Renold Regulatory News (RNO)

Renold plc

("Renold" or the "Group")

Preliminary results for the year ended 31 March 2017

30 May 2017

Robust performance in challenging markets; good progress on strategic plan

Renold, a leading international supplier of industrial chains and related power transmission products, today announces its preliminary results for the year ended 31 March 2017, together with an update on the progress of the Group's Strategic Plan.

Financial highlights

· Underlying revenue broadly stable as Tooth Chain acquisition largely off-set declines in Torque Transmission and Chain operations outside Europe

· Underlying revenue growth in the second half of 2.8% helped to off-set a first half decline of 4.0%

· Return on sales of 7.9% (2016: 8.6%) with reported adjusted EBITDA increasing to £21.3m (2016: £20.1m)

· Net debt to Adjusted EBITDA reduced to 0.8x (2016: 1.1x)

Trading and operational highlights

· Year on year growth in order intake of 4.8% with underlying order intake 1.9% ahead of revenue for the year;

o Second half order intake in Chain particularly strong up 11.9% (against weaker prior year comparators) with book to bill ratio of 106%

· Order book at 31 March 2017 up 9.0% compared with prior year

· Increased commercial and marketing activity delivered organic revenue growth for Chain Europe of 5.9%

· Significant progress on restructuring activities

· Programme to relocate Chinese manufacturing facility commenced, with significant further investment planned for 2017/18

· Sale of properties in France and Australia completed; net disposal proceeds £10.2m

1 Underlying adjusts prior year results to the current year exchange rates to give a like for like comparison. A reconciliation to reported results is included in Note 2.

2 "Adjusted" means excluding the impact of exceptional items, amortisation of acquired intangible assets, pension administration costs and any associated tax thereon. A reconciliation to reported results is included Note 2.

Robert Purcell, Chief Executive of Renold plc, said:

"We have delivered a robust performance in challenging markets. The impact of the market headwinds on revenue and operating profit would have been far greater had it not been for the actions delivered to increase operating efficiencies as part of our STEP 2020 strategy.

"Markets stabilised during the year and there was a return to revenue growth in the second half of the year along with an increase in order intake.

"Although there are some early indications of improvement, macro-economic uncertainty remains and, in turbulent times, our STEP 2020 Strategic Plan remains relevant and critical to the long term delivery of value to all of our stakeholders. Actions already delivered as part of the plan will combine with on-going programmes to further improve the efficiency and effectiveness of our operations. The Group is positioned for organic growth and we continue to believe that mid-teens operating margins, and sustainable gains in adjusted earnings per share, can be delivered when volumes improve through organic growth and targeted acquisitions."

ENQUIRIES:

ANALYSTS AND INVESTORS

A meeting for investors and analysts will be held on 30 May 2017 at 9.30 am at Instinctif, 65 Gresham Street, London, EC2V 7NQ. For those unable to attend, a conference call facility is available as follows:

Dial in: UK Freephone Dial-In: 08006940257

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Conference ID: 21587843

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 their website at: www.renold.com.

Chairman's Letter

"We continue to deliver key elements of our STEP 2020 Strategic Plan, invest in our future and produce encouraging results in volatile market conditions."

Overview

Renold has performed robustly this year against a backdrop of challenging markets. A first half decline in revenues was followed by a return to underlying growth in the second half. Further self-help measures have been delivered this year which reflect our ongoing commitment to the core objectives of our STEP 2020 Strategic Plan.

These include the completion of two consolidation projects, the sale of two major properties in France and Australia and the successful integration of the Tooth Chain acquisition, which continues to trade ahead of expectations. We believe this sets a template for further successful acquisitions in the remaining years of the plan.

Our Markets

Renold's global presence and extensive product offering result in a broad spread of end-customer industries. Customers are served either directly, or through distribution partners, and our products are used to satisfy maintenance and repair requirements in addition to supporting the manufacture of new equipment. Our end-customers generally operate in industrial markets which have continued to be impacted by broader macroeconomic factors and geopolitical uncertainty.

During the year, market conditions proved particularly challenging in North America, impacting upon both Chain and Torque Transmission operations in the region and resulting in a combined 8% decline in regional revenue. Europe and China experienced growth, and in flat markets, we believe this is a result of improving market share arising from the various actions implemented in our STEP 2020 Strategic Plan.

Conditions in certain sectors demonstrated early signs of improvement towards the end of the financial year. It is too early to determine whether this is a sustained improvement in market conditions, or whether this is another phase of volatility in the cycle. Whatever the case, our focus on delivering the underlying improvements required to deliver sustainable progress in operating margins continues.

Trading Performance

Revenue grew by 11.0% in the year, benefiting from foreign exchange tailwinds and continued strong performance of the Tooth Chain business acquired in January 2016. On an underlying basis, and excluding the impact of acquisitions, revenue declined by 3.6% in the year. This decline reflects the continuation into the current year of the challenging market conditions which impacted performance in the second half of the prior year.

This underlying reduction in revenue resulted in a decline in our adjusted underlying operating margin in the year which fell to 7.9% from 8.6% in the prior year.

Whilst this is disappointing, it is reflective of external market factors and our decision to make revenue investments to increase our sales and marketing activities. We continue to focus attention on delivering actions that will provide sustainable improvements in operating margins and have made good progress in these areas during the year.

The year to March 2017 is the fourth year of our STEP 2020 Strategic Plan. The Group has come a long way and delivered a great deal over these four years. The full benefit of the actions delivered to date have been diluted by challenging conditions in our end-user markets over the last two years. In spite of this, we remain confident that we can deliver sustainable mid-teens margins, the exact timing of which will be determined by a recovery in volumes.

STEP 2020 Strategic Plan

Further key projects have been successfully delivered as part of our STEP 2020 Strategic Plan. These include the consolidation of the European Distribution Centre with the sister facility in Germany and the successful transfer of all UK Couplings manufacturing and associated processing into our existing Cardiff site.

Furthermore, we have commenced a programme to relocate our Chain China manufacturing facilities from Hangzhou to a purpose built facility near Changzhou in Jiangsu province. This is a multi-year project which will see the construction of the new facility commence during the year ending March 2018, with the factory relocation expected to occur in the following year.

We have continued to invest in the commercial and marketing activities which we believe will drive organic growth. We are starting to see the benefit of these actions with underlying revenue growth in Chain Europe (excluding acquisitions) of 5.9%.

A number of important health and safety initiatives have continued through the year and I am very pleased that we have again seen further improvements in our health and safety culture and performance. Health and safety rightly remains the number one priority for the Board and the Group. Ongoing and new initiatives in this area will continue to drive further improvements.

Board and People

This year saw the appointment of Ian Scapens as Group Finance Director after Brian Tenner left in order to pursue other opportunities.

Ian Scapens brings extensive experience in all aspects of financial leadership in large complex organisations. He joined Renold from Keepmoat Group, the UK's leading national provider of social housing refurbishment and regeneration services and a developer of low-cost, affordable housing, where he was Deputy Chief Financial Officer.

Also during the year we welcomed David Landless as Non-Executive Director. He has significant experience at senior levels of international manufacturing businesses. Most recently, he was Group Finance Director of Bodycote plc from 1999 until his retirement earlier this year. David will take over the Chairmanship of the Audit Committee from John Allkins at the completion of the 2017 AGM. John will continue as a Non-Executive Director until his retirement from the Board after the 2018 AGM.

I am delighted that both Ian and David have joined the Board. They bring a wealth of relevant experience which will stand the Board in good stead as we continue to implement our STEP 2020 Strategic Plan. I would also like to take the opportunity to thank Brian Tenner for his substantial contribution to Renold over the years.

The Board continues to support the Executive team in reviewing and monitoring all activities under STEP 2020. The Board remains closely involved in the oversight of the major project deliverables. All Board members have continued to give additional time and support on a wide range of issues during the year.

On behalf of the whole Board, I would like to express my gratitude and thanks to all our employees for their continued hard work during the year. The contribution of each employee is valued and appreciated.

Pensions

The Group's gross retirement benefit obligations increased to £102.0m (2016: £82.9m), with the largest element of the increase relating to changes in the discount rates and inflation rates applied as assumptions to assess future liabilities of the UK scheme. This is a reduction of £10.4m from the position at 30 September 2016.

The Group remains committed to progressively de-risking this position over time through a combination of agreed contributions to the schemes and specific de-risking projects as they become viable.

Dividend

The Board has decided not to recommend the payment of a dividend. Whilst the Board fully recognises the importance of dividends to shareholders, it believes that the investment opportunities available to the Group continue to provide the optimal route to increasing shareholder value. This approach will remain under active review for future periods.

Summary

Market conditions remained volatile in the year. Trading conditions, particularly in North America and South-East Asia, remained challenging. Early signs of recovery are evident and are supporting growth in order intake, but it is too soon for these to be considered sustainable or market wide.

We have not allowed a challenging market to stand in the way of delivery of the STEP 2020 Strategic Plan and have delivered significant business change in the year. We are making good progress and continue to believe that mid-teens operating margins can be delivered, supported by volume increases.

Mark Harper

Chairman

30 May 2017

Chief Executive's Review

"We continue to make strong progress against our STEP 2020 Strategic Plan. Challenging market conditions have impacted upon trading performance during the year, particularly in our Torque Transmission and Chain Americas businesses. We have not allowed these challenges to delay or obstruct our strategic progress and continue to take the actions required to position the Group well for when markets recover."

A major milestone in our STEP 2020 programme will be the delivery of sustainable mid-teens margins. We remain confident that the business can meet this objective and, whilst the challenging market environment has, as reported, slowed the rate of EPS progression over the last two years, we are pleased with the overall progress with, and benefits of, STEP 2020 which is alleviating the impact of reduced levels of demand. We are putting in place a number of additional self-help initiatives to mitigate the ongoing challenging environment and to maintain progress.

Operating Performance

Underlying revenue declined only slightly in the year as increases in the full-year revenue from the acquired Tooth Chain business helped to offset a small reduction in other underlying Chain revenues and a larger reduction in underlying Torque Transmission revenues. These revenue reductions largely reflect challenging market conditions experienced by our customers reducing overall demand for Renold's products. The North American and South-East Asian markets were particularly difficult, across both Chain and Torque Transmission divisions. In contrast to this, the European Chain operations delivered organic growth to supplement the growth from the acquired Tooth Chain business.

On a reported basis, adjusted operating profit increased to £14.5m (2016: £14.2m). However, this benefits from the foreign exchange movements in the year. Underlying adjusted operating profit reduced by £2.3m, of which £2.1m occurred in the first half of the year.

Excluding the impact of the acquisition, the underlying revenue decline of £6.7m resulted in a £3.3m reduction in underlying adjusted operating profit as the revenue reduction experienced was not matched by a corresponding reduction in non-variable overhead costs. This was particularly marked in Torque Transmission, but also in the North American and South-East Asian Chain operations.

Order intake improved through the year, with total orders 1.9% ahead of revenue for the year as a whole. In the later part of the year, there were very early indications of improving conditions in certain end-user markets. This helped contribute towards the improving underlying book to bill ratio for the second half of the year of 103% and an underlying 9.0% year on year increase in the closing order book at 31 March 2017.

STEP 2020 Strategic Plan - Update on progress

During the year, we have made progress on all three phases of the STEP 2020 Strategic Plan.

Phase I - restructuring

Very significant progress has been made during the year to relocate and reposition manufacturing and distribution facilities across the Group.

In the Chain division, the European Distribution Centre (EDC) was relocated during the year and the Malaysian manufacturing facility moved to new larger premises in Kuala Lumpur. Relocating the EDC from France to Germany, close to our main European Chain manufacturing site, reduces the costs of handling finished products and improves speed of response and customer service. It also created the opportunity to sell our premises in Seclin, France. In Malaysia, the decision to move was taken to increase the capacity of the site. Market conditions have been weak during the year, and this permitted the site to relocate with minimum disruption. As markets recover, the site now has a greater potential for future growth.

During the year, we took advantage of the opportunity to sell the premises at the Mulgrave site in Melbourne, Australia. The site is too large for our ongoing requirements and the leaseback period of three years provides sufficient time to find alternative premises and to relocate in a controlled manner. Net proceeds of the sale were £9.3m and have reduced net debt at the end of the year to £17.4m (2016: £23.5m).

In Torque Transmission, the UK Couplings manufacturing facilities were consolidated to a single facility in Cardiff. Following a period of investment in the Cardiff infrastructure and the commissioning of new equipment, all manufacturing was moved from the Halifax site during March 2017. This creates a single, focused UK Couplings manufacturing facility where the volume of production justifies investment in efficient manufacturing equipment that would otherwise be underutilised. We also commenced the process of closing our Chinese Couplings manufacturing facility in the year; final closure completed in May 2017. The closure removes a small underinvested manufacturing facility from the Group, but without loss of revenue as the products can now be manufactured in Cardiff and South Africa. This reduces cost and avoids future capital investment. These changes, which generally completed in the latter part of the financial year, build the platform for more efficient manufacturing and distribution in the future.

Overlaying these infrastructure changes is the programme to optimise business processes. The most significant element is the implementation of the Group's ERP system across all sites. This has been successfully implemented at our Cardiff, Halifax and Gronau sites, and was instrumental in permitting the consolidation of the UK Couplings operations and the removal of reliance on vendor support in the acquired Tooth Chain business. The process of roll-out continues and FY18 will see the roll-out progress to further business units, including the first of the major Chain manufacturing sites.

Phase II - organic growth

Market conditions have limited the amount of organic growth delivered in the period. However, we continue to take action to establish an effective commercial team, introduce product development programmes and support our existing brands and customers through focused marketing. This has included extensive training of our teams, distributors and agents along with building sustainable customer relationships though the new Spain, Thailand and Indonesia offices opened during 2016. We have seen early signs of progress in Europe and are replicating these processes and procedures across North America, China and South-East Asia. As markets recover, we expect to see the benefit of these actions.

During the year, we commenced a programme to relocate our Chain manufacturing facility in China. This is a significant factory move which will take around 18 months to two years to complete as we are constructing a purpose built facility. This will be the final step in delivering the Strategic Objective of operating all major manufacturing facilities from owned premises, reducing the risk of uncontrolled relocations in the future and providing the basis for long term investment in core manufacturing locations. When complete, this facility will increase capacity and permit greater levels of manufacturing efficiency. This is critical in targeting growth in the developing domestic Chinese market, where product quality is becoming a more important factor in purchasing decisions, along with supporting growth in the sale of our Chinese-manufactured chain through overseas markets using the Group's extensive geographic reach. The overall programme cost is expected to be £16m over 8 years, with £6m of construction costs deferred for five to eight years, and will be funded from existing Group facilities.

Phase III - acquisitions

The programme to integrate the acquired Tooth Chain business into the wider Renold Group completed in the year. Following the successful roll-out of the Group's ERP system, we were able to remove all dependence from the vendor for back office and systems support. Tooth Chain is now a core part of the Group's product offering and the greater strength in depth of Renold's commercial teams across the world provide the potential for further future growth in this product category. Performance in the period has exceeded original expectations, resulting in the payment of the first element of the deferred consideration in April 2017.

This acquisition was the first step in what we believe will be a programme of value adding acquisitions in the future, targeting opportunities that generate new product or new geographical opportunities, or opportunities to improve manufacturing effectiveness, e.g. through consolidation.

Delivering our Strategic Objectives

We continue to make good progress in improving our health and safety performance. Fewer accidents and a greater focus on identifying and reducing risk in order to avoid accidents is indicative of the progress being made and the behavioural change that we are seeking across the Group's global operations.

Our objective of delivering growth in operating profit margins has been impacted by short-term trading conditions in the year. However, a number of other KPI measures provide evidence that continued progress on restructuring will deliver improvement in operating profit margins when market conditions improve. Average employee numbers during the year have reduced by 2.2%, improving sales per employee to £84.0k (2016: £74.0k; 2016 underlying: £82.7k). This reduction derives from the restructuring activities delivered, combining with a general focus on business efficiency.

The underlying breakeven revenue (adjusted for acquisitions) has remained relatively unchanged in the year at £12.5m per month. This reflects an underlying decrease following the restructuring elements of the Strategic Plan, but offset by additional overheads for marketing, product management and commercial support which have been added to support the organic growth activities.

Developing our people remains a core part of improving the future prospects of the Group and we have made progress across all levels of the businesses. A number of new senior managers have been recruited in the year adding to the wider leadership team, including a Managing Director for the consolidated UK Couplings business, a General Manager for the Chain Europe manufacturing facility in Einbeck, Germany and a Regional MD for our South-East Asian businesses with the objective of increasing our presence in these growing markets. We also continued with our Future Leaders programme, welcoming six new graduates.

Macroeconomic landscape and Brexit

There are a number of well-publicised macroeconomic risks on the horizon. We continue to deliver our strategy, cognisant of the risks, but similarly very aware that the impact of these risks is uncertain and should not delay our progress. 

The vote for Brexit had a significant impact on the value of Sterling and the foreign exchange movements have impacted our reported trading position. However, this is largely a presentational issue as our results are reported in Sterling. Our revenue in the UK is limited, representing 8% of the Group's revenue, whilst we retain manufacturing facilities that supply product to our other global operations. These products have become more competitive in overseas markets as a result of the currency movements.

There are certain product categories which we import to the UK, particularly chain manufactured in our European facilities. Whilst this has become more expensive as a result of the foreign exchange movements, the majority of competitor products are sourced from Europe and the Far-East and are exposed to similar inflationary pressure.

Overall, we do not believe that Brexit significantly impacts on our competitive positioning. The major risk factor to the Group from Brexit, other Eurozone and US macroeconomic risks is the impact on the timing of recovery of industrial production in general. We will continue to monitor this and take action as required.

Chain Performance Review

Underlying revenue of £146.1m was £3.1m (2.2%) ahead of the prior year. Underlying external revenues excluding acquisitions were £2.3m (1.6%) behind prior year reflecting a backdrop of difficult macroeconomic conditions in many of the territories in which we operate. However, regional performance was mixed and there were some encouraging performances, particularly in Europe, Australia and India.

Underlying European revenue increased by £8.3m (16.3%) in the period (£2.9m (5.9%) excluding acquisitions) with organic growth delivered in most of our major European markets, in addition to growth from the full year impact of the acquisition of the Tooth Chain business.

Revenue in the Americas finished £4.4m (7.3%) down on an underlying basis, with continued soft demand in the US from major distributors and larger OEM accounts. Disappointingly, this was compounded by production issues during the final quarter of the year as orders started to recover. These issues are short-term in nature and are being resolved. After a slow start, our Canadian business recovered in the second half to deliver underlying year on year growth of 3.4%.

Domestic sales in India and China grew by £0.5m (7.9%) and £0.4m (12.0%) respectively. However, the overall performance of both businesses was depressed by lower demand in export markets. Underlying revenue in Australasia was down by £0.8m (3.9%), primarily due to continued weakness in palm oil markets in South-East Asia, being partially offset by growth in Australia of 4.9% where sales to the mining and agriculture sectors started to recover.

Order intake of £149.2m was up by £11.4m (8.2%) on the previous year. At a regional level, European underlying order intake was up by £10.7m (21.1%) against a decline of £0.5m (0.9%) in the Americas. Order intake in Australasia was down £0.1m (0.4%) but up in India and China by 6.8% and 19.3% respectively. Order intake accelerated in the second half of the year with growth of 11.9% (compared to growth of 4.6% in the first half of the year) as end-user markets started to demonstrate signs of recovery. Orders for the year finished £4.1m (5.7%) ahead of sales.

Contribution margins, the margin after all variable production costs, remained flat. This was achieved despite increases in raw material costs in the second half of the year and reflects the continued focus on cost reductions, improved product quality and enriched business mix.

Overheads increased year on year with the addition of the Tooth Chain business, continued upgrading of talent and investments in marketing and sales development programmes.

Underlying adjusted operating profit finished at £16.6m compared to £17.8m last year. Return on sales of 11.4% (2016: 12.4%) was particularly impacted by the disappointing performance in the US during the year.

Renold Tooth Chain (acquired in January 2016) continues to trade ahead of expectations, delivering underlying organic growth in both orders and sales against the last comparable period under prior ownership. The business has been fully rebranded and customers transferred into the Renold commercial network with no business loss. In December, the final part of the integration process, the transfer onto the new Group ERP system, was successfully completed and Tooth Chain is now well positioned for further development in the global commercial and distribution footprint as part of the Renold Group.

Commercial talent continues to be steadily upgraded in all regions and the team has been further strengthened with senior commercial resource added in the US, Australia, and India. A new Managing Director for the businesses in South-East Asia has also been appointed for the first time, bringing a single point of focus to our activities within that important growth region.

Service improvements remain key

A key element of the growth strategy continues to centre on improvements to our operational effectiveness and customer service. A number of initiatives have been successfully completed during the year which will enable increased production output, shorter lead times, better inventory efficiency and improved levels of customer service.

The largest single investment in new productive capability, the rotary machining centre (£2.5m), was successfully commissioned in February and is already boosting output in the US facility. This machine dramatically reduces production lead times on complex components whilst at the same time improving quality and removing up to ten separate manufacturing operations. Machine investments in other regions were similarly targeted on harnessing the latest technology in order to boost productive capacity and reduce lead times.

During the year, the European distribution centre was relocated from France to be close to the main manufacturing facility in Einbeck, Germany. The prime drivers behind this move were to reduce lead times, improve stock efficiency and enhance overall customer service. The project was successfully delivered during November and also resulted in reduced headcount and the sale of the previous distribution centre in Seclin, France, resulting in proceeds from the sale of £0.9m.

The Malaysian factory was successfully relocated during December. The new facility will allow up to four times more productive capability whilst enabling inventory management to be improved and response times reduced. It is also an enabler for the introduction of a rapid response cell for customised transmission chains, following a similar addition in China during this year.

Last year, we highlighted the successful introduction of strategic inventory on core product lines. This has been enhanced and developed during the year, in support of our service commitment for 24, 48 and 72 hour response times on standard and configured chains. Where appropriate, targeted holdings of components have also been introduced in order to facilitate the rapid assembly of product variants within particular chain product families. This has been achieved with a marginal increase in net inventories.

As we head into the new financial year, we have commenced the next significant phase in our manufacturing strategy. Using the end of the building lease of our existing Chinese factory as the trigger point for change, we have commenced a programme to relocate the business to a purpose-built facility near Changzhou in Jiangsu province. This strategy incorporates twin objectives of providing a platform for organic growth in the domestic Chinese market along with developing a leading manufacturing facility which can effectively supply Renold's distribution infrastructure with certain standard product ranges.

Torque Transmission Performance Review

Underlying external revenue of £37.3m was £4.4m (10.6%) below the prior year primarily reflecting the annualised effect of the market headwinds that were initially experienced during the second half of 2015/16. These headwinds were reduced demand, particularly in the Americas region, in the oil and gas, raw material extraction and steel industries. This annualising effect impacted upon the first half of 2016/17 and saw revenues decline by 22.6% when compared with the same period in the prior year. During the second half of the year, underlying external revenue of £19.5m was £0.8m (4.3%) ahead of the prior year, benefiting from large orders for escalator drives in the London and New York undergrounds.

Underlying order intake was £3.0m (7.4%) below the prior year. Order intake was 9.6% ahead of revenue in the first half of 2016/17. Due to the longer lead times in the Torque Transmission division, these orders during the first half of the year delivered revenue growth during the second half of the year. Order intake for the second half of the year was 7.7% below revenue for the same period.

Contribution margins, the margin after all variable production costs, improved by 3 percentage points during the year with exchange rate movements benefiting margins for UK manufactured products, although this was largely offset by direct labour costs not reducing in line with the revenue.

Underlying net overheads in the division decreased. The savings arising from the self-help measures implemented have been reinvested in commercial activities including expansion of the sales force in order to target non-traditional end-user sectors.

Underlying adjusted operating profit finished at £3.9m, a decrease of £1.3m from the prior year, with a decrease of £2.8m for the first half of the year, offset by a recovery of £1.5m for the second half of the year. The division's Return on Sales fell from 12.5% to 10.5%, largely reflecting the revenue decline in the period. As with revenue and adjusted operating profit, the performance in the second half of the year improved when compared to the first. Return on Sales for the first half of 2016/17 was 6.7%, increasing to 13.8% for the second half.

Strategic actions

When the STEP 2020 Strategic Plan was originally implemented, the initial actions focused on the Chain division as this was significantly underperforming. At the time, the Torque Transmission division delivered strong margins. However, the decline in revenue experienced during 2015/16 and 2016/17 impacted significantly upon profitability, as the protective actions were not sufficiently developed to mitigate the margin impact.

Following the CEO taking direct day-to-day responsibility for the division, acting as Divisional Managing Director, greater focus has been given to the elements of the STEP 2020 Strategic Plan which impact on the Torque Transmission division, and a number of actions were delivered during the year.

As part of Phase I - Restructuring, the coupling manufacturing locations in the UK, Halifax and Cardiff, were consolidated into the Cardiff facility. This process completed in April 2017, but was the culmination of a number of project streams that upgraded the ERP systems of the businesses to the same platform, invested in capital equipment to increase capacity and trained the teams to ensure manufacturing 'knowhow' was transferred. The one-off cost of the transfer was £2.9m (see Note 3) and benefits are expected to be realised during the next financial year.

In addition to the consolidation of the UK Coupling locations, the manufacture of couplings in Beicai, China, was transferred to Cardiff and South Africa, with this project completing in May 2017. Again, the one-off costs of transfer were incurred in 2016/17 (see Note 3) with the benefits expected to be realised in 2017/18.

As part of Phase II - Organic Growth, the division has re-established its focus on new product development, product marketing and commercial capability. This, along with a reinvigorated focus on customer service is expected to deliver growth, particularly in non-traditional sectors.

Outlook

We have delivered a robust performance in challenging markets. The impact of the market headwinds on revenue and operating profit would have been far greater had it not been for the actions delivered to increase operating efficiencies as part of our Step 2020 strategy.

Markets stabilised during the year and there was a return to revenue growth in the second half of the year along with an increase in order intake.

Although there are some early indications of improvement, macro-economic uncertainty remains and, in turbulent times, our STEP 2020 Strategic Plan remains relevant and critical to the long term delivery of value to all of our stakeholders. Actions already delivered as part of the plan will combine with on-going programmes to further improve the efficiency and effectiveness of our operations. The Group is positioned for organic growth and we continue to believe that mid-teens operating margins, and sustainable gains in adjusted earnings per share, can be delivered when volumes improve through organic growth and acquisitions.

Robert Purcell

Chief Executive

30 May 2017

Finance Director's Review

"We have taken a cautious approach to managing the business in the current volatile market conditions. Whilst operating margins have reduced in the year, this is largely due to market conditions. The self-help actions delivered in the year provide the basis for a stronger recovery when market conditions improve."

Overview

Challenging market conditions, first experienced in the second half of the prior year, continued into the year under review, resulting in reduced revenue and profit in the first half. Relative performance improved through the year as trading in Torque Transmission stabilised and organic growth in Chain Europe was delivered. This helped to recover some of the declines from the first half. Positive indications from order intake during the latter part of the year suggest some early signs of improving end-customer markets as we move into the new financial period.

Orders and revenue

Order intake in the Chain division was higher than revenue with the underlying ratio of orders to revenue (book to bill) being 102.2% in the year (2016: 96.4%). All Chain regions had book to bill ratios greater than 100% for the year. Underlying order intake demonstrated good progress in the year with growth in the second half of 11.9% over the second half of the prior year. This compared to growth of 4.6% for the first half, and together resulted in growth for the full year of 8.2%.

In Torque Transmission, the weaker demand from commodity related and capital goods markets experienced in the second half of the prior year continued into the first half of the current year. Underlying order intake in the first half of the year declined by 13.4% when compared to the same period in the prior year. Whilst underlying order intake in the second half of the year grew by 0.2%, this is growth over the weaker second half of the previous year. The book to bill ratio for the division was 100.8% (2016: 97.4%).

Group revenue for the year increased by £18.2m (11.0%) to £183.4m, benefiting from foreign exchange tailwinds and continued strong performance of the Tooth Chain business acquired in January 2016.

Underlying revenue for the year was broadly unchanged with the small decline of £1.3m representing a 0.7% reduction. This includes the full-year benefit of the Tooth Chain acquisition. Excluding the effect of this acquisition, underlying revenue declined by £6.7m (3.6%). The reduction in underlying revenue was concentrated in the first half of the year with a year-on-year decline of 4.0%, reflecting a continuation of the weak end-customer markets experienced in the second half of the prior year. The Group returned to growth for the second half of the year with revenue 2.8% ahead.

On a divisional basis, the Chain division saw underlying revenue increase by 2.1% with Torque Transmission weaker, 10.5% down.

Operating profit

The Group generated £7.0m of adjusted operating profit in the first half (2016: £7.9m), £7.5m in the second half (2016: £6.3m) and a full year result of £14.5m (2016: £14.2m).

At the half-year, we reported underlying adjusted operating profit down by £2.0m, which increased to £2.1m incorporating the mix effect of changing foreign exchange rates to March 2017. This shortfall significantly reduced during the second half of the year with underlying adjusted operating profit down by £0.2m, resulting in a full year shortfall of £2.3m.

Underlying adjusted operating margins fell during the year to 7.9% (2016: 9.1%). The Tooth Chain acquisition generated underlying revenue growth of £5.4m, delivering an incremental underlying adjusted operating profit of £1.6m. Excluding the impact of the acquisition, underlying revenue declined by £6.7m with a corresponding reduction in underlying adjusted operating profit of £3.3m. The combined effect of these elements is a small reduction to revenue with a reduction to the operating margin delivered in the year.

Although not readily transparent from the consolidated Group results, we continue to remain focused on improving the overhead efficiency of the Group. The monthly breakeven revenue has increased to £12.8m (2016: £11.3m; £12.4m on an underlying basis). The Tooth Chain acquisition introduces a monthly revenue requirement of £0.3m to breakeven. On an underlying basis, excluding the acquisition, the monthly breakeven revenue has increased by £0.2m (1.6%). This reflects the fact that we are spending more on marketing and commercial headcount in order to support the organic growth phase of the STEP 2020 Strategic Plan.

Foreign exchange rates

Foreign exchange rates have been extremely volatile during the year, reflecting the decline in the value of Sterling following the UK's Brexit vote in June 2016. The value of Sterling fell significantly in June, with an impact on the weighted average exchange rates used to convert the Group's results to Sterling in the first half. This fall was largely sustained throughout the second half of the year, compounding the impact on the weighted average rates.

The natural hedge normally provided by the Group's diverse operating territories and currencies therefore did not operate in the year as Sterling weakened against almost all global currencies at the same time.

If the year end exchange rates had applied throughout the year, there would be an estimated increase of £5.6m to revenue and £0.4m to operating profit.

Exceptional items

Net exceptional charges of £1.7m were £0.5m lower than the prior year figure. Gross charges of £4.6m (2016: £3.4m) related to various restructuring and redundancy costs incurred as part of STEP 2020 (£4.3m) and costs of integrating the Tooth Chain acquisition (£0.3m). The more significant restructuring and redundancy costs were incurred in consolidating the UK Couplings manufacturing to Cardiff, relocating the European distribution facility to Uslar, Germany, and commencing the programme to relocate our Chain China manufacturing facility to a new purpose built facility.

Offsetting these gross exceptional costs is a net gain of £2.9m made on the sale and short-term leaseback of the Mulgrave manufacturing facility in Australia. For more details please see Note 3.

Other adjusting items

Other adjusting items include legacy pension scheme administration costs of £0.7m (2016: £0.7m) and amortisation of acquired intangible assets of £1.1m (2016: £0.2m).

Financing costs

External net interest costs in the year were £1.7m (2016: £1.5m). The annual charge includes £0.2m (2016: £0.2m charge) in respect of amortisation of the residual refinancing costs paid in 2012 and 2015. Financing costs also include £0.1m of unwinding discounts on onerous lease provisions established for the Bredbury factory site.

Certain elements of the Group's debt facilities are drawn in non-sterling currencies and the foreign exchange factors which impact upon revenue and operating profit also impact upon financing costs. The movement in foreign exchange rates in the year have the effect of increasing the external net interest cost by £0.1m in the year.

The net IAS 19 finance charge (which is a non-cash item) is £2.5m (2016: £2.0m). In the current year, the actual return on assets was £11.3m higher than the return used in the interest calculation as specified in IAS 19 due primarily to stronger equity markets and the offsetting impact of higher corporate bond yields on the value of corporate bond portfolios.

Result before tax

Profit before tax was £6.7m (2016: £7.4m). Adjusted profit before tax, which excludes exceptional items, IAS 19 financing costs amortisation of acquired intangible assets and legacy pension scheme costs, was £12.8m (2016: £12.7m).

Taxation

The current year tax charge of £1.9m (2016: charge of £2.0m) is made up of a current tax charge of £2.9m (2016: charge of £1.5m) and a deferred tax credit of £1.0m (2016: charge of £0.5m). The Group cash tax paid was much lower at £1.0m (2016: £1.0m). The difference between tax charges and cash tax paid is due to the utilisation of tax losses and other tax assets in various parts of the Group. The last of our historical tax losses in Germany were utilised in the year. The effect of this will be to increase tax payments in future years in this profitable territory, with a double impact in the year ended 31 March 2018 as payments on account become more significant.

Group results for the financial period

Profit for the financial year ended 31 March 2017 was £4.8m (2016: £5.4m). The basic and diluted adjusted earnings per share were both 4.6p (2016: earnings of 4.7p and 4.6p respectively).

Balance sheet

Net assets at 31 March 2017 were £7.8m (2016: £10.5m). The fall was driven by the increase in the net pension deficit as lower discount rates and increasing inflation rates result in increased liabilities. This has only been partially offset by outperformance of asset returns in the period.

The net liability for pension benefit obligations was £84.8m (2016: £68.1m) after allowing for a net deferred tax asset of £17.2m (2016: £14.8m). Overseas schemes now account for £25.0m (29.0%) of the post tax pension deficits and £26.2m of this is in respect of the German scheme which is not required to be prefunded.

Cash flow and borrowings

Cash generated from operations was £7.4m (2016: £10.8m). Gross capital expenditure was up in the year at £9.6m (2016: £9.5m). This investment was partially funded through the disposal proceeds from the sale of properties in the year of £10.2m (2016: £nil).

Capital expenditure in the new financial year is expected to exceed £13.0m. A number of major projects totalling approximately £7.8m are already committed as at the date of this report including £6.0m for the relocation of our Chinese Chain manufacturing facility and £1.2m in respect of the roll out of our global IT system.

Investments were also made in a number of stock lines to support new sales initiatives and new product launches. This in part explains the small rise in our working capital KPI (average working capital as a ratio of rolling 12 month sales) from 20.3% to 22.2% which was also adversely impacted by the slow down in demand. The absolute level of working capital was £3.4m higher than in the prior year.

Group net borrowings at 31 March 2017 of £17.4m were £6.1m lower than the opening position of £23.5m comprising cash and cash equivalents of £16.4m (2016: £13.5m) and borrowings of £33.8m (2016: £37.0m). The decrease in net debt is almost wholly explained by the proceeds received for the sale of properties in the year.

Debt facility and capital structure

The Group's core banking facilities are unchanged in the year and remain a committed £41.0m Multi-Currency Revolving Credit Facility (MCRF), with a £20.0m accordion. The facility matures in May 2020.

The Group continues to operate comfortably within covenant limits. The Net Debt/Adjusted EBITDA ratio as at 31 March 2017 is 0.82 times (covenant requirement: 2.5 times; 2016: 1.1 times), based on the reported figures for the period as adjusted for the banking agreement. The Adjusted EBITDA/interest cover as at 31 March 2017 is 12.1 times (covenant requirement: 4.0 times; 2016: 13.6 times), again on a banking basis.

At 31 March 2017, the Group had unused credit facilities totalling £5.3m and cash balances of £16.4m. Total Group credit facilities amounted to £43.3m, all of which were committed.

Treasury and financial instruments

The Group's treasury policy, approved by the Board, 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 US Dollar denominated borrowings taken out in the UK to finance US acquisitions are designated as a hedge of the net investment in US subsidiaries. At 31 March 2017 this hedge was fully effective. The carrying value of these borrowings at 31 March 2017 was £6.9m (2016: £6.1m).

At 31 March 2017, the Group had 1% (2016: 1%) 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 assets and liabilities

The Group has a mix of UK (83% of gross liabilities) and overseas (17%) defined benefit pension obligations as shown below.

The Group's retirement benefit obligations increased from £82.9m (£68.1m net of deferred tax) at 31 March 2016 to £102.0m (£84.8m net of deferred tax) at 31 March 2017. The largest element of the increase relates to the UK scheme where the deficit increased from £53.6m to £72.0m. The increase in the deficit of the overseas schemes of £0.7m arises from an underlying reduction in the deficit of £1.9m, offset by a £2.6m increase arising from foreign exchange movements in the year.

UK funded scheme

The major reason for the increase in the deficit of the UK funded scheme is the impact of the actuarial assumptions on the value of liabilities. Reductions to discount rates have combined with increasing inflation assumptions to increase the value of liabilities by £35.8m. However, this increase was offset by experience gains (the difference between assumptions previously made and experience of real events) and asset returns delivered above assumed levels, which together generated gains of £15.3m to offset the deficit increase.

Overseas funded schemes

The overseas funded schemes comprise a number of smaller schemes around the world. Deficits on these schemes reduced in the year by £1.0m, despite a £0.7m increase in net liability due to the movement in foreign exchange rates. Experience gains, asset outperformance and contributions to the schemes combined to reduce the underlying deficits in aggregate by £1.7m.

Overseas unfunded schemes

This category largely relates to the unfunded German schemes. The deficit increased in the year as foreign exchange movements increased the liability by £1.9m. The underlying deficit reduced by £0.2m as increases arising from actuarial assumptions were offset by payments of benefits in the year.

The aggregate expense of administering the pension schemes was £0.7m (2016: £0.7m) and is included in operating costs but is excluded in arriving at adjusted operating profit.

The latest triennial actuarial valuation of the UK Scheme, with an effective date of 5 April 2016, was recently agreed. This process concluded that contributions to the UK Scheme should continue unchanged and no additional contributions in excess of the previously agreed asset backed funding structure were deemed necessary. The next triennial valuation date will be 5 April 2019.

Total cash costs for UK deficit repair payments and UK administrative expenses in the period were £3.9m (2016: £3.4m) which includes £0.7m (2016: £0.7m) in administration costs. The increase in UK deficit repair payments in the year of £0.5m reflects a one-off additional contribution as part of the medically underwritten buy-ins which completed in the prior year.

Total cash costs for the overseas pension schemes increased in the period to £2.1m (2016: £1.9m) as a result of foreign exchange differences.

Ian Scapens

Finance Director

30 May 2017

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.

Responsibility statement of the Directors on the annual report and financial statements

The responsibility statement below has been prepared in connection with the company's full annual report for the year ending 31 March 2017. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge:

· the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, 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;

· the strategic report includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face; and

· the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company's performance, business model and strategy.

Consolidated Statement of Comprehensive Income

for the year ended 31 March 2017

Other comprehensive income/(expense):

1 Adjusted for the after tax effects of pension administration costs, exceptional items, changes in the provision discounts, IAS 19 financing costs, and amortisation of acquired intangible assets.

Consolidated Balance Sheet

as at 31 March 2017

Approved by the Board on 30 May 2017 and signed on its behalf by:

Robert Purcell Ian Scapens

Chief Executive Finance Director 

Consolidated Statement of Changes in Equity

for the year ended 31 March 2017

Consolidated Statement of Cash Flows

for the year ended 31 March 2017

Notes to the Financial Information

1. Basis of preparation

The preliminary statement was approved by the Board on 30 May 2017. 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 2017 have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that comply with IFRSs in June 2017.

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 2016. The financial information set out above does not constitute the company's statutory accounts for the years ended 31 March 2016 or 2017, but is derived from those accounts. Statutory accounts for 2016 have been delivered to the Registrar of Companies and those for 2017 will be delivered following the company's Annual General Meeting. The auditors have reported on those accounts: their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3) of the Companies Act 2006.

Changes in accounting policies and disclosures

The Group has adopted all applicable amendments to standards with an effective date from 1 April 2016. Adoption of these standards did not have any material impact on financial performance or position of the Group.

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 and cash flow forecasts, financial instruments and hedging arrangements for at least the twelve month period from the date of signing the Annual Report and Accounts. The Directors consider 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 consolidated financial statements.

2. Segmental information

For management purposes, the Group is organised into two operating segments according to the nature of their products and services and these are considered by the Directors to be the reportable operating segments of Renold plc as shown below:

· The Chain segment manufactures and sells power transmission and conveyor chain and also includes sales of torque transmission products through Chain National Sales Companies (NSCs); and

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

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

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. Management monitor the results of the separate reportable operating segments based on operating profit and loss which is measured consistently with operating profit and loss in the consolidated financial statements. The same segmental basis applies to decisions about resource allocation. Disclosure has not been included in respect of the operating assets of each segment as they are not reported to the CODM on a regular basis. However, Group net financing costs, retirement benefit obligations and income taxes are managed on a Group basis and therefore 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.

2. Segmental information (continued)

The Group uses a variety of alternative performance measures, which are non-IFRS, to assess the performance of its operations. The Group considers these performance measures to provide useful historical financial information to help investors evaluate the underlying performance of the business by adjusting for volatility created by one-off items and non-trading performance related costs such as amortisation and legacy pension costs.

The two consistently applied performance measures which are disclosed are adjusted results and underlying results.

Adjusted results exclude the impact of exceptional items, pension financing charges, pension administration costs and the amortisation of acquired intangible assets and the tax thereon. A reconciliation of these results is shown on the face of the consolidated statement of comprehensive income and in the tables above. Adjusted operating profit of £14.5m is derived from the statutory operating profit of £11.0m.

Underlying results are retranslated to current year exchange rates and therefore only prior year comparatives would be deemed an alternative measure. A reconciliation is provided below.

(1) Inter-segment revenues are eliminated on consolidation.

(2) Included in Chain external sales is £4.7m (2016: £3.8m) of Torque Transmission product sold through the Chain NSCs, usually in countries where Torque Transmission does not have its own presence.

(3) The measure 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.

(4) Capital expenditure consists of additions to property, plant and equipment and intangible assets.

The UK is the home country of the parent company, Renold plc. The principal operating territories, the proportions of Group external revenue generated in each (customer location), external revenues, non-current assets (asset location) and average employee numbers in each 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 (2016: none).

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

3. Adjusting and exceptional items

As part of the acquisition of the Renold Tooth Chain business completed in the prior year, the Group was obliged to pay for some transitional services provided by the seller's group until the business migrated to Renold's IT systems. Costs of £0.3m were incurred until migration was completed in December 2016 and have now ceased.

Various restructuring costs were incurred in the year as part of the STEP 2020 Strategic Plan. The European distribution and sales operations were relocated with the sales functions transferred to a nearby rented office in Lille, France and the European distribution operations moved to a new warehouse in Uslar, Germany located close to the Einbeck Chain manufacturing factory. These moves resulted in redundancy and restructuring costs of £0.6m. The former European distribution site at Seclin, France was sold for £1.0m resulting in no gain or loss on disposal following the £0.5m impairment charge incurred in the prior year.

Also in the year, redundancy and restructuring costs of £2.5m were incurred transferring the HiTec Couplings business, located in Halifax, to our existing Couplings facility in Cardiff. As a result of this transfer, the Halifax property is now held for sale at a value of £0.3m (sold on 15 May 2017 - See Note 11). The increased manufacturing capability at the Cardiff site permitted the closure of the China Couplings facility with manufacturing moving to Cardiff and South Africa. This incurred redundancy and restructuring costs of £0.6m in the year.

A further restructuring cost of £0.4m was incurred in the year as we commenced a multi-year project to transfer the China Chain manufacturing facility from leased premises in Hangzhou to a purpose-built facility near Changzhou in the Jiangsu province. Other restructuring costs included £0.1m incurred following the relocation of the Malaysian manufacturing facility into larger premises and £0.1m of other STEP 2020 restructuring costs incurred in the year.

In March 2017, the Mulgrave manufacturing facility in Australia was sold realising net proceeds of £9.3m resulting in a gain on disposal net of associated costs of £2.9m. As part of the sale agreement, Renold can remain as a tenant and retain full use of the property for three years until March 2020 at which point the property must be vacated.

Prior year restructuring costs included £0.5m incurred at the Milnrow facility, where the business was downsized following the end of a long term supply agreement (offshored by the customer), £0.6m of costs related to the relocation of the head office and £1.4m of other STEP 2020 restructuring costs incurred in the year.

Also in the prior year, a past service credit of £1.3m arose in Germany following the confirmation that the pension scheme was properly closed to future accrual with effect from 2014. This was offset by a £0.1m settlement loss relating to the liquidation of the Australian pension scheme.

4. Net financing costs

5. Taxation

Analysis of tax charge in the year:

Factors affecting the Group tax charge for the year

The UK Government announced that it intends to reduce the main rate of corporation tax to 17% with effect from 1 April 2020. This change was substantively enacted in September 2016. Accordingly, deferred tax balances have been revalued to the lower rate of 17% in these financial statements which has resulted in a £0.5m deferred tax charge to the statement of other comprehensive income.

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.

5. Taxation (continued)

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

Tax payments

Cash tax paid in the year of £1.0m (2016: £1.0m) is lower than the total tax charge due to the utilisation of tax losses in various jurisdictions.

Effective tax rate

The effective tax rate of 28% (2016: 27%) is higher than the UK tax rate of 20% (2016: 20%) due to the following factors:

· Permanent differences including items that are disallowed from a tax perspective such as entertaining and certain employee costs;

· Prior year adjustments arising as tax submissions are finalised and agreed in specific jurisdictions; and

· Differences in overseas tax rates, typically being higher than the rates in the UK.

6. Earnings per share

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

Inclusion of the dilutive securities, comprising 3,293,000 (2016: 4,097,000) additional shares due to share options in the calculation of basic and adjusted EPS does not change the amounts shown above (2016: 2.3p and 4.6p respectively).

The adjusted EPS 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.

7. Dividends

No ordinary dividend payments were paid or proposed in either the current or prior year.

8. Goodwill

The Group performed its annual impairment test of goodwill at 31 March 2017 which compares the current book value to the recoverable amount from the continued use or sale of the related business. No impairment charge has been recognised in the period.

The recoverable amount of each Cash Generating Unit (CGU) has been determined on a value in use basis. Value in use is calculated as the net present value of cash flows derived from detailed financial plans for the next two financial years as approved by the Board. Cash flows beyond this are extrapolated using the long term country growth rates disclosed below:

Key assumptions used in the value in use calculations:

Sales volumes, selling prices and cost changes

The Group prepares cash flow forecasts based on the latest management estimates for the next two financial years. The expected sales prices and volumes reflect management's experience of how sales will develop at this point of the economic cycle. The expected profit margin reflects management's experience of each CGU's profitability at the forecast level of sales and incorporates the impact of any restructuring that took place during the year ended 31 March 2017.

Cash flows beyond the period of projections are extrapolated using long term growth rates published by the Organisation for Economic Co-operation and Development for the territory in which the CGU is based. The discount rates applied to the cash flows of each of the CGUs are based on the risk free rate for long term bonds issued by the government in the respective market. This is then adjusted to reflect both the increased risk of investing in equities and the systematic risk of the specific CGU (using an average of the betas of comparable companies).

8. Goodwill (continued)

Management believe that no reasonably possible change in any of the key assumptions would cause the carrying values to materially exceed each CGU's recoverable amount.

Provisional fair value adjustment - Renold Tooth Chain

During the year, the provisional fair values calculated at the Tooth Chain acquisition date have been reassessed, resulting in an adjustment to the provisional fair values of inventories (£0.2m reduction) and provisions (£0.2m increase) calculated at the date of acquisition. Furthermore, the contingent consideration paid in the year was lower than the provisional amount anticipated at the acquisition date (£0.1m). These adjustments have been reflected in goodwill arising upon acquisition resulting in a £0.3m increase.

9. Intangible assets

The acquisition of the Tooth Chain business in January 2016 brought significant benefit to the Group in terms of new customers, relationships and technical 'know-how'. These benefits have been valued under IFRS 3 using estimates of useful lives and discounted cash flows of expected income. The values are being amortised as follows:

Customer orderbook

Customer orderbook is amortised when the orderbook at the date of acquisition has been fulfilled. This is now fully amortised.

Customer lists and technical know-how

Customer lists and technical know-how are being amortised over five years as the benefits are likely to crystallise over a longer period.

No brand names were acquired as part of the acquisition.

10. Property, plant and equipment

Future capital expenditure

At 31 March 2017 capital expenditure contracted for but not provided for in these accounts amounted to £2.6m (2016: £2.0m).

Asset held for sale

In the current year the former HiTec Couplings manufacturing site located in Halifax, UK was reclassified as an asset held for sale (see Note 11).

11. Asset Held for Sale

In October 2016, the asset held for sale, the former Chain manufacturing facility located in Seclin, France was sold for £1.0m. Proceeds of £0.9m have been received to date with a further £0.1m receivable subject to environmental tests due to be completed in December 2017.

During the year, the HiTec Couplings business was transferred from the manufacturing facility based in Halifax to the existing UK Couplings facility in Cardiff. The Halifax site was sold on 15 May 2017 for net proceeds of £0.5m realising a gain of £0.2m to be recognised in the first half of the next financial year.

12. Inventories

Inventories pledged as security for liabilities amounted to £32.8m (2016: £30.2m).

13. Trade and other receivables

1 Financial assets carried at amortised cost.

The Group has no significant concentration of credit risk but does have a concentration of translational and transactional foreign exchange risk in both US Dollars and Euros. However, the Group hedges against these risks.

Trade receivables are non-interest bearing and are generally on 30-90 days terms. As at 31 March, the ageing analysis of trade receivables is as follows:

14. Cash and cash equivalents

In the Group cash flow statement, net cash and cash equivalents are shown after deducting bank overdrafts as follows:

15. Borrowings

All financial liabilities above are carried at amortised cost.

Core banking facilities

On 13 May 2015 the Group agreed a revision to its existing banking facilities with its current banking partners, Svenska Handelsbanken AB and Lloyds Bank plc. The revised facility replicates the previous £41m Multi-Currency Revolving Facility (MCRF) but also adds a £20m accordion feature that can be accessed by the Group to fund investment or acquisition opportunities. The revised facility has been extended to mature in May 2020 whereas the original maturity was in October 2016. The MCRF is fully committed and available until maturity.

At the year end the undrawn facility was £5.3m (2016: £3.4m). The Group pays interest at LIBOR plus a variable margin in respect of this facility. The average rate of interest paid in the year was LIBOR plus 1.91% for Sterling denominated facility and LIBOR plus 1.82% for the Euro and US Dollar denominated facility (2016: LIBOR plus 1.79% for Sterling denominated facility and LIBOR plus 1.81% for the Euro and US Dollar denominated facility). This facility has two primary financial covenants which are tested on a six monthly basis. The first is net debt as a ratio of rolling annual EBITDA with a maximum ratio of 2.5 times. The second is interest cover with a minimum ratio of 4.0 times (rolling annual EBITDA divided by net financial interest cost). The Group also benefits from a number of overseas facilities totalling £2.2m.

Secured borrowings

Included in Group borrowings are secured borrowings of £32.3m (2016: £35.0m). Security is provided by fixed and floating charges over assets (including certain property, plant and equipment and inventory) primarily in the UK, USA, France, Germany and Australia.

Finance leases

The Group has no obligations under finance leases.

15. Borrowings (continued)

Preference Stock

At 31 March 2017 there were 580,482 units of Preference Stock in issue (2016: 580,482).

All payments of dividends on the Preference Stock have been paid on the due dates. The Preference Stock has the following rights:

(i) a fixed cumulative preferential dividend at the rate of 6% per annum payable half yearly on 1 January and 1 July in each year;

(ii) rank both with regard to dividend (including any arrears on the commencement of a winding up) and return of capital in priority to all other stock or shares in the Company, but with no further right to participate in profits or assets;

(iii) no right to attend or vote, either in person or by proxy, at any general meeting of the Company or to have notice of any such meeting, unless the dividend on the Preference Stock is in arrears for six calendar months; and

(iv) no redemption entitlement and no fixed repayment date.

There is no significant difference between the carrying value of financial liabilities and their equivalent fair value.

16. Trade and other payables

1 Financial liabilities carried at amortised cost.

Trade payables are non-interest bearing and are normally settled within 60 day terms. The Group does have a concentration of translational foreign exchange risk in both US Dollars and Euros. However, the Group hedges against this risk.

17. Provisions

Business restructuring

This provision relates to the reorganisation and restructuring of various parts of the business: £0.6m relates to the Chinese Torque Transmission facility closure initiated in March 2017 and £0.8m relates to the remaining UK HiTec Couplings redundancy costs due to be paid in the first half of the next financial year. See Note 3 on exceptional charges for more details.

17. Provisions (continued)

Onerous lease

This provision relates to onerous lease costs in respect of the lease of the Bredbury plant in the UK and the Mulgrave facility in Australia. The Bredbury lease expires in May 2030. A lease was agreed in August 2016 to sublet a significant part of the property for a five year term for an annual rent of £0.6m. £0.9m of the provision was utilised in the year leaving a provision of £3.2m in respect of this lease.

In addition, as part of the sale agreement of the Mulgrave facility in Australia completed in March 2017, it was agreed that the business could remain in the property for a maximum of three additional years for an annual rent of £0.5m. This lease was deemed to be onerous and as a result a provision was established in relation to the total lease cost of £1.6m. This charge was included in the net exceptional gain on the sale of the property of £2.9m (see Note 3).

Contingent consideration

Renold (Hangzhou) Co Limited: China

A provision of £0.8m (2016: £0.7m) was established for the purchase of the outstanding 10% of the equity following the acquisition of 90% of the equity interest in Renold (Hangzhou) Co Limited in the period ended 31 March 2008 and is due to be paid at the latest by 15 June 2017.

Renold Tooth Chain, Germany

A provision of £1.1m was established on the acquisition of the Tooth Chain business in January 2016. The contingent consideration is expected to be paid over the first two years based upon achieving certain sales targets (up to a maximum of €1.5m). The first year target resulted in consideration of £0.5m (€0.6m) becoming payable. This was paid in April 2017. The reduction has been adjusted though goodwill (see Note 8). Management expect that the second year target will be met and therefore the amount has been provided in full.

18. Additional cash flow information

Reconciliation of operating profit to net cash flows from operations:

18. Additional cash flow information (continued)

Reconciliation of net change in cash and cash equivalents to movement in net debt:

19. Post balance sheet events

There were no significant post balance sheet events to report.