Renishaw Regulatory News (RSW)

Renishaw plc

13 August 2020

Preliminary announcement of unaudited results for the year ended 30 June 2020

Summary

· Revenue was £510.2m, 11% lower than 2019 revenue of £574.0m.

· Revenue was lower in all regions, with the challenging global macroeconomic conditions throughout the year and the COVID-19 pandemic impacting most product lines.

· Metrology revenue was lower by 11% at £475.2m, largely as a result of trade tensions between the USA and China, weaker demand in the machine tool sector and the impact of the pandemic. However, we experienced good growth in our position encoder product line due to a recovery in the semiconductor market.

· Healthcare revenue decreased by 15% to £35.0m, with COVID-19 causing delays in orders, shipments, installations and postponements of elective surgery.

· Adjusted* profit before tax of £48.6m (2019: £103.9m), a reduction of 53%.

· Statutory profit was £3.2m compared with £109.9m last year.

· Actions taken in the year to protect the long-term health of the business by preserving cash, improving productivity and reducing the Group's cost base, including:

• Reductions in direct manufacturing staff in the UK, Ireland and India;

• Restructure of our additive manufacturing business;

• Business resizing that led to a global headcount reduction;

• Targeted reductions in other operating costs; and

• Cancellation of the interim dividend and decision not to declare a final dividend.

· Strong balance sheet, with net cash and bank deposits of £120.4m at 30 June 2020, compared with £106.8m at 30 June 2019.

· Since January 2020 we have implemented a wide range of measures to protect against the spread of COVID-19 at our sites around the world and continue to monitor the impact of the pandemic.

"It has been a particularly challenging year for the Group and we are extremely proud of the commitment our employees have shown during these exceptional times. Looking ahead, there are many exciting opportunities to grow our business, due to our new product pipeline, excellent manufacturing and commercial operations, and highly skilled people." Sir David McMurtry, Executive Chairman

*Note 25, 'Alternative performance measures', defines how adjusted profit before tax, adjusted earnings per share, adjusted operating profit and revenue at constant exchange rates are calculated.

COMMENTARY BY THE CHAIRMAN

Introduction

I am pleased to report our 2020 results. Revenue for the year was £510.2m, 11% lower than the 2019 revenue of £574.0m (13% lower at constant exchange rates), against a backdrop of very challenging economic conditions. Adjusted profit before tax amounted to £48.6m (2019: £103.9m), a decrease of 53%.

We have taken some difficult decisions to preserve cash and protect the longer-term health of the business. These measures included cancelling the interim dividend, as well as deciding not to pay a final dividend. We also undertook a resizing programme, which has regrettably led to a number of redundancies across the Group.

In my role as Executive Chairman, I continue to focus on Group innovation and product strategy, supporting our talented engineering teams. The pandemic has required us all to develop new approaches and learn new skills. Since March I have enjoyed collaborating with our engineers and with other Board members via digital platforms.

During the year, we continued to invest in developing future technologies, with gross engineering costs of £82.4m amounting to 16% of total revenue.

Board changes

On 29 January 2020, John Deer, Deputy Chairman, informed the Board that he wished to step back from his executive responsibilities with immediate effect. He remains on the Board as Non-executive Deputy Chairman on the same or similar terms as the other Non-executive Directors. Although John is spending less time on day-to-day operational matters, I am delighted that, as the co-founder of Renishaw, he is continuing to help set the strategic direction of the Group and provide support and guidance for Will Lee and his leadership team, and I look forward to continuing to work with John to achieve further success for Renishaw. With this change, the Board now comprises two Executive and five Non-executive Directors in addition to my role as Executive Chairman.

People, culture and values

In such a challenging environment, our collaborative team of people has been key to helping the business remain resilient. The way that our employees around the world have risen to the challenge of maintaining supply and support to our customers despite the huge challenges faced has made me immensely proud. On behalf of the Board, I would like to thank them all for their professionalism, dedication and understanding during this most challenging year.

We have created a culture that aims to allow our employees to maximise their potential. We work hard to encourage open communication and innovative thinking, and believe everyone in our business should feel valued and be able to grow.

During the year we have reviewed our values and we are in the process of consulting with various stakeholders on a proposal to add to our existing core values of innovation and integrity. Integrity is key to the relationships that we have with our people, customers, suppliers, communities and other stakeholders. We strive at all times to be open, honest and consistent, and this has been especially important this year due to the number of changes that we have been required to make within the business and our response to the pandemic.

Innovation remains at the heart of everything that we do and has been fundamental to our success over the last 47 years. We believe our people are fundamental to our disruptive thinking and manufacturing excellence which helps our customers to increase their own innovation, improve quality, expand output and enhance efficiency.

We are committed to equality and diversity initiatives at all levels of the company. During the year, we established a diversity and inclusion group to help drive improvements within our business. Our educational outreach programmes continue to focus on encouraging more young people from diverse gender, ethnic and economic backgrounds into the sector.

Corporate governance

The Board is committed to high standards of corporate governance. It has further considered the 2018 UK Corporate Governance Code, which it started to implement last year, and has put in place a number of governance enhancements aimed at contributing to the Group's long-term sustainable success.

Investor communications

Due to the pandemic, our annual investor day, scheduled for 12 May 2020, was postponed until later in the year. We expect this to be an online event because of the ongoing requirement for social distancing, and the date will be communicated once confirmed. The event is one of four key touchpoints across the year where the investment community can learn more about Renishaw's business and strategy, along with the Annual General Meeting (AGM) in October, plus live half-year and full-year webcasts.

Dividend

In view of the ongoing macroeconomic uncertainty, the Board has decided that there will be no final dividend declared in respect of the year ending 30 June 2020. The Board will review its position on dividends during the 2021 fiscal year, with the intention of reinstating the dividend as soon as it is appropriate to do so. This means that there was no dividend paid for the year (2019: 60.0p).

Sir David McMurtry

Executive Chairman

COMMENTARY BY THE CHIEF EXECUTIVE

Introduction

This has been a year unlike any that most of us will ever have encountered. We were facing challenging trading conditions prior to the pandemic and had already taken actions to improve productivity and reduce the Group's cost base. These included not replacing staff who had left the business, reductions in direct manufacturing staff in the UK, Ireland and India, the restructuring of our additive manufacturing (AM) business, and a business resizing that required the difficult decision to instigate redundancy programmes. The overall impact was a total headcount reduction of 578 during the year.

Since the pandemic started, our number one priority has been the health and welfare of our employees, their families and the wider communities in which we operate. It has also been critical to support our customers and manage the business impacts to ensure that we can survive this exceptional period and be well placed to benefit when global markets recover.

COVID-19 pandemic

From January onwards, we implemented a wide range of measures to protect against the spread of COVID-19 at our sites around the world and we continue to monitor the impact of the pandemic, with our response and mitigation committee meeting most days since February.

All our manufacturing facilities around the world are open, although most are operating at lower capacity due to reductions in staff numbers caused by a combination of COVID-secure working practices, school closures, shielding due to health conditions and local operating restrictions. At many of our other sites we have limited operations, with many employees continuing to work productively from home. At all sites we have implemented robust measures to protect the welfare of our employees and mitigate against business risk. We have been able to maintain supply to customers during this challenging period, but this is a constantly evolving situation and we continue to closely monitor all aspects of our supply chain and are taking mitigating actions where necessary.

To closely manage costs and to mitigate against the risk of redundancies, the majority of our non-manufacturing staff across the Group have worked reduced hours (in some cases supported by local Government support schemes). We have also utilised the UK Government's Coronavirus Job Retention Scheme. The members of the Renishaw Board and many staff across the Group also agreed to have their salaries reduced during the period that employees were working reduced hours.

Performance overview

As already outlined by Sir David, this was a very challenging year with reduced revenue and Adjusted operating profit for the Group. However, while all regions experienced a reduction in revenue, our position encoder product line did achieve good growth due to a recovery in the semiconductor market. Despite the challenges, we remain focused on the long term with a key priority being the development of technologies that provide patented products to support the strategies for our metrology and healthcare segments.

Revenue

We achieved revenue for the year ended 30 June 2020 of £510.2m, compared with £574.0m last year, against a backdrop of very challenging economic conditions including the COVID-19 pandemic, the ongoing uncertainty caused by the trade tensions between the USA and China, and weaker demand in the machine tool sector. We experienced revenue reductions in all regions as set out below. We continue to work closely with key customers to ensure we are in position to meet their requirements when economic conditions improve.

Profit and earnings per share

The Group's Adjusted profit before tax for the year was £48.6m compared with £103.9m last year. Adjusted earnings per share was 51.0p compared with 119.9p last year.

Statutory profit before tax for the year was £3.2m compared with £109.9m last year. Statutory earnings per share was 0.4p compared with 126.7p last year.

This year's tax charge amounts to £2.9m (2019: £17.7m) representing a tax rate of 91.0% (2019: 16.1%).

Metrology

Revenue from our metrology business for the year was £475.2m compared with £532.9m last year. It was a difficult trading year for most of our metrology lines. The important machine tool market was impacted by reduced global demand for new machines, particularly from China, with weakness in key sectors including aerospace, automotive, consumer electronics, and oil and gas. This affected many of our metrology product lines, including our machine tool probe systems that are primarily installed on new machines and our calibration products, which saw reduced demand due to lower sales and utilisation of production machinery.

The AM line continued to benefit from the adoption of our RenAM 500Q multi-laser system, but demand was impacted by the global macroeconomic environment. During the year we undertook a restructure of the AM business including the closure of our Staffordshire site, a rationalisation of the product range to focus on the successful RenAM 500Q platform and a restructure of our AM teams across the Group, including the simplification of reporting structures. As previously mentioned, there was, however, good growth in our position encoder product line, with sales of our optical and laser encoder products benefiting from a recovery in the semiconductor market.

The geographical analysis of metrology revenue is set out below.

Adjusted operating profit for our metrology business was £50.3m (2019: £90.7m).

We continued to invest in R&D, with gross engineering costs of £75.9m compared with £90.7m in 2019.

We launched a range of new products during the year. The RFP fringe probe for our REVO® measuring head allows the inspection of freeform surfaces and complex geometry on co-ordinate measuring machines (CMMs), including delicate surfaces. Our machine tool product line introduced the NC4+ Blue system, which features industry-first, blue laser technology to deliver significant improvements in tool measurement accuracy, including for very small tools.

It was a busy year for new launches within our position encoder line, including the addition of new Functional Safety (FS) certified encoders for use in safety-critical applications, including medical robots and collaborative robots (cobots). We also added ATOM DX™, our smallest all-in-one digital incremental encoder which eliminates the need for bulky interfaces, new robust RKLC and RKLA stainless steel tape scales for linear and partial arc applications, and diagnostics tools (interfaces and software) to optimise set-up and analysis of position encoders.

Healthcare

Revenue from our healthcare business for the year was £35.0m, a decrease of 15% over the £41.0m last year. There were reductions in all our healthcare product lines - medical dental, neurological and spectroscopy.

The pandemic had a marked impact on our healthcare lines including the postponement of non-essential operations, which impacted orders for additively manufactured medical implants and dental structures. The neurological product line was most impacted, with orders for the neuromate stereotactic robot delayed and consumable sales reduced due to elective surgeries being put on hold. The spectroscopy product line saw some impact from the pandemic due to delayed shipments, primarily in China.

There was an Adjusted operating profit of £1.4m, compared with a profit of £3.1m last year, with three years of continuous profit now achieved.

Healthcare also saw continued investment in R&D, with gross engineering costs in this business segment of £6.5m compared with £7.2m in 2019.

New Raman spectroscopy products launched during the year include: the Virsa™ Raman Analyser, a versatile, fibre-optic-coupled system designed for reliable, detailed analysis away from the confines of the laboratory and the inVia™ InSpect system, which is specifically targeted at the forensic crime laboratory.

In February the initial results were published of a joint Phase 1-2 clinical study with Herantis Pharma plc, for the investigation of cerebral dopamine neurotrophic factor (CDNF) as a treatment for Parkinson's disease. The initial results indicate predictable and accurate placement of our drug delivery device as well as its positive performance and safety, allowing us to build towards its CE marking.

Strategy and markets

Our strategy is fundamentally based on long-term investments in patented and innovative products and processes, and high-quality manufacturing in all markets around the globe (which has been a real strength during the pandemic). This strategy is consistent across all the product lines and market sectors in which we operate to deliver our purpose.

Renishaw has moved from primarily being a supplier of products to capital equipment manufacturers, to working closely with end users to solve their complex challenges and deliver solutions and systems that transform their manufacturing capabilities. This is helping to deepen brand loyalty and open up new revenue opportunities.

Despite the current challenges resulting from the macroeconomic environment and the pandemic, we continue to see external market growth drivers - including global skills shortages, digitisation, requirements for more capable products, near-shoring and reshoring, a focus on reducing emissions and waste, population growth and increasing life expectancy - that are creating positive opportunities for our business.

We continue to reduce risk through the diversification of applications for our products, our customer base and our routes to market.

Focused investment for long-term growth

The Group firmly believes in its long-term strategy of investing appropriately for the future, expanding our global marketing and distribution infrastructure, along with increasing manufacturing capacity and R&D activities. However, with the current global economic uncertainties, our focus for the short term is on maximising the benefits of the investment we have made over the past few years and clearly prioritising those projects that will either bring faster revenue benefits or are strategically important to the business.

We continue to invest in the global roll-out of a new human resources (HR) system and development programmes for our people, which we believe will ultimately boost our productivity.

Capital expenditure on property, plant and equipment and vehicles for the year was £38.7m (2019: £56.8m), of which £24.6m (2019: £25.4m) was spent on property and £14.1m (2019: £31.4m) on plant and equipment and vehicles.

This year we completed the 94,000 sq ft extension to the Innovation Centre at our New Mills site (although full occupation was delayed to save costs), purchased land in Pune to provide for future expansion of our Indian manufacturing operations, and completed the build of a new design, manufacturing and demonstration facility in Michigan, USA, for Renishaw Fixturing Solutions.

Working capital

Group inventory reduced from £129.0m at the start of the year to £105.5m, primarily reflecting the reduced demand we experienced during the year. We continue to focus on working capital management while remaining committed to our policy of holding sufficient finished inventory to ensure customer delivery performance, given our short order book. Trade receivables decreased from £123.2m to £111.9m, with debtor days of 76 days (2019: 67 days) at the end of the current year.

Net cash balances and bank deposits at 30 June 2020 were £120.4m, compared with £106.8m at 30 June 2019. Additionally, there is an escrow account of £10.6m (2019: £10.5m) relating to the provision of security to the UK defined benefit pension scheme.

Corporate social responsibility

As a socially responsible business, we recognise the importance of operating in a way that delivers long-term sustainable value for all stakeholders. This year we have: assisted local organisations through charitable donations; invested in developing the skills of our employees; recruited apprentices and graduates on our training schemes; reduced our absolute greenhouse gas (GHG) emissions by 8%; reduced our accident frequency rate to 15.55. We reached more than 20,000 children with our educational outreach programmes, as well as donating more than 10,000 hours of paid time to educational organisations during the 2018/19 academic year.

Our people

Our workforce at the end of June 2020 was 4,463 (2019: 5,041), a decrease of 11.5%. During the year, 96 apprentices and graduates were taken on as part of our ongoing commitment to train and develop skilled resource for the Group in the future. We also took on 74 industrial and summer placements in the year.

With the exceptional challenges that we faced this year, including: tough trading conditions, the first pandemic for 100 years, a Group-wide redundancy programme, plus reduced working hours and many UK employees being furloughed; it is testament to the skill, resilience and compassion of our employees that they still continue to introduce innovative new products, support our customers in very trying circumstances, and assist our communities at a time of crisis. We recognise the potential impacts of the pandemic on the health of our people and we have developed a COVID-19 Wellbeing Programme to add to our existing Employee Assistance Programme.

I am truly grateful for the understanding and commitment of our people during this exceptionally challenging year.

Brexit

The Board continues to oversee the work of the Brexit Steering Group in identifying the key risks and mitigation plans arising from a possible no-deal Brexit at the end of the transition period. This includes the following actions already taken in 2019: a new distribution warehouse in Ireland which will significantly reduce the number of direct shipments between the UK and the EU post Brexit (we are currently supplying a number of EU customers from this warehouse and this will increase during 2020); and a general increase in inventory of certain components and finished goods held at our various sites within the EU and the UK, which is being maintained dynamically in line with required demand.

The Steering Group will continue to carefully monitor ongoing developments in the Brexit process and consider their impact against our current plans as the situation becomes clearer through the remainder of 2020.

Outlook

As a result of the timely actions detailed above, despite a very challenging year, the Group is in a strong financial position. We continue to invest in the development of new products and applications, along with targeted investment in production, and sales and marketing facilities around the world. Given the uncertain macroeconomic backdrop, including the pandemic and the risks posed by reduced freedom of global trade, we expect very challenging market conditions, particularly in the automotive and aerospace sectors.

Your Directors remain confident in the long-term prospects for the Group due to the high quality of our people, our innovative product pipeline, extensive global sales and marketing presence and relevance to high-value manufacturing.

Will Lee

Chief Executive

COMMENTARY BY THE GROUP FINANCE DIRECTOR

Overview

Revenue for the year amounted to £510.2m and Adjusted profit before tax of £48.6m with statutory profit before tax of £3.2m. Adjusted profit before tax is a key alternative performance measure by which the Board evaluates the Group's performance as it better represents the underlying trading of the Group, with restructuring costs and fair value gains and losses on financial instruments not eligible for hedge accounting excluded from this measure. Further details of alternative performance measures are provided in note 25. Cash preservation has always been a key focus for the Board, particularly this year due to the high level of uncertainty caused by the COVID-19 pandemic, with net cash and bank deposit balances at the year-end of £120.4m (2019: £106.8m). The balance sheet remains strong with total equity of £546.9m (2019: £583.3m).

Revenue

Revenue for the year amounted to £510.2m, compared with £574.0m last year. It has been a very challenging trading year for the Group due to the global macroeconomic environment, initially due to the ongoing uncertainty caused by the trade tensions between the USA and China and weaker demand in the machine tool sector, compounded in the second half of the year by the impact of the COVID-19 pandemic. The previous year also benefited from a number of large orders from end-user manufacturers of consumer electronic products in the APAC region which have not been repeated to the same extent this year.

In our metrology business segment, revenue was £475.2m, compared with £532.9m last year. Revenue in our healthcare business segment was £35.0m, compared with £41.0m last year.

Revenue analysis by region

A geographical analysis of our metrology and healthcare businesses is shown below.

Operating costs

During the year we have taken a number of actions to improve productivity and reduce the Group's cost base in response to the challenging trading conditions we were facing which were compounded in the second half of the year by the pandemic. Group headcount has decreased from 5,041 at 30 June 2019 to 4,463 at 30 June 2020, with the average for the year of 4,797 compared with 4,968 last year. Headcount reductions were mostly attributable to the activities described in the restructuring costs section of this review and the non-replacement of staff who left the business. Labour costs were also mitigated by reduced working hours and many employees being furloughed.

The resultant labour costs for the year were down 7% to £221.3m (2019: £237.4m), including global job retention grant income totalling £4.5m this year (2019: nil).

The ongoing macroeconomic conditions have resulted in a higher level of uncertainty around the recoverability of certain assets including capitalised development costs and trade receivables. Excluding amounts included in restructuring costs, impairments of capitalised development costs totalled £9.9m (2019: nil) relating primarily to metrology products of a capital nature and where the high-volume growth previously anticipated is now less predictable. Movements in the provision for trade receivables resulted in a charge to the Consolidated income statement of £2.9m, mainly as a result of an increase in the expected credit loss allowance, and this year also included a £1.6m charge from the impairment of other intangible assets.

Actions were also put in place to significantly reduce discretionary spend such as travel and exhibitions which has also contributed to the decrease in operating costs.

Restructuring

Restructuring costs arose following the reorganisation and rationalisation of certain operating activities, particularly related to our additive manufacturing (AM) business including the closure of our Staffordshire site and a rationalisation of the AM product range to focus on our successful multi-laser platform.

The AM restructuring costs, including write-downs of tangible fixed assets, inventories and capitalised development costs, totalled £17.5m.

Also included in restructuring costs are redundancy costs of £6.3m, mostly relating to the wider redundancy programme.

Total restructuring costs for the year were £23.8m and have been reported separately in the Consolidated income statement. Further details are provided in note 26. The comparatives for each of these items in 2019 was nil.

Research and development

Gross expenditure on engineering costs, including R&D on new products, was £82.4m (2019: £97.9m). The gross charge amounts to 16% of Group revenue (2019: 17%). The R&D tax credit in 2020 amounted to £4.4m compared with £5.1m in 2019. Further details are provided in note 4.

Gross expenditure on engineering costs was £75.9m (2019: £90.7m) in our metrology segment and £6.5m (2019: £7.2m) in our healthcare segment.

New product R&D expenditure amounted to £66.6m, which compares with £75.0m spent last year. There have been a number of new product releases in both our metrology and healthcare business segments, and a number of new product introductions are anticipated during the 2021 financial year.

Profit and tax

Adjusted profit before tax amounted to £48.6m compared with £103.9m in 2019. Statutory profit before tax was £3.2m compared with £109.9m in the previous year.

Last year benefited from a £6.0m currency gain, primarily in respect of intra-group balances, compared with a loss of £2.6m this year. This year also included a net gain of £2.3m arising from the fair value adjustment of a convertible loan, a partial disposal of shares and a subsequent partial impairment of the investment and loans, all relating to our associate company.

In our metrology business, Adjusted operating profit was £50.3m compared with £90.6m last year, while in our healthcare business, Adjusted operating profit was £1.4m compared with £3.1m last year.

The overall effective rate of tax was 91.0% (2019: 16.1%). The Group operates in many countries around the world and the overall effective tax rate is a result of the combination of the varying tax rates applicable throughout these countries. The year on year rate increase primarily arises from an increase in the deferred tax rate in the UK from 17% to 19% resulting in a charge of £1.1m, UK losses resulting in no patent box benefit this year (2019: £1.8m credit) and the partial derecognition of deferred tax assets for US tax losses and excess interest totalling £3.0m. Note 8 provides further analysis of the effective tax rate.

Consolidated balance sheet

Total equity at the end of the year was £546.9m, compared with £583.3m at 30 June 2019, primarily as a result of dividends paid of £33.5m and an increase in pension liabilities due to changes in the discount rate and inflation assumptions.

As a result of the high levels of uncertainty arising from the COVID-19 pandemic, the Board has focused on cash preservation, with capital expenditure significantly lower in the second half of the financial year, reduced inventory levels compared with December 2019 and the cancellation of the interim dividend.

Net cash and bank deposit balances at 30 June 2020 were £120.4m (2019: £106.8m). In line with our capital allocation strategy, the chart below summarises our sources and uses of cash for the year, reconciling opening to closing cash and bank deposits balances.

Additions to property, plant and equipment and vehicles totalled £38.7m, of which £24.6m was spent on property and £14.1m on plant and machinery, IT equipment and infrastructure, and vehicles.

£28.4m of the additions were incurred in the first half of the year, with spend in the second half significantly lower at £10.3m. 

The main additions were:

- in the UK, completion of the 94,000 sq ft extension to our Renishaw Innovation Centre; 

- acquisition of property in Pune, India to provide capacity for future growth; 

- refurbishment of the building purchased in Nagoya, Japan last year; and

- completion of the new facility for Renishaw Fixturing Solutions in Michigan, USA.

Within working capital, inventories decreased to £105.5m from £129.0m at the beginning of the year, primarily as a result of the lower trading levels. We continue to focus on inventory management while remaining committed to our policy of holding sufficient finished goods to ensure customer delivery performance, given our short order book.

Trade receivables decreased from £116.9m to £105.1m, while debtor days were 76 at the end of the year, compared with 67 at the end of last year.

Pensions

At the end of the year, the Group's defined benefit pension schemes, now closed for future accrual, showed a deficit of £64.9.m, compared with a deficit of £51.9m at 30 June 2019. Defined benefit pension schemes' assets at 30 June 2020 increased to £188.6m from £181.6m at 30 June 2019, primarily reflecting funding of £11.8m less benefits paid of £6.9m.

Pension scheme liabilities increased from £233.5m to £253.5m, primarily reflecting the net impact of decreases in the discount rate, RPI and CPI for the UK defined benefit scheme since 30 June 2019. According to the terms of the deficit funding plan agreed with The Pensions Regulator, the Company will pay £8.7m per annum into the scheme for five years, effective from 1 October 2018. In line with the previous agreement, the new agreement will continue until 30 June 2031 and any outstanding deficit will be paid at that time. The agreement will end sooner if the actuarial deficit (calculated on a self-sufficiency basis) is eliminated in the meantime.

Treasury policies

The Group's treasury policies are designed to manage financial risks to the Group that arise from operating in a number of foreign currencies, to maximise interest income on cash deposits and to ensure appropriate funding arrangements are available for each Group company.

The Group uses forward exchange contracts to hedge a proportion of anticipated foreign currency cash inflows and the translation of foreign currency denominated intercompany balances. There are forward contracts in place to hedge against the Group's Euro, US Dollar and Japanese Yen cash inflows and to offset movements on Renishaw plc's Euro, US Dollar and Japanese Yen intercompany balances. The Group does not speculate with derivative financial instruments.

Most of these forward contracts are subject to hedge accounting under IFRS 9 Financial Instruments. The hedged item in these contracts is the revenue forecasts of Renishaw plc and Renishaw UK Sales Limited, and during the year these forecasts were reduced due to the global macroeconomic uncertainty. This has resulted in proportions of forward contracts failing hedge effectiveness testing according to IFRS 9.

Gains and losses which recycle through the Consolidated income statement as a result of ineffectiveness are excluded from adjusted profit measures. See note 20 for further details on financial instruments and note 25 on alternative performance measures.

Earnings per share and dividend

Adjusted earnings per share is 51.0p compared with 119.9p last year.

Statutory earnings per share is 0.4p compared with 126.7p last year.

In light of the increased global macroeconomic uncertainty experienced in the first half of the year, and with redundancy programmes in progress, the Directors elected to waive their right to the interim dividend. Following the outbreak of the COVID-19 pandemic, and according to the Board's priority of conserving cash and managing the Group in a prudent manner through this period of uncertainty, the interim dividend for the year was then cancelled, and no final dividend is declared in respect of the year.

The Board will review its position on dividends during the next financial year with the intention of reinstating its long-term progressive dividend policy as soon as it is appropriate to do so. While we have confirmed eligibility to participate in the Coronavirus Corporate Finance Facility (CCFF), we do not anticipate issuing commercial paper under the scheme. If commercial paper were to be issued with a maturity date on or after 19 May 2021, no dividends could be declared until all related financing was repaid.

Capital allocation strategy

The Board regularly reviews the capital requirements of the Group, in order to maintain a strong financial position to protect the business and provide flexibility to fund future growth.

Our capital allocation approach has been consistently applied for many years. We are committed to investment in the research and development of new products, manufacturing processes and global support infrastructure in order to generate growth in future returns, and to improve productivity, while managing expenditure appropriate to trading conditions. This is evidenced in the year with investments in capital and R&D. Actual and forecast returns, along with our strong financial position, then support our progressive dividend policy, which aims to increase the dividend per share, while maintaining a prudent level of dividend cover. In exceptional circumstances the Board may deem it appropriate to not issue a dividend.

Allen Roberts

Group Finance Director

PRINCIPAL RISKS AND UNCERTAINTIES

Our performance is subject to a number of risks - the principal risks, factors impacting on them and mitigations are ranked in the table below. The Board has conducted a robust assessment of the principal risks facing the business.

CONSOLIDATED INCOME STATEMENT

for the year ended 30 June 2020

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME AND EXPENSE

for the year ended 30 June 2020

CONSOLIDATED BALANCE SHEET

at 30 June 2020

*2019 cash and cash equivalents and bank deposits have been restated following a change in accounting policy, see note 1, and trade receivables have been reclassified, with finance lease receivables reported as separate line items, see note 22.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 30 June 2020

More details of share capital and reserves are given in note 21.

CONSOLIDATED STATEMENT OF CASH FLOW

for the year ended 30 June 2020

*2019 cash and cash equivalents and bank deposits figures have been restated, see note 1.

NOTES (FORMING PART OF THE FINANCIAL STATEMENTS)

1. Accounting policies

Basis of preparation

Renishaw plc (the Company) is a company incorporated in England and Wales. The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the Group) and equity account the Group's interest in associates and joint ventures.

The financial information set out in the announcement does not constitute the Group's statutory accounts for the years ended 30 June 2020 or 30 June 2019. The financial information for the year ended 30 June 2019 is derived from the statutory accounts for that year, which have been delivered to the Registrar of Companies, but restated for the impact of a change in accounting policy. The auditor reported on those accounts; their report was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under s498 (2) or (3) Companies Act 2006. The audit of the statutory accounts for the year ended 30 June 2020 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Group's annual general meeting. The consolidated financial statements are presented in Sterling, which is the Company's functional currency and the Group's presentational currency, and all values are rounded to the nearest thousand (£'000).

The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Group financial statements. Judgements made by the directors, in the application of these accounting policies, that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are noted below.

Critical accounting judgements and estimation uncertainties

The preparation of financial statements in conformity with adopted IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.

The areas of key estimation uncertainty and critical accounting judgement that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities in the next financial year are summarised below, with further details included within accounting policies as indicated.

The impact of COVID-19 has been considered as part of the estimates and judgements above, and factored into sensitivity analyses included in the following notes. Global macroeconomic uncertainty preceding COVID-19, and furthered by COVID-19, has impacted the revenue, profit and cashflow forecasts which underpin most of the above estimates. The valuation of defined benefit pension schemes' liabilities are not affected by these forecasts, however COVID-19 has affected the key assumptions of discount rate and inflation rate. The timing of satisfaction of performance obligations has not been affected by COVID-19.

New, revised or changes to existing accounting standards

The following accounting standards have been applied for the first time, with effect from 1 July 2019, and have been adopted in the preparation of these financial statements

IFRS 16 'Leases'

IFRS 16 'Leases' replaces IAS 17 and related standards, and provides an accounting model under which substantially all leases are recognised on the balance sheet of the lessee. A 'right of use' asset is recognised, being the right to use the underlying asset of the lease, and a lease liability is also recognised on the balance sheet, being the obligation to make payments in respect of the use of the underlying asset.

The Group adopted IFRS 16 on 1 July 2019 using the modified retrospective transition approach (and has therefore not restated comparatives for the prior period) with the principal change being that leases previously classified as operating leases under IAS 17 were brought on to the balance sheet at 1 July 2019. The impact of IFRS 16 is disclosed later in this note.

In adopting IFRS 16 the Group took advantage of the following practical expedients permitted by the standard:

- The right of use assets were measured at an amount based on the lease liability at adoption, and initial direct costs incurred when obtaining leases were excluded from this measurement;

- Reliance was placed on previous assessments of whether leases are onerous (the assessment of which determined that the impact of onerous leases was trivial); and

- Operating leases with a remaining lease term of less than 12 months at 1 July 2019 were accounted for as 'short-term leases'.

As IFRS 16 no longer distinguishes between operating leases and finance leases, operating lease commitments disclosed at 30 June 2019 were replaced with a lease liability and recognised at 1 July 2019, as follows:

Recognition differences include leases now classified as low value or short-term and re-evaluations of non-cancellable lease terms according to IFRS 16. The weighted average incremental borrowing rate applied to the Group's lease liabilities recognised in the consolidated balance sheet at 1 July 2019 was 2.4%.

The impact on the primary statements of adopting IFRS 16 at 1 July 2019 is summarised below:

Impact on the Consolidated balance sheet

Right of use assets at 1 July 2019 consisted of £11,377,000 relating to property leases occupied for trading purposes, £3,013,000 relating to vehicle leases and a small amount relating to machinery leases.

Impact on the Consolidated income statement

The impact on the Consolidated income statement for the financial year ended 30 June 2020 is to increase operating profit by £62,000 and increase financial expenses by £766,000, therefore reducing profit before tax by £704,000. The aggregate of depreciation and interest expense will generally result in higher expenses in the earlier periods of leases than would have been the case under IAS 17.

Impact on the Consolidated cash flow statement

There is no change to net cash flow from the adoption of IFRS 16. Under IAS 17 operating lease payments were treated as operating cash outflows, however under IFRS 16 payments made at lease inception and subsequently (both principal and interest) are classified as financing outflows. The Group therefore shows both higher cash inflows from operating activities and higher cash outflows from financing activities under IFRS 16.

In addition to IFRS 16, the Group has adopted the following IFRS amendments, which have not had a material impact on amounts reported or disclosures in these financial statements:

- IFRS 17 'Insurance Contracts';

- IFRS 9 (amendments) - Prepayment Features with Negative Compensation;

- IAS 28 (amendments) - Long-term Interests in Associates and Joint Ventures;

- IAS 19 (amendments) - Plan Amendment, Curtailment or Settlement;

- IFRS 10 and IAS 28 (amendments) - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture;

- Annual Improvements - Amendments to IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing Costs; and

- IFRIC 23 'Uncertainty over Income Tax Treatments'.

Going concern

The Group's Principal risks and uncertainties are set out earlier in the announcement, and details of the financial and liquidity positions are given in the Group Finance Director's commentary. Note 20 sets out the Group's objectives and policies for managing its capital, details of its financial instruments and hedging activities and its exposures to credit risk and liquidity risk.

As explained in note 26 Restructuring costs, changes were made to the Group's strategy for Additive Manufacturing and resulted in impairments to capitalised development costs, goodwill and property and equipment relating to this part of the business. The Board do not consider that this will have a significant adverse effect on the Group's profitability or liquidity in the period covered by either the going concern assessment or the viability statement, and have taken account of these strategic changes when preparing the forecast models. This consideration is also applicable to the impact on the 12-month forecast period of the impairment in 2020 of other capitalised development costs.

As at 30 June 2020 the Group has a strong balance sheet, with net current assets of £286.4m, including net cash and bank deposits of £120.4m. Whilst the Group has secured eligibility to the Bank of England Covid Corporate Financing Facility (CCFF), no commercial papers have been issued and the Group does not anticipate making use of this facility. Access to the CCFF has not been taken into consideration in the downside scenarios discussed below.

Against the backdrop of the aforementioned strong financial position, as part of the directors' consideration of the appropriateness of adopting the going concern basis in preparing these financial statements, severe but plausible scenarios have been considered that estimate the potential impact of the principal risks on the financial forecasts over the assessment period, as well as the potential impact of the COVID-19 pandemic.

Third-party research and publications were reviewed, in which the most severe scenario considered that a 'second wave' of the pandemic would be experienced in the remainder of the calendar year 2020, before easing from the start of the calendar year 2021. The Board's most severe scenario therefore assumed that lockdown measures and other COVID-19 related restrictions would reoccur in calendar year 2020, resulting in reduced demand for that period, particularly in the aerospace and automotive markets. Principal risks most relevant to short-term revenue, being supply chain dependencies and exchange rate fluctuations were also assumed to crystallise in the first six months of the forecast period, reflecting the risks relating to Brexit and the impact on revenue of a 15% strengthening of sterling. Other principal risks of industry fluctuations and economic and political uncertainty are reflected in the assumption that trading in the second six months of the forecast period would be comparable to the first half of financial year 2020.

From this combination of assumptions, a revenue forecast of c£350m was determined for the 12 months to August 2021. In assessing liquidity for the going concern period the other key assumptions under this scenario were a deterioration in debtor days to 85 days (worse than was experienced by the Group in the 2009 global financial crisis), continued funding of the UK defined benefit pension scheme in line with the agreed recovery plan, no reduction in the Group's operating expenses beyond the cost-reduction initiatives that are already underway, and the impact on costs of a 15% strengthening in sterling against the major trading currencies of the Group. This scenario also assumes that the Group will conserve its cash by not paying dividends and by restricting capital expenditure to £10m per annum, a level which would support the Group's manufacturing facilities and IT infrastructure. No additional borrowings or financing are assumed in this severe scenario, and the cash flow forecast shows positive cash balances, net of working capital requirements, throughout the 12-month going concern period.

Reverse stress testing has also been applied to the model and was updated to reflect actual sales in July 2020. This stress testing demonstrated that the Group would retain a positive liquidity position until revenue decreased to c£169m for the 12 months to August 2021. The Board considers the possibility of this revenue forecast to be highly unlikely, and mitigating actions to further reduce operating costs would be put in place if actual trading in the period was consistent with this scenario.

As a result of the assessments undertaken, the Directors consider that the Group is well placed to manage its business risks successfully. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for a period of at least 12 months from August 2020. Accordingly, they continue to adopt the going concern basis in preparing these financial statements.

Basis of consolidation

Subsidiaries - Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights that are exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable to the noncontrolling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance.

Application of the equity method to associates and joint ventures - Associates and joint ventures are accounted for using the equity method (equity accounted investees) and are initially recognised at cost. The Group's investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group's share of the total comprehensive income and equity movements of equity accounted investees, from the date that significant influence commences until the date that significant influence ceases. When the Group's share of losses exceeds its interest in an equity accounted investee, the Group's carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal obligations or made payments on behalf of an investee.

Transactions eliminated on consolidation - Intragroup balances and transactions, and any unrealised income and expenses arising from intragroup transactions, are eliminated. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group's interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

Separately disclosed items

The directors consider that certain items should be separately disclosed to aid users' understanding of the Group's performance.

Gains and losses from the fair value of financial instruments are therefore separately disclosed in the Consolidated income statement, where these gains and losses relate to certain forward currency contracts that are not effective for hedge accounting. Restructuring costs are also separately disclosed where significant costs have been incurred in rationalising and reorganising our business as part of a Board-approved strategy and relate to matters that do not frequently recur.

These items are also excluded from Adjusted profit before tax, Adjusted operating profit and Adjusted earnings per share measures, as explained in Note 25 Alternative Performance Measures.

Alternative performance measures

The financial statements are prepared in accordance with adopted IFRS and applied in accordance with the provisions of the Companies Act 2006. In measuring our performance, the financial measures that we use include those which have been derived from our reported results in order to eliminate factors which distort year-on-year comparisons.

These are considered non-GAAP financial measures. We believe this information, along with comparable GAAP measurements, is useful to stakeholders in providing a basis for measuring our operational performance. The Board use these financial measures, along with the most directly comparable GAAP financial measures, in evaluating our performance (see note 25).

Revenue

The Group generates revenue from the sale of metrology and healthcare goods, capital equipment and services. These can be sold both on their own and together.

a) Sale of goods, capital equipment and services

The Group's contracts with customers consist both of contracts with one performance obligation and contracts with multiple performance obligations.

For contracts with one performance obligation, revenue is measured at the transaction price, which is typically the contract value except for customers entitled to volume rebates, and recognised at the point in time when control of the product transfers to the customer. This point in time is typically when the products are made available for collection by the customer, collected by the shipping agent, or delivered to the customer, depending upon the shipping terms applied to the specific contract.

Contracts with multiple performance obligations typically exist where, in addition to supplying product, we also supply services such as user training, servicing and maintenance, and installation services. Where the installation service is simple, does not include a significant integration service and could be performed by another party then the installation is accounted for as a separate performance obligation. Where the contracts include multiple performance obligations, the transaction price is allocated to each performance obligation based on the relative stand-alone selling prices, the assessment of which is documented in the Key judgement. The revenue allocated to each performance obligation is then recognised when, or as, that performance obligation is satisfied. For installation, this is typically at the point in time in which installation is complete. For training, this is typically the point in time at which training is delivered. For servicing and maintenance, the revenue is recognised evenly over the course of the servicing agreement except for ad-hoc servicing and maintenance which is recognised at the point in time in which the work is undertaken.

b) Sale of software

The Group provides software licences and software maintenance to customers, sold both on their own and together with associated products. Where the software licence and/or maintenance is provided as part of a contract that provides customers with software licences and other goods and services then the transaction price is allocated on the same basis as described in a) above.

The Group's software licences provide a right of use, and therefore revenue from software licences is recognised at the point in time in which the licence is supplied to the customer. Revenue from software maintenance is recognised evenly over the term of the maintenance agreement.

c) Programming contracts

Programming is typically a distinct performance obligation and revenue for this work is recognised at a point in time, being when the completed program is supplied to the customer.

d) Extended warranties

The Group provides standard warranties to customers that address potential latent defects that existed at point of sale and as required by law (assurance-type warranties). In some contracts, the Group also provides warranties that extend beyond the standard warranty period and may be sold to the customer (service-type warranties).

Assurance-type warranties continue to be accounted for by the Group under IAS 37 'Provisions, Contingent Liabilities and Contingent Assets'. Service-type warranties are accounted for as separate performance obligations and therefore a portion of the transaction price is allocated to this element, and then recognised evenly over the period in which the service is provided.

e) Contract balances

Contract assets represent the Group's right to consideration in exchange for goods and services that have been transferred to a customer, and mainly includes accrued revenue in respect of goods and services provided to a customer but not yet fully billed. Contract assets are distinct from receivables, which represent the Group's right to consideration that is unconditional.

Contract liabilities represent the Group's obligation to transfer goods or services to a customer for which the Group has either received consideration or consideration is due from the customer.

f) Disaggregation of revenue

The Group disaggregates revenue from contracts with customers between: goods, capital equipment and installation, and aftermarket services; reporting segment; and geographical location.

Management believe these categories best depict how the nature, amount, timing and uncertainty of the Group's revenue is affected by economic factors.

Key judgement - Timing of satisfaction of performance obligations

The majority of the Group's revenue is recognised at a point in time, and to determine that point an assessment is made as to when the customer obtains control of promised products or services. This assessment is made primarily by reference to the shipping terms applied to the specific contract for products that do not require customer acceptance.

Where the contract requires customer acceptance, management assess whether the Group can objectively determine that the criterion of the testing can be successfully met at the point of transferring the equipment to the customer. Where this can be objectively determined, customer acceptance testing is considered a formality and does not delay the recognition of revenue. Where this cannot be objectively determined control of the product is not deemed to have transferred to the customer and therefore the portion of the transaction price that relates to this performance obligation is not recognised until the acceptance criteria are met.

For revenue recognised over time, such as servicing contracts, the Group recognises the revenue on a basis that depicts the Group's performance in transferring control of the goods or services to the customer, having assessed the nature of the promised goods or service. The Group applies the relevant output or input method consistently to similar performance obligations in other contracts.

Foreign currencies

Consolidation - Overseas subsidiaries' results are translated into Sterling at weighted average exchange rates for the year, which is effected by translating each overseas subsidiary's monthly results at exchange rates applicable to each of the respective months. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated into Sterling at the foreign exchange rates prevailing at that date. Differences on exchange resulting from the translation of overseas assets and liabilities are recognised in Other comprehensive income and are accumulated in equity.

Transactions and balances - Monetary assets and liabilities denominated in foreign currencies are reported at the rates prevailing at the time, with any gain or loss arising from subsequent exchange rate movements being included as an exchange gain or loss in the Consolidated income statement. Foreign currency differences arising from transactions are recognised in the Consolidated income statement.

Financial instruments and fair value measurements

The Group measures financial instruments such as forward exchange contracts at fair value at each balance sheet date in accordance with IFRS 9 'Financial instruments'. Fair value, as defined by IFRS 13 'Fair Value Measurement', is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Note 20, Financial instruments, provides detail on the IFRS 13 fair value hierarchy.

Trade and other current receivables are initially recognised at fair value and are subsequently held at amortised cost less any provision for bad and doubtful debts and expected credit losses according to IFRS 9. Long-term loans to associates and joint ventures are initially recognised at fair value and are subsequently held at amortised cost. Trade and other current payables are initially recognised at fair value and are subsequently held at amortised cost.

Financial liabilities in the form of loans are initially recognised at fair value and are subsequently held at amortised cost. Financial liabilities are assessed for embedded derivatives and whether any such derivatives are closely related. If not closely related, such derivatives are accounted for at fair value in the Consolidated income statement.

Foreign currency derivative cash flow hedges

Foreign currency derivatives are used to manage risks arising from changes in foreign currency rates relating to overseas sales and foreign currency denominated assets and liabilities. The Group does not enter into derivatives for speculative purposes. Foreign currency derivatives are stated at their fair value, being the estimated amount that the Group would pay or receive to terminate them at the balance sheet date, based on prevailing foreign currency rates.

Changes in the fair value of foreign currency derivatives which are designated and effective as hedges of future cash flows are recognised in Other comprehensive income and in the Cash flow hedging reserve, and subsequently transferred to the carrying amount of the hedged item or the Consolidated income statement. Realised gains or losses on cash flow hedges are therefore recognised in the Consolidated income statement within revenue in the same period as the hedged item.

Hedge accounting is discontinued when the hedging instrument expires or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument previously recognised in equity is retained in equity until the hedged transaction occurs. If the hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is then transferred to the Consolidated income statement.

Changes in fair value of foreign currency derivatives, which are ineffective or do not meet the criteria for hedge accounting in IFRS 9, are recognised in the Consolidated income statement within Gains/losses from the fair value of financial instruments.

In addition to derivatives held for cash flow hedging purposes, the Group uses short-term derivatives not designated as hedging instruments to offset gains and losses from exchange rate movements on foreign currency denominated assets and liabilities. Gains and losses from currency movements on underlying assets and liabilities, realised gains and losses on these derivatives and fair value gains and losses on outstanding derivatives of this nature are all recognised in Financial income in the Consolidated income statement. See note 20 for further detail on financial instruments.

Key estimate - Estimates of highly probable forecasts of the hedged item

Derivatives are effective for hedge accounting to the extent that the hedged item is 'highly probable' to occur, with 'highly probable' indicating a much greater likelihood of occurrence than the term 'more likely than not'. Determining a highly probable sales forecast for Renishaw plc and Renishaw UK Sales Limited, being the hedged item, over a multiple year time period, requires judgement of the suitability of external and internal data sources and estimations of Renishaw's future sales. Relevant sensitivity analysis is included in note 20.

Cash and cash equivalents

During the FRC's review of our 2019 Annual Report we clarified that while we considered that certain bank deposits met the requirements of IAS 7 to be treated as cash equivalents, the expiry date of two of these short-term deposits exceeded 3 months. We have therefore amended our accounting policy to the following:

Cash and cash equivalents comprise cash balances, and deposits meeting the following criteria

- deposits with an original maturity of less than 3 months; and

- deposits with an original maturity date of more than 3 months where the deposit can be accessed on demand without significant penalty for early withdrawal and where the original deposit amount is recoverable in full

Bank overdrafts that are repayable on demand form part of cash and cash equivalents for the purposes of the Consolidated statement of cash flow.

This change in accounting policy has been applied retrospectively and therefore the comparatives in the Consolidated statement of cash flow has been amended to show a cash outflow of £52.5m in investing activities for the amounts placed on deposits exceeding 3 months and not accessible on demand, and the comparatives in the Consolidated balance sheet show £52.5m of Bank deposits separately from Cash and cash equivalents.

Pension scheme cash escrow account

The Company holds a pension scheme escrow account as part of the security given for the UK defined benefit pension scheme. This account is shown within current assets in the Consolidated balance sheet as it may be used to settle pension scheme liabilities immediately upon enforcement of the charge over the account.

Goodwill and other intangible assets

Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred. Deferred consideration relating to acquisitions is subject to discounting to the date of acquisition and subsequently unwound to the date of the final payment. Goodwill arising on acquisition represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired, net of deferred tax. Identifiable intangibles are those which can be sold separately or which arise from legal rights regardless of whether those rights are separable.

Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group.

Goodwill is stated at cost less any accumulated impairment losses. It is not amortised but is tested annually for impairment or earlier if there are any indications of impairment. The annual impairment review involves comparing the carrying amount to the estimated recoverable amount and recognising an impairment loss if the recoverable amount is lower. Impairment losses are recognised in the Consolidated income statement.

Intangible assets such as customer lists, patents, trade marks, know-how and intellectual property that are acquired by the Group are stated at cost less amortisation and impairment losses. Amortisation is charged to the Consolidated income statement on a straight-line basis over the estimated useful lives of the intangible assets. The estimated useful lives of the intangible assets included in the Consolidated balance sheet reflect the benefit derived by the Group and vary from five to ten years.

Key estimate - Estimates of useful life of intangible assets

The periods of amortisation of intangible assets require judgements to be made on the estimated useful lives of the intangible assets to determine an appropriate rate of amortisation. Future assessments of impairment may lead to the writing off of certain amounts of intangible assets and the consequent charge in the Consolidated income statement for the accelerated amortisation. Capitalised development costs are written off over five years, the period over which demand forecasts can be reasonably predicted.

Intangible assets - research and development costs

Expenditure on research activities is recognised in the Consolidated income statement as an expense as incurred. Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the Group intends and has the technical ability and sufficient resources to complete development, future economic benefits are probable and the Group can measure reliably the expenditure attributable to the intangible asset during its development.

Development activities involve a plan or design for the production of new or substantially improved products or processes. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the Consolidated income statement as an expense as incurred.

Capitalised development expenditure is amortised over five years and is stated at cost less accumulated amortisation and less accumulated impairment losses. Capitalised development expenditure is removed from the balance sheet ten years after being fully amortised.

Key judgement - Whether a project meets appropriate criteria for capitalisation

Product development costs are capitalised once a project has reached a certain stage of development and these costs are subsequently amortised over a five-year period. Judgements are required to assess whether the new product development has reached the appropriate point for capitalisation of costs to begin. Should a product be subsequently obsoleted, the accumulated capitalised development costs would need to be immediately written off in the Consolidated income statement.

Intangible assets - software licences

Intangible assets, comprising software licences that are acquired by the Group, are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged on a straight-line basis over the estimated useful life of the assets. The useful life of each of these assets is assessed on an individual basis and they range from two to ten years.

Impairment of non-current assets

All non-current assets are tested for impairment whenever there is an indication that their carrying value may be impaired. An impairment loss is recognised in the Consolidated income statement to the extent that an asset's carrying value exceeds its recoverable amount, which represents the higher of the asset's net realisable value and its value in use. An asset's value in use represents the present value of the future cash flows expected to be derived from the asset or from the cash-generating unit to which it relates. The present value is calculated using a discount rate that reflects the current market assessment of the time value of money and the risks specific to the asset concerned.

Goodwill and capitalised development costs are subject to an annual impairment test.

Key estimate - Estimates of future cash flows used for impairment testing

Determining whether goodwill is impaired requires an estimation of the value-in-use of cash-generating units (CGUs) to which goodwill has been allocated. The value-in-use calculation involves an estimation of the future cash flows of CGUs and also the selection of appropriate discount rates, which involves judgement, to calculate present values (see note 11). Similarly, determining whether capitalised development costs are impaired requires an estimation of their value-in-use which involves significant judgement. Relevant sensitivity analysis is included in note 11.

Property, plant and equipment

Freehold land is not depreciated. Other assets are stated at cost less accumulated depreciation. Depreciation is provided to write off the cost of assets less their estimated residual value on a straight-line basis over their estimated useful economic lives as follows:

Freehold buildings 50 years, Plant and equipment 3 to 25 years, Vehicles 3 to 4 years.

Inventory and work in progress

Inventory and work in progress is valued at the lower of actual cost on a first-in, first-out (FIFO) basis and net realisable value. In respect of work in progress and finished goods, cost includes all production overheads and the attributable proportion of indirect overhead expenses that are required to bring inventories to their present location and condition. Overheads are absorbed into inventories on the basis of normal capacity or on actual hours if higher.

Key estimate - Determination of net realisable inventory value

Determining the net realisable value of inventory requires judgement, especially in respect of provisioning for slow moving and potentially obsolete inventory. Management use the higher of previous 12-month usage levels or demand from customer orders and manufacturing build plans as a basis for estimating the future annual demand of individual stock items. For most products and their components, provisions are typically made for quantities held in excess of three years' demand. A demand basis lower than three years is used for those products and related components where the sales history is more volatile. Where strategic purchases of critical components have been made, an outlook beyond three years is considered where appropriate.

Leases

As a lessee

At the lease commencement date the Group recognises a right of use asset for the leased item and a lease liability for any lease payments due.

Right of use assets are initially measured at cost, being the present value of the lease liability plus any initial costs incurred in entering the lease and less any lease incentives received. Right of use assets are subsequently depreciated on a straight-line basis from the commencement date to the earlier of i) the end of the useful life of the asset, or ii) the end of the lease term.

Lease liabilities are initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the incremental borrowing rate of the applicable entity. The lease liability is subsequently measured at amortised cost using the effective interest method and is remeasured if there is a change in future lease payments arising from a change in an index or rate (such as an inflation-linked increase), of if there is a change in the Group's assessment of whether it will exercise an extension or termination option. When this happens there is also a corresponding adjustment to the right-of-use asset.

Where the Group enters into leases with a lease term of 12 months or less, these are treated as 'short term' leases and are recognised on a straight-line basis as an expense in the Consolidated income statement. The same treatment applies to low-value assets, which are typically IT equipment and office equipment.

As a lessor

The Group acts as a lessor for Renishaw-manufactured plant and equipment and determines at inception whether the lease is a finance or an operating lease.

Where the Group transfers the risks and rewards of ownership of lease assets to a third party, the Group recognises a receivable in the amount of the net investment in the lease. The lease receivable is subsequently reduced by the principal received, while an interest component is recognised as financial income in the Consolidated income statement.

Where the Group retains the risks and rewards of ownership of lease assets, it continues to recognise the leased asset in Property, plant and equipment. Income from operating leases is recognised on a straight-line basis over the lease term and recognised as Revenue rather than Other revenue as such income is not material.

Employee benefits

The Group operates contributory pension schemes, largely for UK, Ireland and USA employees, which were of the defined benefit type up to 5 April 2007, 31 December 2007 and 30 June 2012 respectively, at which time they ceased any future accrual for existing members and were closed to new members.

The schemes are administered by trustees who are independent of the Group finances. Investment assets of the defined benefit schemes are measured at fair value using the bid price of the unitised investments, quoted by the investment manager, at the reporting date. Pension scheme liabilities are measured using a projected unit method and discounted at the current rate of return on a high-quality corporate bond of equivalent term and currency to the liability. Remeasurements arising from defined benefit schemes comprise actuarial gains and losses, the return on scheme assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest). The Company recognises them immediately in Other comprehensive income and all other expenses related to defined benefit schemes are included in the Consolidated income statement.

The pension schemes' surpluses, to the extent that they are considered recoverable, or deficits are recognised in full and presented on the face of the Consolidated balance sheet under employee benefits. Where a guarantee is in place in relation to a pension scheme deficit, liabilities are reported in accordance with IFRIC 14 'The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction'. To the extent that contributions payable will not be available as a refund after they are paid into the plan, a liability is recognised at the point the obligation arises, which is the point at which the minimum funding guarantee is agreed. Overseas-based employees are covered by state, defined benefit and private pension schemes in their countries of residence. Actuarial valuations of overseas pension schemes were not obtained, apart from Ireland and USA, because of the limited number of members. For defined contribution schemes, the amount charged to the Consolidated income statement represents the contributions payable to the schemes in respect of the accounting period.

Accruals are made for holiday pay, based on a calculation of the number of days holiday earned during the year, but not yet taken and also for the annual performance bonus, if applicable.

Key estimate - Valuation of defined benefit pension schemes' liabilities

Determining the value of the future defined benefit obligation requires judgement in respect of the assumptions used to calculate liabilities and their present values. These include future mortality, discount rate and inflation. Management makes these judgements in consultation with independent actuaries. Details of the estimates and judgements in respect of the current year are given in note 13. Based on a review of the terms of the UK scheme trust deed, management has concluded that there are no likely circumstances which would result in the Company having an unconditional right to a refund in the event of a fund surplus. Relevant sensitivity analysis is included in note 13.

Share-based payments

The Group provides share-based payment arrangements to certain employees in accordance with the Renishaw plc deferred annual equity incentive plan (the Plan) (see the Governance section for further detail). The share awards are subject only to continuing service of the employee and are equity settled. The fair value of the awards at the date of grant, which is estimated to be equal to the market value, is charged to the Consolidated income statement on a straight-line basis over a three-year vesting period, with appropriate adjustments made to reflect expected or actual forfeitures. The corresponding credit is to Other reserve. The Renishaw Employee Benefit Trust (EBT) is responsible for purchasing shares on the open market on behalf of the Company to satisfy the Plan awards. Own shares held are recognised as an element in equity until they are transferred at the end of the vesting period, and such shares are excluded from earnings per share calculations.

Warranty provisions

The Group provides a warranty from the date of purchase, except for those products that are installed by the Group where the warranty starts from the date of completion of the installation. This is typically for a 12-month period, although up to three years is given for a small number of products. A warranty provision is included in the Group financial statements, which is calculated on the basis of historical returns and internal quality reports.

Government grants

Government grants are recognised in the Consolidated income statement as a deduction against expenditure. Where grants are received in advance of the related expenses, they are initially recognised in the Consolidated balance sheet and released to match the related expenditure. Where grants are expected to be received after the related expenditure has occurred, and there is reasonable assurance that the entity will comply with the grant conditions, amounts are recognised to offset the expenditure and an asset recognised. Accordingly, amounts relating to the UK Coronavirus Job Retention Scheme are recognised as grants.

Taxation

Tax on the profit for the year comprises current and deferred tax. Tax is recognised in the Consolidated income statement except to the extent that it relates to items recognised directly in Other comprehensive income, in which case it is recognised in the Consolidated statement of comprehensive income and expense. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in previous years.

Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination; and differences relating to investments in subsidiaries, to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

Key estimate - Estimates of future profits to support the recognition of deferred tax assets

Deferred tax assets are recognised to the extent it is probable that future taxable profits (including the future release of deferred tax liabilities) will be available, against which the deductible temporary differences can be utilised, based on management's assumptions relating to the amounts and timing of future taxable profits. Estimates of future profitability on an entity basis are required to ascertain whether it is probable that sufficient taxable profits will arise to support the recognition of deferred tax assets relating to the corresponding entity. Relevant sensitivity analysis is included in note 9.

2. SEGMENTAL ANALYSIS

The Group manages its business in two segments, comprising metrology and healthcare products. The results of these are regularly reviewed by the Board to allocate resources to segments and to assess their performance. Within the operating segment of metrology, there are multiple product offerings with similar economic characteristics, and where the nature of the products and production processes and their customer bases are similar.

There is no allocation of assets and liabilities to operating segments. Depreciation is included within certain other overhead expenditure which is allocated to segments on the basis of the level of activity.

The following table shows the disaggregation of group revenue by category:

Aftermarket services include repairs, maintenance and servicing, programming, training, extended warranties, and software licences and maintenance.

The analysis of revenue by geographical market was:

Revenue in the previous table has been allocated to regions based on the geographical location of the customer. Countries with individually material revenue figures in the context of the Group were:

There was no revenue from transactions with a single external customer which amounted to more than 10% of the Group's total revenue.

The following table shows the analysis of non-current assets, excluding deferred tax and derivatives, by geographical region:

No overseas country had non-current assets amounting to 10% or more of the Group's total non-current assets.

3. PERSONNEL EXPENSES

The aggregate payroll costs for the year were:

Amounts recognised as 'Government grants - employment support' mostly relates to the UK Coronavirus Job Retention Scheme. 2020 total payroll costs do not include redundancy costs relating to restructuring, see note 26.

The average number of persons employed by the Group during the year was:

Key management personnel have been assessed to be the Directors of the Company.

The total remuneration of the Directors was:

Full details of Directors' remuneration are given in the Directors' remuneration report.

4. COST OF SALES

Included in cost of sales are the following amounts:

Research and development expenditure includes the payroll costs, material costs and allocated overheads attributed to projects identified as being related to new products or processes. Other engineering expenditure includes the payroll costs, material costs and allocated overheads attributed to projects identified as being related to existing products or processes.

Research and development expenditure impaired excludes amounts relating to Restructuring costs, per note 26.

5. FINANCIAL INCOME AND EXPENSES

Currency gains and losses relate to revaluations of foreign currency denominated balances using latest reporting currency exchange rates. The gains recognised in 2019 largely relate to a depreciation of Sterling relative to the US dollar affecting US dollar-denominated intragroup balances in the Company.

Certain intragroup balances were reclassified as 'net investments in foreign operations' during 2019, such that revaluations from currency movements on designated balances after this date accumulate in the Currency translation reserve in Equity. Additionally, from 1 January 2019, a policy of entering into rolling one month forward currency contracts began, with fair value gains and losses being recognised in financial income or expenses, to offset currency movements on remaining intragroup balances. See note 20 for further details.

6. PROFIT BEFORE TAX

Included in the profit before tax are the following costs/(income):

These costs/(income) can be found under the following headings in the Consolidated income statement: (a) within cost of sales, distribution costs and administrative expenses and (b) within administrative expenses.

7. EARNINGS PER SHARE

Basic and diluted earnings per share are calculated on earnings of £288,000 (2019: £92,232,000) and on 72,778,904 shares (2019: 72,778,904 shares), being the number of shares in issue. The number of shares excludes 9,639 shares held by the EBT, which were purchased on 10 December 2018.

There is no difference between the weighted average earnings per share and the basic and diluted earnings per share.

For the calculation of adjusted earnings per share, per note 25, earnings of £288,000 (2019: £92,232,000) are adjusted by post-ax amounts for Fair value (gains)/losses on financial instruments not eligible for hedge accounting (reported in revenue), Fair value (gains)/losses on financial instruments not eligible for hedge accounting (reported in Gains/(losses) from the fair value of financial instruments) and restructuring costs, amounting to £592,000 gain, £18,095,000 loss and £19,276,000 loss respectively.

8. INCOME TAX EXPENSE