Renold Regulatory News (RNO)

19 Jul 2006 07:00

Renold PLC19 July 2006 19 July 2006 RENOLD plc 2006 PRELIMINARY RESULTS Renold plc, a leading international supplier of industrial chains and relatedpower transmission products today announces its preliminary results for the yearended 31 March 2006. Summary • A year of progress, implementing a strategic shift to focus on the core Industrial Power Transmission business, while improving profitability and reducing the cost base. • Revenue from continuing operations increased by 8% at £155.0 million (2005: £143.2 million). • Continuing operations' operating profit improved significantly at £5.4 million (2005: £0.4 million). • Continuing operations' operating profit (before exceptional items) increased to £6.8 million (2005: £4.6 million). • Continuing operatings' pre-tax profit of £1.8 million (2005: pre-tax loss £1.8 million). • Basic earnings per share from continuing operations 0.4p (2005: loss per share 0.4p). Adjusted earnings per share from continuing operations of 1.7p (2005: 3.8p) (adjusted for the after tax effects of exceptional items). • Proposed sale of Machine Tools and Automotive businesses announced. Proceeds will be used to reduce debt. • Discontinued operations' operating loss (after £12.8 million impairment charge) was £13.8 million (2005:profit £0.6 million). • Board proposed not to pay a dividend for 2005/06 and future dividend policy will be considered in light of the results from the re-focused and downsized business. Prospects Roger Leverton, Chairman of Renold plc, said today: "Overall, the economic environment continues positive although concerns remainover the negative impact of escalating raw material and energy costs. That said,the refocused business, with a reduced cost base, is better positioned to showfurther progress during 2006/07." RENOLD plc Chairman: Roger Leverton Preliminary Results for the Financial Year ended 31 March 2006 FINANCIAL SUMMARY 2006 2005 (2) (1), (2) £m £mContinuing operations:Revenue 155.0 143.2Operating profit 5.4 0.4Operating profit before exceptional items 6.8 4.6Profit before tax and exceptional items 3.2 2.4Profit/(loss) before tax 1.8 (1.8) Discontinued operations:(Loss)/profit from discontinued operations includingimpairment charges (13.9) 0.2 Other information:Basic and diluted (loss) per share - Group (19.6)p (0.1)pBasic and diluted earnings/(loss) per share - continuing operations 0.4p (0.4)pDividends paid per ordinary share 4.5pGroup capital expenditure 6.6 7.6Group net debt 20.7 17.0 (1) The figures for 2005 have been restated following the adoption of International Financial Reporting Standards. (2) The results for continuing operations in both years report the Group's performance, excluding the activities of the Automotive and Machine Tools businesses, which have been reported as discontinued operations. CHAIRMAN'S STATEMENT Overview It has been a year of progress towards returning the Group to its PowerTransmission core competency and improving profitability and future prospectsfor the business. In line with the Board's strategic direction for the Group in targeting a moretightly focused business with a substantially lower cost base and a reducedlevel of borrowings, the Group announced the proposed sale of its Machine Toolsand Automotive businesses, the proceeds of which will be used to reduce bankdebt. In the light of these proposed sales, the results of the Group showseparately the results of the continuing Group businesses. There were unprecedented steel price increases in the second half of last yearand the pressures on the Group were compounded by a continuing weakness of theUS Dollar. Where steel represents the major part of raw material costs, avigorous programme of sales price increases and cost reduction was implementedand this has resulted in improved margins and profitability of the ongoingIndustrial Power Transmission business. Continuing operations' profitability improved, reaching an operating profitbefore exceptional items of £6.8 million compared with £4.6 million in 2005.This result reflected strong sales growth in North America but with weakermarket conditions persisting in Europe until the later part of the year.Development of the Group's activities in China continued with further contractswon. Continuing operations recorded a pre-tax profit of £1.8 million compared with apre-tax loss of £1.8 million in 2005. All figures take account of the newInternational Financial Reporting Standards and comparative numbers have beenrestated as appropriate. After an impairment charge of £12.8 million relating to discontinued operations,the Group loss for the year was £13.6 million compared with a loss of £0.1million in 2004/05. Group net borrowings, excluding preference shares, ended the year at £20.2million compared with £17.0 million the previous year. It is intended thatproceeds from the sale of the Machine Tools and Automotive businesses willsubstantially reduce the level of debt going forward. Dividend Given this year of transition the Board believes it is prudent to recommend thatno dividend be paid for the year. The Board will consider future dividend policyin the light of results from the re-focused business. Board Changes Tony Brown, Finance Director, and Geoffrey Newton, Company Secretary, both planto retire following the 2006 AGM. Both are long-term employees of the Companyand we thank them for their unstinted contribution over many years. Peter Bream joined the Board on 1 July, 2006 and will replace Tony Brown asFinance Director effective from the 2006 AGM. Peter Bream is an experiencedaccountant having been Finance Director of Provalis plc, a UK listed company,prior to his appointment. Keith Brown, Company Solicitor, will replace GeoffreyNewton as Company Secretary in a new combined role. Prospects Overall, the economic environment continues positive although concerns remainover the negative impact of escalating raw material and energy costs. That said,the refocused business, with a reduced cost base, is better positioned to showfurther progress during 2006/07. CHIEF EXECUTIVE'S REVIEW Improved trading during the second half enabled the Group to achieve progress inthe operating results for all the businesses last year. In 2004/05 the dramaticand rapid increase in steel prices severely impacted costs. This year steelprices have been stable and some small reductions have been seen; however, steelcosts are still at least 40% higher than at the start of 2004/05. Theseincreases have now been substantially offset by increased selling prices andcost reductions. Despite the need to pass on the increased cost of steel, salesgrowth was achieved. The increases in freight, utility and other energy relatedcosts are a concern going forward. The strategy of reducing our dependence on manufacturing in the traditionalareas of Europe and the US continued with the establishment of facilities inPoland, Malaysia and China. Increasingly these will provide the cost platformthat will protect the existing business base and allow sales penetration intomarkets and countries where Renold has not traditionally been strong. Thesefacilities will serve both local and international markets during theforthcoming year. Further investment in the sales teams has also been made inthese and other growing markets. The strategy of focusing on the core Industrial Power Transmission business wastaken forward with the announcement in June of the proposed sale of theAutomotive and Machine Tools businesses. The Automotive business, despite someimprovement in the second half, continued to be unprofitable and to consumecash. Renold was a relatively small player in the automotive supply industrycompared with the size of its major competitors. Double digit sales growth, overthe past few years, driven by technical excellence, demanded significantcontinued investment. INA-Schaeffler KG, with over €5.0 billion sales in theautomotive segment and manufacturing locations in many parts of the world,including Europe, USA and China, is in a better position to serve this market.The Automotive manufacturing and design facilities are based in Calais and StSimeon in France and Morristown, Tennessee, in the US. Automotive productmanufacturing in Einbeck, Germany, has been transferred to St Simeon. The Machine Tools business has little overlap with the core businesses but iscyclical and, at times, has a high demand for cash. The business operates fromself-contained sites in Rochdale (Holroyd/Edgetek) and Leicester (Jones &Shipman). A production cell for loose gears will transfer from the Machine Toolsbusiness to the adjacent Renold Gears site after completion of the proposedtransaction. Following these proposed divestitures, Renold will be a more focused Group.Going forward it will have the ability to invest more heavily in the IndustrialPower Transmission business and will accelerate changes to the manufacturingfootprint and development of sales, particularly in the USA, China, EasternEurope and South America. OPERATIONS REVIEW The Group going forward is focused on its Industrial Power Transmissionbusiness, which forms one business segment. The activities of the segmentinclude the manufacture and sale of chain, gear and coupling products, which aresold through the Group's worldwide sales operations to a broad range of originalequipment manufacturers and distributors. The key performance indicators which are used to monitor performance arefinancial, including rate of sales growth, margin, material costs (particularlysteel), payroll costs, working capital performance and net debt. The Group'sperformance against these key indicators is noted in the comments which follow.Other non-financial performance indicators are used but vary on a business bybusiness basis. Chain_____ The industrial chain business recovered well in the second half resulting in animproved performance compared with last year. Steel prices declined slightly butstill remained 40% higher than at the start of 2004/05. Passing these costincreases on to customers was an essential, but time consuming, feature of theyear. This process was managed in a way that allowed the majority of customersto be retained and it was pleasing to see that organic sales growth was achievedduring this difficult period. The full impact of steel price increases was notrecovered by increased pricing alone but the shortfall was substantially made upby cost reduction achievements. Europe Renold is the leading supplier of Industrial Chain in Europe and this positionwas maintained during the year. Excluding price increases, sales were relativelyflat during the early part of the year but increased towards the end of theyear. Germany in particular started to show signs of recovery following alengthy period of flat sales. The first new factory for many years was established in Goleniow, close toSzczecin, in Poland. The first chain was assembled in November. Phase 1 of thisproject was to transfer the assembly of special, low volume products from theEinbeck and Manchester facilities. This phase is nearly complete with over 60new jobs already being established in Poland. An infrastructure is now beingestablished which will allow the second phase to begin. This will include directshipments to customers and will provide products in response to the demands ofthe local market. Phase 2 was originally scheduled to start at the end of 2006/07 but is being initiated six months ahead of plan. This facility is beingmanaged by the Einbeck team who have done an excellent job of establishing thefacility ahead of schedule and within budget. The local Government in Goleniowhave been particularly supportive and have contributed to this success. The creation of this new facility was timely as the demand on the Einbeckfacility increased at the end of the fourth quarter and is ongoing into 2006/07.This demand has been met by modest capital investments and efficiencyimprovements. The transfer of Automotive product to the SAF factory at StSimeon, in June 2006, will allow a further increase in capacity with littleadditional investment. The European Distribution Centres project made good progress in the year. Thisproject is aimed at improving customer service by reducing lead times andincreasing stock availability. The UK and German distribution centres are nowestablished on a common software platform and have started to ship direct tocustomers. This will be rolled out across all European selling companies duringthe forthcoming year. A total of 94 redundancies were made following the announcement of the closureof the facility in Burton. This work has been transferred to Poland, Manchesteror outsourced. The initial planning application for redevelopment of the Burtonsite was rejected but an appeal has been lodged which is expected to be heardbefore the end of 2006. During the year 18 job losses were announced at theSeclin manufacturing facility in France. Americas The US achieved good growth with sales up by over 13% compared with the previousyear. This growth came from all segments of the business but sales throughdistribution were particularly strong. Sales to the two largest US PowerTransmission Distributors, Motion and AIT, increased significantly. Thisincrease in market share has moved Renold into the top three Industrial Chainmanufacturers in the US. Despite the need to increase prices, following the increase in steel costs, theOEM segment also grew. Orders increased for new products introduced over thelast few years - Synergy (the world's leading transmission chain), Syno(lubrication free/dry to the touch chain) and the latest introduction XXL. Thisnew product allows performance features to be achieved in chain that wouldnormally need to be one size larger. This innovation has the real potential forOEM's to save size, weight and cost. During the coming year the manufacture of certain products, which are soldmainly in North America, will be moved to the manufacturing facility inMorristown, Tennessee. This facility has progressed well with the introductionof Lean manufacturing and has completed a number of joint Lean events withcustomers during the year. South American sales are now led by a local Sales Manager focused on the region.Starting from a relatively small base, the benefits of this focus are alreadybeing seen, with orders substantially increased. Additional resources will beadded in the forthcoming year and, to fully realise the potential of the region,consideration will be given to adding a manufacturing facility the followingyear. Asia Pacific Progress continues to be made in China with additional sales resources beingadded. All product groups are sold in China but the largest order, at over £1.5million, came from a steel mill for large spindles for the Couplings business.Increasingly Renold chain products are being recognised for their exceptionalperformance and capabilities. Markets such as power generation, metals, glassand printing machines provided good order intake. In total, orders from Chinaincreased by 50%, albeit from a relatively low base, and, going forward, stronggrowth is again expected in the coming year. To accelerate this growth the intent is to start manufacturing products inChina, primarily to serve the local market. During the second half a lease wastaken on 3000 square metres of manufacturing space close to Shanghai. This iscurrently being refurbished and the product will be manufactured in thislocation during 2006/07. In addition to this facility a new sales office,located in the centre of Shanghai, will be opened during the year. In addition to China, a new manufacturing facility will be opened in Malaysia in2006/07. This will initially assemble chain for the palm oil industry but isexpected to expand to satisfy the demands of other local customers. Gears_____ Gears operations have been consolidated under a single management team. Loosegears were already sold through the Gears sales team but the manufacturingresponsibility was transferred from the Machine Tools & Rotors Division to theadjacent facility in Milnrow close to Manchester. The facility in South Africawas also consolidated into this grouping. South Africa, with sales of £4.5million, manufactures, maintains and overhauls gearboxes from its base inJohannesburg and sells a range of other power transmission products. Growth in the year came mainly from China, Germany and the USA. This success isbased on providing creative design solutions for specific customer problems. Agood example of this is an innovative Compact Escalator Direct Drive unit for amajor European manufacturer. The Apprentice Training School is located in the Gears Milnrow facility. Giventhe importance of key technicians to the Group, it is planned that this will beretained by Renold following the divestiture of Machine Tools. Couplings_________ It was a good year for this product group with orders up on the previous year.The growth came mainly from North America for the power generation and marineindustries and from China for steel mills. Sales are underpinned by the largemulti-year Mass Transit contract for Alstom/New York City. This runs until 2008and over £2 million worth of shipments are scheduled for 2006/07. There arefurther customer options to extend the contract beyond 2008. A licensing agreement was reached with David Brown that permits Renold to offerboth couplings and gearboxes for Mass Transit applications. This significantlyincreases the available market size for Renold products. Multi-year contractsfor over £30 million are currently being bid on. The strong order performance and ongoing Alstom contract positions this productgroup well for another strong year. FINANCIAL REVIEW Overview The financial statements of the Group, including restated comparatives, havebeen prepared in accordance with International Financial Reporting Standards(IFRS). The principal differences arising from the transition to IFRS from UKGenerally Accepted Accounting Practice were set out in a press release dated 23November 2005 and details are also included in the notes to the consolidatedfinancial statements. As required under IFRS, the results of discontinued businesses are reported onone line in the income statement. Discontinued Businesses As announced in June 2006, the Group is at an advanced stage of negotiation forthe sale of the business and certain assets of both the Automotive and MachineTools businesses. Further information on these disposals is reported in theChief Executive's Review. As a consequence the Automotive and Machine Tools businesses are accounted foras discontinued operations in the financial statements. Turnover The turnover of continuing operations increased by 8% to £155.0 million, atconstant exchange rates the increase was 6%. North America exhibited stronggrowth, up 17%, with Continental Europe up 4%, but the UK only 2% higher;elsewhere growth in the Far East was partially offset by a reduction inAustralia. Sales in the second half-year, at £79.1 million were 4% higher thanthe first half. Operating Profit Operating profit before exceptional items was £6.8 million up 48% on 2004/5.Operating profit in the second half year was £4.2 million representing a 5.3%return on sales, compared with £2.6 million in the first half or 3.4%. Thisdemonstrates a further recovery in margins resulting from the pricing and costactions taken following the rapid steel price increase in 2004 and early 2005,which depressed profitability particularly in the second half of the 2004/05year. Exceptional costs were £1.4 million, compared with £4.2 million in 2004/05, andrelated to redundancy and restructuring costs incurred mainly in the Europeanchain operations. Financing Costs Net interest cost rose to £2.2 million (2004/05: £1.9 million), there were costsof £0.7 million relating to the renegotiation of banking facilities, and a fairvalue gain on derivatives of £0.3 million. The net of interest costs on pensionbalances and the expected return on pension plan assets was a charge of £1.0million (2004/05: £0.3 million). Profit Before Tax Profit before tax and before exceptional items was £3.2 million compared with£2.4 million last year. Profit before tax after exceptional items was £1.8million compared with a loss of £1.8 million in 2004/05. Taxation The tax charge of £1.5 million (2004/05: £1.5 million credit) for the yearrepresented higher than a normal percentage of the profit before tax mainly dueto losses, including redundancy and restructuring costs, arising in subsidiarieswhere it is considered unlikely that they will be recovered in the foreseeablefuture. Discontinued Operations As noted above the Automotive and Machine Tools businesses have been reported asdiscontinued operations with a loss, before disposal impairment charges, of £1.1million in the year compared with a profit of £0.2 million in 2004/05. Detailsof the results of the discontinued operations are given in note 4 of thePreliminary Financial Statements. Results For The Financial Period The loss for the year was £13.6 million (stated after disposal impairmentcharges of £12.8 million) compared with £0.1 million in 2004/05; the basic anddiluted loss per share was 19.6p (2004/05: 0.1p loss). The basic and dilutedearnings per share from continuing operations was 0.4p (2004/05: loss 0.4p). Balance Sheet Net assets at 31 March 2006 were £40.6 million (2004/05: £56.1 milllion) afteran impairment charge of £12.8 million in relation to discontinued operations,details of which are shown in note 6(b) of the Preliminary Financial Statements.The liability for retirement benefit obligations was £53.9 million (2004/05:£53.2 million) before allowing for a deferred tax asset of £12.7 million (2004/05: £14.3 million). Cash Flow And Borrowings Cash inflow from continuing operations was £4.7 million (2004/05: £8.6 million);there was a net cash outflow of £2.7 million for redundancy and restructuringcosts in the year (2004/05: £4.9 million inflow). Cash inflow from discontinued operations was £1.7 million (2004/05: £2.0 millionoutflow). Payment for purchase of property, plant and equipment was £6.7 million (2004/05:£7.7 million), of which £2.9 million (2004/05: £3.9 million) related todiscontinued activities. Proceeds of disposals, including the sale of leaseholdimprovements at the Bredbury factory site totalled £3.2 million. Group net borrowings at 31 March 2006 were £20.7 million (2005: £17.0 million)comprising cash and cash equivalents £17.8 million (2005: £24.5 million) andborrowings of £38.5 million (2005: £41.5 million). Treasury And Financial Instruments The Group treasury policy, approved by the directors, is to manage its fundingrequirements and treasury risks without undertaking any speculative risks. A major exposure of the Group relates to currency risk on its sales andpurchases made in foreign (non-functional) currencies, and to reduce such risksthese transactions are covered, as commitments are made, primarily by forwardforeign exchange contracts. Such commitments generally do not extend more thansix months beyond the balance sheet date, although exceptions can occur wherelonger-term projects are entered into. Interest rate swaps have been used to fix interest rates on certain Groupborrowings. At 31 March 2006 the Group had 31% of its gross debt at fixedinterest rates. Cash deposits are placed short-term with banks where securityand liquidity are the primary objectives. Certain dollar denominated borrowings taken out in the UK to finance theacquisition of the Jeffrey Chain Corporation in 2000 have been designated as ahedge of the net investment in US subsidiaries, the fair value of theseborrowings was £5.4 million at 31 March 2006 (31 March 2005: £4.6 million). Pensions Information on the Group's pension schemes is set out in note 7 to thePreliminary Financial Statements, including the key assumptions used by theactuary in arriving at the IAS 19 funding position. This year, for the firsttime, information has been provided in the note on the mortality assumptionsused for the main UK schemes. The gross pension deficits before taxation are as follows: 2006 2005 Assets Liabilities Deficit Assets Liabilities Deficit £m £m £m £m £m £m UK Schemes -funded 162.7 195.6 32.9 142.4 177.2 34.8 Overseas Schemes - funded 15.5 17.9 2.4 12.4 12.1 (0.3)- unfunded 18.6 18.6 18.7 18.7 ________________________________ ________________________________ 178.2 232.1 53.9 154.8 208.0 53.2 ________________________________ ________________________________ During the year the assets of the funded schemes rose by £23.4 million duemainly to the return on assets exceeding the expected return by £16.2 million,and to UK deficit reduction payment of £3.1 million made in the year. Thefunding deficit did not materially change, however, as liabilities increased by£21.5 million due to actuarial losses caused primarily by a reduction in bondrates, with that used for discounting UK liabilities falling from 5.4% to 5.0%. The overseas deficit comprises £2.4 million in respect of defined benefitschemes, and £18.6 million relating principally to the unfunded German schemewhich, as is common in Germany, is a "pay as you go" scheme which does notrequire to be pre-funded. There is no obligation for deficit funding paymentsfor this type of scheme. The key issues for the Group are those relating to the UK schemes, furtherdetails of which are given below: There are three UK defined benefit pension schemes, the main scheme which is theRenold Group Pension Scheme (RGPS), the Renold Supplementary Pension Scheme(RSPS), and the Jones & Shipman Retirement Benefit Scheme (J&S). As at 31.3.06 RGPS RSPS J&S Total £m £m £m £m IAS 19 liabilities 125.9 30.9 38.8 195.6Market value of assets 102.2 23.6 36.9 162.7Deficit on IAS 19 basis 23.7 7.3 1.9 32.9Annual deficit reduction payment (based on funding valuations) 2.2 0.7 0.2 3.1Total members (approximately) 6,200 120 1,080 7,400of which active are 625 20 70 715 For the UK schemes, the sensitivity to change in bond yields has been estimatedassuming that the value of bond and annuity assets would change in line with thechange in yields, but that the equity values would be unchanged; for a 0.5%increase in bond yields the UK deficit would reduce by some £12 million; for a0.5% reduction in bond yields the UK deficit would increase by some £14 million. The UK schemes' assets at 31 March 2006 were invested 48% in equities and 52% inbonds. Using the expected rates of return on the different asset groups, theweighted average rate of expected return is 6.3%. This rate is used indetermining the amount of expected return on plan assets shown as income in theprofit and loss account. If the same 6.3% rate were to be used to discount thepast service liabilities, rather than the corporate bond rate required by IAS19, then the value of UK scheme liabilities would reduce to £160.3 millioncompared with assets of £162.7 million. The sensitivity of the UK schemes to change in projected mortality has also beenestimated; an increase in the post retirement mortality rate of 15%, broadlyequivalent to a change of one year in life expectancy at age 65, would reducethe projected deficit by £7 million; conversely, a reduction in the postretirement mortality rate of 15% would increase the deficit by £7 million. Themortality projections used for the RGPS make allowance for a higher mortalityrate than that of the standard PA92 table as a mortality review carried out atthe time of the last valuation indicated that this would be appropriate. The deficits in the UK schemes are being funded over the remaining service livesof active members at the rate of £3.1 million per year in total. These deficitreduction payments were established at the most recent actuarial valuations asat April 2004 for the RGPS and SPS, and at April 2003 for the J&S scheme.Funding rates will be revised following the next triennial valuations which willincorporate the new Scheme Specific Funding requirements. Annual Report to be published 31 July 2006Annual General Meeting 19 September 2006 Annual Report: This preliminary announcement does not form the Group's statutoryfinancial statements. The figures shown in this release have been extracted fromthe Group's full financial statements which have been prepared under accountingstandards adopted by the European Union. These financial statements will bedelivered to the Registrar of Companies. The financial statements for the yearended 31 March 2005, which were prepared under UK GAAP, have been delivered tothe Registrar of Companies. The 2005 and 2006 financial statements both carry anunqualified audit report. The preliminary announcement was approved by the Board on 19 July 2006. For further information, please contact: Bob Davies, Chief Executive 19 July 2006 telephone: 020 7067 0700Tony Brown, Finance DirectorRenold plc Thereafter telephone: 0161 498 4500 Terry Garrett/Stephanie BadjonatWeber Shandwick Square Mile Telephone: 020 7067 0700 RENOLD PLCPRELIMINARY RESULTS Consolidated Income Statement for the year ended 31 March 2006 Notes 2006 2005 £m £mContinuing operations:Revenue 1 155.0 143.2Operating costs (149.6) (142.8) ________ ________Operating profit 5.4 0.4 ======== ======== Operating profit before exceptional items 6.8 4.6Exceptional items (1.4) (4.2) ________ ________Operating profit 5.4 0.4 ======== ======== Financial expenses (14.1) (11.8)Financial income 10.5 9.6 ________ ________Net financing costs 2 (3.6) (2.2) ======== ========Profit/(loss) before tax 1.8 (1.8)Taxation 3 (1.5) 1.5 ________ ________Profit/(loss) for the financial year from continuingoperations 0.3 (0.3) ======== ========Discontinued operations:(Loss)/profit for the financial year fromdiscontinued operations 4 (13.9) 0.2 ________ ________(Loss) for the financial year (13.6) (0.1) ======== ========= Earnings per share 5Basic and diluted (loss) per share (19.6)p (0.1)pBasic and diluted earnings/(loss) per share fromcontinuing operations 0.4p (0.4)p Consolidated Statement of Recognised Income and Expense for theyear ended 31 March 2006 2006 2005 £m £m (Loss) for the year (13.6) (0.1) ________ ________Net income/(expense) recognised directly in equity:Foreign exchange translation differences 1.1 0.1Gains on fair value of hedging net investments in foreignoperations 1.1Actuarial (losses) on retirement benefit obligations (5.3) (15.9)Tax on items taken directly to equity 1.7 4.6 ________ ________Total expense recognised directly in equity (1.4) (11.2) ________ ________Total recognised income and expense for the year (15.0) (11.3)Change in equity following adoption of IAS 39 (0.2) ________ ________Total recognised income and expense (15.2) (11.3) ======== ========= Consolidated Balance Sheetas at 31 March 2006 Notes 2006 2005 £m £mASSETSNon-current assetsGoodwill 17.1 15.7Other intangible fixed assets 0.2 0.5Property, plant and equipment 38.2 64.2Other non-current assets 0.3 0.4Deferred tax assets 18.4 17.0 ________ ________ 74.2 97.8 ________ ________ Current assetsInventories 36.5 47.3Trade and other receivables 25.8 41.7Derivative financial instruments 0.2Cash and cash equivalents 17.8 24.5 ________ ________ 80.3 113.5Asset held for sale 6 3.4Assets of discontinued operations 6 37.1 ________ ________ 120.8 113.5 ________ ________TOTAL ASSETS 195.0 211.3 ________ ________ LIABILITIESCurrent liabilitiesBorrowings (12.4) (28.5)Trade and other payables (31.3) (45.5)Provisions (0.4) (11.7)Current tax liabilities (0.7) (1.0) ________ ________ (44.8) (86.7) Liabilities directly associated with discontinuedoperations 6 (28.1) ________ ________ (72.9) (86.7) ________ ________NET CURRENT ASSETS 47.9 26.8 ________ ________ Non-current liabilitiesBorrowings (25.6) (13.0)Derivative financial instruments (0.1)Preference shares (0.5)Trade and other payables (0.7) (0.9)Deferred tax liabilities (0.7) (1.4)Retirement benefit obligations 7 (53.9) (53.2) ________ ________ (81.5) (68.5) ________ ________TOTAL LIABILITIES (154.4) (155.2) ________ ________ NET ASSETS 40.6 56.1 ======== ======== EQUITYIssued share capital 17.4 17.9Share premium 6.0 6.0Other reserves 2.7 0.5Retained earnings 14.5 31.7 ________ ________TOTAL SHAREHOLDERS' EQUITY 8 40.6 56.1 ======== ======== Consolidated Cash Flow Statement for the year ended 31 March 2006 2006 2005 £m £mCash flows from operating activities (Note 9)Cash generated from operations - continuing 4.7 8.6Cash generated/(absorbed) by operations - discontinued 1.7 (2.0) ________ ________ 6.4 6.6Income taxes paid (1.7) (1.0) ________ ________Net cash from operating activities 4.7 5.6 ________ ________ Cash flows from investing activitiesPurchase of property, plant and equipment (6.7) (7.7)Purchase of intangible assets (0.2) (0.3)Proceeds on disposal of property, plant and equipment 3.2Purchase of subsidiary (0.1)Cash acquired on purchase of subsidiary 9.7Interest received 0.1 ________ ________Net cash from investing activities (3.7) 1.7 ________ ________ Cash flows from financing activitiesFinancing costs paid (3.3) (2.2)Increase in borrowings 6.9 2.4Issue of ordinary shares 0.1Payment of finance lease liabilities (0.1) (0.1)Equity dividends paid (3.2) ________ ________Net cash from financing activities 3.6 (3.1) ________ ________ Net increase in cash and cash equivalents 4.6 4.2Net cash and cash equivalents at beginning of year 4.8 0.6Effects of exchange rate changes 0.2 __________ _________Net cash and cash equivalents at end of year 9.6 4.8 ========== ========= Notes to the consolidated financial statements 1. Segmental information Primary reporting format - business segment The Group's continuing activities are in one class of business, Industrial PowerTransmission. During the year the Group's former segments, Automotive andMachine Tools, have been classified, and accounted for, as disposal groups. Theconsolidated income statement for continuing operations therefore relates whollyto the Industrial Power Transmission business. Segment assets and liabilities The tables shown below provide an analysis of the distribution of assets andliabilities between continuing and discontinued activities, and how they relateto the former business segments. Reconciliation of segment assets to consolidated total assets: 2006 2005 £m £mAssets allocated to segments:- Industrial Power Transmission 116.6 115.8- Automotive 36.1- Machine Tools 17.6 ________ ________ 116.6 169.5 Unallocated corporate assets 1.7 0.3Cash and cash equivalents 17.8 24.5Deferred tax 18.4 17.0 ________ ________ 154.5 211.3Asset held for sale 3.4Assets of discontinued operations 37.1 ________ ________Consolidated total assets 195.0 211.3 ======== ======== Reconciliation of segment liabilities to consolidated totalliabilities:Liabilities allocated to segments:- Industrial Power Transmission (86.3) (81.8)- Automotive (25.4)- Machine Tools (3.7) ________ ________ (86.3) (110.9) Unallocated corporate liabilities (0.4)Preference shares (0.5)Derivative financial instruments (0.1)Borrowings (38.0) (41.5)Current and deferred tax (1.4) (2.4) ________ ________ (126.3) (155.2) Liabilities directly associated with assets ofdiscontinued operations (28.1) ________ ________Consolidated total liabilities (154.4) (155.2) ======== ======== Secondary reporting format - geographical segments The operations of the Group are based in six main geographical areas. The UK isthe home country of the parent. The main operations in the principal territoriesare as follows: United KingdomGermanyFranceRest of EuropeUnited States and CanadaOther countries The sales analysis in the table below is based on the location of the customer;the analysis of assets and capital expenditure is based on the location of theassets: Revenue Segment assets Capital expenditure 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m United Kingdom 20.4 20.0 29.5 50.4 1.6 2.0Germany 14.6 14.2 19.5 18.9 1.7 2.1France 7.4 7.5 5.9 41.2 0.1 5.7Rest of Europe 28.2 26.7 6.7 6.0 0.1 0.1North America 57.2 48.8 41.2 40.0 0.8 0.7Other countries 27.2 26.0 13.8 13.0 0.2 0.2 _______ _______ _______ ______ _______ _______ 155.0 143.2 116.6 169.5 4.5 10.8 Unallocated assets 37.9 41.8Asset held for sale 3.4Discontinued operations 37.1 2.1 _______ _______ _______ ______ _______ _______ 155.0 143.2 195.0 211.3 6.6 10.8 ======= ======= ======= ====== ======= ======= Included within capital expenditure shown for France in 2005 is an amount of£3.2m in respect of property, plant and equipment additions arising throughbusiness combinations. In accordance with IFRS 5, comparative geographical data for revenue has beenrestated to reflect only continuing activities of the Group. The geographicalanalysis of segment assets and capital expenditure at 31 March 2005 remains aspresented for the Group at that date. 2. Net financing costs 2006 2005 £m £m £m £mFinancial expenses:Interest payable on bank loans and overdrafts (2.3) (2.0)Interest cost on pension plan balances (11.1) (9.8)Costs associated with refinancing (0.7) _______ ______ (14.1) (11.8)Financial income:Interest receivable on bank deposits and cash equivalents 0.1 0.1Expected return on pension plan assets 10.1 9.5Fair value gains on derivative instruments 0.3 _______ _______ 10.5 9.6 ______ ________Net financing costs (3.6) (2.2) ======== ======== 3. Taxation Analysis of tax charge/(credit) in the year 2006 2005 £m £mUnited KingdomUK corporation tax at 30% (2005 - 30%) 0.5 0.7Less: double taxation relief (0.5) (0.7) _______ _________ Overseas taxesCorporation taxes 1.3 1.0 _______ _________Total current tax 1.3 1.0 _______ _________Deferred taxUnited Kingdom 0.3 (1.6)Overseas (0.4) (0.9) _______ _________Total deferred tax (0.1) (2.5) _______ _________Tax charge/(credit) on loss on ordinary activities 1.2 (1.5) ======== =========Analysed as:Continuing 1.5 (1.5)Discontinued (0.3) _______ _________ 1.2 (1.5) ======== ========= 4. Discontinued operations The Group has announced the proposed disposal of its Automotive and MachineTools businesses. The results of these discontinued businesses are set outbelow: 2006 2005 Automotive Machine Total Automotive Machine Total Tools discontinued Tools discontinued £m £m £m £m £m £m External revenue 49.3 20.8 70.1 35.3 18.5 53.8 __________________________________ _____________________________________ Operating (loss)/profit before exceptional items (1.6) 0.1 (1.5) (1.2) (1.2)Redundancy, restructuring and impairment of plant and equipment 0.7 (0.2) 0.5 (6.9) (6.9)Negative goodwillarising on acquisition 11.3 11.3Impairment of goodwill (2.6) (2.6) __________________________________ _____________________________________ Operating(loss)/profit (0.9) (0.1) (1.0) 3.2 (2.6) 0.6Net financing costs (0.3) (0.1) (0.4) (0.3) (0.1) (0.4) __________________________________ _____________________________________ (Loss)/profit before tax (1.2) (0.2) (1.4) 2.9 (2.7) 0.2Taxation 0.5 (0.2) 0.3 __________________________________ _____________________________________ (Loss)/profit after tax (0.7) (0.4) (1.1) 2.9 (2.7) 0.2 ================================== =====================================Impairment on classification as disposal groups (9.1) (3.7) (12.8)Taxation __________________________________ Net impairment onclassification as disposal groups (9.1) (3.7) (12.8) __________________________________ (Loss)/profit for the year on discontinuedoperations (9.8) (4.1) (13.9) 2.9 (2.7) 0.2 ================================== ===================================== In 2005/2006 a gear making operation was transferred to Industrial PowerTransmission. Previously the activities of this operation had been reported aspart of the Machine Tools businesses, having been physically located within themain UK Machine Tools facility. The turnover for this operation in 2006 was £1.9million, with an operating profit of £0.2 million. The cash flows attributed to discontinued operations comprise: 2006 2005 £m £m From operating activities 1.7 (2.0)From investing activities (2.8) 5.7From financing activities (0.5) (0.1) ======== ======== In 2005 the cash inflow from investing activities reflects cash acquired withthe purchase of Sachs Automotive France SAS (£9.7 million), offset by cashoutflows arising from the purchase of property, plant and equipment in thatyear. 5. Earnings per share Earnings per share is calculated by reference to the earnings for the year andthe weighted average number of shares in issue during the year as follows: 2006 2005 restated Earnings Weighted Per- Earnings Weighted Per- £m average share £m average share number of amount number of amount shares Pence shares Pence Thousands Thousands Basic EPSEarnings attributed toordinary shareholders (13.6) 69,350 (19.6) (0.1) 69,328 (0.1)Effect of dilutivesecurities:Employee share options 63 332 _______________________________________________________________________ Diluted EPS (13.6) 69,413 (19.6) (0.1) 69,660 (0.1) ======================================================================= Earnings per share from continuing operations:Basic EPS (13.6) 69,350 (19.6) (0.1) 69,328 (0.1)Post tax loss/(profit)from discontinuedoperations 1.1 1.6 (0.2) (0.3)Impairment on classification as disposal groups 12.8 18.4 _______________________________________________________________________Basic EPS from continuingoperations 0.3 69,350 0.4 (0.3) 69,328 (0.4) ======================================================================= Earnings per share from discontinued operations:Post tax (loss)/profitfrom discontinuedoperations (1.1) 69,350 (1.6) 0.2 69,328 0.3Impairment onclassification as disposal groups (12.8) (18.4) _______________________________________________________________________Basic EPS from discontinued operations (13.9) 69,350 (20.0) 0.2 69,328 0.3 ======================================================================= Inclusion of the dilutive securities, shown above, does not change the amounts shown for basic EPS for both continuing and discontinued operations. Adjusted EPS for continuing activities:Basic EPS from continuingoperations 0.3 69,350 0.4 (0.3) 69,328 (0.4)Effect of exceptionalitems, after tax:Redundancy andrestructuring costs 0.9 1.3 2.9 4.2 _______________________________________________________________________Adjusted EPS 1.2 69,350 1.7 2.6 69,328 3.8 ======================================================================= Inclusion of the dilutive securities, shown above, in the calculation ofadjusted EPS does not change the amounts shown of 1.7p (2005 - 3.8p). Theadjusted earnings per share numbers have been provided in order to give a usefulindication of underlying performance by the exclusion of exceptional items. 6. Assets classified as held for sale and associated liabilities (a) Asset held for sale 2006 2005 £m £m Property 3.4 ========= ========= As announced during the year, the Group is in the process of selling the formerBurton-upon-Trent factory site in the United Kingdom and accordingly the assethas been reclassified from property, plant and equipment. (b) Discontinued operations As announced on 6 June 2006, the Board is in advanced negotiations to dispose ofthe Automotive business. It was also announced on 26 June 2006 that Renold wasat an advanced stage of negotiation for the disposal of the Machine Toolsbusiness. These announcements are in line with the Board's strategy to focus onthe Group's core activity of the manufacture and the sale of Industrial PowerTransmission products. Further details on the background leading to the negotiations for the disposalof these businesses is set out in the Chief Executive's Report. The Automotive and Machine Tools business segments have been accordinglyaccounted for as disposal groups and balance sheet assets and liabilities havebeen reclassified and disclosed separately on the balance sheet as discontinuedoperations. A summary of the trading results of the disposal groups is shown innote 4. Set out below is a summary of the net assets of the disposal groups as at 31March 2006: Automotive Machine Tools Carrying Impairment Carrying Impairment Carrying value value value of before before disposal impairment impairment groups after impairment £m £m £m £m £mNon-current assetsIntangible assets 0.2 (0.2)Property, plant andequipment 13.8 (9.1) 4.0 (3.5) 5.2 Current assetsInventory 7.2 7.4 14.6Trade and otherreceivables 10.7 6.6 17.3 ____________________________________________________________________ 31.7 (9.1) 18.2 (3.7) 37.1 =================================================================== Following the classification as discontinued operations, the net assets havebeen re-evaluated on a "fair value less costs to sell" basis and, as shown inthe table above, an impairment of the assets has been recognised. In accordancewith IFRS 5, the impairment has been allocated on a pro rata basis to thenon-current assets. This allocation is solely for the purposes of preparing thefinancial statements in accordance with relevant international accountingstandards. It should not be interpreted as being representative of valuesassigned to the assets by the vendor or purchaser in the context of a sale andpurchase agreement. In assessing the fair value, less costs to sell, it was not consideredappropriate to take into account any consideration that could be contingent onfuture performance and incorporated in current negotiations by way of deferredconsideration. The net liabilities directly associated with assets of the disposal groups areas follows: Automotive Machine Total £m Tools £m £mCurrent liabilitiesTrade and other payables (16.2) (6.7) (22.9)Provisions (2.9) (2.9) Non-current liabilitiesTrade and other payables (0.4) (0.4)Retirement benefit obligations (1.7) (1.7)Deferred tax liabilities (0.2) (0.2) ____________________________________ (21.2) (6.9) (28.1) ==================================== 7. Pensions The Group operates a number of pension schemes throughout the world coveringmany of its employees. The principal funds are those in the United Kingdom: theRenold Group Pension Scheme ('RGPS'); the Jones & Shipman plc RetirementBenefits Plan (1971) and the Renold Supplementary Pension Scheme 1967 ('RSPS').These three schemes are funded schemes of the defined benefit type with assetsheld in separate trustee administered funds. The Renold Group Money PurchasePension Scheme is a defined contribution type scheme and membership is availableto all new employees, the main defined benefit schemes having been closed to newemployees in 2002. As a result of the Schemes' closure the age profile of theactive membership is increasing, and consequently current service cost is likelyto increase, as members of the Schemes approach retirement. Overseas employees participate in a variety of different pension arrangements ofthe defined contribution or defined benefit type, funded in accordance withlocal practice. The most recent actuarial valuations of the Renold Group Pension Scheme and theRenold Supplementary Pension Scheme 1967 were at 5 April 2004. The valuations ofboth schemes used the projected unit method and were carried out by BarnettWaddingham, professionally qualified actuaries. The last valuation of the Jones& Shipman plc Retirement Benefits Plan (1971) was in April 2003, by William MMercer Limited, who were the former actuarial advisors to the Group. For all defined benefit schemes operated by the Group the disclosures in theaccounts are based on the most recent actuarial valuations. Where material,these have been updated to the balance sheet date by qualified independentactuaries. The disclosures provided below are presented on a weighted averagebasis where appropriate. The principal financial assumptions used to calculate scheme liabilities as at31 March 2006 are presented below. The assumptions adopted by the schemes'actuaries represent the best estimates chosen from a range of possible actuarialassumptions which, due to the timescale covered, may not necessarily be borneout in practice. UK Overseas 2006 2005 2006 2005 Rate of increase in pensionable salaries 3.4% 3.3% 2.9% 2.8%Rate of increase in pensions in payment anddeferred pensions 2.8% 2.6% 1.8% 1.8%Discount rate 5.0% 5.4% 5.2% 5.6%Inflation assumption 2.9% 2.8% 2.2% 2.2%Expected return on plan assets 6.3% 6.5% 8.0% 8.5% The predominant defined benefit obligation for funded schemes within the Groupresides in the UK (£195.6 million of the £213.5 million Group obligation forfunded schemes). In addition to the assumptions shown above, mortalityassumptions have a significant bearing on the calculated obligation. In thedetermination of the UK defined benefit obligation, as at 31 March 2006, thepost-retirement mortality assumptions are based on the PA92 series tablespublished by the UK Actuarial Profession. The post-retirement mortality ratesused for the Renold Group Pension Scheme (which represents the principal definedbenefit obligation) are based on projections to calendar year 2020 fornon-pensioners and 2004 for current pensioners reduced by 10% for non-pensionersand female pensioners and 20% for male pensioners. This reduction to mortalityrates reflects the results of mortality experience carried out by the actuary aspart of the actuarial valuation as at 5 April 2004. The expected long-term rates of return and market values of assets of theprincipal defined benefit schemes of the Group, together with the present valueof scheme liabilities, are shown below. It should be noted that the marketvalues of the schemes' assets are stated as at the Group's year end. It is notintended to realise the assets in the short-term and the value may therefore besubject to significant change before being realised. The present values of theschemes' liabilities are derived from cash flow projections over long periodsand are thus inherently uncertain. The fair values of plan assets were: UK Overseas Total 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m Equities 78.2 71.6 9.2 7.0 87.4 78.6Bonds 84.5 70.8 3.8 4.2 88.3 75.0Other 2.5 1.2 2.5 1.2 ____________________________________________________________Total market value of assets 162.7 142.4 15.5 12.4 178.2 154.8 Present value of scheme liabilities (195.6) (177.2) (36.5) (30.8) (232.1) (208.0) _____________________________________________________________Deficits inschemes (32.9) (34.8) (21.0) (18.4) (53.9) (53.2) ============================================================ Pension commitments Pension obligations: The movement in the present value of the defined benefit obligation is asfollows: 2006 2005 UK Overseas Total UK Overseas Total £m £m £m £m £m £m Opening obligation (177.2) (30.8) (208.0) (154.0) (28.6) (182.6)Current servicecost (2.1) (0.7) (2.8) (2.0) (0.7) (2.7)Interest cost (1) (9.5) (1.7) (11.2) (8.2) (1.7) (9.9)Contributions byplan participants (0.8) (0.2) (1.0) (0.9) (0.1) (1.0)Actuarial gainsand losses (15.2) (6.3) (21.5) (20.4) (20.4)Gains oncurtailments 0.1 0.3 0.4Liabilitiesextinguished onsettlements 1.0 1.0Benefits paid 8.1 2.3 10.4 8.3 1.5 9.8Business combination (0.8) (0.8)Exchange adjustment (1.1) (1.1) (0.4) (0.4)Relating to disposal groups 1.7 1.7 ____________________________________________________________ Closing obligation (195.6) (36.5) (232.1) (177.2) (30.8) (208.0) ============================================================ (1) "Interest cost" includes £0.1 million (2005 - £0.1 million) in respect ofdiscontinued operations. The total defined benefit obligation can be analysed as follows: Obligations related to funded pension plans (195.6) (17.9) (213.5) (177.2) (12.1) (189.3)Obligations related to unfunded pensionplans (18.6) (18.6) (18.7) (18.7) ____________________________________________________________ (195.6) (36.5) (232.1) (177.2) (30.8) (208.0) ============================================================ Pension assets: The movement in the present value of the defined benefit plan assets is asfollows: 2006 2005 UK Overseas Total UK Overseas Total £m £m £m £m £m £m Opening assets 142.4 12.4 154.8 133.0 10.6 143.6Expected returnon plan assets 9.1 1.0 10.1 8.7 0.8 9.5Actuarial gainsand losses 14.5 1.7 16.2 3.3 1.2 4.5Assets distributed on settlement (0.9) (0.9)Contributions bythe employer 4.9 0.6 5.5 4.8 0.3 5.1Contributions byplan participants 0.8 0.2 1.0 0.9 0.1 1.0Benefits paid (8.1) (1.3) (9.4) (8.3) (0.5) (8.8)Exchange adjustment 0.9 0.9 (0.1) (0.1) ____________________________________________________________Closing assets 162.7 15.5 178.2 142.4 12.4 154.8 ============================================================ Balance sheet reconciliation:Plan obligations (195.6) (36.5) (232.1) (177.2) (30.8) (208.0)Plan assets 162.7 15.5 178.2 142.4 12.4 154.8 ____________________________________________________________Retirement benefitobligation (32.9) (21.0) (53.9) (34.8) (18.4) (53.2) ============================================================ The net amount of actuarial gains and losses taken to the statement ofrecognised income and expense is as follows: 2006 2005 £m £m Actuarial gains and losses arising on scheme obligations (1) (21.5) (20.4)Actuarial gains and losses arising on scheme assets 16.2 4.5 _________ ________Net actuarial gains and losses (5.3) (15.9) ========= ======== (1) "Actuarial gains and losses arising on scheme obligations" includes a gainof £0.1 million (2005 - nil) relating to discontinued operations. An analysis of amounts charged to operating costs is set out below: 2006 2005 £m £mOperating costs - continuingCurrent service cost (2.8) (2.6)Gains on curtailments 0.1Liabilities extinguished on settlements 1.0Assets distributed on settlements (0.9) ________ ________ (2.6) (2.6)Amounts relating to discontinued operationsCurrent service cost (0.1)Gains on curtailments 0.3 ________ _________Total cost of retirement benefits (2.3) (2.7) ======== ========= The cumulative amount of actuarial losses recognised in equity since 4 April2004 was £21.2 million (2005 - £15.9 million). Of this amount £nil (2005 - loss£0.1 million) related to discontinued operations. The Group expects tocontribute approximately £5.7 million to defined benefit schemes in the year to31 March 2007. As a result of the deficits in the main UK schemes, it has been agreed with theactuaries and trustees that, under existing arrangements, annual lump sumpayments of £2.2 million will be paid to the RGPS scheme, £0.7 million to theRSPS scheme and £0.2 million to the Jones & Shipman scheme over the averageremaining service lives of members, being fifteen, twelve and fifteen yearsrespectively. The Group operates a number of defined contribution schemes. The cost for theperiod was £0.5 million (2005 - £0.6 million). There were outstandingcontributions in creditors of £nil (2005 - £0.1 million) at the balance sheetdate. 8. Statement of changes in shareholders' equity Share Share Retained Currency Hedging Total capital premium earnings translation reserve equity account reserve £m £m £m £m £m £m At 3 April 2004 17.9 6.0 46.6 70.5Loss for the year (0.1) (0.1)Foreign exchange translation difference (0.4) 0.5 0.1Actuarial gains and losses (15.9) (15.9)Dividends (3.2) (3.2) Tax on items recogniseddirectly in equity 4.6 4.6 Employee share options:- value of employee services 0.1 0.1 __________________________________________________________________As at 31 March 2005 17.9 6.0 31.7 0.5 56.1 Effect of adoption ofIAS 32 and IAS 39 (0.6) (0.2) (0.8) ___________________________________________________________________ At 1 April 2005 restated 17.3 6.0 31.5 0.5 55.3Loss for the year (13.6) (13.6)Foreign exchange translation difference 1.1 1.1Actuarial gains andlosses (5.3) (5.3)Gains on fair value ofhedging net investmentsin foreign operations 1.1 1.1Tax on items recogniseddirectly in equity 1.7 1.7Employee share options:- value of employee services 0.2 0.2- proceeds from shares issued 0.1 0.1 ___________________________________________________________________At 31 March 2006 17.4 6.0 14.5 1.6 1.1 40.6 =================================================================== 9. Reconciliation of profit/(loss) before tax to net cash flows from operations 2006 2005 £m £mCash generated from operations:Continuing operations:Profit/(loss) before taxation 1.8 (1.8)Depreciation and amortisation 5.4 6.0Equity share plans 0.2 0.1Net finance costs 3.6 2.2(Increase)/decrease in inventories (1.8) 0.2(Increase) in receivables (0.4) (4.1)Increase in payables 2.7 5.2(Decrease)/increase in provisions (2.7) 4.9Movement on pension schemes (3.8) (4.1)Movement in derivative financial instruments (0.3) ________ ________Cash generated from continuing operations 4.7 8.6 ________ ________Discontinued operations(Loss)/profit before taxation (1.4) 0.2Depreciation and amortisation 3.1 2.8Plant and equipment impairment 0.8Goodwill impairment 2.6Negative goodwill release (11.3)(Gain) on plant and equipment disposals (0.1)Net finance costs 0.4 0.4(Increase) in inventories (0.6) (0.2)Decrease/(increase) in receivables 0.2 (1.8)Increase/(decrease) in payables 5.3 (1.5)(Decrease)/increase in provisions (5.7) 6.8Movement on pension schemes (0.3) ________ ________Cash generated/(absorbed) by discontinued operations 1.7 (2.0) ________ ________ ________ ________Cash generated from operations 6.4 6.6 ======== ======== 10. Explanation of the transition to International Financial Reporting Standards (IFRS) Details of the impact of the transition to IFRS have been provided on theGroup's website (www.renold.com) in two separate statements entitled "Update onIFRS" and "Renold plc IFRS Restatement". These statements can be found on the"Investors - Investor Relations" page of the Website, under the "UsefulInformation" sub-section. However, in order to provide a summary of the keyissues and changes to the financial statements (covered in greater detail in thestatements provided on the website), this note explains the impact of thetransition to IFRS. The Group previously prepared its financial statements under UK GenerallyAccepted Accounting Principles ("UK GAAP"). European Law requires that alllisted companies prepare consolidated financial statements in accordance withIFRS. The relevant Regulation applies to all accounting periods beginning on orafter 1 January 2005. This determines that the "transition date" for Renold plcis 4 April 2004, being the start of the earliest period of comparativeinformation. Guidance on the transition to IFRS is provided in IFRS 1 ("First Time Adoptionof IFRS"). This standard allows exemptions from the application of certain IFRSsto assist in the transition process. The principal exemptions adopted by Renoldcan be summarised as; (1) Business combinations prior to the date of transition are not restated. Accordingly, the carrying value of goodwill was not adjusted at the transition date. (2) IAS 32 and 39, the international standards on financial instruments, are adopted only with effect from 1 April 2005 and therefore 2005 comparative information covered by these standards remains stated in accordance with UK GAAP. (3) Cumulative translation differences for foreign operations that are recognised separately in equity under IFRS are deemed to be reset to zero at the transition date. (4) Freehold properties have been measured on a fair value basis at the date of transition and this valuation is treated as the deemed cost of the respective properties. (5) The international standard in respect of Share Based Payments (IFRS 2) only applies to awards made after 7 November 2002 and which vest after 1 January 2005. The tables below provide a high level summary to put into context the relativeimportance of the main financial adjustments that arise following the adoptionof IFRS. These tables show the change in the comparative period's incomestatement, the balance sheet at the date of transition (4 April 2004), thecomparative balance sheet at 31 March 2005 and the opening balance sheet asadjusted for the adoption of IAS 32 and 39. A cross reference is given whereappropriate at the head of each column to the narrative which sets out thebackground to the adjustment. The effect of the transition to IFRS on the income statement for the year ended31 March 2005 is as follows: UK Negative Goodwill Depreciation Employee Share- Taxation IFRS GAAP goodwill benefits based released payments £m £m £m £m £m £m £m £m (a) (b) (c) (d) (e) (f) Revenue 197.0 197.0Operating costs(excluding goodwill and exceptional items) (193.3) (0.1) (0.1) (0.1) (193.6) ________________________________________________________________________________________Operating profitbefore goodwill andexceptional items 3.7 (0.1) (0.1) (0.1) 3.4Goodwill amortisationand impairment (3.6) 1.0 (2.6)Exceptional items (4.3) 4.5 0.2 ________________________________________________________________________________________ Operating profit (4.2) 4.5 1.0 (0.1) (0.1) (0.1) 1.0Net financing costs (2.6) (2.6) __________________________________________________________________________________________ Loss before tax (6.8) 4.5 1.0 (0.1) (0.1) (0.1) (1.6)Tax 1.6 (0.1) 1.5 __________________________________________________________________________________________Loss for the financial period (5.2) 4.5 1.0 (0.1) (0.1) (0.1) (0.1) (0.1) ========================================================================================== The effect of the transition to IFRS on the balance sheet at 4 April 2004 is asfollows: UK Property at Proposed Employee Taxation IFRS GAAP deemed cost dividends benefits £m £m £m £m £m £m (c) (g) (d) (f) Total assets 183.4 15.2 (4.0) 194.6Total liabilities (125.5) 2.1 (0.5) (0.2) (124.1) _________________________________________________________________ Net assets 57.9 15.2 2.1 (0.5) (4.2) 70.5 =================================================================Share capitaland reserves 51.9 15.2 2.1 (0.5) (4.2) 64.5Share premium 6.0 6.0 ________________________________________________________________Total equity 57.9 15.2 2.1 (0.5) (4.2) 70.5 ================================================================ The effect of the transition to IFRS on the balance sheet at 31 March 2005 is asfollows: UK Property at Goodwill Employee Share-based Taxation IFRS GAAP deemed cost benefits payments £m £m £m £m £m £m £m (c) (a)/(b) (d) (e) (f) Total assets 195.5 15.2 5.5 (4.9) 211.3Total liabilities (155.2) (1.0) 1.0 (155.2) _______________________________________________________________________________Net assets 40.3 15.2 5.5 (1.0) (3.9) 56.1 ===============================================================================Share capital and reserves 34.3 15.2 5.5 (1.0) (0.1) (3.9) 50.0Share premium 6.0 0.1 6.1 _______________________________________________________________________________Total equity 40.3 15.2 5.5 (1.0) (3.9) 56.1 =============================================================================== The effect of adopting IAS 32 and 39 at 1 April 2005 is as follows: IFRS Reclassification Deferred Recognition Adjustment IFRS (Pre IAS 32 of preference tax of financial to trade (post IAS 32 and 39) shares net of instruments receivable and 39) fair value provisions adjustment £m £m £m £m £m £m (i) (i) (i) (i) Total assets 211.3 0.1 0.1 211.5Total liabilities (155.2) (0.5) (0.5) (156.2) __________________________________________________________________________________Net assets 56.1 (0.5) 0.1 (0.5) 0.1 55.3 ==================================================================================Share capital and reserves 50.0 (0.5) 0.1 (0.5) 0.1 49.2Share premium 6.1 6.1 __________________________________________________________________________________Total equity 56.1 (0.5) 0.1 (0.5) 0.1 55.3 ================================================================================== (a) Following an acquisition in March 2005 the UK GAAP balance sheet retained an amount of £4.5 million in respect of the surplus of fair value of assets acquired over the consideration paid ("negative goodwill"). Following a review of the acquisition accounting for the purposes of IFRS adoption it was concluded that no revision was necessary to the existing amount £4.5 million. However, IFRS requires the immediate recognition in the income statement of negative goodwill arising on acquisition, and hence this amount has been transferred to income for the period. (b) Under UK GAAP capitalised goodwill was amortised over its estimated economic life, subject to the immediate recognition of any identified impairment. Under IFRS goodwill is not subject to amortisation but is tested annually for impairment. In the year to 31 March 2005 an impairment charge of £2.4 million was made in the UK GAAP accounts. Therefore, as illustrated in the table, the adoption of IFRS has given rise to an improvement in the reported result of £1.0 million, representing the net reversal of amortisation charges made under the former UK GAAP policy. (c) The revaluation of the Group's freehold properties noted above resulted in an increase in the deemed cost of £15.2 million over the carrying value retained under UK GAAP. The associated impact on the annual depreciation charge is an increase of £0.1 million. (d) In the UK GAAP financial statements for 2005 Renold accounted for pensions in accordance with FRS 17 ("Retirement benefits") which in most respects is similar to the respective international standard IAS 19 ("Employee Benefits"). However, a number of technical differences have given rise to revisions in the former FRS 17 disclosure. IAS 19 also introduces more prescriptive guidance on the treatment of other employee benefits. The total impact of adopting IAS 19 has increased the charge to income by £0.1 million. The recognition of certain Jubilee and other potential service related awards, together with the revisions to FRS 17, resulted in additional liabilities of £0.5 million at 4 April 2004 and £1.0 million at 31 March 2005. (e) In respect of share options granted by the Company no charge to income was required under UK GAAP because the exercise price was the same as the option price at the date of grant. Following the adoption of IFRS it was necessary to recognise a charge of £0.1 million due to the requirement to adopt a fair value assessment of the options granted. (f) The net effect of IFRS adjustments on the taxation charge for the year was £0.1 million. The primary change to the balance sheet deferred tax provision results from additional liabilities recognised in respect of the property revaluation noted under (c) above. (g) Under UK GAAP the final dividend for the 31 March 2004 year was provided in the results for that year; under IFRS the final dividend can only be recognised as a liability in the year it is declared. Consequently the 2004 final dividend provision has been reversed. (No final dividend was declared in 2005). (h) Not shown in the tables above, because there is no impact on net assets, is the reclassification from property, plant and equipment to intangible assets of software that is not an integral part of the related hardware. The reclassifications were £0.4 million and £0.3 million in the 4 April 2004 and 31 March 2005 balance sheets respectively. (i) As permitted under IFRS 1 the Group has adopted IAS 32 and 39 prospectively from 1 April 2005. These standards set out the accounting rules surrounding the recognition, measurement, disclosure and presentation of financial instruments. As a result of adopting these standards net assets were reduced by £0.8 million on 1 April 2005. There were three principal areas explaining this change. Firstly, preference shares (£0.5 million stated at fair value) were formerly shown as part of Shareholders' Funds but under IFRS definitions these have been reclassified and disclosed as liabilities. Secondly, derivative financial instruments (£0.3 million) have been recognised as assets and liabilities measured at fair value. This adjustment results mainly from the interest rate swap taken out by the Group in relation to its US dollar borrowing costs. Net assets were increased by £0.1 million following the reassessment of trade receivable provisions on a basis consistent with the criteria established by IAS 39. A deferred tax asset of £0.1 million was recognised as a result of these changes. As indicated at the time of publishing the detailed transitional statements,accounting practice surrounding IFRS is continuing to evolve. In response todeveloping practice it has been deemed appropriate to reflect certain minorrevisions of a presentational nature. These changes have not altered thepost-transition net equity previously reported at 4 April 2004 or 31 March 2005. The adoption of IFRS has no impact on the actual cash flows of the underlyingbusinesses. However, IAS 7 ("Cash Flow Statements") introduces reviseddefinitions that in turn lead to a revised presentation. The change inpresentation is illustrated in the IFRS statements on the Group's website. This information is provided by RNS The company news service from the London Stock Exchange