Renishaw Regulatory News (RSW)

RENISHAW plc

1 August 2019

Preliminary announcement of results for the year ended 30 June 2019

Summary

·; Revenue of £574.0m, a decrease at constant exchange rates of 7%

·; Revenue growth in the Americas and EMEA regions; weakness in the APAC region (19% decrease at constant exchange rates*)

·; Metrology revenue decreased by 7% to £532.9m, largely as a result of a slowdown in demand for encoder and machine tool products in the APAC region

·; Metrology revenue benefited from strong growth in our additive manufacturing line and good growth in our measurement and automation line (Equator gauging systems) and fixturing line

·; Healthcare revenue increased by 15% with strong growth in our spectroscopy and medical dental product lines giving rise to Adjusted operating profits of £3.1m (2018: £0.3m)

·; Adjusted* profit before tax of £103.9m (2018: £145.1m), a decrease of 28%

·; Statutory profit decreased by 29% to £109.9m (2018: £155.2m)

·; Strong balance sheet, with cash of £106.8m, compared with £103.8m last year

·; Recommended final dividend of 46p per share; total dividend for the year of 60p (2018: 60p)

*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.

CHAIRMAN'S STATEMENT

Introduction

I am pleased to report our 2019 results. We achieved a turnover for the year of £574.0m (2018: £611.5m) with a decrease in revenue of 7% at constant exchange rates*, against a backdrop of challenging economic conditions. Adjusted* profit before tax amounted to £103.9m (2018: £145.1m), a decrease of 28%.

Following the appointment of Will Lee as Chief Executive last year, I have been delighted to see his progress and strong leadership during the year. He is driving change in key areas of the business, including a focus on the skills development of our people, to continue to improve productivity.

Innovation drives our business, from the generation of new technologies to new manufacturing processes. In my role as Executive Chairman, I have enjoyed the opportunity to focus on Group innovation and product strategy, supporting our talented engineering teams. This has included our industrial metrology and additive manufacturing technologies, where there are exciting opportunities for future growth.

During the year, we continued to invest in developing future technologies, with total engineering costs of £97.9m (before net capitalised development costs and the R&D (research and development) tax credit), amounting to 17% of total revenue.

Board changes

On 30 June 2019, Geoff McFarland, Group Engineering Director, resigned as a Director of the Board for family reasons. On behalf of the Board, I would like to thank Geoff for the invaluable contribution he has already made to the developments that have helped Renishaw grow into the global technology leader that it is today. I look forward to continuing to work with him in his new role as Director of Group Technology, reporting to Will.

As reported last year, Kath Durrant stepped down from the Board on 31 July 2018. Catherine Glickman joined us as an Independent Non-executive Director on 1 August 2018, becoming Chair of the Remuneration Committee and a member of the Audit and Nomination Committees. Catherine previously held the role of Group HR Director at Genus plc and Tesco PLC and is making a valuable contribution as we strengthen our HR processes and implement a new internal communications and employee engagement strategy.

People, culture and values

We thrive through our collaborative team of 5,000 people. They bring fresh thinking, deep experience and an obsession with quality to every aspect of their work. On behalf of the Board, I would like to thank them all for their professionalism and dedication during the 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.

Innovation is at the heart of everything that we do and is one of our core values. 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.

Integrity is another of our core values and 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.

We are also focused on diversity at all levels. During the year we published our second Gender Pay Gap report. While progress has been made, we and our industry still have much work to do in this area. Our educational outreach programmes engage with children from primary school age onwards to encourage more young people from diverse gender, ethnic and economic backgrounds into the sector.

Corporate governance

The Board is committed to the highest standards of corporate governance to protect our business and its long- term success. The Board has already started to consider the new 2018 UK Corporate Governance Code and steps have been taken to start implementing its requirements.

Investor communications

Our sixth annual investor day on 14 May 2019 was attended by a record 150 people, with an equal mix of private and institutional investors. The day included presentations on Group strategy, industry sectors and key sales regions, as well as demonstrations, opportunities to meet the Board and senior management, and a question and answer (Q&A) session with Board members. Following the event, we conducted a survey with all the attendees to gather further feedback.

The event is one of four key touchpoints across the year where the investment community can learn more about Renishaw's business and strategy, with the Annual General Meeting (AGM) in October, plus live half-year and full-year webcasts.

UK defined benefit pension scheme

Following further engagement with The Pensions Regulator, the Company and trustees have agreed the terms of a new deficit funding plan for the Company's UK defined benefit pension scheme. The Company has agreed to pay £8.7m per annum into the scheme for five years with effect from 1 October 2018. Under the terms of the previous agreement the Company paid approximately £4m per year.

Dividend

A final dividend of 46.0p net per share will be paid on 31 October 2019, to shareholders on the register at 27 September 2019, giving a total dividend of 60.0p for the year (2018: 60.0p).

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.

CHIEF EXECUTIVE'S REVIEW

Introduction

As stated last year, my role is to build on the strong heritage and culture developed by our co-founders, Sir David McMurtry and John Deer, and inspire our people to meet the opportunities and challenges of a changing business environment. During my first full year I have travelled widely within the Group, spending time with our R&D teams, visiting our sales regions, attending trade exhibitions, and listening to what people feel is good about Renishaw and where we can make improvements. This has given me a clear sense of where we need to focus to continue to be a technology world leader that is trusted by our customers and suppliers, and an employer that inspires its people.

Performance overview

As Sir David has already outlined, this was a challenging year with reduced turnover and Adjusted* operating profit for the Group. However, outside APAC, our other regions saw strong growth for some of our product lines, including the additive manufacturing (AM) and spectroscopy lines. We remain focused on the long term with a key focus on developing 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 2019 of £574.0m, compared with £611.5m last year, against a backdrop of challenging economic conditions including the impact of trade tensions between the USA and China, and ongoing uncertainty surrounding the potential impacts of Brexit. Aside from APAC, we experienced revenue growth in all regions as set out below. The lower revenue in the APAC region is largely a result of a slowdown in demand for our encoder products, which are used in electronics and display manufacturing equipment, and for our machine tool products from large end-user manufacturers of consumer electronic products, due to weaker smartphone demand and the resultant over-capacity in the supply chain. We have not experienced an erosion in our customer base in the region and 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 £103.9m compared with £145.1m last year. Adjusted* earnings per share on continuing activities was 119.9p compared with 170.5p last year.

Statutory profit before tax for the year was £109.9m compared with £155.2m last year. Statutory earnings per share on continuing activities was 126.7p compared with 181.8p last year.

This year's tax charge on continuing operations amounts to £17.7m (2018: £22.9m) representing a tax rate of 16.1% (2018: 14.7%). Lower profits in the UK in the current year resulted in a fall in the patent box benefit of £3.9m relative to the previous year, which is the principal factor for the increase in the effective tax rate.

Metrology

Revenue from our metrology business for the year was £532.9m compared with £575.8m last year. There was strong growth in our AM product line; good growth in our measurement and automation line (Equator gauging systems) and in our fixturing line - reflecting pleasing progress in our end-user focused solutions business. We continue to focus on ensuring that our AM systems satisfy the demands of our customers for the series production of metal components. As previously mentioned, we have seen a slowdown in demand for our encoder products and from large end-user manufacturers of consumer electronic products, which primarily impacts the machine tool revenue.

The geographical analysis of metrology revenue is set out below.

Adjusted* operating profit for our metrology business was £90.6m (2018: £142.8m).

We continued to invest in R&D, with total engineering costs of £90.7m (before net capitalised development costs and the R&D tax credit) compared with £77.1m in  2018.

A range of new products were launched during the year. The PHS-2 second generation servo positioning head for CMMs is used within the automotive market for body-in-white measurement. We also introduced new calibration products including the XM-600 calibration system for high-speed dynamic CMM error-mapping and fault-finding, and the XK10 alignment laser system for use during the build and alignment of machine tools, replacing the need for artefacts.

The APCA-45 tool setting probe is designed for the very harsh environments surrounding lathes and multi-tasking machine tools, while the new SupaScan QuickPoint macro software package allows superfast probing cycles in machining applications with very short cycle times.

For the motion control market we launched a rotary encoder for our QUANTiC™ family of incremental encoders, while for high-end XY stages that require multiple interferometer feedback axes, our new multi-axis periscope (RMAP) enables accurate six degrees of freedom measurements.

Healthcare

Revenue from our healthcare business for the year was £41.0m, an increase of 15% over the £35.7m last year. There was strong growth in our spectroscopy and medical dental product lines.

There was an Adjusted* operating profit of £3.1m, compared with £0.3m last year, with two years of continuous profit achieved for the first time. Healthcare also saw continued investment in R&D, with total engineering costs in this business segment of £7.2m (before net capitalised development costs and the R&D tax credit) compared with £6.5m in 2018.

New products launched during the year include the RA816 Biological Analyser, a compact benchtop Raman imaging system designed exclusively for biological and clinical research, and the new neurolocate™ 2D module, which requires just two X-rays to register patient position against the neuromate® robot, also obtained a CE mark.

The results of a pioneering clinical trial for which Renishaw manufactured a drug delivery device on behalf of North Bristol NHS Trust, to administer Glial Cell Line-Derived Neurotrophic Factor (GDNF), were made public in February. The results showed that the drug delivery system performed effectively and reliably, and a similar device developed by Renishaw, called neuroinfuse, is now being used in another clinical trial.

Strategy and markets

Our strategy is fundamentally based on long-term investments in patented and innovative products and processes, high-quality manufacturing, and the provision of excellent local support to customers in all our markets around the globe. This strategy is consistent across all the product lines and market sectors in which we operate to deliver our purpose.

Renishaw has moved in recent years, 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 build brand loyalty and opening up new revenue opportunities.

At the same time, we are seeing external market growth drivers - including global skills shortages, digitisation, requirements for more capable products, rising energy costs, a focus on reducing emissions and waste, population growth and rising life expectancy - that are creating positive opportunities for our business.

We continue to spread risk through the diversification of our applications for product lines, 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 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 near-term is on maximising the benefits of the investment we have made over the past few years.

We are also investing in 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 £56.8m (2018: £34.9m), of which £25.4m (2018: £10.0m) was spent on property and £31.4m (2018: £24.9m) on plant and equipment and vehicles.

This year saw the commencement of a 94,000 sq ft extension to the Innovation Centre at our New Mills site, the purchase of a new property in Nagoya to support the expansion of our Japanese distribution function, the purchase of land near São Paulo for the future development of a distribution facility in Brazil and the purchase of our existing building in The Netherlands for our Benelux operation.

Working capital

Group inventory increased from £110.6m at the start of the year to £129.0m, primarily reflecting the impact of Brexit contingency preparations and the reduced demand we experienced in the second half of the financial 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 £154.6m to £123.2m, with debtor days outstanding at the end of the current year at 73 days (2018: 69 days).

Net cash balances at 30 June 2019 were £106.8m, compared with £103.8m at 30 June 2018. Additionally, there is an escrow account of £10.5m (2018: £10.4m) 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: increased investment in developing the skills of our employees; assisted local organisations through charitable donations; reached more than 10,000 children with our educational outreach programmes and donated more than 10,000 hours of paid time to educational and other local organisations; recruited a record number of apprentices on our training schemes; reduced our greenhouse gas (GHG) emissions by 15%; and reduced our accident frequency rate to 24.67.

Our people

Our workforce at the end of June 2019 was 5,041 (2018: 4,862) an increase of 4%. During the year, 119 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 73 new paid industrial and summer placements in the year.

In January 2019, we carried out an extensive UK Employee Engagement survey. The results clearly showed that our people believe Renishaw makes a positive impact on society, they have pride in their roles, treat each other with respect and believe that the business acts in a socially responsible manner. They also told us we need to focus more on career development, including progression opportunities, be clearer on performance assessment and improve the way we recognise and ensure people feel valued. This fully validates the HR initiatives we introduced during the year, including a renewed focus on learning and development, and leadership and management training.

I would like to express my thanks to all employees for their invaluable contribution to the success of the Group during the year.

Brexit

The Board continues to oversee the work of the Brexit steering group in identifying the key risks arising from a no-deal Brexit scenario and implementing mitigation plans.

These activities significantly increased in the period leading up to the original Brexit deadline of March 2019 and included the following:

The steering group will continue to carefully monitor ongoing developments in the Brexit process and consider the impact of these against our current plans as the situation develops in the coming months.

Outlook

The Group is in a strong financial position, despite a challenging year, and continues to invest in the development of new products and applications, along with targeted investment in production, and sales and marketing facilities around the world. With the ongoing uncertainty surrounding Brexit, weaker economic indicators, exchange rate volatility and trade tensions between the USA and China, we expect market conditions to remain difficult throughout this financial year.

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

* 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.

FINANCIAL REVIEW

Overview

We have achieved revenue amounting to £574.0m and Adjusted profit before tax of £103.9m. Statutory profit before tax was £109.9m. We have a strong balance sheet with total equity growing by £34.7m to £583.3m, with net cash balances of £106.8m (2018: £103.8m). In line with our progressive dividend policy, the Board is proposing an unchanged dividend of 60.0p per share for the year.

Revenue

We achieved revenue for the year of £574.0m, compared with £611.5m last year. This fall is largely a result of a slowdown in demand for our encoder products and from large end-user manufacturers of consumer electronic products, primarily driven by economic uncertainty in the APAC region. The table below shows the analysis of Group revenue by geographical market.

In our metrology business segment, revenue was £532.9m, compared with £575.8m last year. Revenue in our healthcare business segment increased by 15% from £35.7m last year to £41.0m.

Revenue analysis by region

Profit and tax

The adjusted profit before tax amounted to £103.9m compared with £145.1m in 2018. Statutory profit before tax was £109.9m compared with £155.2m in the previous year.

In our metrology business, Adjusted operating profit was £90.6m, compared with £142.8m last year. I am pleased to report further growth in our healthcare business, with an adjusted operating profit of £3.1m compared with £0.3m last year.

The overall effective rate of tax on continuing operations was 16.1% (2018: 14.7%). 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. Lower profits in the UK in the current year resulted in a fall in the patent box benefit to £1.8m (2018: £5.7m) and is the principal factor for the increase in the overall effective tax rate. Note 8 provides further analysis of the effective tax rate.

Alternative performance measures

In 2017, the Board introduced alternative performance measures (Adjusted profit before tax, Adjusted operating profit and Adjusted earnings per share) to report the results on the basis that all forward contracts are accounted for as effective hedges. These measures are the basis by which the Board evaluates the Group's performance as they better represent the underlying trading of the Group. The table below shows the details of the adjustments between adjusted profit before tax and statutory profit before tax.

See note 25 for further details on this and Revenue at constant exchange rates.

Earnings per share and dividend

Adjusted earnings per share from continuing operations is 119.9p, compared with 170.5p last year. Statutory earnings per share from continuing operations is 126.7p, compared with 181.8p last year.

A final dividend of 46.0p net per share (2018: 46.0p) results in a total dividend for the year of 60.0p (2018: 60.0p). Dividend cover is 2.0 times (2018: 2.8 times) on an adjusted basis.

Research and development

Gross expenditure on engineering costs, including R&D on new products, was £97.9m (2018: £83.6m). The gross charge amounts to 17% of Group revenue (2018:14%).

The capitalisation of development costs (net of amortisation charges) amounted to £2.9m (2018: £2.1m). The R&D tax credit in 2019 amounted to £5.1m compared with £4.1m in 2018. The net charge in the Consolidated income statement amounted to £89.8m compared with £77.4m in 2018.

Between the business segments gross expenditure on engineering costs was £90.7m (2018: £77.1m) in the metrology segment and £7.2m (2018: £6.5m) in our healthcare segment.

New product R&D expenditure amounted to £67.0m, which compares with £59.1m 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 2020 financial year.

Group headcount

Group headcount has increased from 4,862 at 30 June 2018 to 5,041 at 30 June 2019, with the average for the year of 4,968, compared with 4,639 last year. The increase during the year of 179 comprised additional employees of 122 in the UK and 57 overseas. In the UK we took on 119 apprentices and graduates in the year, and are also funding the further education of 117 employees in engineering, software and commercial/professional disciplines.

Labour costs, the most significant cost for the Group, increased by 5% to £237.4m (2018: £226.8m) reflecting a pay increase in July 2018 and the incremental cost of the employees recruited in both 2018 and 2019, partially offset by a reduction in bonuses.

Business systems transformation

In recent years, we have made significant progress in enhancing and simplifying financial reporting processes and systems, to further improve the analysis of business performance. With a focus on increasing productivity and efficiency, further major system deployments are in progress for our HR, engineering change management and marketing activities. We have recently committed to a new ERP system to replace our global finance, sales & marketing and CRM systems. This will deliver many benefits to the business including enhanced customer support and inventory management and will provide the infrastructure to support our growing solution selling activities.

Consolidated balance sheet

The Group's shareholders' funds at the end of the year were £583.3m, compared with £548.6m at 30 June 2018. Reserves benefited from our trading results, with a retained profit after tax of £92.2m and were reduced by dividends paid of £43.7m.

Additions to property, plant and equipment and vehicles totalled £56.8m, of which £25.4m was spent on property and £31.4m on plant and machinery, IT equipment and infrastructure, and vehicles.

The main additions were:

Within working capital, inventories increased to £129.0m from £110.6m at the beginning of the year primarily reflecting the impact of Brexit contingency preparations and the reduced demand we experienced in the second half of the financial year. 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 £154.6m to £123.2m reflecting record revenue in the final quarter of 2018. Debtor days were 73 at the end of the year, compared with 69 at the end of last year.

Net cash balances at 30 June 2019 were £106.8m (2018: £103.8m).

Pensions

At the end of the year, the Group's defined benefit pension schemes, now closed for future accrual, showed a deficit of £51.9m, compared with a deficit of £67.4m at 30 June 2018. Defined benefit pension schemes' assets at 30 June 2019 increased to £181.6m from £172.8m at 30 June 2018, representing investment performance during the year net of £7.2m benefit payments including transfers. Pension fund liabilities decreased from £240.2m to £233.5m. Following further engagement with The Pensions Regulator, the Company and trustees have agreed the terms of a new deficit funding plan for the UK defined benefit pension scheme, based on the triennial valuation as at 30 September 2018. The Company has agreed to pay £8.7m per annum into the scheme for five years with effect from 1 October 2018. Under the terms of the previous agreement, the Company paid approximately £4.0m per year.

In line with the previous agreement, the new agreement will continue until 30 June 2031 and any outstanding deficit paid at that time. The agreement will end sooner if the actuarial deficit (calculated on a self-sufficiency basis) is eliminated in the meantime.

On 26 October 2018, the High Court reached a judgement in relation to Lloyds Banking Group's defined benefit pension schemes which concluded that the schemes should be amended to equalise pension benefits for men and women as regards guaranteed minimum pension benefits. The issues determined by the judgment arise in relation to most other defined benefit pension schemes and are relevant to the Company's UK defined benefit pension scheme. Following discussions between the Company, the trustees and their respective advisors, we have estimated incremental liabilities to be £0.8m, which have been recognised in the Consolidated Income Statement in Administrative expenses. The estimate has increased the scheme's liabilities by 0.4% and is based on the C2 method which has been approved by the courts and likely to be the most commonly used approach. The Company and Trustees along with their respective advisors continue to assess the most appropriate method to achieve the equalisation of benefits.

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 and to maximise interest income on cash deposits. As an international group, the main exposure is in respect of foreign currency risk on the trading transactions undertaken by Group companies and on the translation of the net assets of overseas subsidiaries.

Weekly Group-wide cash management reporting and forecasting is in place to facilitate management of this currency risk. The operations of Group Treasury, which is situated at head office, are governed by Board- approved policies.

All Sterling and foreign currency balances not immediately required for Group operations are placed on short-term deposit with leading international highly-rated financial institutions. See note 15 for an analysis of cash balances at the year end.

The Group uses forward exchange contracts to hedge a significant proportion of anticipated foreign currency cash inflows. There are forward contracts in place to hedge against the Group's Euro, US Dollar and Japanese Yen cash inflows. The Group does not speculate with derivative financial instruments. See note 20 for further details on financial instruments.

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 R&D of new products, manufacturing processes and global support infrastructure in order to generate growth in future returns. This is evidenced in the year with capital investments and additional R&D spend cited previously. Actual and forecast returns, along with our strong financial position, then support our progressive dividend policy, which aims to increase the dividend per share, whilst maintaining a prudent level of dividend cover.

Allen Roberts

Group Finance Director

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Group and Company Financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and Company Financial statements for each financial year. Under that law the Directors have prepared the Group Financial statements in accordance with International

Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and have prepared the Company Financial statements in accordance with UK Accounting Standards, including FRS 101 'Reduced Disclosure Framework'.

Under company law the Directors must not approve the Financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of their profit or loss for that period.

In preparing each of the Group and Company Financial statements, the Directors are required to:

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the Financial statements comply with the Companies Act 2006.

They are also responsible for taking such steps as are reasonably open to them to safeguard the assets of the Group and the Company to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We confirm that to the best of our knowledge the Financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and of the Company and the undertakings included in the consolidation taken as a whole.

Allen Roberts

Group Finance Director

CONSOLIDATED INCOME STATEMENT

for the year ended 30 June 2019

All discontinued operations relate to operations discontinued as at June 2017. See note 7 'Discontinued operations' for further details

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME AND EXPENSE

for the year ended 30 June 2019

CONSOLIDATED BALANCE SHEET

at 30 June 2019

These financial statements were approved by the Board of directors on 1 August 2019 and were signed on its behalf by:

Sir David McMurtry Allen Roberts

Directors

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 30 June 2019

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

CONSOLIDATED STATEMENT OF CASH FLOW

for the year ended 30 June 2019

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 Group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (adopted IFRS). 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). These do not represent the company's statutory accounts, which have not yet been delivered to the registrar for 2019. An unqualified auditor's report was signed on 1 August 2019.

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.

Renishaw GmbH, Pliezhausen, Germany has chosen to exercise the right under section 264 - sub-section 3 of the German Commercial Code (HGB) on exemption and preparation. The consolidated financial statements of the Group include the financial statements of Renishaw GmbH, Pliezhausen, Germany. 

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.

New, revised or changes to existing accounting standards

The following accounting standards have been applied for the first time, with effect from 1 July 2018, and have been adopted in the preparation of these financial statements.

IFRS 15 'Revenue from Contracts with Customers'

The Group adopted IFRS 15 on 1 July 2018 using the modified retrospective transition approach. taking advantage of the practical expedient in IFRS 15 C7 to apply the standard retrospectively only to contracts that are not completed as at 1 July 2018. 

IFRS 15 provides a single, principles-based five-step model to be applied to all sales contracts with customers, against which the Group has reviewed the following:

- individually-significant contracts by value;

- customers with cumulatively-significant contracts;

- variable consideration arrangements;

- warranty arrangements, analysing such arrangements between assurance-type warranties already accounted for under IAS 37 and 'service-type' warranties as defined by IFRS 15, to which revenue should be attributed to and deferred over the service period; and

- sale of software licences and maintenance.

The impact on the Group's results and net assets is not material, with a cumulative catch-up adjustment of £1,270,000 made to equity at 1 July 2018. This primarily relates to the impact of more revenue being allocated to extended warranties under IFRS 15 than under IAS 18. See note 26 for a comparison between IFRS 15 and IAS 18 on the 2019 financial statements.

IFRS 9 'Financial Instruments'

The Group adopted IFRS 9 on 1 July 2018. The Standard introduced new requirements for the classification and measurement of financial assets, impairment of financial assets and hedge accounting.

For the classification and measurement requirements, no changes have arisen from IFRS 9, while for the new impairment requirements, the Group recognises an 'expected credit loss' (ECL) for trade receivables under the Standard's 'simplified approach'. IFRS 9 does not impact hedge accounting in the Group's financial statements because all hedging relationships that were eligible under IAS 39 remain eligible under IFRS 9 and the change in fair value of foreign currency contracts continues to hedge movements in the forward currency rate. No adjustments have been made in respect of IFRS 9 to the Group's opening reserves at 1 July 2018 as the impairment adjustment calculated from a simple ECL model which considered historic credit loss rates was not material to the Group.

In addition to IFRS 15 and IFRS 9, 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 2 (amendments) - Classification and Measurement of Share-based Payment Transactions;

- IAS 40 (amendments) - Transfers of Investment Property;

- IAS 28 (amendments) - Investments in Associates and Joint Ventures; and

- IFRIC 22 'Foreign Currency Transactions and Advance Consideration'.

The following accounting standards and interpretations have been issued but are not yet effective for the Group and have not been applied in these financial statements:

- IFRS 16 'Leases';

- 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'.

These are not expected to have a material impact on the financial statements of the Group, except in relation to IFRS 16.

IFRS 16 is effective for accounting periods beginning on or after 1 January 2019 and will be adopted by the Group for the financial year commencing 1 July 2019. Where the Group acts as a lessor, the accounting treatment is substantially unchanged. Where the Group acts as a lessee, the new standard will eliminate the classification of leases as either operating or finance leases and instead the Group will recognise a right of use asset and a lease liability for all leases (except for low-value assets and leases less than 12 months), similar to the accounting for finance leases under IAS 17.

At 1 July 2019 right-of-use assets and lease liabilities of £13,079,000 are expected to be recognised by the Group under the new standard, of which £11,088,000 relates to property and £1,880,000 relates to vehicles. Depreciation on the right-of-use assets will then be charged to the Consolidated income statement on a straight line basis over the lower of the asset's useful life or the life of the lease contract, while interest will be accreted to the lease liability across the same period. The aggregate of depreciation and interest expense will generally result in higher expenses in the earlier periods of a lease, however this is not expected to be material for the Group. No transition adjustment will be required to opening reserves in 2020.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic report, where details of the financial and liquidity positions are also given. In addition, note 20 in the financial statements includes 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. The Group has considerable financial resources at its disposal and the directors have considered the current financial projections. As a consequence, 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 the date of approval of the financial statements. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report.

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.

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 uses 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 as bundled packages.

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 below. 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 as a bundled package with associated products. Where the software licence and/or maintenance is provided as part of a bundled package 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 fulfilment costs

Contract fulfilment costs are recognised as an asset when they directly relate to a contract, will be used to fulfil one or more performance obligations in a contract in the future, and are expected to be recoverable. Contract fulfilment costs for the Group therefore typically relate to contracts in which programming is a distinct performance obligation and the associated labour costs have been incurred but the program has not yet been provided to the customer. Such assets are amortised to the income statement when the corresponding performance obligation is fulfilled.

f) 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.

g) 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.

The point at which control of performance obligations is transferred to customers under IFRS 15 is the same as under IAS 18 for the majority of our contracts with customers.

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 ruling at that date. Differences on exchange resulting from the translation of overseas assets and liabilities are recognised in Other comprehensive income and 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. Fair value, as defined by IFRS 13, 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.

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 Currency 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 'Financial instruments', 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. 

Cash and cash equivalents

Cash and cash equivalents comprise cash balances and short-term (with an original maturity of less than 12 months) deposits. Bank overdrafts that are repayable on demand form part of cash and cash equivalents for the purpose of the Consolidated statement of cash flow.

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 through 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 2 to 10 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.

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 consider historic and future forecast sales patterns of individual stock items when calculating inventory provisions. For most inventory lines, provisions are based on the excess levels held compared to a maximum three year outlook. Where strategic purchases of critical components have been made, an outlook beyond three years is considered where appropriate. The sensitivities around estimates vary significantly from product to product.

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.

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.

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). 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.

Government grants

Government grants, comprising R&D tax credits, 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 balance sheet and released to match the related expenditure.

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 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.

Discontinued activities

Where a line of the Group's business is treated as a discontinued operation, the financial statements are re-presented and restated where required as if operations discontinued during the current year had been discontinued from the start of the comparative year. Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as a profit or loss after tax from discontinued operations in the Consolidated income statement.

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:

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

Key management personnel have been assessed to be the Executive Directors of the Company. The total remuneration of the Directors was:

4. FINANCIAL INCOME AND EXPENSES

Currency gains relates 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 dollar affecting dollar denominated intragroup balances in the Company. In previous reporting periods, such movements were recognised in Administrative expenses (2018: £604,000 loss).

Certain intragroup balances were reclassified as 'net investments in foreign operations' on 3 December 2018, 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 rolling one month forward currency contracts began, with fair value gains and losses being recognised in financial income, to offset currency movements on remaining intra group balances. See note 20 for further detail.

5. 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; (b) within cost of sales; and (c) within administrative expenses.

 6. EARNINGS PER SHARE

Basic and diluted earnings per share from continuing operations are calculated on earnings of £92,232,000

(2018: £132,342,000) and on 72,778,904 shares (2018: 72,788,543 shares), being the number of shares in issue. The 2019 number of shares excludes 9,639 shares held by the EBT, which were purchased on 10 December 2018.

Basic and diluted earnings and losses per share from discontinued operations for 2018 were calculated on losses of £582,000 and on 72,788,543 shares in issue.

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

7. DISCONTINUED OPERATIONS

In October 2016, the Group decided to discontinue the operations of Renishaw Diagnostics Limited (healthcare segment) and in June 2017, to discontinue the spatial measurements business (metrology segment), on the basis of continued losses. Certain assets of the businesses were sold. Financial information relating to the discontinued operations is set out below:

8. INCOME TAX EXPENSE

The tax for the year is lower (2018: lower) than the UK standard rate of corporation tax of 19% (2018: 19%).

The differences are explained as follows: