments under the unexpired lease term of 16 years less an allowance for assumed rental income from potential sub-leasing of the facility. A working group is currently reviewing options to mitigate this liability (including the options for a sub-lease).

In the prior year, the Group carried out a review of the business model for the Chain division which resulted in the identification and impairment of a number of assets, largely driven by excess production capacity. Asset impairments of £5.7m were recognised in respect of the Bredbury site which subsequently closed as described above. In addition, due to a reduction in the number of management units and expected users resulting from restructuring activities, a proportion of the costs in respect of the ERP system were also impaired (intangible assets impairment charge of £1.1m). A provision of £0.3m was also made for future payments for licences that are now unlikely to be used.

Also in the prior year, an impairment charge of £0.1m was made against the carrying value of the investment in the jointly controlled entity Renold Transmission Technology (Jiangsu) Inc. The carrying value of this investment at 1 April 2013 was £nil.

Other reorganisation and redundancy costs incurred in the current and prior year relate primarily to redundancy costs associated with the global initiative to reduce overheads in all of our operations.

In the prior year costs associated with the pension merger and asset backed funding projects have been treated as exceptional following the restatement required for IAS 19R.

Exceptional refinancing costs of £0.2m were recognised in the prior year representing costs associated with the previous borrowing arrangements that would have been amortised over the duration of those facilities.

4. Net financing costs

5. Taxation

Analysis of tax charge/(credit) in the year

Factors affecting the Group tax charge for the year

The UK Finance Act 2013 proposed reductions in the main rate of UK corporation tax from 23% to 20%, reducing the rate to 21% from 1 April 2014 and then 20% from 1 April 2015. As at 31 March 2014, these reductions have been enacted and their effect has been incorporated into the closing deferred tax balances in the company's financial statements.

This has resulted in a £0.4m deferred tax charge to the income statement and a £1.3m deferred tax charge to other comprehensive income, due to the reduction in the value of the deferred tax assets recognised in the UK.

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 actual tax on the Group's loss before tax differs from the theoretical amount using the UK corporation tax rate as follows:

6. (Loss) / earnings per share

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

Inclusion of the dilutive securities, comprising 4,105,000 (2013: 30,000) additional shares due to share options and nil (2013: 434,000) additional shares due to warrants over shares, in the calculation of adjusted EPS does not change the amount shown above (2013: no change).

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. Due to the existence of unrecognised deferred tax assets, there was no associated tax credit on some of the exceptional charges and in these instances exceptional costs are added back in full.

At 31 March 2014, the issued ordinary share capital comprised 223,064,703 ordinary shares of 5p each (2013: 221,064,453) and 77,064,703 deferred shares of 20p each (2013: 77,064,703).

In August 2013, the Company issued 2,000,250 fully paid ordinary shares of 5p each (2013:1,499,750) pursuant to the exercise of warrants by Royal Bank of Scotland at a price of 21.06p. The warrants had a seven year term commencing from 13 August 2009 during which they could be exercised at any time and were granted as part of the re-financing agreed with the Group's banks at that time. There are no outstanding warrants as at 31 March 2014.

8. Additional cash flow information