Half-year Report

Renishaw plc

4 February 2021

Interim report 2021 - for the six months ended 31 December 2020

Highlights

Renishaw, the global high-precision metrology and healthcare technology group, today reports its half-year results for the six months to 31 December 2020.

· First half-year revenue of £255.1m (H1 2019/20: £259.4m)

· Significant improvement in profitability in the first half as the benefits of our Fit for the Future strategy continued to be felt:

- adjusted1 profit before tax of £43.4m (H1 2019/20: £14.3m)

- statutory profit before tax of £63.9m (H1 2019/20: £9.9m)

· Robust balance sheet with net cash and bank deposit balances of £186.6m, compared with £120.4m at 30 June 2020

· Interim dividend of 14.0p per share.

1 Note 11, 'Alternative performance measures', defines how adjusted profit before tax and earnings per share are calculated.

Overview for the six months ended 31 December 2020

Revenue for the six months ended 31 December 2020 was £255.1m, compared with £259.4m for the corresponding period last year. We achieved good revenue growth in our APAC region, where we continue to see strong demand for our encoder product lines which are benefitting from increased investments in the semiconductor and electronics capital equipment markets. We experienced continuing weaker demand in our EMEA and Americas regions, which have been affected by the ongoing uncertainty caused by the pandemic and consequent challenges to key sectors, particularly aerospace. Our Fit for the Future strategy has delivered improved productivity and significant reductions in the Group's cost base. This is reflected in the much-improved profitability compared to the same period last year.

Metrology

Revenue in our metrology business for the first six months was £235.6m, compared with £241.5m last year. Adjusted operating profit was £41.2m, compared with £17.4m for the comparable period last year. We have seen growth in demand for many of our metrology products, notably in our machine tool product line and our optical and laser encoder product lines. The latter have seen good growth due to a continuing recovery in the semiconductor and electronics capital equipment market. We have experienced reduced demand for our CMM product line due to the challenges in some sectors, particularly aerospace, but our strong portfolio of measurement products and global customer base means that we are well placed to benefit from a recovery in sector investments. Our additive manufacturing (AM) product line revenue was also lower than the same period last year, but was in-line with our expectations following the restructuring of the business that was implemented in FY 2019/20.

Healthcare

Revenue from our healthcare business for the first six months was £19.5m, compared with £17.8m last year. The adjusted operating profit was £2.2m in the first half of this year compared with a £1.5m loss for the comparable period last year. We have seen growth in our neurological product line and good growth in our spectroscopy product line which has seen a recovery in Raman spectrometer investment across all our regions, plus increasing adoption of the Virsa™ Raman Analyzer which was launched during FY 2019/20. We are also seeing that those surgeries and procedures that were delayed due to the pandemic have started to be rescheduled.

COVID-19 update

Our priorities continue to be the health and welfare of our employees, their families and the wider communities in which we operate, and to maintain high service levels to our global customer base. Our response and mitigation committee continues to meet at least twice weekly to review any developments caused by the pandemic and to take any necessary mitigating actions. We have a wide-range of COVID-secure working practices in place to protect against the spread of the virus and, within the UK, where we have higher numbers of employees, we have introduced weekly testing for all employees who must work on-site due to the nature of their roles. All our manufacturing facilities around the world are operating as normal and despite many challenges, supply to customers has been maintained throughout the pandemic. We have expanded the use of digital collaborative tools for customer support, and we are continuing to ensure a supply of high-quality sales opportunities using virtual exhibitions, webinars and enhanced digital marketing activities.

Productivity and operating costs

Our Fit for the Future strategy, which commenced in FY 2019/20, has resulted in a number of actions which improved productivity and reduced the Group's cost base. This included a resizing of the business, a restructure of our AM product line, and a focus on prioritising design projects to accelerate the market launch of significant products. The Group headcount has reduced further during the first half of this financial year and was 4,324 at the end of December 2020 compared to 4,463 at the end of June 2020, due to the non-replacement of some leavers and a small number of redundancies. We are currently recruiting production staff to ensure we have sufficient capacity to meet demand. Labour costs were £109.0m in this half-year compared to £119.4m last year and the average headcount in the first half-year was 4,371 (H1 2019/20: 4,990). This year's labour cost includes £1.0m of global job retention grant income (H1 2019/20: £nil), all of which originated overseas, and a £3.5m one-off 'thank you payment' for employees to recognise their exceptional commitment to the Group during the pandemic.

Certain other operating costs, such as travel and exhibitions, are lower this half-year compared to last year due to restrictions resulting from the pandemic. We expect these costs to increase once restrictions are lifted, although we do not expect travel to return to pre-pandemic levels as the use of online meetings has proven an effective tool for many communications. No significant asset impairments have been recognised this year.

The Group remains committed to our long-term strategy of delivering growth through the development and introduction of innovative and patented products and during the first six months of this year we incurred net engineering expenditure of £37.7m compared with £46.1m last year. This reduction is consistent with our expectations given the focus on key design projects, and the net expenditure includes our continuing commitment to support existing products and technologies. Our engineering teams have continued to develop products during the pandemic and last month we launched the FORTiS™ enclosed optical encoder which provides high-performance measurement in harsh environments, including machine tools and semiconductor wafer dicing.

The Directors would like to thank our employees for their dedication, professionalism, understanding and much valued contributions during this exceptionally challenging period for them and the business.

Profit and tax

Adjusted profit before tax1 for the first half-year was £43.4m compared with £14.3m last year, primarily due to the reduced operating costs. Statutory profit before tax for the first half-year was £63.9m, compared with £9.9m last year, which includes a £20.5m fair value gain on financial instruments not effective for hedge accounting and not included in adjusted profit before tax. The gain relates primarily to proportions of forward contracts which failed hedge effectiveness testing in the previous financial year, after the global macroeconomic uncertainty resulted in reductions to the highly probable forecasts of the hedged item. No further contracts have been designated as ineffective in the six months to 31 December 2020.

The income tax expense (before deferred tax asset impairment movements) in the Consolidated income statement has been estimated at a rate of 19.0% (H1 2019/20: 17.4%) and is based on management's best estimate of the full year effective tax rates by geographical unit applied to half-year profits. The tax expense in the first half also includes a £0.7m credit for the recognition of deferred tax assets for losses previously impaired.

Adjusted earnings per share were 49.2p, compared with 15.1p last year. Statutory earnings per share were 72.1p, compared with 10.2p last year.

Balance sheet

Capital expenditure for this half-year was £4.8m (H1 2019/20: £28.4m) and was primarily on plant and equipment to support our manufacturing processes and IT infrastructure. The lower spend this year is in line with expectations following significant infrastructure investments in recent years.

Inventory balances have reduced by £7.3m since 30 June 2020, primarily reflecting a planned reduction in certain component safety stock levels. Trade receivables have decreased by £9.5m in the same period, mainly as a result of a reduction in debtor days and currency exchange rate movements.

Net cash and bank deposit balances at 31 December 2020 were £186.6m, compared with £71.3m at 31 December 2019 and £120.4m at 30 June 2020, reflecting the cash generated from operating profit, a reduction in working capital items, and the reduced level of capital expenditure.

Dividend

The Board is reinstating the dividend programme and has approved an interim dividend of 14.0 pence net per share (2020: nil) which will be paid on 6 April 2021 to shareholders on the register on 5 March 2021.

Principal risks and uncertainties

The Board has considered the risks and uncertainties which could have a material effect on the Group's performance and position. Whilst there is continuing uncertainty regarding both the impact of COVID-19 and Brexit, as well as global macroeconomic conditions and trade tensions, the overall impact and likelihood of our principal risks is not considered to have changed significantly. This conclusion also reflects the mitigation undertaken by the Group in response to these risks. The principal risks and uncertainties set out on pages 26 to 36 of the 2020 Annual Report therefore remain relevant.

Brexit

To mitigate against the potential impacts of the UK leaving the EU we established a warehouse in Ireland, expanded the existing warehouse in Germany and increased the inventory of certain finished goods and components at sites within the EU and the UK. Although there have been some delays at the UK borders for shipments into the EU since 1 January 2021, the measures that we have taken have minimised the impact on customer service.

Going concern

The Directors have prepared the unaudited interim financial information on a going concern basis. In considering the going concern basis, the Directors have considered the above-mentioned principal risks and uncertainties, as well as the Group's current trading performance and updated cashflow forecasts.

In the 2020 Annual Report we disclosed details of 'severe scenario' forecasts used in the Director's going concern assessment, and viability statement, as at August 2020. Both Metrology and Healthcare are expected to outperform the 'severe scenario' forecasts for the year to 30 June 2021, and performance in subsequent periods is also expected to outperform the respective 'severe scenario' forecasts.

The Directors have also considered the financial resources available to the Group, with net current assets of £331.5m at 31 December 2020 (compared to £281.6m at 30 June 2020), including £186.6m net cash and bank deposits at 31 December 2020, an increase from £120.4m at 30 June 2020. In addition, the going concern assessment does not rely upon any external financial support.

Outlook

The Board remains confident in the long-term prospects for the Group due to its strong financial position, the high quality of our people, our innovative product pipeline, extensive global sales and marketing presence and relevance to high-value manufacturing.

Whilst the trading environment remains uncertain as a result of the pandemic, we currently have a strong order book, and we are well placed to take advantage of the opportunities presented by any recovery in the global economy. At this stage, we expect full year revenue to be in the range of £515m to £545m. Adjusted profit before tax is expected to be in the range of £85m to £105m.

1Note 11, 'Alternative performance measures', defines how adjusted profit before tax, operating profit and earnings per share are calculated.

Consolidated income statement

Consolidated statement of comprehensive income and expense

Consolidated balance sheet

* December 2019 cash and cash equivalents and bank deposits have been restated following a change in accounting policy explained in the 2020 Annual report, p.111, to show £30,000,000 of Bank deposits separately from Cash and cash equivalents.

Consolidated statement of changes in equity

Consolidated statement of cash flow

* December 2019 cash and cash equivalents and bank deposits have been restated following a change in accounting policy explained in the 2020 Annual report, p.111, such that the Consolidated statement of cash flow has been amended to show a cash inflow of £22,500,000 in investing activities for the amounts maturing from deposits exceeding three months and not accessible on demand.

Responsibility statement

The condensed set of financial statements is the responsibility of, and has been approved by, the Directors. We confirm that to the best of our knowledge:

- As required by DTR 4.2 of the Disclosure Rules and Transparency Rules, the condensed set of financial statements, which has been prepared in accordance with the applicable set of accounting standards, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation as a whole. The Interim report has been prepared in accordance with IAS 34, 'Interim Financial Reporting', as issued by the International Accounting Standards Board and as adopted by the EU.

- The Interim report includes a fair review of the information required by:

(a) DTR 4.2.7 of the Disclosure Rules and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8 of the Disclosure Rules and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last Annual Report that could do so.

On behalf of the Board

Allen Roberts FCA

Group Finance Director

4 February 2021

Notes

1. Basis of preparation

The Interim Report, which includes the condensed consolidated financial statements for the six months ended 31 December 2020, was approved by the Directors on 4 February 2021.

The condensed consolidated financial statements for the six months ended 31 December 2020 were prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' (IAS 34) as issued by the International Accounting Standards Board and as adopted by the European Union, and apply the same accounting policies, presentation and methods of calculation as were applied in the preparation of the Group's consolidated financial statements for the year ended 30 June 2020, except for income taxes which are accrued using the forecast tax rate for the financial year, and except for the adoption of new accounting standards.

The condensed consolidated financial statements included in this Report have not been audited and do not constitute the Group's statutory accounts as defined in section 434 of the Companies Act 2006. The information relating to the year ended 30 June 2020 is an extract from the Group's published Annual Report for that year, which has been delivered to the Registrar of Companies, and on which the auditor's report was unqualified and did not contain any emphasis of matter or statements under section 498(2) or 498(3) of the Companies Act 2006.

Going concern

The Directors have prepared the unaudited interim financial information on a going concern basis. In considering the going concern basis, the Directors have considered the above-mentioned principal risks and uncertainties, as well as the Group's current trading performance and updated cashflow forecasts.

In the 2020 Annual Report we disclosed details of 'severe scenario' forecasts used in the Director's going concern assessment, and viability statement, as at August 2020. Both Metrology and Healthcare are expected to outperform the 'severe scenario' forecasts for the year to 30 June 2021, and performance in subsequent periods is also expected to outperform the respective 'severe scenario' forecasts.

The Directors have also considered the financial resources available to the Group, with net current assets of £331.5m at 31 December 2020 (compared to £281.6m at 30 June 2020), including £186.6m net cash and bank deposits at 31 December 2020, an increase from £120.4m at 30 June 2020. In addition, the going concern assessment does not rely upon any external financial support.

Having made appropriate enquiries, the Directors are satisfied that, at the time of approving the unaudited condensed consolidated financial statements, it is appropriate to continue to adopt a going concern basis of accounting.

New accounting standards and policies

The following new standards and amendments became effective as at 1 January 2020 and have been adopted for the financial year commencing 1 July 2020.

- Amendments to IFRS 3 Definition of a Business

- Amendments to IFRS 7, IFRS 9 and IAS 39 Interest Rate Benchmark Reform

- Amendments to IAS 1 and IAS 8 Definition of Material

- Amendments to References to the Conceptual Framework for Financial Reporting

- Amendments to IFRS 16 COVID-19-Related Rent Concessions

These have not had an impact on these financial statements.

2. Segmental information

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. More details of the Group's products and services are given in the Strategic report of the 2020 Annual report.

In normal trading conditions, whilst future revenue is difficult to predict given that the Group's outstanding order book is typically around one month's worth of revenue value, larger consumer electronics orders in the APAC region within the metrology segment typically fall in the first or last quarter of the financial year. In addition, the Group typically experiences lower demand in August and December, and so revenue and operating profits are typically lower in the first half of the year. This information is provided to allow for a better understanding of the results, and management do not believe that the business is 'highly seasonal' in accordance with IAS 34. Whilst this is the case during normal trading conditions, COVID-19 may introduce some additional fluctuations in the short-term.

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 following table shows the analysis of revenue by geographical market:

Revenue in the above 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 amounting to 10% or more of the Group's total revenue

for the period.

3. Financial income and expenses

Currency losses relate to revaluations of foreign currency denominated balances using latest reporting currency exchange rates. The losses recognised in both the six months to 31 December 2020 and the six months to 31 December 2019 largely related to an appreciation of sterling relative to the dollar affecting dollar-denominated intragroup balances in the Company (Renishaw plc). These losses are partially offset by rolling one-month forward currency contracts, with fair value gains recognised in financial income. After these mitigating activities, net currency gains in the six months to 31 December 2020 amounted to £543,000 (December 2019: £1,968,000 net loss).

4. Taxation

The income tax expense in the Consolidated income statement has been estimated at a rate of 19.0% (December 2019: 17.4%), before the net recognition of deferred tax assets of £693,000 (December 2019: impairment of £809,000), based on management's best estimate of the full year effective tax rates by geographical unit applied to half-year profits. The net deferred tax asset recognition arises mainly from increased certainty over the recoverability of a portion of previously unrecognised losses in our US business, following better than previously expected current year taxable profit forecasts. The overall effective tax rate for the six months to 31 December 2020 is 18.0% (December 2019: 25.6%).

5. Earnings per share

The earnings per share for the six months ended 31 December 2020 is calculated on earnings of £52,460,000 (December 2019: £7,395,000) and on 72,778,904 shares (December 2019: 72,778,904 shares), being the number of shares in issue during the period. This excludes 9,639 shares held by the Renishaw Employee Benefit Trust.

6. Dividends

All shareholders on the register on 5 March 2021 will be paid an interim dividend of 14.0p net per share on 6 April 2021, resulting in a dividend payable of £10,189,047.

7. Property, plant and equipment

Additions to assets in the course of construction of £3,040,000 (December 2019: £10,628,000) comprise £251,000 (December 2019: £8,412,000) for freehold land and buildings and £2,789,000 (December 2019: £2,216,000) for plant and equipment. At the end of the period, assets in the course of construction, not yet transferred, of £6,663,000 (December 2019: £18,275,000) comprise £2,804,000 (December 2019: £14,269,000) for freehold land and buildings and £3,859,000 (December 2019: £4,006,000) for plant and equipment.

8. Intangible assets

As detailed in the 2020 Annual report, the key assumption in determining the value-in-use of intangible assets are sales forecasts. As noted previously in this report, both Metrology and Healthcare are now expected to outperform the forecasts at 30 June 2020, which is also the case for the constituent business units relating to the intangible assets above. As a result, no impairments have been recognised in the six months to 31 December 2020 (December 2019: £1,973,000).

9. Financial instruments

There is no significant difference between the fair value of financial assets and financial liabilities and their book value in the Consolidated balance sheet. All financial assets and liabilities are held at amortised cost, apart from the forward exchange contracts which are held at fair value, with changes going through the Consolidated income statement unless subject to hedge accounting. The fair values of the forward exchange contracts have been calculated by a third party expert, discounting estimated future cash flows on the basis of market expectations of future exchange rates, representing level 2 in the IFRS 13 fair value hierarchy. There were no transfers between levels during any period disclosed.

At 31 December 2020 the total nominal value of USD, EUR and JPY forward contracts held for cash flow hedging purposes was £654,888,000. During the 2020 financial year, global macroeconomic uncertainty resulted in a reduction to the 'highly probable' revenue forecasts of Renishaw plc and Renishaw UK Sales Limited, being the hedged item, resulting in proportions of forward contracts failing hedge effectiveness testing, with nominal value amounting to £247,547,000. Accumulated fair value losses on forward currency contracts ineffective as a cash flow hedge amounting to £24,361,000 were consequently recycled from the Cash flow hedging reserve to the Consolidated income statement in the previous financial year. Subsequent fair value movements on outstanding ineffective forward contracts accumulate in the Consolidated income statement, with a resultant £23,289,000 gain in the six months to 31 December 2020. A loss of £2,763,000, mostly relating to fair value movements on options contracts previously entered into with the forward contracts, was also reported in 'Gains/(losses) from the fair value of financial instruments - derivatives'. At 31 December 2020 the remaining nominal value of USD, EUR and JPY forward contracts ineffective for cash flow hedging and yet to mature amounted to £189,162,000, with no additional forward contracts becoming ineffective for hedge accounting purposes in the six months to 31 December 2020.

On an ongoing basis, a 10% depreciation of GBP against USD, EUR and JPY would result in a £18,916,000 loss being recognised in the Consolidated Income Statement, while a 10% appreciation would result in a £17,197,000 gain.

Fair value gains and losses relating to this have been excluded from adjusted profit measures, see note 11 for further detail.

Credit risk

The Group carries a credit risk relating to non-payment of trade receivables by its customers and establishes an allowance for impairment in respect of trade receivables where recoverability is considered doubtful. In the six months to 31 December 2020, the Group has not experienced a deterioration in debtor repayments nor in the assumptions used in calculating allowances for expected credit losses. At 31 December 2020, total expected credit losses amounted to £5,166,000, being 5.1% of gross trade receivables, compared with £5,964,000 at 30 June 2020, being 5.4% of gross trade receivables.

Liquidity risk

The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, and the Group continues to use monthly cash flow forecasts on a rolling 12-month basis to monitor cash requirements. With net cash and bank deposits at 31 December 2020 totalling £186,619,000, an increase of £66,233,000 from 30 June 2020, and bank deposits of maximum three-month maturity, the Group's liquidity has improved in the six months to 31 December 2020.

10. Employee benefits

In October 2020 the trustees of the Renishaw Pension Fund notified the Company of a difference between the calculation of liabilities in the UK Defined Benefit Pension Fund for administration purposes and for accounting purposes. Following an initial review, it appears that corrections may be needed to the way that some pensions are calculated, and the value placed on these pension benefits for accounting purposes and these corrections would relate to the period over which revaluation and late retirement factors are applied. The position is not yet certain and we are working with the trustees to reach an agreed conclusion. Given this current uncertainty over the outcome (and therefore the financial impact), we have not made any adjustments in the financial statements in the six months to 31 December 2020.

11. Alternative performance measures

In accordance with Renishaw's Alternative Performance Measures (APMs) policy and ESMA Guidelines on Alternative Performance Measures (2015), APMs are defined as - Revenue at constant exchange rates, Adjusted profit before tax, Adjusted earnings per share and Adjusted operating profit.

Revenue at constant exchange rates is defined as revenue recalculated using the same rates as were applicable to the previous year and excluding forward contract gains and losses.

Adjusted profit before tax, Adjusted earnings per share and Adjusted operating profit are defined as the profit before tax, earnings per share and operating profit after excluding costs relating to business restructuring, and gains and losses in fair value from forward currency contracts which did not qualify for hedge accounting and which have yet to mature.

Restructuring costs reported separately in the Consolidated Income statement have also been excluded from adjusted measures, on the basis that they relate to matters that do not frequently recur. During the 2020 financial year the Board introduced its 'Fit for the future' strategy, which incorporated the rationalisation and reorganisation of certain operating activities, particularly relating to the additive manufacturing (AM) business, and cost control measures which included a UK compulsory redundancy programme. No expenses relating to this restructure have been incurred in the 2021 financial year.

From 2017, the gains and losses from the fair value of financial instruments not effective for cash flow hedging have been excluded from statutory profit before tax, statutory earnings per share and statutory operating profit in arriving at Adjusted profit before tax, Adjusted earnings per share and Adjusted operating profit, to reflect the Board's intent that the instruments would provide effective hedges. This is classified as 'Fair value (gains)/losses on financial instruments not eligible for hedge accounting (i)' in the following reconciliations. The amounts shown as reported in revenue represent the amount by which revenue would change had all the derivatives qualified as eligible for hedge accounting. Gains and losses which recycle through the Consolidated income statement as a result of contracts deemed ineffective during 2020 are also excluded from adjusted profit measures, on the basis that all forward contacts are still expected to be effective hedges for Group revenue, while the potentially high volatility in fair value gains and losses relating to these contracts will otherwise cause confusion for users of the financial statements wishing to understand the underlying trading performance of the Group. This is classified as 'Fair value (gains)/losses on financial instruments not eligible for hedge accounting (ii)' in the following reconciliations.

The Board considers these alternative performance measures to be more relevant and reliable in evaluating the Group's performance.

Adjustments to segmental operating profit:

12. Related party transactions and post balance sheet events

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Full details of the Group's other related party relationships, transactions and balances are given in the Group's Annual report for the year ended 30 June 2020. No related party transactions have taken place in the first six months of the financial year that have materially affected the financial position or the performance of the Group during that period.

Financial calendar

Registered office:

Renishaw plc

New Mills

Wotton-under-Edge

Gloucestershire

GL12 8JR

UK