Renold Regulatory News (RNO)

Renold plc

("Renold" or the "Group")

Preliminary results for the year ended 31 March 2020

16 June 2020

Renold, a leading international supplier of industrial chains and related power transmission products, today announces its preliminary results for the year ended 31 March 2020.

Financial highlights

1. The results for the year ended 31 March 2019 have been re-presented to reflect discontinued operations and changes to the treatment of adjusting items, see Note 19.

2. See overleaf for reconciliation of reported and adjusted figures.

Trading and operational highlights

· Significant disruption in the final months of the year ended 31 March 2020 from Covid-19 related factory closures

· Continued improvement in operational efficiency, in particular at the Chinese chain facility, reflected in stable adjusted operating margin despite 5.1% revenue decline due to challenging markets and the initial impact of Covid-19

· Strong activity in the Torque Transmission division delivering revenue growth and profit improvement

· Completed the £1.8m purchase of JV partner's 25% share of the Indian chain business; now a wholly owned subsidiary operating in a market with significant potential

· Substantial, multi-year infrastructure change programme completed successfully, with significantly reduced future costs of change expected, supporting higher free cash generation

Covid-19 update

· All sites now operational, although some at reduced capacity

· Supply chains remain resilient with the Group able to continue to support customers

· Cost mitigation and cash preservation actions taken swiftly, including utilisation of government support to maintain employment, temporary pay reductions, curtailment of discretionary spend, reduced capital expenditure and deferral of net UK pension scheme contributions

· Financial position strengthened by agreement with lenders to amend banking covenants, creating increased flexibility through to September 2021

· Focus on preserving capability to ensure a strong response as markets recover and to maintain strategic momentum

· Cash generative and profitable in the first months of the new financial year

Robert Purcell, Chief Executive, commented:

"Prior to the Covid-19 pandemic, the Group was on track to deliver improved adjusted operating margins despite a challenging market backdrop resulting in a revenue decline. The combination of a number of strands of the strategic plan were expected to be sufficient to overcome the operational gearing effect of falling revenue.

"During the final quarter of the year, the initial impact of the Covid-19 pandemic created short-term disruption and a number of operational challenges. Renold reacted quickly to these challenges, ensuring the safety and welfare of all our employees, compliance with local restrictions and continuity of supply to customers, while at the same time taking steps to reduce costs and preserve cash flow.

"The uncertainty caused by the Covid-19 pandemic is likely to result in a period of volatile demand, preventing the Board from giving specific guidance for the year ahead at this stage. The Group's financial position has been strengthened by the flexibility provided by our lenders and the Trustee of the UK pension scheme. Together with the cost and cash actions taken, this supports the Board's confidence that the Group will be able to manage through the current period of disruption.

"Renold holds a leading position in many of its markets and the strategic programme that has been undertaken over the past years has delivered a business far more resilient and better placed to overcome the current challenges. Having successfully completed the substantial infrastructure change programme, we will have greater cash resources with which to accelerate our growth initiatives. As a result, the Group is well positioned to capture the significant opportunities available to it as markets stabilise and demand recovers."

Reconciliation of reported and adjusted results

1 Results for the year ended 31 March 2019 have been re-presented for discontinued activities associated with the disposal of the South Africa business unit and certain changes to the treatment of adjusting items (see Note 19).

ENQUIRIES:

Cautionary statement regarding forward-looking statements

Some of the information in this document may contain projections or other forward-looking statements regarding future events or the future financial performance of Renold plc and its subsidiaries (the Group). You can identify forward-looking statements by terms such as "expect", "believe", "anticipate", "estimate", "intend", "will", "could", "may" or "might", the negative of such terms or other similar expressions. Renold plc (the Company) wishes to caution you that these statements are only predictions and that actual events or results may differ materially. The Company does not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in projections or forward-looking statements of the Group, including among others, general economic conditions, the competitive environment as well as many other risks specifically related to the Group and its operations. Past performance of the Group cannot be relied on as a guide to future performance.

ANALYSTS AND INVESTORS

A virtual meeting for investors and analysts will be held on 16 June 2020 at 9.00 am. If you wish to attend this meeting please contact Renold@instinctif.com or call Rosie Driscoll of Instinctif (07891 564 641) before 8.45 am to be provided with access details.

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.comChairman's Letter

During the year ended 31 March 2020, the Group has faced a series of macro-economic challenges on a global scale, and it is satisfying to see the progress Renold has made in being able to face up to and overcome these challenges. While in the past, such challenges may have converted profits to losses or required direct shareholder support to recapitalise the Group, the strategic progress that has been made over the past years has delivered a business that is more resilient and far better positioned to weather these storms. This is true for financial performance, but it is also true for the flexibility and adaptability of our people across the world who have been key to delivery in this unprecedented global environment.

Reaction to the Covid-19 pandemic

In the Chief Executive's Review, Robert outlines the impact of the Covid-19 pandemic on Renold and the actions we have delivered to ensure the safety of our employees and continuity of supply to customers plus the cost and cash measures implemented to protect the financial strength of the Group.

With our manufacturing facility in China, we gained early exposure to the operational changes required to ensure the safety of our employees in a Covid-19 environment. These changes were fully implemented upon reopening of the Chinese factory in late February 2020. As Covid-19 spread across the world, particularly to Europe and America, we were well placed to share best practice and quickly implement safe working environments in our other locations. The welfare and safety of our employees have remained paramount throughout the current crisis.

One of the key strengths of Renold is the broad spread of end-use applications for our products and the broad base of customers that we serve. Throughout the various geographic lock-downs across the world, we have sought, where appropriate and safe to do so, to keep our manufacturing operations open in support of various industries that are essential in the current environment. Whether the end application is in agriculture, food processing, energy or a myriad of other essential industries, Renold is playing its part in ensuring our customers can continue to operate.

The changes that we have implemented can only be successful with the support of our employees across the world. Their willingness to adapt and adopt new working practices, including where these incur personal hardships, has highlighted their commitment and loyalty to Renold. Whether that is changing shift patterns, reducing working hours or accepting temporary pay reductions, all of our employees have stepped forward to support us in addressing the current challenges.

Our markets

At the half year, we outlined tougher market conditions, particularly in the European and US chain markets and, as expected, these conditions continued into the second half of the year. Market disruption and uncertainty created by increasing tariff barriers, Brexit and slowing capital investment have impacted elements of our customer base.

Other than domestic orders in China, disruption related to the Covid-19 pandemic occurred too late in the year to have a material impact on market demand, and order levels were not significantly reduced until the final weeks of March. However, supply chain and operational disruption in our manufacturing facilities caused by Covid-19 reduced our production output and revenue in the final months of the year.

Trading performance

Revenue from continuing operations declined by 5.1% in the year (6.2% at constant exchange rates), reflecting the weakening market conditions which accelerated in the final quarter of the year as the impact of operational disruption from the Covid-19 pandemic materialised.

The volatile market conditions impacted most acutely on the Chain division which experienced a revenue decline of 7.6% (8.6% at constant exchange rates). Unsurprisingly, this affected profitability and adjusted return on sales for the division declined to 9.2% (2019: 11.2%). However, the revenue reduction masks the progress made in improving underlying operational effectiveness.

Torque Transmission's revenue from continuing operations increased by 6.4% (5.0% at constant exchange rates) as project wins were more than sufficient to offset the weakening market conditions. Adjusted return on sales increased in the year to 13.4% (2019: 9.4%) reflecting actions taken to improve the profitability at the Gears business unit and the benefit of successful project wins.

There are a number of accounting changes that affect adjusted operating profit, including adoption of IFRS 16 'Leases' (increases adjusted operating profit by £0.5m in year ended 31 March 2020; no change in adjusted profit before tax), consistent treatment of the disposed South African Torque Transmission business as discontinued activities and re-presentation of adjusting items to no longer adjust for ongoing pension costs (reduces adjusted operating profit in each of the years ended 31 March 2019 and 2020 by £0.8m). Details of these accounting changes are included in the accounting policies on pages 31 and 32, and Note 19.

After applying these changes, adjusted operating profit from continuing operations decreased to £13.4m (2019: £14.8m) with an adjusted operating margin of 7.1% (2019: 7.4%). Statutory operating profit was £10.1m (2019: £15.4m).

Strategic Developments

During the year, Renold made good progress in delivering strategic change across the Group.

The transfer of the Chinese factory to a new purpose-built facility in Jintan was completed in March 2019. Improvements in productivity ultimately took longer to achieve than originally anticipated with a newly recruited work force to train but were being delivered prior to the Covid-19 extended shutdown during January and February 2020.

As outlined in the Interim Results announcement on 13 November 2019, during the first half of the year we disposed of the non-core, loss making South African Torque Transmission business unit to management for nominal consideration. We also completed the purchase of our joint venture partner's remaining 25% share of the Indian chain business in November 2019, which became a wholly owned subsidiary creating greater flexibility to source inter-group supply without diluting returns.

During June 2019, we completed the transfer of the Company's listing to AIM in order to improve the Group's ability to execute acquisitions. The rationale for this transfer remains valid, as does the strategic benefit of pursuing an acquisition strategy. While acquisitions are unlikely in the near term as we navigate the uncertainty of the current environment, the greater flexibility offered through trading on AIM positions the Group to react quickly as opportunities arise and markets recover.

The year to 31 March 2020 also represented the final year of the major infrastructure change programme which has provided the platform for the efficiency improvements that the Group has achieved. This is significant for the Group as it will free up cash and so provide Renold with greater capital resources which can be allocated to both organic and inorganic growth opportunities.

We have also made strong progress in improving the control environment, implementing the recommendations identified following the independent review into the previously announced, historical accounting issues at the Gears business unit.

The Board

Consistent with the cost actions being delivered across the Group, the Board has elected to take a temporary reduction in fees/salary of 20% for Non-Executive Directors and 25% for Executive Directors. Initially, these pay reductions are for a period of four months commencing on 1 April 2020, but will be reviewed and adjusted as required by trading conditions being experienced by the Group.

As previously reported, Ian Griffiths, the Senior Independent Director and Chair of the Remuneration Committee, retired on 12 November 2019 after nine years of service to the Company. Consistent with the succession plan outlined in previous Chairman's Letters, Tim Cooper, who joined the Board in November 2018 with a view to taking over Ian Griffiths's remuneration responsibilities, has been appointed as the chair of the Remuneration Committee.

David Landless, the Chair of the Audit Committee, was appointed to the role of Senior Independent Director to replace Ian. I continue to Chair the Nominations Committee.

Also as previously announced, Ian Scapens, Group Finance Director, will be leaving the Company in June 2020. On 12 May 2020, we announced that James Haughey will replace Ian as Group Finance Director, and is expected to commence his role in November 2020.

I would like to extend my thanks to both Ian Griffiths and Ian Scapens for their contributions during their tenure.

Pensions

The latest triennial actuarial valuation of the UK pension scheme, with an effective date of 5 April 2019, was agreed in March 2020 with no change to future contribution arrangements. This valuation assessed the deficit at 5 April 2019 to be £9.1m, with the shortfall to be recovered from expected asset outperformance. The Group's net retirement benefit obligations as determined by IAS 19R decreased in the year to £97.6m (2019: £101.9m).

In the period since 31 March 2020, reflecting the uncertainty in short-term outlook caused by the Covid-19 pandemic, Renold approached the Trustee with a request to defer contributions to the UK scheme for a 12-month period to 31 March 2021. The Trustee supported this proposal and it was agreed that the deferred contributions will be repaid over a five-year period commencing on 1 April 2022. Certain other conditions were required to secure the deferral including an additional contribution to the scheme of 25% of any dividends paid (above the existing 25% requirement) until such time as the deferred contributions have been made good.

Going concern

Due to the uncertainty in the operating environment caused by Covid-19 and the potential impact on underlying markets, the Board has stress-tested a number of detailed downside scenarios to inform its assessment of going concern. Due to the risk of a breach of banking covenants in the most severe downside scenario, the Directors' assessment includes reference to material uncertainty, in common with many other businesses. The Directors confirm, that after due consideration, they have a reasonable expectation that the Group has adequate resources to continue to trade for the foreseeable future and have thereby continued to adopt the going concern basis in preparing the financial statements. More detail on the consideration the Directors have given to going concern is outlined in the Finance Director's Review.

Dividend

The Board fully recognises the importance of dividends to shareholders. However, given the volatile operating environment created by the Covid-19 pandemic and the likely impact on market demand, the Board has decided not to recommend the payment of a dividend on ordinary shares for the year ended 31 March 2020. This approach will remain under active review for future periods.

Summary

In these uncertain times, we have taken swift action to protect our people, to ensure continuity of supply for our customers and to reduce costs and preserve cash. As a direct result of the strategic change that has been delivered, the Group is far more resilient and better positioned to navigate the uncertain market conditions arising from the Covid-19 pandemic. I would like to thank all of our employees around the world for their flexibility and commitment in helping the Group manage through these unprecedented times.

Mark Harper

Chairman

Chief Executive's Review

Overview

The year ended 31 March 2020 has proved to be uniquely challenging, and we can take some comfort that, prior to the outbreak of the Covid-19 pandemic, we were seeing significant progress across the business.

More challenging market conditions, particularly in our key European and US markets, adversely impacted demand. However, the more streamlined and flexible operating model developed through several years of strategic change was proving robust and we had an expectation of improving adjusted operating margins despite lower revenues.

As outlined in our announcement on 28 February 2020, the initial disruption resulting from the Covid-19 related extended shutdown across China impacted our manufacturing capability and supply of chains in certain markets. As lock-downs spread across the world in the final weeks of our financial year, Renold, like many other businesses, experienced manufacturing disruption, either from enforced closure of manufacturing sites or due to increased absence as employees self-isolated or had childcare responsibilities.

As a result of these factors, Group revenue from continuing operations declined by 5.1% to £189.4m, with adjusted operating profit 9.5% lower at £13.4m (2019: £14.8m). Statutory operating profit was £10.1m (2019: £15.4m). Despite a 5.1% reduction in revenue, adjusted operating margin fell only slightly by 0.3 percentage points to 7.1% (2019: 7.4%).

Group order intake reflected the more challenging market conditions through the year and, with the onset of Covid-19 related lock-downs in the final weeks of our financial year, declined by 11.0% for the year at constant exchange rates. At constant exchange rates, the Group's closing order book at 31 March 2020 was 10.9% lower than the prior year.

The longer-term impact of the Covid-19 pandemic on macroeconomic conditions and our markets is as yet uncertain and, therefore, the Group is taking a prudent approach to reduce costs and conserve cash, as outlined in more detail below.

Covid-19 - Impact on operations and Renold's response

The first impact of the Covid-19 pandemic occurred in the Group's Chinese operations. Following the normal closure of the Chinese factory for the Chinese Spring Festival in January, the government enforced lock-down resulted in almost four weeks of additional closure. This closure reduced sales to domestic Chinese markets and created some disruption in the Group's supply chains for Chinese manufactured product. In addition, our Australasian Chain businesses source some products from other Chinese suppliers, and the extended shutdown resulted in delayed supply of product to them.

Upon release of the Chinese lock-down, operations in our Chinese factory recovered quickly with minimal supply chain disruption and slightly outperformed our expectations in March 2020.

As the Covid-19 pandemic spread around the world, governments took different approaches resulting in inconsistent impacts in different parts of the world. New Zealand, Malaysia and India enforced complete lock-downs, including requirements for complete closure of factories. Across Europe, our manufacturing sites remained open, but with increased levels of absence as school closures resulted in childcare responsibilities for a number of employees and as strict self-isolation procedures were applied. Our US sites followed state requirements which resulted in different approaches. Our Chain factory in Tennessee remained open, designated as an essential supplier. Our Torque Transmission manufacturing site in New York state initially closed but then partially reopened as an essential business. As lock-downs have started to be relaxed across the world, all our locations have reopened.

The geographically different Covid-19 restrictions and the speed with which they have been introduced has required our management teams around the world to quickly assess the impact and requirements on a localised basis. Throughout this period, our highest priority has been the safety and welfare of our employees. Each location has established a Covid-19 operational planning team with best practice and learning being shared across the different geographic teams. The solutions implemented differ by location but include employees not required in our factories working from home, changes to shift patterns to reduce the number of individuals on site at any point in time, changes to operational processes to ensure social distancing is enforced and strict approaches to self-isolation for individuals who are at risk of having been exposed to anybody showing symptoms or having been diagnosed as having the virus.

As we enter the new financial year, the Covid-19 pandemic is causing significant disruptions to our end markets and their respective supply chains, with customer demand falling as activity levels have reduced. In expectation of falling demand, a number of actions have been implemented to reduce costs and preserve cash. These include:

· suspending all discretionary spend and restricting non-committed capital expenditure;

· flexing working hours or operational headcount to match labour to demand;

· rephasing or renegotiating payments on leased properties, direct and indirect tax payments and recovery of over-estimated corporate taxes where paid on account;

· agreeing, with the scheme Trustee, a deferral of contributions to the UK pension fund for 12 months; and

· temporary pay reductions for indirect employees, including a 25% reduction for the Executive Directors and 20% for the Non-Executive Directors.

The above actions include making use of government support packages being provided in different territories, particularly the UK, Germany and USA, where we have sought to avoid redundancies where possible.

In addition to the actions noted above to reduce costs and preserve cash, we have also worked with our banks to revise covenant structures creating additional flexibility in uncertain operating conditions. More details of these temporary changes to borrowing facilities are outlined in the Finance Director's Review.

At 31 March 2020, our committed borrowing facilities were £65.5m and the Group had headroom of £13.1m under these committed facilities in addition to £15.6m of cash. Following the early stages of implementation of the cash preservation actions noted above, the Group's net debt at 31 May 2020 was £35.8m, being £0.8m lower than at 31 March 2020. The Group was profitable in both April and May 2020.

Chain performance review

The Chain division experienced weakening market conditions through the year with the most significant impact in the key European and US markets. In the final quarter of the year, Covid-19 related disruption, initially in China, but more widespread in March, further weakened revenue.

Partly as a result of market conditions, but also arising from the ongoing strategic programme, productivity focused projects and general cost reduction activities resulted in reduced headcount for the division which at 31 March 2020 was 10.6% lower than at 31 March 2019. Revenue of £151.4m for the year was £14.3m (8.6%) below the prior year at constant exchange rates.

European constant exchange rate revenue declined by 5.2% in the first half of the year with the reduction accelerating to 7.7% in the second half of the year, most significantly in March as Covid-19 related disruption affected a number of markets across Europe.

In the Americas, the market decline in the first half of the year was more pronounced with fewer large projects resulting in revenue reducing by 7.6% at constant exchange rates. Again, this reduction accelerated in the second half of the year which was 16.3% lower at constant exchange rates. The combined 12.0% reduction for the full year is not significantly affected by Covid-19 and represents a significant slowdown across US markets, especially for larger, capital-project chains.

In Australasia, a strong first half performance supported by large projects was more than offset by the closure of the Malaysia factory during March under Covid-19 restrictions and supply chain disruption in Australia for Chinese sourced materials, resulting in a constant exchange rate revenue decline for the year of 6.4%.

Domestic revenues in India also suffered in the year with constant exchange rate revenue 12.2% lower. Growth in domestic Chinese revenues was from a reduced base in the prior year as we relocated the factory and revenue, at constant exchange rates, grew by 5.8%, albeit from a low absolute base.

At constant exchange rates, order intake for the Chain division of £148.3m was £19.0m (11.4%) below the previous year and total orders for the year finished £3.0m (2.0%) behind sales.

Despite the revenue reduction, contribution margin, that is the margin after all variable production costs as a percentage of revenue, remained stable as variable costs, including direct labour, were flexed in line with revenue.

The combined effect of these movements was the delivery of an adjusted operating profit margin of 9.2% (2019: 11.2%).

Torque Transmission performance review

1 Results for the year ended 31 March 2019 have been re-presented for discontinued activities associated with the disposal of the South Africa business unit (see Note 19).

Revenue from continuing operations of £38.0m increased by 5.0%, at constant exchange rates, from the £36.2m delivered in the prior year. On a statutory basis, revenue increased by 6.4%.

The Torque Transmission division experienced more challenging market conditions as the year progressed, following similar trends to the Chain division. However, the revenue phasing of the large multi-year Couplings contract, combined with strong growth in key customer projects in our US operations, was sufficient to more than offset the market decline.

The Gears business unit made good progress following the challenges that were encountered earlier in the year and which were outlined in detail in the 31 March 2019 Revised Annual Report and Accounts. New management for the business unit, along with a re-energised team, have delivered margin improvements and cost reductions while improving customer service.

The South African business unit was largely a stand-alone operation within the division with only small levels of sourcing from other manufacturing units in the division. The deteriorating market environment in South Africa, along with small, but consistent operating losses resulted in a business unit that was likely to require continued cash investment, but with limited future upside. This profile resulted in the business being considered non-core and it was sold to its management team in September 2019 for nominal consideration.

After adjusting for the discontinued South African operations, the revenue growth was delivered with largely unchanged overheads resulting in a 54.5% increase in adjusted operating profit to £5.1m (2019: £3.3m). It is pleasing to note that all business units in the division increased their adjusted operating profit in the year. Statutory operating profit from continuing operations was £4.7m (2019: £3.3m).

Order intake was £35.3m, which is 9.7% below the prior year at constant exchange rates. Total orders finished the year £2.7m (7.1%) behind sales.

Strategic Plan - update on progress

As previously outlined, the relocation of the Chinese factory to Jintan was a major project, upgrading the infrastructure and capability of our business in China. Having opened the new factory and completed the transfer from the old factory by 31 March 2019, the focus for the year was to improve operational productivity. Upon transfer to the new site, a largely new operational workforce was recruited and productivity suffered, as expected. Although not as fast as originally envisaged, productivity has progressively improved through the year with employee numbers reducing by almost 20% while increasing output. The financial benefit of this operational improvement in the second half of the year was largely offset by the Covid-19 related extended shutdown which impacted profitability in China. However, as the site has returned to work, productivity gains have returned quickly, positioning the facility for improved performance when volumes recover.

As part of the Chinese factory move, we bought out our Chinese partner's minority stake creating a wholly owned Chinese subsidiary. In November 2019, the Group also purchased our joint venture partner's remaining 25% share in the Indian chain business unit. These projects complete the significant period of major change in the Chain division and deliver on our objective of having wholly owned chain manufacturing capabilities in each of the key territories in which we operate.

Not only do these transactions ensure we have full ownership and control in markets that are expected to grow significantly in the coming years, they also support these manufacturing facilities playing a greater part in the Group's supply chain strategies without diluting profits through sharing with joint venture partners.

Initial benefits from this strategy have already commenced with India now fully participating within the Group's supply chain. As the US introduced tariffs on Chinese manufactured products, Renold was able to resource certain products from India, ensuring continued supply. For European customers, India now provides additional capability in conveyor chain applications. Short lead time product can continue to be supplied through the Bredbury service centre in the UK. However, this can now be supplemented by lower cost but longer lead time product from India, ensuring greater product coverage for our European customer base.

Progressive future investment will be required to upgrade and align manufacturing capability across the chain facilities, but this, along with increasingly standardised products and components will allow us to access greater economies of scale and production efficiencies.

The South African Torque Transmission business unit had been loss making for a number of years. Despite a number of false starts, the unit had been unable to grow revenue streams without continuing to invest capital. While there were potential opportunities that existed from operating in the South African market, increasingly difficult market conditions and greater opportunities for the Group elsewhere in the world resulted in the unit being classified as non-core. The business unit was sold to its management team for nominal consideration.

These projects highlight an intentional trend in capital allocation decisions for the Group. With the large infrastructure projects complete, capital allocation decisions are now less frequently limited by a site's capability, but are focused on customer service and optimising profitability. Especially for the Chain division, this allows us to access economies of scale and offer a truly global service.

Macroeconomic landscape and business positioning

We are living in unprecedented times, with levels of uncertainty that do not permit any realistic assessment of market conditions today, or whether such market conditions will continue into the near-term future.

With this level of short-term uncertainty, it is necessary to look at the underlying fundamentals of the Group and the markets we serve. Many of these fundamentals are unchanged from when I joined the Group seven years ago and include:

· Valued and recognised brand and engineering expertise

Renold's brand has been built up over our 150 year history and is trusted by customers.

· Global market position and unique geographical manufacturing capability

Renold's global market position has existed for many years, but, following significant strategic restructuring in the Chain division, the geographical manufacturing footprint is unique, permitting us to service customer demand with unparalleled levels of flexibility - a critical factor in rapidly changing market environments.

· Low component cost, but critical products

Chain and torque transmission products are fundamental elements of applications into which they are incorporated. Our products are often a small proportion of cost when compared with the overall end application, but without their seamless, reliable functioning can undermine the entire product.

· Broad base of customers and end-user markets

Renold's products are used in an extremely diverse range of end applications resulting in a huge spread of customers and markets served. While some markets will win and some markets will lose in the current dynamically changing environment, Renold will benefit from both diversification as well as the ability to focus commercial efforts where opportunities are the greatest.

· High specification products that deliver environmental benefits for customers

The Group's products have always been highly specified, premium products which deliver environmental benefits to customers. Whether through product efficiency leading to lower power usage, longer life leading to lower overall usage of materials and energy, or lower lubrication requirements, Renold's products are well placed for an increasingly environmentally aware marketplace.

The progress made in leveraging these fundamentals through the strategic plan has been significant with:

· improvements in productivity and operational efficiency in the year, continuing the improving trend in sales per employee which has increased by almost 20% over five years;

· improvement in levels of customer service being delivered through the Group's 'Step 2 Service' programme; and

· greater flexibility in the cost base as we start to reduce the direct link between revenue and direct labour.

While revenue needs to recover to fully realise the financial benefits of these improvements, the significant investment in infrastructure and cost to change is largely at an end. As markets recover, cash generated from trading will no longer be required to support investment in substantial change programmes creating more flexibility in capital allocation decisions.

In the near term, market demand will certainly fluctuate as the world addresses the Covid-19 pandemic and certain aspects of life may never return to pre Covid-19 norms. However, through the benefits of the strategic programme already delivered, Renold is more resilient and well positioned to navigate this period of uncertainty.

Outlook

Prior to the Covid-19 pandemic, the Group was on track to deliver improved adjusted operating margins despite a challenging market backdrop resulting in a revenue decline. The combination of a number of strands of the strategic plan were expected to be sufficient to overcome the operational gearing effect of falling revenue.

During the final quarter of the year, the initial impact of the Covid-19 pandemic created short-term disruption and a number of operational challenges. Renold reacted quickly to these challenges, ensuring the safety and welfare of all our employees, compliance with local restrictions and continuity of supply to customers, while at the same time taking steps to reduce costs and preserve cash flow.

The uncertainty caused by the Covid-19 pandemic is likely to result in a period of volatile demand, preventing the Board from giving specific guidance for the year ahead at this stage. The Group's financial position has been strengthened by the flexibility provided by our lenders and the Trustee of the UK pension scheme. Together with the cost and cash actions taken, this supports the Board's confidence that the Group will be able to manage through the current period of disruption.

Renold holds a leading position in many of its markets and the strategic programme that has been undertaken over the past years has delivered a business far more resilient and better placed to overcome the current challenges. Having successfully completed the substantial infrastructure change programme, we will have greater cash resources with which to accelerate our growth initiatives. As a result, the Group is well positioned to capture the significant opportunities available to it as markets stabilise and demand recovers.

Robert Purcell

Chief Executive

Finance Director's Review

More challenging market conditions and the impacts of the Covid-19 pandemic affected trading performance in the year. However, the effect on adjusted operating margins has been significantly mitigated as a result of cost reduction actions and the benefits of strategic projects.

Re-presentation of results for the year ended 31 March 2019 and impact of adoption of new accounting standards

Consistent with the treatment applied in the interim results for the six months to 30 September 2019, we have revised the presentation of 'adjusted' results in the income statement for the year ended 31 March 2020. In previous years, the pension administration costs and the IAS 19R finance charges have been treated as adjusting items as they relate to historical pension schemes which are not indicative of the underlying performance of the operating businesses. While this continues to be the case, Renold's treatment of these items differs from other companies in the peer group and in order to assist users of the financial statements, the legacy pension costs will no longer be treated as adjusting items. The results for the year ended 31 March 2019 have been re-presented on this basis.

As part of this re-presentation, and following the disposal of the South African Torque Transmission business unit in the year, the results for the year ended 31 March 2019 have also been adjusted to separately identify the results of this business unit as discontinued. A full reconciliation of this re-presentation is set out in Note 19.

Renold has adopted IFRS 16 'Leases' with effect from 1 April 2019. Adoption of this standard changes the presentation of the statement of comprehensive income and introduces right-of-use assets and lease liabilities to the balance sheet. For the year ended 31 March 2020, this has had the effect of increasing operating profit by £0.5m, which is offset in finance costs with no net impact in profit before tax. More details of the impact of adoption of the accounting standard is set out in the accounting policies note on pages 31 and 32. As the impact on operating profit is considered small, particularly at the business unit level, I have not attempted to adjust for this change when outlining year on year changes in this report, or in other sections of the announcement.

Orders and revenue

1 Results for the year ended 31 March 2019 have been re-presented for discontinued activities associated with the disposal of the South Africa business unit and certain changes to the treatment of adjusting items (see Note 19).

Order intake for the Chain division was impacted by increasingly challenging market conditions through the year with a reduction of 6.0%, at constant exchange rates, in the first half of the year (2019: growth of 5.5%), accelerating to 17.5% in the second half (2019: 4.0%). Together, this resulted in an overall decline in constant exchange rate order intake of 11.4% for the year. Order intake in the Chain division fell slightly behind revenue with the ratio of orders to revenue (book-to-bill) being 98.0% in the year (2019: 101.0%).

Orders from continuing operations in the Torque Transmission division were also impacted by the deteriorating market conditions, falling by 9.7% (2019: 4.2% reduction) at constant exchange rates. The book-to-bill ratio for continuing operations for the division was 92.8% (2019: 107.9%).

Group revenue from continuing operations for the year reduced by £10.2m (5.1%) to £189.4m. Deteriorating market conditions through the year combined with Covid-19 related disruption in the final months of the year. As a result, reductions in constant exchange rate revenue from continuing operations of 2.6% in the first half of the year accelerated to a 9.7% reduction for the second half.

On a divisional basis, the Chain division saw constant exchange rate revenue from continuing operations decrease by 8.6% while Torque Transmission increased by 5.0%.

Operating profit

The Group generated an adjusted operating profit from continuing operations for the year of £13.4m (2019: £14.8m). Reported operating profit from continuing operations after adjusting items was £10.1m (2019: £15.4m).

Despite a 5.1% reduction in revenue from continuing operations, adjusted operating margins fell by only 0.3 percentage points during the year to 7.1% (2019: 7.4%). The operational leverage acting on reducing revenue would normally result in a large drop in adjusted operating margins. However, cost reductions in the face of increasingly challenging market conditions combined with the benefits of a number of strategic projects to mitigate a large proportion of the negative operational leverage.

Foreign exchange rates

Foreign exchange rates have remained volatile during the year, reflecting a depreciation of sterling against a number of currencies through the year. The rates of our major currencies, USD and EUR, have not moved significantly between our half year at 30 September 2019 to our year end at 31 March 2020. However, this masks a period of significant volatility in the second half of the year. The most significant movement for Renold has been the 5% strengthening of the US dollar against sterling between March 2019 to March 2020. However, due to the phasing of movements over the current and prior years, the impact on the weighted average exchange rate used to translate US dollar only reflects a 3% strengthening of the US dollar based on a weighted average rate of 1.27 for the year ended 31 March 2020 (2019: 1.31).

The sterling to euro rate has experienced similar volatility, although the euro ended the year 3% stronger at 31 March 2020 when compared to 31 March 2019. Again, phasing of movements over the current and prior year mean the weighted average exchange rate used to translate euro trading results is less volatile, strengthening by 1% based on a rate of 1.14 for the year ended 31 March 2020 (2019: 1.13).

If the year-end exchange rates had applied throughout the year, there would be an estimated increase of £0.9m to revenue and no change to operating profit.

Adjusting items

Costs of £1.5m, disclosed as a loss from discontinued operations, relate to the disposal of the South African Torque Transmission business unit and comprise asset write-downs (£1.2m) and operating losses in the period (£0.3m).

Restructuring costs of £2.4m, shown as adjusting items in calculating adjusted operating profit, arise principally from the costs associated with headcount reductions, but also include costs associated with the Indian joint venture purchase, the costs of investigating the historical overstatement of profit in the Gears business unit and closure costs associated with Australian branch restructuring.

Financing costs

Total net interest costs in the year were £5.2m (2019: £5.0m).

Total loan financing costs include external interest on bank loans and overdrafts of £2.1m (2019: £1.9m), amortisation of arrangement fees and costs of refinancing, including the additional costs from the refinancing completed in March 2019, of £0.2m (2019: £0.3m), and, for the first time following adoption of IFRS 16, £0.5m of interest expense on lease liabilities. In the prior year, the cost of writing off remaining bank facility arrangement fees from the old facility, arising as a result of amending and extending the facility, was £0.3m.

The net IAS 19R finance charge (which is a non-cash item) reduced slightly to £2.2m (2019: £2.4m).

Financing costs also include £0.2m resulting from the unwinding of discounts on the deferred build costs of the Chinese factory, classified as non-current trade and other payables. In the prior year, the £0.1m on discount unwind on provision related to the onerous lease provisions established for the Bredbury factory site. Following adoption of IFRS 16, a stand-alone provision for the onerous lease is no longer required but is included within lease liabilities.

Profit before tax

Profit before tax was £4.9m (2019: £10.4m). Adjusted profit before tax, which excludes restructuring costs and amortisation of acquired intangible assets (plus in the prior year amortisation of financing costs and discounts on provisions), was £8.2m (2019: £10.2m). 

Taxation

The current year tax charge of £1.5m (2019: £3.5m) is made up of a current tax charge of £0.6m (2019: £1.1m) and a deferred tax charge of £0.9m (2019: £2.4m). The tax charge in the year to 31 March 2019 was high as a result of the deferred tax charge on the pension past service credit arising in the year.

The Group cash tax paid was £1.6m (2019: £1.8m).

Group results for the financial period

A profit after tax of £1.9m was achieved for the financial year ended 31 March 2020 (2019: £6.7m). Adjusted earnings per share was 2.9p (2019: 3.1p). Basic earnings per share of 1.5p compares to 3.0p for the year ended 31 March 2019.

Balance sheet

Net liabilities at 31 March 2020 were £0.4m (2019: net liabilities £0.9m). Although net profit of £1.9m was delivered for the year, including the impact of other elements, including the adoption of IFRS 16 and acquisition of the Indian joint venture share, ultimately results in a small decrease in net liabilities.

Net liabilities continue to be impacted by the pension deficit which, on an IAS 19R basis, decreased to £97.6m (2019: £101.9m). The net liability for pension benefit obligations was £80.2m (2019: £85.3m) after allowing for a net deferred tax asset of £17.4m (2019: £16.6m). Overseas schemes now account for £29.6m (30.3%) of the net pension deficits and £23.9m of this is in respect of the German scheme which is unfunded.

Cash flow and borrowings

Cash generated from operating activities was £10.9m (2019: £8.3m) and reflects the impact of changes to lease accounting under IFRS 16. Gross capital expenditure in the year was £9.2m (2019: £10.8m).

Working capital was £4.5m higher than in the prior year, reflecting increased inventory holdings in support of improving customer service through the 'Step 2 Service' programme and a reduction in outstanding payables from the high level at 31 March 2019.

Group net debt at 31 March 2020 of £36.6m was £6.3m higher than the opening position of £30.3m comprising cash and cash equivalents of £15.6m (2019: £17.6m) and borrowings of £52.2m (2019: £47.9m). The increase in net debt reflects the investment in the new Chinese factory, purchase of the Indian joint venture share plus capital investment across the Group.

Debt facility and capital structure

In March 2019, the Group's core banking facilities were amended and extended to March 2024. Following the amendment, the Group's committed multi-currency revolving credit facility (MCRF) totalled £61.5m, with an additional £20.5m accordion facility providing a route to additional funding if required, although this element is not committed. As a result of the extension of term, the facility matures in March 2024.

At 31 March 2020, the Group had unused credit facilities totalling £13.1m and cash balances of £15.6m. Total Group credit facilities amounted to £65.5m, all of which were committed.

The Group's facilities contain both leverage and interest cover covenants, tested semi-annually. The net debt/adjusted EBITDA ratio as at 31 March 2020 was 1.7 times (covenant requirement: up to 2.5 times; 2019: 1.3 times), calculated in accordance with the banking agreement. The adjusted EBITDA/interest cover as at 31 March 2019 was 9.0 times (covenant requirement: greater than 4.0 times; 2019: 10.0 times), again in accordance with the banking agreement.

While liquidity remains sufficient under the bank facility, the unprecedented economic uncertainty arising from the Covid-19 pandemic results in a degree of risk around the Group's ability to remain within its leverage covenant in the future. Therefore, the Group has agreed with its banking partners to amend the covenant structure over the next 16 months to September 2021. This revised structure replaces the net debt to EBITDA and EBITDA to net financing charge tests with minimum rolling 12-month EBITDA and minimum available liquidity tests at quarterly test dates, creating additional flexibility in uncertain operating conditions. We expect to remain within the revised covenant levels, even in a severe but plausible scenario which the Group has modelled, and which is described in the Going Concern section below.

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.

Further information in relation to the Group's business activities, together with the factors likely to affect its future development, performance and position is set out in the Chairman's Letter, the Chief Executive's Review, the Finance Director's Review and the Principal Risks and Uncertainties which are summarised on pages 18 to 23. Additional details of the Group's cash balances and borrowings and facility are included in Notes 13, 14 and 17.

The facility has historically been subject to two covenants, which are tested semi-annually: net debt to EBITDA (leverage) and EBITDA to net finance charges. In recognition of the current macroeconomic uncertainty, the Group's banks have amended the covenant test structure, replacing the existing tests with minimum rolling 12-monthly EBITDA and minimum available liquidity tests, tested on a quarterly basis for the period to March 2021. After March 2021, the facility reverts to the original net debt to EBITDA and EBITDA to net finance charge covenants, but with a greater level of flexibility (i.e. 3.5 times net debt to EBITDA versus original 2.5 times) until September 2021 when the original covenant tests resume.

The Directors believe that the Group is well placed to manage its business risks and, after making enquiries including a review of forecasts and predictions, taking account of reasonably possible changes in trading performances and considering the existing banking facilities, including the available liquidity and amended covenant structure, have a reasonable expectation that the Group has adequate resources to continue in operational existence for the next 12 months following the date of approval of the financial statements.

The uncertainty as to the future impact on the Group of the current Covid-19 pandemic has been considered as part of the Group's adoption of the going concern basis. Our Chinese manufacturing facility reopened in March 2020 and all other facilities which had been closed due to national restrictions have now reopened, although some with reduced staffing levels. Across the Group, public health measures advised by governments are being followed, operating costs have been reduced, including by utilising government-backed support schemes to maintain employment, and capital expenditure and other cash demands are being managed.

As part of its assessment, the Board has considered downside scenarios that reflect the current unprecedented uncertainty in the global economy and which we consider to be severe but plausible. The results of these scenarios show that there is sufficient liquidity in the business for a period of at least 12 months from the date of approval of these financial statements. However, the most severe downside case indicates the potential for a covenant breach during the test period, notwithstanding the recent changes to the covenants over the period to 30 September 2021 which create greater headroom. Lenders remain supportive, as indicated by the recent covenant amendments, and further flexibility may be available in the future if required. The most severe scenario considered assumed Group revenue being more than 20% below revenues for the year ended 31 March 2020, and more than 25% below revenues in the year ended 31 March 2019, being the last period which was not impacted by the Covid-19 pandemic. Set against this were mitigating actions including discretionary cost reductions, management of headcount, utilisation of government schemes to maintain employment, pay reductions across a broad range of global employees, and cash preservation actions including deferral of contributions to the UK pension scheme, deferral of rent and tax payments and significant reductions to capital expenditure.

The most severe but plausible downside scenario, arising due to risk over level of future revenue, indicates a material uncertainty related to events or conditions which may cast significant doubt over the Company's and Group's ability to continue as a going concern in the event that, following a covenant breach, lenders elected to trigger a repayment of outstanding debt. In such circumstances and without further mitigating actions, the Company and Group may be unable to realise assets and discharge liabilities in the normal course of business. The Company and Group consolidated financial statements do not include the adjustments that would result if the Company and Group were unable to continue as a going concern.

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.

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. Treasury and financing matters are assessed further in the section on Principal Risks and Uncertainties.

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 2020 this hedge was fully effective. The carrying value of these borrowings at 31 March 2020 was £7.3m (2019: £6.7m).

At 31 March 2020, the Group had 1% (2019: 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 (82% of gross liabilities) and overseas (18%) defined benefit pension obligations as shown below.

The Group's retirement benefit obligations decreased from £101.9m (£85.3m net of deferred tax) at 31 March 2019 to £97.6m (£80.2m net of deferred tax) at 31 March 2020. The largest element of the decrease relates to the UK scheme where the deficit decreased from £72.6m to £68.0m. Reflecting changes in assumptions for discount rates and inflation rates, the deficit of the overseas schemes increased by £0.3m to £29.6m.

UK funded scheme

The deficit of the UK scheme decreased in the year to £68.0m (2019: £72.6m) reflecting a number of changes in assumptions and factors.

The net reduction in liabilities of £14.3m arises from a combination of the inflation assumption reducing (CPI of 2.0% compared with 2.4% in the prior year), experience gains from mortality being greater than assumed in the calculation of liabilities and settlement of liabilities through pension payments and transfers out of the scheme.

Offsetting the reduction in liabilities is a reduction in scheme assets through the combined effects of payments of benefits and reductions in asset values reflecting the impact on equity markets of the Covid-19 pandemic, partially offset by contributions paid into the scheme.

The latest triennial actuarial valuation of the UK Scheme, with an effective date of 5 April 2019, was agreed in March 2020 and identified a deficit of £9.1m. This is significantly lower than the IAS 19R deficit, largely as the triennial valuation places a value on the Group's future cash payments to the scheme under the central asset reserve structure established in June 2013. It is expected that the triennial valuation deficit can be recovered through asset outperformance, above the prudent levels assumed in the valuation, over the remaining life of the scheme. As a result, there are no changes to the contribution arrangements. Contributions in the year ended 31 March 2020 were £3.1m (2019: £3.0m), increasing annually in future by RPI plus 1.5% capped at 5%. Additional contributions will be due to the scheme in future based on 25% of any dividend paid or £1.0m per annum if the Group delivers adjusted operating profit of over £16.0m. The next triennial valuation date will be as at 5 April 2022.

In the period since 31 March 2020, reflecting the uncertainty in short term outlook caused by the Covid-19 pandemic, Renold approached the Trustees with a request to defer contributions to the UK scheme for a 12-month period to 31 March 2021. The Trustees supported this proposal and it was agreed that the deferred contributions will be repaid over a five-year period commencing on 1 April 2022. Certain other conditions were required to secure the deferral including an additional contribution to the scheme of 25% of any dividends paid (above the already existing 25%) until such time as the deferred contributions have been made good.

Overseas schemes

The largest element of the overseas schemes is the German unfunded scheme, with a total deficit of £23.9m. Other overseas funded schemes comprise a number of smaller schemes around the world, with a combined deficit of £5.7m. The combined deficits of all the overseas schemes were largely unchanged, increasing by £0.3m. These changes were most significantly a reduction in the liability of the unfunded German scheme due to reduced inflation assumptions, offset by increased liabilities in the US schemes due to reduced discount rates.

For overseas pension schemes, the Company contributions in the year were £1.3m (2019: £1.6m).

Control environment improvements in response to historical misstatement of results in the Gears business unit

Following the events reported on in the revised Annual Report and Accounts for the year ended 31 March 2019 relating to the historical misstatement of results in the Gears business unit, significant progress has been made in implementing the findings and recommendations from the independent investigation and from the Group's Auditor. Control environment enhancements include:

· Greater levels of approval, review and oversight across all levels of financial reporting.

· Ongoing activity designed to reduce the level of manual input required, with certain solutions being rolled out alongside the wider M3 ERP system roll-out across the Group.

· Additional manual compliance and control checks being implemented until the adoption of systemised solutions being rolled out across the Group.

· Amendment of the Group's internal audit programme with a greater focus on financial control compliance.

Ian Scapens

GROUP Finance Director

Principal Risks and Uncertainties

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

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 2020. 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 Income Statement

for the year ended 31 March 2020

1. Adjusted: In addition to statutory reporting, the Group reports certain financial metrics on an adjusted basis. Definitions of adjusted measures, and information about the differences to statutory metrics are provided in Note 20.

2. The results for the year ended 31 March 2019 have been re-presented to reflect discontinued operations and changes to the treatment of adjusting items, see Note 19 for further details.

Consolidated Statement of Comprehensive Income

for the year ended 31 March 2020

Consolidated Balance Sheet

as at 31 March 2020

Approved by the Board on 16 June 2020 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 2020

Consolidated Statement of Cash Flows

for the year ended 31 March 2020

Accounting Policies

Basis of preparation

The financial information for the year ended 31 March 2020 and the year ended 31 March 2019 does not constitute the company's statutory accounts for those years. Statutory accounts for the year ended 31 March 2019 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 31 March 2020 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

The auditors' reports on the accounts for the years ended 31 March 2020 and 31 March 2019 were unqualified and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006. The auditors' report on the accounts for the year ended 31 March 2019 included an emphasis of matter as follows:

We draw attention to the Accounting Policies and Notes 27 and 28 in the financial statements, which describe the need for revision of the consolidated financial statements arising from the identification of historical accounting errors over the three years ending 31 March 2017, 2018 and 2019, arising from an intentional overstatement of certain asset values, understatement of certain liabilities, and thus an overall overstatement of profit over this period relating to the Renold Gears division. The original group financial statements were signed on 28 May 2019 and our previous audit report was signed on that date. We have not performed a subsequent events review for the period from the date of our previous auditor's report to the date of this report. Our opinion is not modified in this respect.

The auditors' report on the accounts for the year ended 31 March 2020 included a reference to a material uncertainty related to going concern as follows:

We draw attention to the going concern section in the accounting policies to the financial statements, which indicates that a material uncertainty exists that may cast doubt on the Group's and Company's ability to continue as a going concern.

The Group has secured facilities that contain covenants requiring the Group to maintain specified financial ratios and certain other financial covenants. Following the event of Covid-19 and general economic uncertainty, these covenants were successfully renegotiated with the lenders and now include minimum rolling 12 month EBITDA and minimum available liquidity tests tested quarterly up to March 2021, and then net debt to EBITDA and EBITDA to finance charge covenants tested until September 2021. Following this period, the covenants revert to original conditions in place prior to the event of Covid-19.

In performing their assessment of going concern, the Directors have considered forecast cash flows to March 2022. The current economic uncertainty that exists because of Covid-19 means that a number of key assumptions within the forecasts, principally concerning future revenue levels, are not wholly within management's control. As such, management have performed additional possible downside forecast scenarios, principally focused on the risk over further future potential falls in revenue. The most severe scenario considered assumed revenue being more than20% below revenues for the year ended 31 March 2020, and more than 25% below revenues in the year ended 31 March 2019, being the last period which was not impacted by the Covid-19 pandemic.

This scenario shows that without mitigating actions, a covenant breach would occur, and thus in such circumstances the Company and Group may be unable to realise assets and discharge liabilities in the normal course of business.

As stated in the going concern section in the accounting policies to the financial statements, these events or conditions, along with the other matters as set forth in this section, indicate that a material uncertainty exists that may cast significant doubt over the group's and the company's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

The Annual Report and Accounts for the year ended 31 March 2020 will be published on or before 27 June 2020.

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.

Further information in relation to the Group's business activities, together with the factors likely to affect its future development, performance and position is set out in the Chairman's Letter, the Chief Executive's Review, the Finance Director's Review and the Principal Risks and Uncertainties which are summarised on pages 18 to 23. Additional details of the Group's cash balances and borrowings and facility are included in Notes 13, 14 and 17.

The facility has historically been subject to two covenants, which are tested semi-annually: net debt to EBITDA (leverage) and EBITDA to net finance charges. In recognition of the current macroeconomic uncertainty, the Group's banks have amended the covenant test structure, replacing the existing tests with minimum rolling 12-monthly EBITDA and minimum available liquidity tests, tested on a quarterly basis for the period to March 2021. After March 2021, the facility reverts to the original net debt to EBITDA and EBITDA to net finance charge covenants, but with a greater level of flexibility (i.e. 3.5 times net debt to EBITDA versus original 2.5 times) until September 2021 when the original covenant tests resume.

The Directors believe that the Group is well placed to manage its business risks and, after making enquiries including a review of forecasts and predictions, taking account of reasonably possible changes in trading performances and considering the existing banking facilities, including the available liquidity and amended covenant structure, have a reasonable expectation that the Group has adequate resources to continue in operational existence for the next 12 months following the date of approval of the financial statements.

The uncertainty as to the future impact on the Group of the current Covid-19 pandemic has been considered as part of the Group's adoption of the going concern basis. Our Chinese manufacturing facility reopened in March 2020 and all other facilities which had been closed due to national restrictions have now reopened, although some with reduced staffing levels. Across the Group, public health measures advised by governments are being followed, operating costs have been reduced, including by utilising government-backed support schemes to maintain employment, and capital expenditure and other cash demands are being managed.

As part of its assessment, the Board has considered downside scenarios that reflect the current unprecedented uncertainty in the global economy and which we consider to be severe but plausible. The results of these scenarios show that there is sufficient liquidity in the business for a period of at least 12 months from the date of approval of these financial statements. However, the most severe downside case indicates the potential for a covenant breach during the test period, notwithstanding the recent changes to the covenants over the period to 30 September 2021 which create greater headroom. Lenders remain supportive, as indicated by the recent covenant amendments, and further flexibility may be available in the future if required. The most severe scenario considered assumed Group revenue being more than 20% below revenues for the year ended 31 March 2020, and more than 25% below revenues in the year ended 31 March 2019, being the last period which was not impacted by the Covid-19 pandemic. Set against this were mitigating actions including discretionary cost reductions, management of headcount, utilisation of government schemes to maintain employment, pay reductions across a broad range of global employees, and cash preservation actions including deferral of contributions to the UK pension scheme, deferral of rent and tax payments and significant reductions to capital expenditure.

The most severe but plausible downside scenario, arising due to risk over level of future revenue, indicates a material uncertainty related to events or conditions which may cast significant doubt over the Company's and Group's ability to continue as a going concern in the event that, following a covenant breach, lenders elected to trigger a repayment of outstanding debt. In such circumstances and without further mitigating actions, the Company and Group may be unable to realise assets and discharge liabilities in the normal course of business. The Company and Group consolidated financial statements do not include the adjustments that would result if the Company and Group were unable to continue as a going concern.

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.

Adoption of new accounting standards

The Group has adopted all applicable amendments to standards with an effective date from 1 April 2019. With the exception of IFRS 16 'Leases' detailed below, adoption of these standards did not have any material impact on financial performance or position of the Group.

IFRS16 'Leases'

From 1 April 2019 the Group has adopted IFRS 16 'Leases' on a modified retrospective basis. As permitted under the standard no restatement of prior year comparatives has been performed and the adjustments arising on adoption have been recognised in the opening balance sheet at 1 April 2019.

· Approach to transition

On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as operating leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate as of 1 April 2019. The associated right-of-use assets were measured on a retrospective basis as if the new rules had always been applied.

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

• The use of a single discount rate to a portfolio of leases with reasonably similar characteristics;

• Reliance on previous assessment of whether leases are onerous and deduction of onerous lease provisions from the initial right-of-use asset recognised;

• The exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application;

• The use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease; and

• Not to reassess whether a contract is or contains a lease.

The Group's weighted average incremental borrowing rates applied to lease liabilities as at 1 April 2019 are 2.6% in respect of property leases, 4.3% in respect of plant and equipment leases and 4.1% in respect of vehicle leases.

• Financial impact

As the Group has used the modified retrospective approach in adopting IFRS 16, comparatives have not been restated. The adoption of this new accounting policy resulted in the following changes to the opening balance sheet at 1 April 2019:

Of the total £10.4m of right-of-use assets recognised at 1 April 2019, £7.7m related to leases of property and £2.7m to leases of plant and machinery.

The impact on profit or loss for the year ended 31 March 2020 was the following:

Accounting Policies (continued)

IFRS16 'Leases' (continued)

The adoption of IFRS 16 has also had an impact on the presentation of the payment of lease rentals in the cash flow statement. In the comparative periods, lease rentals were recorded in operating expenses (or where relevant, against the associated onerous lease provision) and therefore deducted in cash flows from operating activities. In the year ended 31 March 2020, operating expenses includes a depreciation charge which has subsequently been added back within cash flows from operating activities. The interest element of lease repayments is presented within finance costs paid and the principal element of the lease payment has been included within cash flows from financing activities. Short-term lease payments and payments for leases of low-value assets are presented within cash flows from operating activities.

The impact on the cash flow statement for the year ended 31 March 2020 is as follows:

Total cash outflows for leases in the year ended 31 March 2020 were £4.0m, including £0.2m cash outflows in relation to short-term leases and leases of low-value assets.

A reconciliation of total operating lease commitments to the IFRS 16 lease liability at 1 April 2019 is as follows:

1. 'Other' principally includes inflationary increases of £3.7m on long property leases (48 years). These inflationary increases were not previously recognised in the IAS 17 operating lease commitment disclosure.

Notes to the Consolidated Financial Statements

1. 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.

1. Segmental information (continued)

1. Inter-segment revenues are eliminated on consolidation.

2. Included in Chain external sales is £6.4m (2019: £4.2m) 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.

5. The results for the year ended 31 March 2019 have been re-presented to reflect discontinued operations and changes to the treatment of adjusting items, see Note 19 for further details.

In addition to statutory reporting, the Group reports certain financial metrics on an adjusted basis (alternative performance measures, APMs). Definitions of adjusted measures, and information about the differences to statutory metrics are provided in Note 20 to the financial statements.

Constant exchange rate results are retranslated to current year exchange rates and therefore only prior year comparatives would be deemed an alternative performance measure. A reconciliation is provided below and in Note 20.

1. The results for the year ended 31 March 2019 have been re-presented to reflect discontinued operations and changes to the treatment of adjusting items, see Note 19 for further details.

1. Segmental information (continued)

Geographical analysis of external sales by destination, non-current asset location and average employee numbers

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 (2019: 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.

2. Adjusting items

In addition to statutory reporting, the Group reports certain financial metrics on an adjusted basis (alternative performance measures, APMs). Definitions of adjusted measures, and information about the differences to statutory metrics are provided in Note 20 to the financial statements.

2. Adjusting items (continued)

Restructuring costs

Restructuring costs were incurred in the year as part of the Strategic Plan, including redundancy costs associated with headcount reductions and various other smaller costs associated with restructuring. A further £0.4m of other costs were incurred in relation to the investigation of the historical overstatement of profit in the Gears business unit and the purchase of the non-controlling interest in the Group's Indian operations.

Prior year restructuring costs included £1.8m for the multi-year project to transfer the China Chain manufacturing facility (which completed ahead of schedule in the second half of the 2019 financial year), the final costs associated with the European restructuring project and the closure of the Singapore site. Other costs included those associated with transferring the company's stock market listing to AIM.

Restructuring costs are recognised as adjusting items because they are considered material and non-recurring.

Pension past service credit

The prior year pension past service credit of £4.4m related to the UK pension scheme and was the net impact of an £8.2m gain, following the move of certain future pension increases from RPI to CPI, offset by a £3.8m past service cost relating to GMP equalisation.

This item is included in adjusting as it is non-recurring and relates to legacy pension liabilities.

Amortisation of acquired intangible assets

Acquisition related intangible asset amortisation costs of £0.9m (2019: £0.9m) were recognised in the current year. This is considered to be an adjusting item on the basis that these charges result from acquisition accounting and do not relate to current trading activity.

Adjusting finance costs items

The financing elements of adjusting liabilities, including the unwind of discount on provisions, are excluded from adjusted finance costs because these provisions were originally recognised as adjusting and the treatment has been maintained for ongoing costs and credits.

3. Net financing costs

* Amounts arising on financial liabilities measured at amortised cost.

4. Taxation

Analysis of tax charge in the year

Factors affecting the Group tax charge for the year

The current year UK deferred tax charge relates to pensions with the charge arising on the net of the past service credit, interest charges, and cash contributions. Overseas deferred tax relates to the utilisation of recognised deferred tax assets. The increase in overseas current corporate tax relates to jurisdictions where historical tax losses have now been fully utilised.

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 in accordance with IAS 12.39.

4. 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:

1. The results for the year ended 31 March 2019 have been re-presented to reflect discontinued operations and changes to the treatment of adjusting items, see Note 19 for further details.

Effective tax rate

The effective tax rate of 31% (2019: 34%) is higher than the UK tax rate of 19% (2019: 19%) due to the following factors:

· Losses in jurisdictions where, due to uncertain future profitability, deferred tax assets are not recognised;

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

· Differences in overseas tax rates, typically being higher than the rates in the UK; offset by

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

Tax payments

Cash tax paid in the year of £1.6m (2019: £1.8m) is higher than the current tax charge as payments on account exceeded the calculated liabilities for the year.

5. 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:

1. Adjusted: In addition to statutory reporting, the Group reports certain financial metrics on an adjusted basis. Definitions of adjusted measures, and information about the differences to statutory metrics are provided in Note 29.

Inclusion of the dilutive securities, comprising 1,944,433 (2019: 7,820,809) additional shares due to share options, in the calculation of basic, basic continuing and adjusted EPS changes the amounts shown above to 0.8p, 1.5p and 2.9p respectively (2019: basic EPS 2.8p, basic continuing EPS 2.9p, adjusted EPS 3.0p).

The adjusted EPS numbers have been provided in order to give a useful indication of underlying performance by the exclusion of adjusting items. Due to the existence of unrecognised deferred tax assets there were no associated tax credits on some of the adjusting items and in these instances adjusting items are added back in full.

6. Dividends

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

7. Goodwill

Impairment testing

The Group performed its annual impairment test of goodwill at 31 March 2020 which compares the current book value to the recoverable amount from the continued use or sale of the related business.

The recoverable amount of each Cash Generating Unit (CGU) has been determined on a value-in-use basis, calculated as the net present value of cash flows derived from detailed financial plans. All business units in the Group have submitted a budget for the financial year ending 31 March 2021 and strategic plan forecasts for the two financial years ending 31 March 2023. The budget and strategic forecasts, which are subject to detailed review and challenge, were approved by the Board in December and October 2019 respectively. The Group prepares cash flow forecasts based on these projections for the first three years, with years four and five extrapolated based on known future events, recently observable trends and management expectations. A terminal value calculation is used to estimate the cash flows after year five.

For the year ended 31 March 2020, to reflect the changes in the current trading environment, all short-term business unit forecasts were updated to include management's best estimate of the impact of the Covid-19 pandemic for the years ending 31 March 2021 and 2022. These revised forecasts include a reduced level of sales and profitability, before trading returns to previous levels based on budgets and forecasts for the year ending 31 March 2023 and thereafter, including the terminal value. Sensitivity analysis has been performed including a reduction in sales and an increase in the discount rates used (to reflect the increased level of uncertainty). The forecasts used for the impairment review are consistent with those used in the Going Concern review.

The key assumptions used in the value-in-use calculations are:

• Sales: Forecast sales are built up with reference to expected sales prices and volumes from individual markets and product categories based on past performance, projections of developments in key markets and management's judgement;

• Margins: Forecast margins reflect historical performance and management's experience of each CGUs profitability at the forecast level of sales including the impact of all completed restructuring projects. The projections do not include the impact of future restructuring projects to which the Group is not yet committed;

• Discount rate: Pre-tax discount rates have been calculated based on the Group's weighted average cost of capital and risks specific to the CGU being tested; and

• Long-term growth rates: As required by IAS 36, 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). These rates do not reflect the long-term assumptions used by the Group for investment planning.

The Covid-19 pandemic and its impact on the economy is unprecedented. The impact on the Group's operations over the coming months cannot be forecast with reasonable certainty and accordingly the impairment of non-financial assets is considered a key source of estimation and uncertainty. While the updated forecasts reflect a severe a downside scenario, with no resulting impairment, an even larger reduction in revenue cannot be ruled out. For the Ace Chains (Australia) and Renold Tooth Chain (Germany) CGUs, the Directors do not consider that any reasonably possible changes to the key assumptions would reduce the recoverable amount to its carrying value. The excess of recoverable amount over the carrying amount of the Jeffrey Chain (USA) and Renold Chain India CGUs (£33.7m and £6.6m respectively) could be reduced to nil as a result of annual sales growth rates in the first five years of the projections being reduced by 5% and 10% respectively. No impairment charge has been recognised in the period for any CGU. 

7. Goodwill (continued)

No impairment charge has been recognised in the period for any CGU.

8. Intangibles

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 is 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. 

9. Property, plant and equipment

The asset recategorisation between plant and equipment, land and buildings, and computer software has arisen due to the review of the fixed asset register in Germany as part of the implementation of a new accounting system. The revised classification is considered to better represent the nature of the underlying assets and it is not considered necessary to amend the prior year comparatives as it is not material or relevant to the users of the financial statements.

Property, plant and equipment pledged as security for liabilities amounted to £36.6m (2019: £36.2m).

Future capital expenditure

At 31 March 2020 capital expenditure contracted for but not provided for in these accounts amounted to £3.3m (2019: £2.2m).

10. Leasing and right-of-use assets

Right-of-use assets