PRESSURE TECHNOLOGIES PLC ANNUAL REPORT 2013 A LEADING DESIGNER AND MANUFACTURER OF ENGINEERING SOLUTIONS FOR HIGH PRESSURE MARKETS P R E S S U R E T E C H N O L O G I E S P L C A N N U A L R E P O R T 2 0 1 3 Alternative Energy Engineered Products Cylinders A LEADING DESIGNER AND MANUFACTURER OF HIGH PRESSURE ENGINEERING SYSTEMS, SERVING THE GLOBAL ENERGY, DEFENCE AND INDUSTRIAL GASES MARKETS 01 Pressure Technologies plc Annual Report 2013 HIGHLIGHTS Record revenue £34.4m (2012: £30.4m) Adjusted earnings per share 22.6p (2012: 12.5p) Operating profit post acquisition costs and related amortisation £2.9m Total dividend 7.8p per share (2012: 7.5p) (2012: £1.8m) Pre-tax profit £2.9m (2012: £1.8m) Basic earnings per share 19.4p (2012: 11.2p) Operating cash flow £2.8m (2012: £1.9m) Year end net funds £4.0m (2012: £2.7m) Growth in sales and profits led by the Cylinder and Engineered Products divisions as a result of increased activity in the oil and gas market Breakthrough for the Alternative Energy division as Chesterfield BioGas wins £4.6 million of major orders for delivery in 2014 Strong order books and pipeline across the Group due to sustained activity in oil and gas, defence and alternative energy Group pressing on with its strategy of organic and acquisitive diversification Company Overview Highlights Group Structure Chairman’s Statement Business Review Chief Executive’s Statement Finance Director’s Report Key Performance Indicators Principal Risks and Uncertainties Governance Directors and Advisers Report of the Remuneration Committee Directors’ Report Report of the Independent Auditor to the Members of Pressure Technologies plc Financial Statements Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Accounting Policies Notes to the Consolidated Financial Statements Company Balance Sheet Notes to the Company Financial Statements 01 02 04 06 12 14 16 18 20 23 27 28 29 30 31 32 38 55 56 Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 02 Pressure Technologies plc Annual Report 2013 GROUP STRUCTURE The Group is organised into three divisions: Cylinders (Chesterfield Special Cylinders), Engineered Products (Hydratron and Al-Met) and Alternative Energy (Chesterfield BioGas). These divisions serve four markets: Oil and Gas, Defence, Industrial Gases and Alternative Energy. 1 2 3 OIL AND GAS Chesterfield Special Cylinders / Engineered Products Sales £27.6m (2012: £24.1m) % of Group Revenue 80% (2012: 79%) The largest market sector for the Group, Oil and Gas, is and will remain, the focus for development and acquisitions. The market for hydrocarbons is such that even if there is a reduction in their use as a fuel, industrial uses will continue to increase and this will be an important market for decades to come. Sales into this market grew by 14% in 2013. This was due to a combination of further increases in deep-water oil rig and drillship building where the Cylinder Division supplies air pressure vessels and a major increase in orders for wear parts for subsea trees, a key market for the Engineered Products Division. This increased activity has continued into 2014. The Cylinder Division, also offers a range of in-situ inspection services that give reductions in cost and time for statutory pressure vessel retest. This service is gaining considerable attention from the market and has won a number of awards for innovation. 03 Pressure Technologies plc Annual Report 2013 5 4 KEY Agents and distributers Manufacturing and sales 1. Head Office Chesterfield Special Cylinders 1. Chesterfield BioGas 2. Hydratron Ltd 3. Al-Met 4. Hydratron Inc 5. CSC Deutschland DEFENCE INDUSTRIAL GASES ALTERNATIVE ENERGY . s m e t s y S E A B 0 1 0 2 © t h g i r y p o C Chesterfield Special Cylinders / Engineered Products Chesterfield Special Cylinders / Engineered Products Chesterfield BioGas Sales £3.8m (2012: £2.2m) % of Group Revenue 11% (2012: 7%) Sales £1.8m (2012: £3.9m) % of Group Revenue 5% (2012: 13%) Sales £1.2m (2012: £0.3m) % of Group Revenue 4% (2012: 1%) The Group supplies the UK and international naval and aerospace markets. Our largest market in this sector is the supply of ultralarge cylinders into the naval market where we have a world-wide reputation for our expertise. We also supply small steel cylinders into the military aerospace sector and our Engineered Products division supplies test equipment into the UK defence sector. Following the closure of our German competitor in the naval cylinder market, our Cylinder Division was awarded major contracts for the supply of cylinders for naval vessels being built in Germany. Chesterfield Special Cylinders is now the principal supplier of ultralarge cylinders for the naval shipbuilding market in Europe. Outside Europe, we won further contracts for South Korea and our long term aim remains to break into the US naval market. The Cylinder Division also offers a range of in-situ inspection services and specialist cleaning services into the naval and aerospace sectors. A diverse range of products and services is supplied into this market by our Cylinder Division, ranging from bulk gas storage for large industrial applications to the reconditioning and retest of cylinders and trailers. Our Engineered Products Division supplies a range of test equipment for high pressure components. Sales into this market were lower than in the prior year as a result of lower sales into the bulk storage and transportation market by the Cylinder Division. There are signs of an upturn in this market and two, innovative, composite cylinder trailers are currently being manufactured for the European market. In the medium to long term, we expect to see an increase in the bulk storage and transportation of compressed natural gas and hydrogen as result of growth in the alternative fuels market. As with the Oil and Gas and Defence markets, the Cylinder Division offers a range of in-situ testing services into this market. The Group provides a range of equipment in the UK and Eire for the upgrade of biogas to biomethane for injection into the gas grid, licensed in-perpetuity to our Chesterfield BioGas subsidiary by world market leading Greenlane® Biogas. Chesterfield BioGas was one of the early entrants into this market and supplied upgrade equipment to the first project to inject biomethane into the UK gas grid in 2010. A second small upgrader was supplied at the beginning of the year under review but a number of regulatory and financial hurdles slowed down major adoption of this technology. In May 2013 the last of these hurdles was resolved and we won two large orders for delivery in 2014 with a combined sales value of £4.6 million. The Division is at an advanced stage of negotiation on a number of follow-on projects. Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 04 Pressure Technologies plc Annual Report 2013 CHAIRMAN’S STATEMENT as we benefited from the effects of operational gearing. The Group’s balance sheet continues to strengthen on the improved trading results, with a year-end net asset value of £17.5m (2012: £16.1m), £4.0m of net cash (2012: £2.7m) and no bank debt. As a result of the solid balance sheet and positive trading outlook, the Board is continuing its progressive dividend policy and is recommending a final dividend of 5.2p per share (2012: 5.0p), giving a total of 7.8p per share for the year; a 4% increase on last year. If approved, the final dividend will be paid to shareholders on 7 March 2014. Trading and Market Conditions Overall conditions in our largest market, oil & gas, were favourable during the year with the global demand for oil increasing by 1.2%. Oil prices have traded between US$90-120 per barrel over the past three years, with yearly averages stabilising around US$110. This has provided a stable investment environment, whereby spending on oil and gas Exploration and Production (E&P) in 2013 has experienced an estimated increase of 6%, creating a positive impact on our two core sectors: deep water drilling rigs and subsea wellheads. The quest to find and develop oil fields in deeper waters has put pressure on the ageing stock of drilling rigs, mostly built during the 1970-90s, which has spurred a flurry of orders for sixth-generation ultra-deep water rigs capable of operating in 3,000m water depths. This was strongly reflected in sales in our Cylinders Division and in our continued strong order book. However, many of these new-build orders have been placed with South Korean shipbuilders on a fixed-price, lump-sum basis, which has put pressure on pricing from suppliers of equipment, as shipbuilders try to maximize their profits. In response to this, our Cylinders Division has continued to develop higher added value services and expanded its portfolio of defence customers, winning major contracts for naval projects in Germany. £ Group sales £34.4m (2012: £30.4m) £ Pre-tax profit £2.9m (2012: £1.8m) % Return on sales 8.4% (2012: 5.8%) In this my first year as Chairman of the Group, I am delighted to report a very strong set of results for 2013 and excellent prospects for 2014. Pressure Technologies is a great business, operating in some of the world’s most dynamic markets with demanding customers who value our ability to design and manufacture engineering solutions that meet their exacting standards. There have been major changes to the Board during the year. Neil MacDonald and I joined as non-executive directors and the Group’s former Chairman, Richard Shacklady retired in March. I would like to extend the Board’s thanks to Richard for his outstanding contribution to the company since 2004, in particular his vision to float the company on AIM, which enabled us to fund the expansion and diversification of the Group. Results Group sales for the full-year reached a record £34.4m (2012: £30.4m), which yielded a pre-tax profit of £2.9m (2012: £1.8m), giving a return on sales of 8.4% (2012: 5.8%). It is particularly pleasing to note that large incremental profits were generated in Cylinders and Engineered Products divisions “Pressure Technologies is a great business, operating in some of the world’s most dynamic markets with demanding customers who value our ability to design and manufacture engineering solutions that meet their exacting standards.” FOCUS WHAT IS BIOGAS UPGRADING? Biogas is generated as a product of the anaerobic digestion of organic waste. A typical composition could be 60% methane, 39% carbon dioxide (“CO2”) and 1% other gases. Upgrading removes the majority of the CO2 and other gases to give upwards of 98% pure methane. The Greenlane® upgrading process uses water under pressure in a process akin to a giant soda syphon. The CO2 dissolves in the water and the less soluble methane is collected and dried for injection into the natural gas grid. 05 Pressure Technologies plc Annual Report 2013 We are aware that the four leading subsea tree manufacturers experienced unprecedented order intake during 2013, which is further confirmation of the quest to find and develop oil in deep water. Encouragingly, such levels of order intake have been very positive for our Engineered Products Division, which has enjoyed record sales and order intake and solid profit growth. This outstanding performance has continued into the first quarter of the current financial year. Regulatory changes in the UK have resulted in our Alternative Energy Division securing large orders for biogas upgrading equipment for delivery in the current financial year. This is the breakthrough we had anticipated and much credit is due to the Board and management for their vision and perseverance in this venture. Prospects Set against market forecasts of global GDP growth for 2014 in the order of 3% the global demand for oil is expected to increase by 1.3%, slightly higher than the previous year. This increased demand will further underpin the oil price and E&P investment, which is forecast to grow by 8% thereby creating a generally positive and encouraging picture for the coming year. At a more granular level, we have begun the current financial year with an order book 37% higher than last year, so the prospects for a further improvement in performance are very promising. We also continue to develop new products and services across the Group and are planning major capital expenditure over the next two years to expand capacity, improve productivity and quality and increase profitability. In parallel with growing our core businesses, the Board continues to evaluate earnings enhancing acquisitions which complement and add value to our existing portfolio. I view the current year with much enthusiasm and look forward to presenting further evidence of the Group’s ability to capitalise on the opportunities which lie ahead. Alan Wilson Chairman 3 December 2013 Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 06 Pressure Technologies plc Annual Report 2013 CHIEF EXECUTIVE’S STATEMENT The past year for Pressure Technologies has seen a material step change in our businesses. Once again the Group delivered improved results and the diversification of our businesses continued apace. The major markets of all of the Group’s three divisions, Cylinders, Engineered Products and Alternative Energy, are experiencing significant volume growth and there is a real sense that this will be a continuing trend in the mid term. Cylinder Division Chesterfield Special Cylinders (“CSC”) had a very good year. Continued growth in its principal market, the supply of Air Pressure Vessels (“APVs”) for motion compensation systems in the deep water oil and gas market, combined with an increase in delivery schedules to the Naval market, resulted in both increased sales and significantly increased profits. Pleasingly, the positive trends in the deep water oil and gas market have carried over into the current financial year. Our current order book, in terms of number of projects won, is ahead of the same time last year although market share has been maintained at the expense of the well flagged significant reductions in selling price. Whilst this work remains profitable, these selling price reductions are expected to materially impact margins in the division. We continue to develop the customer base in this market and CSC was awarded US ASME accreditation, which is already leading to additional sales orders in the United States. Our presence in the naval defence market has continued to expand, particularly since the closure of our European competitor, MCS International. We have won significant orders for vessels being built in German shipyards and we are now the principal supplier of ultra-large cylinders on all major European submarine projects. Our medium term target is penetration of the large US naval market. Sales of services fell in the year as a result of an anticipated reduction in hydrogen trailer retest and refurbishment for BOC. This was due to a combination of phasing of the retest cycle and a continued downturn in the UK hydrogen market. There are signs of improvement and we have secured new retest and refurbishment contracts from other industrial gases companies. CYLINDER DIVISION Sales £17.3m (2012: £16.3m) Operating profit £3.6m (2012: £2.3m) Net Assets £6.9m (2012: £6.8m) 07 Pressure Technologies plc Annual Report 2013 We have continued to develop the in-situ retest service for the oil and gas and defence markets. Sales growth for this new service was lower than anticipated, as a result of two projects requiring replacement cylinders following our initial site survey. This will, however, result in additional cylinder sales in the current year. The rate of new in-situ project wins is accelerating and we anticipate that this service will grow rapidly over the next two years. Our long term goal is to generate 50% of divisional profits through sales of services. The market for new high pressure gas trailers has been moribund. We did, however, secure orders for two new state of the art compressed natural gas (“CNG”) trailers for delivery in the current financial year. These trailers, developed with a major industrial gases company, were designed and will be built by CSC using lightweight, composite cylinders supplied by Worthington. As the use of alternative fuels such as CNG and hydrogen increases, we expect the market for this type of trailer and large high pressure storage facilities to increase. CSC is actively engaged in this market through its German subsidiary, CSC Deutschland GmbH. Major capital spend in the year was centred on improving our forging capability for small cylinders and naval defence cylinders. The Group anticipates spending in the order of £1 million over the next two years to further enhance our capabilities in these areas both in terms of quality and efficiency. “The past year for Pressure Technologies has seen a material step change in our businesses. Once again the Group delivered improved results and the diversification of our businesses continued apace.” FOCUS SUPPORTING THE ARMY RESERVE As well as supplying equipment and technical services to our UK Armed Forces, the Group provides practical support and employment opportunities for service personnel. Chesterfield Special Cylinders has been commended as a supportive employer and for piloting a work experience scheme for Army Reservists. It has been presented with certificate by Brigadier Greville Bibby CBE, Commander 15 (North East) Brigade. The scheme gives Army Reservists not in civilian employment, experience and skills in manufacturing which increases their employability and complements the skills they are developing in the Army Reserve. Photograph by Corporal Gabriel Moreno, Royal Logistic Corps – Crown Copyright Reserved 2013 Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 08 Pressure Technologies plc Annual Report 2013 ENGINEERED PRODUCTS Sales £16.0m (2012: £13.9m) Operating profit £1.6m (2012: £1.0m) Net Assets £7.7m (2012: £7.7m) Engineered Products Division The division is primarily focused on the oil and gas market but, unlike the Cylinder Division, it is not confined to a narrow sector of the market, either geographically or technologically. The division’s products are used onshore and in all areas of offshore. The division comprises Hydratron, based in Altrincham and Houston, Texas, and Al-Met in Pontyclun, South Wales. Hydratron manufactures a range of air operated high pressure hydraulic pumps, gas boosters, power packs, hydraulic control panels and test rigs mainly for use in the oil and gas sector. Al-Met produces wear resistant components in a range of high alloy steels and tungsten carbides for use in high-pressure choke and flow control valves, designed to regulate flow volumes in extremely demanding applications in the subsea and surface oil and gas industries. Al-Met Al-Met had its best year ever, breaking records for both order intake and sales output, as a result of the rapidly growing subsea tree market and its ability to win greater market share through a focus on on-time in-full delivery. Major improvements to the factory layout and working practices also significantly improved productivity and the management team has been augmented to promote business development and to underpin gains in quality and environmental management. The increase in order intake has continued into the new financial year and, with subsea tree order lead times to the oil exploration and production sector currently at 18 months, we expect this trend to continue for the foreseeable future. Capital investment of at least £750,000 is planned in the current financial year to increase production capacity and the range of products. Due to the nature of equipment used at Al-Met, finance leasing is available and inexpensive; consequently we are able to spread the cost of purchase so that capital investment is self-financing. As a result, additional equipment over and above the current year’s budget will be leased if the current market dynamic continues. Hydratron Hydratron saw a sustained upturn in its markets in the second half of the year that more than offset the low order intake of the first quarter which impacted the first half year results. Annual sales in the UK side of the business were the highest ever. In May, the US business was brought under the direct control of the UK and significant progress has been made in strengthening the US sales and design functions. As with Al-Met, both order books and the pipeline remain very strong and we expect to make significant progress in the current year. Similarly, the management team has been strengthened in the area of quality and environmental management. As a result, the company has recently achieved both ISO14001 (environmental) and OHSAS18001 (health and safety) accreditation. These are important milestones for the business where our customers have an increasing focus on both environmental and health and safety management. During the year, the business has started to reduce the level of in-house manufacture of components in the UK 09 Pressure Technologies plc Annual Report 2013 to free up additional space for assembly of pumps and systems. This will continue in 2014 and consequently no major investment in plant and equipment is planned. The major expenditure of 2013 was replacement of the IT infrastructure, which will be followed up in the current year by investment in ERP systems to manage the growth and increasing complexity of the business. Product development is critical to the long-term success of the business. Our major development programme is centred on the automation of control panels and test systems. This has the benefit for the customer of simplifying operations, improving safety and providing a digital audit trail. The latter is particularly important for test systems where our customers’ customers are imposing more stringent product certification requirements. Plans are well advanced to increase the resources available for research and development. From January 2014, R&D will be managed separately from engineering under a recently recruited specialist R&D manager. This will allow Hydratron to speed up the time to market for development projects. Given our success in buying and integrating Al-Met and Hydratron into the Group, we see Engineered Products as an area for further development. There is significant organic growth potential which we will continue to pursue but we are also looking for acquisition opportunities to expand the range of products of the division. FOCUS OTIF AIDING GROWTH IN ENGINEERED PRODUCTS The Group has significant experience in using management techniques developed in the automotive industry to improve our businesses. In Engineered Products, the focus has been on On Time In Full (“OTIF”) delivery to our customers. In an industry with a history of poor customer service this is a clear differentiator. OTIF puts our customers first and reduces their costs and inventory levels. The discipline required to achieve OTIF also means that our businesses and supply chain are more efficient and we therefore get the double benefit of higher sales and lower costs. Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 10 Pressure Technologies plc Annual Report 2013 ALTERNATIVE ENERGY Sales £1.1m (2012: £0.2m) Operating Loss £(0.5)m (2012: £(0.5)m) Net Assets £0.2m (2012: £1.6m) Alternative Energy Chesterfield BioGas (“CBG”) sells a range of equipment for cleaning raw biogas produced by anaerobic digestion of organic waste. The cleaning process uses water to strip out unwanted gases such as carbon dioxide producing almost pure methane, known as biomethane, which is then injected into the UK natural gas grid. In the energy sector, this is termed Biogas to Grid (“BtG”). CBG was the first company in the UK to provide equipment for BtG at Didcot in 2010. In October 2012, CBG delivered its second BtG project to a waste processing site in Stockport and this was the reason for the increase in sales over 2012. Losses remained at £0.5 million, as we continued to invest for expected growth in 2014. In last year’s preliminary results presentation, I described the year under review as the “crucial year” for CBG. This has proved to be the case. The remaining regulatory hurdles to large scale injection of biomethane into the UK gas grid were resolved in May and we have seen a transformation of the sales pipeline as large utility companies and processors of organic waste have woken up to the potential of this market. To date we have received orders for delivery of two BtG projects in 2014 with a combined sales value of £4.6 million. Negotiations are at an advanced stage on further BtG projects, which may result in additional sales in the current financial year and give grounds for significant optimism for 2015. People As a Group, we recognise the importance of hiring, developing and retaining high calibre people. This is not only necessary to deliver our short term goals but is essential for our medium and long term succession planning. In the past year, two of our subsidiary Managing Directors have completed strategic decision making courses at Cranfield University; we have two senior managers who have completed MBAs and we continue to support a number of employees in first degree courses, professional qualifications and apprenticeships. All UK based manufacturing units now have apprentices and we have just recruited five new graduates across the Group. We will continue to seek out the best talent to ensure that we are properly resourced to meet our growth opportunities. Summary and outlook The year under review has been another good year for the Group and one in which we have made significant progress in all three divisions. The Group has continued to improve profitability, whilst at the same time improving the quality of these earnings through a better balance of performance across its divisions. Looking to the current year, there is significant growth potential for the Engineered Products and Alternative Energy divisions. The Cylinder Division has a fantastic opportunity to develop its service offerings, in particular in-situ testing, and this gives the Board confidence for further progress in the year. All operating divisions of the Group are expected to be profitable and we look forward to updating shareholders as the year progresses. John Hayward Chief Executive 3 December 2013 11 Pressure Technologies plc Annual Report 2013 STRATEGY BUILDING FOR THE FUTURE GOAL To build a highly profitable group of companies, specialising in technology for the containment and control of liquids and gases in pressure systems. STRATEGY To identify and develop, profitable niche opportunities in growth sectors for pressure products and services through a combination of organic growth and acquisitions. 1 IDENTIFYING ORGANIC AND ACQUISITION OPPORTUNITIES Internal focus, drawn from Group knowledge, market research and attending trade events External focus, capitilising on feedback from customers, agents, distributors and suppliers DELIVERY 2 DEVELOPING PROFITABLE ORGANIC GROWTH OPPORTUNITIES Structured development programmes with project champions subject to regular Group review Minimising risk through evolutionary development “Lean” business specialists at all operating companies focusing on total quality and profit maximisation 3 DEVELOPING PROFITABLE ACQUISITION OPPORTUNITIES Clear Group acquisition criteria: Minimised risk by focusing on closely related technologies and markets with overlapping customer base Profitable businesses with significant growth prospects Stable management teams capable of delivering growth Rapid integration of management and financial control Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 12 Pressure Technologies plc Annual Report 2013 FINANCE DIRECTOR’S REPORT Revenue The Group’s revenue grew to £34.4m (2012: £30.4m). The growth of 13% was driven by a continued recovery in CSC’s oil and gas business, growth in the Engineered Products Division and completion of a biogas upgrader project in the year. The Group seeks to target niche markets with good growth prospects and uses return on revenue as a key performance indicator. Our aim is a target return of 15% before taking account of the cost of acquiring subsidiaries and the subsequent amortisation of the intangible assets so acquired. Profitability The movement in profitability between the two years was as follows: Earnings before interest, taxation, depreciation and amortisation (“EBITDA”) (Stated before charging acquisition costs of £0.2m in 2013 (see below) Depreciation Amortisation – Chesterfield BioGas licence Amortisation – Development costs Operating profit pre acquisition costs and amortisation re acquired businesses Amortisation charges arising from the acquisition of Al-Met and Hydratron Acquisition related costs Profit before taxation 2013 £m 4.0 2012 £m 2.9 (0.6) (0.1) (0.6) (0.1) – (0.2) 3.3 2.0 (0.2) (0.2) (0.2) 2.9 – 1.8 The cost of the Chesterfield BioGas licence and distribution agreement with Greenlane Biogas is being amortised over a period of 15 years; this being the period over which significant revenues are expected to be generated. The Board intends to grow the Group both organically and by acquisition and consequently both acquisition related costs and goodwill and intangible assets are expected to be a recurring theme within the annual financial statements. In the interest of clarity, acquisition costs and the amortisation of intangible assets resulting from acquisitions are shown separately in the Income statement. The relevant costs for the last two years, are as follows: Amortisation of intangible assets acquired with Al-Met and Hydratron Acquisition related costs Total 2013 £m 0.2 0.2 0.4 2012 £m 0.2 – 0.2 13 Pressure Technologies plc Annual Report 2013 The remaining carrying value of these intangible assets totalling £0.3m (2012: £0.5m) will be fully amortised over the next two years. Cash flow The movement in cash flow can be summarised as follows: As required by IFRS 3, the costs of market research and professional fees in relation to possible acquisitions are expensed in the year in which they are incurred. It is pleasing to note that in each of the three years since Al-Met and Hydratron were acquired in 2010 they have generated profits before amortisation charges of over £1m p.a, relative to an acquisition cost (including borrowing assumed) of £5.8m. The effects on earnings per share of these adjustments are as follows: Earnings per share as reported Adjustment for acquisition costs and related amortisation Adjusted earnings per share 2013 £m 19.4p 3.2p 2012 £m 11.2p 1.3p 22.6p 12.5p Earnings before interest, tax, depreciation and amortisation (EBITDA) Movement in working capital Capital expenditure (net of disposals) Operating cash flow UK Corporation tax paid Dividend paid Acquisition of Hydratron (2012: deferred consideration paid) 2013 £m 3.8 2012 £m 2.9 (0.2) (0.8) 2.8 (0.6) (0.9) – (0.4) (0.6) 1.9 (0.5) (0.8) (0.8) Net movement 1.3 (0.2) Cash flow in 2013 was again strongly positive at the operational level. Net capital expenditure at £0.8m compares to a depreciation charge of £0.6m. Taxation The effective tax rate for the Group in 2013 was 23.6% (2012: 28.5%), which is in line with the UK standard rate of 23.5% as unrelieved US losses were compensated by a reduction in the UK taxation charge as detailed in note 9. Corporation tax paid in the UK during 2013 totalled £0.6m. There are no further deferred consideration payments to be made for either Al-Met or Hydratron. The Group has a strong balance sheet with net funds of £4.0m (2012: £2.7m) and an unused overdraft facility of £3m. James Lister Group Finance Director 3 December 2013 Foreign exchange The Group operates in international markets and accordingly trades in the Euro and the US Dollar, as well as Sterling. Whilst the level of exposure at any point in time is dependent on the nature of individual contracts, the Group usually has a partial hedge in place as both purchases and sales are made in Euro and also to a lesser extent in US dollars. With the Group’s manufacturing activities based mainly in the UK, management estimates that a 5% movement of the Euro against Sterling would affect Group profit by circa £0.5m. The effect on the Group of movements in the US dollar to Sterling exchange rate, as long as it is within normal trading parameters, is not significant. At the end of September 2013, the Group had contracts in place to sell €3.95m at an average exchange rate of €1.16 to £1 (2012: Contracts in place to sell €3.5m at an average exchange rate of €1.26). Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 14 Pressure Technologies plc Annual Report 2013 KEY PERFORMANCE INDICATORS (“KPIS”) The Board uses key performance indicators when assessing the performance of the Group. These KPIs are divided into three sections: ADJUSTED EARNINGS PER SHARE – PENCE 32.1 23.1 22.6 12.5 6.2 2009 2010 2011 2012 2013 REPORTABLE ACCIDENTS 3 2 1 0 0 22.6p Adjusted Earnings per Share 2 2009 2010 2011 2012 2013 Reportable Accidents Shareholders Adjusted earnings per share is used as a measure of shareholder return. In the interest of clarity, as stated in the Finance Director’s Report, acquisition costs and the amortisation of intangibles assets resulting from acquisition are shown separately in the income statement. The Board believe the use of adjusted earnings per share is a more appropriate KPI. Adjusted earnings per share is calculated as the profit before tax adjusted for the add back of acquisition costs and amortisation on acquired businesses, net of tax effects, divided by the weighted average number of shares in issue. Corporate Social Responsibility (CSR) This is sub-divided into two areas: Health & safety The measure used is reportable accidents where the target is zero across the Group. Environment The measure used is number of reportable environmental incidents. Again, the target is zero across the Group. A full-time health, safety and environmental manager reports directly to the Group Chief Executive on these matters. Environmental incidents are not graphed as there has been no reportable incident for the five year period. 15 Pressure Technologies plc Annual Report 2013 Financial Performance Growth is measured in terms of sales revenue. The efficiency of converting sales into profits is measured in terms of return on revenue. Return on revenue is calculated as operating profit pre acquisition costs and related amortisation divided by revenue. It is also stated after excluding Chesterfield BioGas which is still considered to be in start-up mode (see note 1 for the detailed segmental analysis). The Group target return on revenue is 15%. REVENUE – £ MILLION 34.4 30.4 26.2 23.1 21.7 2009 2010 2011 2012 2013 RETURN ON REVENUE – % 20.1 19.0 10.8 8.1 6.7 2009 2010 2011 2012 2013 34.4m Revenue 10.8% Return on Revenue Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 16 Pressure Technologies plc Annual Report 2013 PRINCIPAL RISKS AND UNCERTAINTIES Specific principal risks identified by management are described below together with management actions to minimise these risks: RISK AND IMPACT MANAGEMENT STRATEGY Customer concentration CSC and Al-Met both have one customer accounting for over 45% of their respective sales revenue. The loss of either of these customers would materially affect Group results. Development of markets, products and services Significant management resource is allocated to service the requirements of these customers to maintain customer loyalty. Market concentration A downturn in the deep water oil and gas sector would have a significant impact on results of both the Cylinder and Engineering Product divisions. Development of markets, products and services The Group has development programmes for new products and services to dilute the proportion of total revenues into these markets and, by growing other activities of the Group, both organically and by acquisition. Competitive pricing pressures The Group operates in certain markets where its major competitors are based in low cost countries which have considerable cost advantages and they are able to undercut on pricing. Reduced dependence on price sensitive business The Group has set minimum gross margin levels and does not reduce prices to unacceptable levels as experience indicates that these pressures reduce in the medium term. Product development is pursued in order to maintain a technical lead and a range of high value added service offerings is under development to reduce dependence on markets where this pricing pressure exists. Cost reduction through lean manufacturing and supplier development reduces the impact of pricing pressures. Contract delay CSC earns a significant amount of its revenues from large contracts in the deepwater oil and gas and defence markets and CBG is a start-up business in the Biogas to Grid market. In most cases, individual contracts in these two divisions are material to Group revenues and the timing of such contracts is influenced by a number of factors outside the control of the Group. Focused project management Major contracts are managed through project teams to ensure all elements in the contract quotation and negotiation process that are under our control or influence are managed efficiently and effectively. However, the impact of the timing of individual contracts on half-year and full-year revenue remains a significant risk to the Group. 17 Pressure Technologies plc Annual Report 2013 RISK AND IMPACT MANAGEMENT STRATEGY Supplier concentration The Group derives a high proportion of its raw material supplies from a small number of key suppliers, some of whom are competitors. Managing and developing the suppliers To reduce the inherent risk of supply from competitors, requirements are split across the available supplier base. A constant review is maintained to identify alternative suppliers subject to constraints on pricing and quality. Production concentration Each subsidiary operates from a single manufacturing site. In the event of a prolonged interruption to operations, the Group may not have the ability to transfer its manufacturing activities to other facilities. Active site management Health, safety and environmental risks which could result in site closure are managed on a day to day basis by a designated manager at each site. Equipment concentration The Group has a number of large pieces of equipment at CSC for which it would be uneconomical to duplicate that equipment to guarantee continuity of supply in the case of major equipment failure. A failure in one of these key pieces of equipment could lead to a prolonged interruption to operations. Active equipment management Key pieces of equipment are subject to on-going maintenance programmes and strategic spares for critical components are held. There remains a risk that, if a major component for which spares cannot be held failed, operations could still see a prolonged interruption. Staff concentration The Group is small and relies on a small number of key Directors, senior managers and specialists. A loss of a small number of such staff could have a major impact on Group revenues and development. Succession planning As the business grows, increases in staff numbers make succession planning easier and recruitment is already carried out to ensure that skills and expertise can be duplicated. Key man insurance is in place for the Group Chief Executive and Group Finance Director. Foreign currency The Group purchases some of its raw materials in both US Dollars and Euros and receives payment for some of its products in Euros. Movements in exchange rates could potentially impact Group revenues. Hedging of exchange rate exposures The Group has natural hedges for much of its foreign currency exposure. Regular reviews of the net exposure are maintained and where it is deemed necessary the exposure is reduced by the use of forward exchange contracts, subject to limits in the Group’s banking facility. Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 18 Pressure Technologies plc Annual Report 2013 DIRECTORS AND ADVISERS AJS Wilson Non-executive Chairman JTS Hayward Chief Executive TJ Lister Finance Director Alan is a degree-qualified Chartered Engineer with 33 years of experience from working in the oil & gas industry, the majority of which has been served at senior management and board level. His experience spans most aspects of the industry life cycle including; oil company operations, major capital projects, support services and product manufacturing. Alan joined the board of Pressure Technologies in February 2013 and also serves as Chairman and Non-executive Director of other private equity-backed and privately owned companies within the oil & gas sector. John joined the Company in 1997 when it was part of United Engineering Forgings. He led the MBO in 2004 that created Chesterfield Special Cylinders and then assumed the role of Chief Executive of Pressure Technologies on admission to AIM. John is a qualified accountant and has finance and general management experience in the steel, chemicals and engineering sectors. In 2008 he was the UK Ernst and Young Entrepreneur of the Year® for manufacturing. He holds a degree in Physics from Oxford University. James joined the Company in 2008. His previous engineering industry experience includes seven years with The 600 Group plc in roles both as Group Financial Controller and as Finance Director of 600 Lathes. Prior experience included 15 years with Bridon in a variety of roles including Group Development Manager where he acted as the in-house mergers and acquisitions manager. James is a qualified Chartered Accountant. 19 Pressure Technologies plc Annual Report 2013 PS Cammerman Non-executive Director NF Luckett Non-executive Director NA MacDonald Non-executive Director Philip has over 20 years’ industrial experience in engineering and hi-tech industries and has worked in both the UK and USA. He spent 23 years in the venture capital industry, playing a major part in the development of the YFM Group into the most active investor in UK SMEs. He retired from all YFM Group businesses in April 2008 following their disposal to GLE Capital. A qualified Chartered Accountant, Nigel is a former partner of Thomson McLintock & Co and latterly KPMG and has over 40 years of extensive corporate finance, insolvency and auditing experience. Since his retirement from KPMG in 1995, he has had a number of Non-executive Director and Chairman positions in the broad engineering sector. Nigel is Chairman of the Audit Committee. Neil is a Chartered Accountant with 25 years of experience in the oil and gas and engineering industries. He was Group Finance Director of AES Engineering Limited (AES), a successful, fast growing, privately owned mechanical seals manufacturer, until September 2012, when he resigned to take up the role of Master of The Company of Cutlers in Hallamshire. Neil remains on the Board of AES as a Non-Executive Director. Prior to this, he was Group Finance Director of the international aerospace company, Firth Rixson. Neil has valuable experience of fast growth in the oil and gas sector and general M&A. COMPANY INFORMATION Directors AJS Wilson Non-executive Chairman JTS Hayward Chief Executive TJ Lister Finance Director PS Cammerman Non-executive Director NF Luckett Non-executive Director NA MacDonald Non-executive Director Secretary TJ Lister Registered office Meadowhall Road Sheffield S9 1BT Registered number 06135104 Website www.pressuretechnologies.co.uk Nominated adviser Charles Stanley Securities 131 Finsbury Pavement London, EC2A 1NT Bankers Lloyds Bank 14 Church Street Sheffield, S1 1HP Auditors Grant Thornton UK LLP No 1 Whitehall Riverside Leeds, LS1 4BN Solicitors hlw Keeble Hawson LLP Commercial House 14 Commercial Street Sheffield, S1 2AT Registrars Capita Asset Services Northern House Woodsome Park Fenay Bridge Huddersfield, HD8 0GA Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 20 Pressure Technologies plc Annual Report 2013 REPORT OF THE REMUNERATION COMMITTEE The Remuneration Committee comprises four non-executive Directors and is chaired by Philip Cammerman. The committee meets when necessary, usually at least three times annually, and is responsible for determining the remuneration packages of the executive Directors and the Chairman. The remuneration of the non-executive Directors is set by the board annually. Policy on remuneration of Executive Directors The committee aims to ensure that the remuneration packages offered are designed to attract, maintain and motivate high calibre Directors without paying more than necessary for this purpose. The remuneration policy and packages attempt to match the interest of the executive with those of shareholders by providing: a) Basic salary and benefits Executive Directors’ basic salaries are reviewed each year, taking into account the performance of the individual and rates of salary and benefits for similar jobs in companies of comparable size. Benefits include all assessable tax benefits arising from employment by the Company and relate mainly to the provision of private medical and life assurance cover. The company pays 5% of basic salary into individual money purchase pension schemes so long as this is matched, by salary sacrifice, by the individual. b) Annual performance related cash bonus scheme In order to link executive remuneration to Group performance, executive Directors participate in a cash bonus scheme which, in the event of exceptional performance, can pay out up to a maximum of 50% of basic salary. c) Long Term Incentive Plan The company intends to introduce a long term incentive plan whereby, at the discretion of the Remuneration Committee, share options would be granted to executive directors and senior managers on a rolling annual basis. The extent to which options granted vest will be dependent on the cumulative growth in earnings per share (EPS) over the three year period following the grant relative to the EPS in the period immediately prior to grant as follow: Increase in EPS over three year period 33% 50% 100% % of annual salary over which options granted vest 25% 50% 100% The maximum grant of options in any one year will be fixed at 100% of basic salary for executive directors of Pressure Technologies plc and 50% of salaries for other senior managers in the Group. The option price will be set at the outset and be in line with the share price at that time. Executives who leave the Group before the expiry of the three year vesting period will lose their right to exercise their options. d) Service Contracts All executive Directors have rolling service contracts terminable on no more than one year’s notice. 21 Pressure Technologies plc Annual Report 2013 The following graph shows the Company’s performance over the previous five year period when compared to the performance of the AIM all share index. The Board and its advisors believe this to be the most appropriate broad equity market index with which to compare the Company’s performance. Total Shareholder Return (TSR) is calculated to show the theoretical growth in the value of a shareholding over a specified period assuming that dividends are reinvested to purchase additional shares. Pressure Technologies FTSE AIM All-Share ) 0 0 1 o t d e s a b e r ( x e d n I n r u t e R 180 160 140 120 100 80 60 40 20 0 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Directors’ Remuneration Particulars of Directors’ emoluments are as follows: Salary and fees £’000 19 38 28 28 10 145 119 387 Benefits £’000 Bonus £’000 Pension £’000 — — — — — 2 2 4 — — — — — 40 49 89 — — — — — 15 13 28 Employers’ national insurance 2013 £’000 Total 2012 £’000 Employers’ national insurance 2012 £’000 30 — 20 20 — 136 115 321 — — 3 2 — 24 22 51 — — 2 2 — 16 13 33 Total 2013 £’000 19 38 28 28 10 202 183 508 Non-Executive: RL Shacklady (Resigned 21 March 2013) AJS Wilson (Appointed 12 February 2013) PS Cammerman NF Luckett NA MacDonald (Appointed 4 June 2013) Executive: JTS Hayward TJ Lister Total emoluments All the payments shown for RL Shacklady were paid to RLS Associates, a partnership which he controls. The remuneration of AJS Wilson and, since April 2013, for NF Luckett, is paid to management companies which they control. The number of Directors who are accruing benefits under money purchase pension arrangements is two (2012: two). Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 22 Pressure Technologies plc Annual Report 2013 REPORT OF THE REMUNERATION COMMITTEE CONTINUED The Group believes that the Directors of Pressure Technologies plc are the only key management personnel under the definition of IAS 24 ‘Related party disclosures’. In addition to the above, Directors have received dividends during the year as follows: Non-Executive: RL Shacklady PS Cammerman NF Luckett Executive: JTS Hayward TJ Lister Total dividends paid to Directors Directors’ Options The Directors’ interests in share options are as follows: TJ Lister TJ Lister TJ Lister TJ Lister Total 2013 £’000 Total 2012 £’000 3 3 4 76 1 87 5 2 4 73 — 84 Date granted Number Option price 7 October 2009 23 February 2012 6 August 2012 9 August 2013 51,612 73,089 6,000 53,000 232.5p 150.5p 150.0p 242.5p Further details of the share options granted to executive Directors can be found on page 24 of the Directors’ report. On behalf of the Board Philip Cammerman Chairman, Remuneration Committee 3 December 2013 23 Pressure Technologies plc Annual Report 2013 DIRECTORS’ REPORT The Directors present their report and the audited financial statements for the period from 30 September 2012 to 28 September 2013. Principal activities Pressure Technologies plc (“PT”) is the holding Company for the following Group operations: Cylinders Chesterfield Special Cylinders Limited (“CSC”) whose principal activities are the design, manufacture, testing and reconditioning of seamless steel high pressure gas cylinders. During the period a new company CSC Deutschland GmbH was incorporated. Engineered Products Al-Met Limited (‘Al-Met’) whose principal activity is the manufacture of precision engineered valve components for use in the oil and gas industry. The Hydratron Group of Companies’, (‘Hydratron Ltd’ and ‘Hydratron Inc’) whose principal activity is the design, manufacture and sale of a range of air operated high pressure hydraulic pumps, gas boosters, power packs, hydraulic control panels and test rigs. Alternative Energy Chesterfield BioGas Limited (“CBG”) which was formed to market, sell and manufacture biogas upgrading equipment to produce high purity biomethane for use as a vehicle fuel or injection into the natural gas grid using technology licensed in perpetuity from Greenlane® Biogas of New Zealand. Results and dividends The consolidated statement of comprehensive income is set out on page 28. The profit on ordinary activities before taxation of the Group for the period ended 28 September 2013 amounted to £2.878 million (2012: £1.778 million). An interim dividend of 2.6 p per share was paid during the period (2012: 2.5p). The Directors recommend the payment of a final dividend of 5.2p per share (2012: 5.0p). Business review The Chairman’s and Chief Executive’s Statements on pages 4 to 10 gives a detailed review of the current year’s performance. The operational overview is contained in the Chief Executive’s statement on pages 6 to 10. The financial review is contained in the Finance Director’s report on pages 12 to 13. Environment Pressure Technologies recognises that its activities have an impact on the environment. Managing this impact is an integral part of responsible corporate governance and good management practice. The Group has developed environmental policies and the main points are listed below: • Overall responsibility for the implementation of these policies is the responsibility of the main Board and the senior management at each Group Company. The Group will comply with both the letter and the spirit of relevant environmental regulations. Additionally, the Group will actively participate in industry and Governmental environmental consultative processes. • The Group is committed to the continuous improvement of its environmental management system. Specifically the Group seeks to reduce waste and energy use and prevent pollution. • As part of continuous improvement, it is the policy of the Group to establish measurable environmental objectives and communicate these to all employees. These documented objectives will be periodically reviewed as part of the management review process. The necessary personnel and financial resources will be provided to meet these objectives. • Employees are given such information, training and equipment as is necessary to enable them to undertake their work with the minimum impact on the environment. The Group had no notifiable environment incidents in 2013 (2012: nil). Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 24 Pressure Technologies plc Annual Report 2013 DIRECTORS’ REPORT CONTINUED Substantial shareholdings As at 27 November 2013, the following held or were beneficially interested in 3% or more of the Company’s issued ordinary share capital: The Liontrust Intellectual Capital Trust JTS Hayward Artemis Hargreave Hale JW Brown A Harding ACUIM Unicorn Directors and their interests The present Directors of the Company are set out on pages 18 and 19. The following Directors were appointed/resigned during the period; RL Shacklady AJS Wilson NA MacDonald (Resigned 21 March 2013) (Appointed 12 February 2013) (Appointed 4 June 2013) Ordinary shares JTS Hayward PS Cammerman TJ Lister NF Luckett (including 7,667 shares held by his wife) Number of Percentage of issued share shares capital owned 1,019,012 1,002,221 761,667 727,800 607,454 588,333 497,990 469,967 9.0% 8.8% 6.7% 6.4% 5.4% 5.2% 4.4% 4.1% 28 September 29 September 2012 No. 2013 No. 1,002,221 33,395 30,000 70,000 1,002,221 33,395 9,800 52,000 The former chairman, RL Shacklady, held 64,500 shares (including 22,500 held by his wife) at 29 September 2012 and at 21 March 2013. Share options On 29 July 2013 options were granted over 57,213 ordinary shares under the rules of the Pressure Technologies plc Save-As-You-Earn Scheme at an exercise price of 156p. The options are exercisable after three years and lapse six months after this date if they are not exercised. On 9 August 2013, options were granted over 153,000 ordinary shares under the rules of the Pressure Technologies plc Performance Share Plan – Enterprise Management Incentive Plan. The options have an exercise price of 242.5p. The options are exercisable between three and five years following date of grant. The Directors’ interests in share options are disclosed in the report of the Remuneration Committee. Financial instruments The Group’s operations expose it to a variety of financial risks including the effects of changes in interest rates, foreign currency exchange rates, credit risk and liquidity risk. The Group’s principal financial instruments comprise cash and bank deposits together with trade receivables and trade payables that arise directly from its operations. The Group has entered into derivative transactions in the normal course of trade. It does not trade in financial instruments as a matter of policy. Information about the use of financial instruments by the Company and its subsidiaries is given in note 21 to the consolidated financial statements. 25 Pressure Technologies plc Annual Report 2013 Directors’ indemnities The Company maintains director and officer insurance cover for the benefit of its Directors which remained in force at the date of this report. Employee involvement It is the policy of the Group to communicate with employees by regular briefing meetings conducted by senior management. Career development is encouraged through suitable training and annual appraisals. The Group takes the approach of maximising performance through the heightening of awareness of corporate objectives and policies. Disabled persons The Group gives full and fair consideration to applications for employment from disabled persons, where they have the necessary abilities and skills for that position, and, wherever possible, will retrain employees who become disabled so that they can continue their employment in another position. The Group engages, promotes, and trains staff on the basis of their capabilities, qualifications and experience, without discrimination, giving all employees an equal opportunity to progress. Going concern Management has produced forecasts for all business units which have been reviewed by the Directors. These demonstrate that the Group is forecast to generate profits and cash in 2013/2014 and beyond and that the Group has sufficient cash reserves to enable the Group to meet its obligations as they fall due for a period of at least 12 months from when these financial statements have been signed. As such, the Directors are satisfied that the Company and Group have adequate resources to continue to operate for the foreseeable future. For this reason they continue to adopt the going concern basis for preparing the financial statements. Post balance sheet events There are no post balance sheet events to note. Statement of Directors’ responsibilities for the financial statements The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group financial statements for each financial year. Under that law the Directors have to prepare the Group’s financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs). The Directors have elected to prepare the parent Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP). 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 and profit or loss of the Group and parent Company for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • for the Group financial statements, state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements; for the parent Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; • • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 26 Pressure Technologies plc Annual Report 2013 DIRECTORS’ REPORT CONTINUED 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 Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm that: • so far as each Director is aware, there is no relevant audit information of which the company’s auditor is unaware; and • the Directors have taken all steps that they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Auditor Grant Thornton UK LLP are willing to continue in office and a resolution to reappoint them will be proposed at the Annual General Meeting. Cautionary statement on forward-looking statements and related information The annual report contains a number of forward-looking statements relating to the Group. The Group considers any statements that are not historical facts as “forward-looking statements”. They relate to events and trends that are subject to risks and uncertainties that could cause the actual results and financial position of the Group to differ materially from the information presented. Readers are cautioned not to place undue reliance on these forward-looking statements which are relevant only as at the date of this document. By order of the Board TJ Lister Secretary 3 December 2013 27 Pressure Technologies plc Annual Report 2013 REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF PRESSURE TECHNOLOGIES PLC We have audited the financial statements of Pressure Technologies plc for the period ended 28 September 2013 which comprise the consolidated statement of comprehensive income, the consolidated and parent company balance sheets, the consolidated statement of changes in equity, the consolidated statement of cash flows and notes 1 to 27 to the Group consolidated financial statements and notes 1 to 14 to the parent Company financial statements. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 25, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/apb/scope/private.cfm. Opinion on financial statements In our opinion: • • • • the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 28 September 2013 and of the Group’s profit for the period then ended; the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or the parent Company financial statements are not in agreement with the accounting records and returns; or • • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Andrew Wood Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Leeds 3 December 2013 Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 28 Pressure Technologies plc Annual Report 2013 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the period ended 28 September 2013 52 weeks ended 52 weeks ended 28 September 29 September 2012 £’000 2013 £’000 Notes Revenue Cost of sales Gross profit Administration expenses Operating profit pre acquisition costs and amortisation on acquired businesses Acquisition costs and amortisation on acquired businesses Operating profit post acquisition costs and amortisation on acquired businesses Finance income Finance costs Profit before taxation Taxation Profit for the period attributable to owners of the parent Other comprehensive income Items that may be reclassified subsequently to profit of loss: Currency translation differences on translation of foreign operations Total comprehensive income for the period attributable to the owners of the parent Earnings per share – basic – diluted All the above results are from continuing operations. The accounting policies and notes on pages 32 to 54 form part of these financial statements. 1 1 5 2 3 4 9 10 10 34,383 (24,088) 10,295 (7,012) 3,283 (407) 2,876 11 (9) 2,878 (678) 2,200 19 2,219 19.4p 19.2p 30,442 (22,704) 7,738 (5,788) 1,950 (190) 1,760 27 (9) 1,778 (507) 1,271 9 1,280 11.2p 11.2p 29 Pressure Technologies plc Annual Report 2013 CONSOLIDATED BALANCE SHEET As at 28 September 2013 Non-current assets Goodwill Intangible assets Property, plant and equipment Deferred tax asset Trade and other receivables Current assets Inventories Trade and other receivables Cash and cash equivalents Derivative financial instruments Total assets Current liabilities Trade and other payables Derivative financial instruments Borrowings Current tax liabilities Non-current liabilities Other payables Deferred tax liabilities Total liabilities Net assets Equity Share capital Share premium account Translation reserve Retained earnings Total equity 28 September 29 September 2012 £’000 2013 £’000 Notes 12 13 14 22 17 16 17 18 19 18 20 19 22 23 1,964 1,221 4,767 138 163 8,253 7,206 8,705 4,044 71 20,026 28,279 (9,236) — — (448) (9,684) (593) (538) (1,131) (10,815) 17,464 568 5,387 25 11,484 17,464 1,964 1,478 4,654 110 152 8,358 6,922 7,257 2,693 — 16,872 25,230 (7,651) (23) (6) (252) (7,932) (655) (588) (1,243) (9,175) 16,055 568 5,378 6 10,103 16,055 The accounting policies and notes on pages 32 to 54 form part of these financial statements. The financial statements were approved by the Board on 3 December 2013 and signed on its behalf by: JTS Hayward Director Company number: 06135104 Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 30 Pressure Technologies plc Annual Report 2013 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the period ended 28 September 2013 Balance at 1 October 2011 Dividends Share based payments Shares issued Transactions with owners Profit for the period Other comprehensive income: Exchange differences on translating foreign operations Total comprehensive income Balance at 29 September 2012 Dividends Share based payments Shares issued Transactions with owners Profit for the period Other comprehensive income: Exchange differences on translating foreign operations Total comprehensive income Balance at 28 September 2013 Share capital £’000 567 — — 1 1 — — — 568 — — — — — — — Share premium account £’000 5,369 — — 9 9 — — — 5,378 — — 9 9 — — — 568 5,387 Translation reserve £’000 (3) — — — — — 9 9 6 — — — — — 19 19 25 Profit and loss account £’000 9,605 (829) 56 — (773) 1,271 — 1,271 10,103 (863) 44 — (819) 2,200 — 2,200 11,484 Total equity £’000 15,538 (829) 56 10 (763) 1,271 9 1,280 16,055 (863) 44 9 (810) 2,200 19 2,219 17,464 The accounting policies and notes on pages 32 to 54 form part of these financial statements. 31 Pressure Technologies plc Annual Report 2013 CONSOLIDATED STATEMENT OF CASH FLOWS For the period ended 28 September 2013 52 weeks ended 52 weeks ended 28 September 29 September 2012 £’000 2013 £’000 Notes Operating activities Cash flows from operating activities Finance costs paid Income tax paid Net cash inflow from operating activities Investing activities Interest received Proceeds from sale of fixed assets Purchase of property, plant and equipment Deferred purchase consideration Net cash used in investing activities Financing activities Repayment of borrowings Dividends paid Shares issued Net cash outflow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period The accounting policies and notes on pages 32 to 54 form part of these financial statements. 25 3,544 (8) (558) 2,978 — 9 (776) — (767) (6) (863) 9 (860) 1,351 2,693 4,044 2,573 (9) (514) 2,050 2 84 (727) (800) (1,441) (36) (829) 10 (855) (246) 2,939 2,693 Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 32 Pressure Technologies plc Annual Report 2013 ACCOUNTING POLICIES Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use in the European Union and IFRIC interpretations issued by the International Accounting Standards Board and the Companies Act 2006. The Company has elected to prepare its parent Company financial statements in accordance with UK Generally Accepted Accounting Practice (UK GAAP). These are presented on pages 55 to 59. The Group has applied all accounting standards and interpretations issued relevant to its operations for the period ended 28 September 2013. The consolidated financial statements have been prepared on a going concern basis. Management has produced forecasts for all business units which have been reviewed by the Directors. These demonstrate the Group is forecast to generate profits and cash in 2013/2014 and beyond and that the Group has sufficient cash reserves to enable the Group to meet its obligations as they fall due for a period of at least 12 months from when these financial statements have been signed. As such, the Directors are satisfied that the Company and Group have adequate resources to continue to operate for the foreseeable future. For this reason they continue to adopt the going concern basis for preparing the financial statements. The financial statements have been prepared under the historical cost convention, except for derivative financial instruments which are carried at fair value. Standards and interpretations not yet applied by the Group There are a number of standards and interpretations issued by the International Accounting Standards Board that are effective for financial statements beginning on or after the dates given below and are expected to be relevant to the financial statements. These standards will be effective in future periods: IFRS 7 (amendments) Disclosures – Offsetting Financial assets and liabilities (effective 1 January 2014) IFRS 10 Consolidated Financial Statements (effective 1 January 2014) IFRS 11 Joint Arrangements (effective 1 January 2014) IFRS 12 Disclosure of Interests in Other Entities (effective 1 January 2014) IFRS 13 Fair Value Measurement (effective 1 January 2013) IAS 19 Employee benefits (effective 1 January 2013) IAS 27 (Revised), Separate Financial Statements (effective 1 January 2014) IAS 28 (Revised), Investments in Associates and Joint Ventures (effective 1 January 2014) IAS 32 (amendments) Offsetting Financial assets and liabilities (effective 1 January 2014) IAS 36 (amendments) Impairment of assets (effective 1 January 2014) • • • • • • • • • • • Annual Improvements 2009-2011 Cycle (effective 1 January 2013) The application of these standards and interpretations is not expected to have a material impact on the Group’s reported financial performance or position. However, they may give rise to additional disclosures being made in the financial statements. Changes in accounting policies Adoption of ‘Presentation of Items of Other Comprehensive Income’ (Amendments to IAS 1). The Group has applied the amendments to IAS 1 ‘Presentation of Items of Other Comprehensive Income’ for the first time in the current year. The amendments to IAS 1 are effective for annual periods beginning on or after 1 July 2012 and require entities to group items presented in other comprehensive income (OCI) into those that, in accordance with other IFRS, will not be reclassified subsequently to profit or loss and those that will be reclassified subsequently to profit or loss when specific conditions are met. Critical accounting judgements and key sources of estimation uncertainty In the application of the Group’s accounting policies, which are described below, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and assumptions that have a material risk to the carrying value of assets and liabilities within the next financial year are discussed below: 33 Pressure Technologies plc Annual Report 2013 Critical accounting judgements Revenue recognition – Cylinders The Group recognises revenue when the goods in question have finished production and passed any applicable factory and customer acceptance tests. Where goods remain on the Group’s premises at the year end at the request of the customer, management consider the detailed criteria for the recognition of revenue from the sale of the goods as set out in IAS 18 ‘Revenue’. In particular, consideration is given as to whether the significant risks and rewards of ownership are considered to have transferred to the buyer. Capitalisation of development costs The Group capitalises costs in relation to development projects where the specific recognition criteria are met. The key judgement required to capitalise costs is whether future revenues will exceed total forecast capitalised costs. Management make this judgement based on their knowledge of the project, the size of the market into which it can be sold and the expected demand for the project. Once capitalised, the assets are reviewed for impairment at each reporting date as explained below. Impairment reviews – intangible assets The Group has acquired, through business combinations and through other acquisitions, intangible assets and capitalised certain assets, such as licence agreements and development costs, which are expected to generate revenue in the future but at a reporting period end may not have generated significant income at that time. At each reporting period date, the Directors review the likelihood of the assets generating income, the period over which this is likely to be achieved and the potential income that can be generated. Where it is probable the future fair value of income will be in excess of capitalised costs the assets are held within the balance sheet at cost. Where this is not the case, an impairment charge will be recorded to adjust the assets to fair value. Key sources of estimation uncertainty Inventory provisions The Directors have reviewed the level of inventory provisions carried against inventory in the light of outstanding current and anticipated customer orders. The future realisation of carrying amounts is affected by whether the anticipated level of orders is achieved. Basis of consolidation The Group financial statements consolidate those of the Company and all of its subsidiary undertakings drawn up to 28 September 2013 (2012: to 29 September 2012). Subsidiaries are all entities over which the Group has the power to control the financial and operating policies. The Group obtains and exercises control through voting rights. The consolidated financial statements of the Group incorporate the financial statements of the parent Company as well as those entities controlled by the Group by full consolidation. Intra-group balances and transactions, and any unrealised gains or losses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Business combinations and goodwill The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred and the equity interests issued by the Group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred. The Group recognises identifiable assets acquired and liabilities assumed, including contingent liabilities, in a business combination regardless of whether they have been previously recognised in the acquiree’s financial statements prior to the acquisition. Assets acquired and liabilities assumed are measured at their acquisition-date fair values, which are also used as the bases for subsequent measurement in accordance with the Group accounting policies. Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the excess of the sum of: fair value of consideration transferred; the recognised amount of any non-controlling interest in the acquiree; and • • • acquisition-date fair value of any existing equity interest in the acquiree, over the acquisition-date fair values of identifiable net assets. If the fair values of identifiable net assets exceed the sum calculated above, the excess amount (ie gain on a bargain purchase) is recognised in profit or loss immediately. Contingent consideration is recognised at its acquisition date fair value. Subsequent changes to this fair value resulting from events after the acquisition date are recognised through profit or loss. Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 34 Pressure Technologies plc Annual Report 2013 ACCOUNTING POLICIES CONTINUED Revenue Revenue is measured by reference to the fair value of consideration received or receivable and arises from the sales of goods and services provided in the normal course of business, net of trade discounts, VAT and other sales-related taxes. Revenue from the sale of goods is recognised when the significant risks and rewards of ownership have been transferred to the buyer, which may be the date the goods are despatched to the customer, completion of the product or the product being ready for delivery based on specific contract terms; when the amount of revenue can be measured reliably; and when it is probable that the economic benefits associated with the transaction will flow to the Group. Cylinders In respect of revenue recognition within the Cylinders segment, revenue is recognised when the goods in question have finished production and passed any applicable factory and customer acceptance tests. Goods may not always have been despatched for revenue to be recognised provided the above criteria have been met. Revenue from services is recognised when the outcome of the transaction can be estimated reliably and the Group has performed its obligations and, in exchange, obtained the right to consideration. Engineered Products In applying the above policy, revenue is recognised in the Engineered Products segment when production is complete, the goods are ready to be despatched and substantially all the risks and rewards associated with the product have passed to the customer. In the vast majority of cases, despatch takes place as soon as production has been completed. Alternative Energy Revenue is recognised in the Alternative Energy segment when the equipment has been installed and all tests of the equipment installed by the Group have been passed. Share-based employee remuneration The Group operates equity-settled share-based remuneration plans for some of its employees. The Group’s plan does not feature any options for a cash settlement. All services received in exchange for the grant of any share-based payment are measured at their fair values. Where employees are rewarded using share-based payments, the fair values of employees’ services are determined indirectly by reference to the fair value of the share options granted to the employee. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions (for example, profitability and sales growth targets). All share-based remuneration is ultimately recognised as an expense in profit or loss with a corresponding credit to the profit and loss reserve. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made to any expense recognised in prior periods if share options ultimately exercised are different to that estimated on vesting. Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up to the nominal value of the shares issued are allocated to share capital with any excess being recorded as additional paid-in capital. The cancellation of equity-settled share based payments is accounted for as an acceleration of vesting. Dividends Interim dividends are charged in the period in which they are paid. Final dividends are only provided when approved by the shareholders. Property, plant and equipment Plant and equipment is stated at cost, net of depreciation and any provision for impairment. Depreciation is applied on a straight-line basis so as to reduce the assets to their residual values over their estimated useful lives. The rates of depreciation used are: Plant and machinery 4 – 15 years The estimates used for residual values and useful lives are reviewed as required, but at least annually. The gain or loss arising on the disposal of an asset is determined as the difference between the disposal proceeds and the carrying amount of the asset and is recognised in the consolidated statement of comprehensive income. 35 Pressure Technologies plc Annual Report 2013 Intangible assets Licence and distribution agreement Intangible assets are recorded at cost, net of amortisation and any provision for impairment. The Group’s licence and distribution agreement is being amortised over 15 years, being the period over which the Directors have assessed that significant revenues will be generated. Development costs Development costs are recognised at cost, net of amortisation or provision for impairment, where the recognition requirements under IAS38 Intangible assets are met. These are: • • • • • it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; the project is technically and commercially feasible; the Group intends to and has sufficient resources to complete the projects; the Group has the ability to use or sell the asset; and the cost of the asset can be measured reliably. These costs are capitalised up to the point development is complete and the asset is then amortised over the period which the asset is expected to generate income. If at any point the development costs fail to meet the recognition requirements of IAS 38, the costs are expensed through the statement of comprehensive income. Intangible assets acquired as part of a business combination In accordance with IFRS 3 ‘Business Combinations’, an intangible asset acquired in a business combination is deemed to have a cost to the Group of its fair value at the acquisition date. The fair value of an intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the Group. Such intangible assets are amortised on a straight-line basis over their estimated useful lives as follows: Customer order book Non-contractual customer relationships Over life of the order book – typically one year Five years Impairment testing of non-current assets For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the group at which management monitors goodwill. Cash-generating units to which goodwill has been allocated are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the assets or cash-generating unit’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use based on an internal discounted cash flow evaluation. Leased assets In accordance with IAS 17 ‘Leases’, the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards related to the ownership of the asset. The related asset is recognised at the inception of the lease at its fair value or, if lower, the present value of the lease payments. A corresponding liability is recognised where the interest element of the lease payments represents a constant proportion of the capital balance outstanding and is charged to profit or loss over the period of the lease. All other leases are treated as operating leases. Payments under operating leases are charged to profit or loss on a straight-line basis over the term of the lease. Lease incentives are spread over the term of the lease. Benefits received as an incentive to enter into an operating lease are spread over the lease term on a straight line basis. Inventories Inventories are stated at the lower of cost and net realisable value, on a first in first out basis. Cost includes materials, direct labour and an attributable proportion of manufacturing overheads based on normal levels of activity. Net realisable value is based on the estimated sales price after allowing for all further costs of completion and disposal. Provision is made for obsolete, slow-moving or defective items where appropriate. Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 36 Pressure Technologies plc Annual Report 2013 ACCOUNTING POLICIES CONTINUED Income taxes The tax expense represents the sum of the tax currently payable and deferred tax. Current tax is the tax currently payable based on taxable profit for the year. Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets. Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective periods of realisation, provided they are enacted or substantively enacted at the balance sheet date. Changes in deferred tax assets and liabilities are recognised as a component of tax expense in the consolidated statement of comprehensive income, except where they relate to items that are recognised in other comprehensive income or directly in equity, in which case the related deferred tax is also recognised in other comprehensive income or equity, respectively. Accounting for financial assets The Group has financial assets in the following categories: • • loans and receivables (trade and other receivables, cash and cash equivalents); financial assets at fair value through profit or loss (derivative financial instruments). Financial assets are assigned to the different categories on initial recognition, depending on the characteristics of the instrument and its purpose. A financial instrument’s category is relevant for the way it is measured and whether any resulting income and expenses are recognised in profit or loss or other comprehensive income. All financial assets are recognised when the Group becomes a party to the contractual provisions of the instrument. Financial assets other than those categorised as at ‘fair value through profit or loss’ are recognised at fair value plus transaction costs. Financial assets categorised as at fair value through profit or loss are recognised initially at fair value with transaction costs expensed through the profit or loss. Changes in fair value due to subsequent measurement are recognised in profit or loss. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition, these are measured at amortised cost using the effective interest method, less provision for impairment. Impairment is considered where the balances are past due or where there is other evidence that a counterparty may default. Any gains or losses arising as a result of the impairment review are recognised in profit or loss. Pressure Technologies plc’s trade and most other receivables fall into this category of financial instrument. Discounting on loans and receivables is omitted where the effect is immaterial. However, where it is required, the asset is held at fair value after discounting and the difference is recognised in the profit and loss account under financing costs. Long term retentions due on contracts are the main balances where such treatment is required. Receivables are considered for impairment on a case-by-case basis. Accounting for financial liabilities Financial liabilities represent a contractual obligation for the Group to deliver cash or other financial assets. Financial liabilities are initially recognised at fair value, net of issue costs, when the Group becomes a party to the contractual agreements of the instrument. All interest- related charges and, if applicable, changes in an instrument’s fair value that are reported in profit or loss are included in the consolidated statement of comprehensive income line items “finance costs” or “finance income”. The Group’s financial liabilities include borrowings, trade and other payables, and derivative financial instruments. After initial recognition, all but the latter are measured at amortised cost using the effective interest rate method. Derivative financial instruments The Group has derivative financial instruments that are carried at fair value through profit or loss. The Group does not hedge account for these items. Any gain or loss arising from derivative financial instruments is based on changes in fair value, which is determined by direct reference to active market transactions or using a valuation technique where no active market exists. The Group has foreign currency forward contracts that fall into this category. 37 Pressure Technologies plc Annual Report 2013 Cash and cash equivalents Cash and cash equivalents comprise cash in hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts, where they form an integral part of the Group’s cash management. Equity and reserves An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Share premium represents premiums received on issuing of share capital. Retained earnings include all current and prior year results as disclosed in the consolidated statement of comprehensive income and reserves note. The translation reserve is used to record foreign exchange translation differences that occur as a result of the translation of overseas subsidiary undertakings’ financial statements into the presentation currency of the consolidated financial statements. Retained earnings include all current and prior period results as disclosed in the consolidated statement of comprehensive income. Foreign currency translation Foreign currency transactions are translated into the functional currency (being the currency of the primary economic environment in which the entity operates) of the respective Group entity, using the exchange rates prevailing at the dates of the transactions (spot exchange rate). Foreign exchange gains and losses resulting from the settlement of such transactions and from the re-measurement of monetary balance sheet items at year-end exchange rates are recognised in the profit or loss. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. The consolidated financial statements are presented in Pounds Sterling, which is also the functional currency of the parent company. The results of overseas subsidiary undertakings are translated at the average exchange rate (being an approximation to the rate at the date of transactions throughout the year) and the balance sheets of such undertakings are translated at the year-end exchange rates. Exchange differences arising on the retranslation of opening net assets of overseas subsidiary undertakings are charged/credited to other comprehensive income and recognised in the translation reserve in equity. On disposal of a foreign operation the cumulative translation differences are transferred to profit or loss as part of the gain or loss on disposal. Grants Grants are recognised where there is reasonable assurance that the entity complies with the conditions attached to them. Grants relating to property, plant and equipment are treated as deferred income and released to profit or loss over the expected useful lives of the assets concerned. Other grants are credited to profit or loss in the same period as the related expenditure is incurred. Pensions The Group operates defined contribution schemes with costs being charged to profit or loss in the period to which they relate. Segment reporting IFRS 8 requires operating segments to be identified on the basis of the internal reports about operating units of the Group that are regularly reviewed by the Chief Executive to allocate resources and to assess their performance. The Group operates three operating segments which represent the main products and services provided by the Group: • Cylinders: the design, manufacture and reconditioning of seamless high pressure gas cylinders. • Engineered products: the manufacture of precision engineered valve components, air operated high pressure hydraulic pumps, gas boosters, power packs, hydraulic control panels and test rigs. • Alternative energy: marketing, selling and manufacture of biogas upgrading equipment to produce high purity biomethane. Each of these operating segments is managed separately as each requires different technologies, resources and marketing approaches. The measurement policies used by the Group for segment reporting are the same as those used in its financial statements. Amortisation of intangible assets arising from business combinations and fair value adjustments arising from business combinations are allocated to the operating segment to which they relate. In addition, corporate overheads and assets not directly related to the business activities of any operating segment are not allocated to a segment. The reported segment, Engineered Products, is an aggregate of operating segments Hydratron Ltd, Hydratron Inc and Al-Met Limited. Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 38 Pressure Technologies plc Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Segment analysis The financial information by segment detailed below is frequently reviewed by the Chief Executive. For the period ended 28 September 2013 Revenue – from external customers Operating profit/(loss) before acquisition costs Acquisition costs* Operating profit/(loss) Net finance income/(costs) Profit/(loss) before tax Engineered Alternative Unallocated Cylinders £’000 Products £’000 Energy £’000 Amounts** £’000 Total £’000 17,306 15,942 1,135 — 34,383 3,558 — 3,558 7 3,565 1,562 (187) 1,375 (2) 1,373 (480) — (480) — (480) (1,357) (220) (1,577) (3) (1,580) 3,283 (407) 2,876 2 2,878 Segmental net assets*** 6,940 7,728 153 2,643 17,464 Other segment information: Capital expenditure Depreciation Amortisation Period ended 29 September 2012 Revenue – from external customers Operating profit/(loss) before acquisition costs Acquisition costs**** Operating profit/(loss) Net finance income/(costs) Profit/(loss) before tax 396 295 — 362 309 187 6 34 70 12 8 — 776 646 257 Cylinders £’000 Engineered Products £’000 Alternative Energy £’000 Unallocated Amounts** £’000 16,306 13,912 2,303 — 2,303 26 2,329 1,017 (190) 827 (8) 819 224 (494) — (494) — (494) — (876) — (876) — (876) Total £’000 30,442 1,950 (190) 1,760 18 1,778 Segmental net assets*** 6,815 7,703 1,632 (95) 16,055 Other segment information: Capital expenditure Depreciation Amortisation 446 275 224 275 331 190 6 33 70 — — — 727 639 484 *Acquisition costs include the amortisation of intangible assets acquired through business acquisitions, and fees associated with making acquisitions. **Unallocated amounts include central costs, central assets and unallocated consolidation adjustments. *** Segmental net assets comprise the net assets of each division adjusted to reflect the elimination of the cost of investment in subsidiaries and the provision of financing loans provided by Pressure Technologies plc. ****Acquisition costs include the amortisation of intangible assets acquired through business acquisitions. 39 Pressure Technologies plc Annual Report 2013 1. Segment analysis continued The following table provides an analysis of the Group’s revenue by geographical destination. Revenue United Kingdom Europe Rest of the World 2013 £’000 10,639 5,690 18,054 34,383 2012 £’000 10,307 4,275 15,860 30,442 The UK is the entity’s country of domicile with revenue of £10,639,000 (2012: £10,307,000) being obtained during the period. Revenue of £23,744,000 (2012: £20,135,000) has been generated overseas. The Group’s largest customer contributed 34% to the Group’s revenue (2012: 38%) which is reported within the Cylinders segment. No other customer contributed more than 10% in the year to 28 September 2013 (2012: Nil). The following table provides an analysis of the Group’s revenue by market. Revenue Oil and gas Defence Industrial gases Alternative energy 2013 £’000 27,640 3,793 1,793 1,157 34,383 2012 £’000 24,051 2,190 3,888 313 30,442 The above table is provided for the benefit of shareholders. It is not provided to the PT board on a regular monthly basis and consequently does not form part of the divisional segmental analysis. The following table provides an analysis of the carrying amount of non-current assets, additions to property, plant and equipment. United Kingdom 2013 £’000 8,188 724 Rest of the World 2013 £’000 65 52 Total 2013 £’000 8,253 776 United Kingdom 2012 £’000 8,333 706 Rest of the World 2012 £’000 25 21 Non-current assets Additions to property, plant and equipment 2. Finance income Interest receivable on bank deposits Fair value discounting adjustment on loans and receivables (note 17) 2013 £’000 — 11 11 Total 2012 £’000 8,358 727 2012 £’000 2 25 27 Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 40 Pressure Technologies plc Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 3. Finance costs Interest payable on bank loans and overdrafts Interest payable on finance leases Other interest 4. Profit before taxation Profit before taxation is stated after charging/(crediting): Depreciation of property, plant and equipment – owned assets Depreciation of property, plant and equipment – assets under finance lease and hire purchase agreements (Profit)/loss on disposal of fixed assets Amortisation of intangible assets – licence and distribution agreement – development costs Impairment of intangible assets – development costs Amortisation of grants receivable Staff costs (see note 7) Cost of inventories recognised as an expense Operating lease rentals: – Land and buildings – Machinery and equipment Foreign currency loss 5. Acquisition costs and amortisation on acquired businesses Amortisation of intangible assets arising on a business combination Acquisition costs – fees 6. Auditor’s remuneration Fees payable to the Company’s Auditor for the audit of the financial statements Fees payable to the Company’s Auditor and its associates for other services: – Audit of the Company’s subsidiaries pursuant to legislation Fees payable to the Group’s Auditor for non-audit services: – Tax services – Other services 2013 £’000 5 1 3 9 2013 £’000 646 — 8 70 — — (39) 6,904 16,327 627 66 275 2013 £’000 187 220 407 2013 £’000 13 36 21 10 2012 £’000 3 6 — 9 2012 £’000 624 15 (1) 70 50 174 (37) 6,485 15,019 624 44 134 2012 £’000 190 — 190 2012 £’000 14 39 13 15 41 Pressure Technologies plc Annual Report 2013 7. Employee costs Particulars of employees, including Executive Directors: Wages and salaries Social security costs Other pension costs Share based payments The average monthly number of employees (including Executive Directors) during the period was a follows: Production Selling and distribution Administration 8. Directors’ emoluments Particulars of Directors’ emoluments are as follows: Emoluments – short term employee benefits Pension costs – post employment benefits Employers’ national insurance 2013 £’000 6,080 608 172 44 6,904 2013 No. 151 17 23 191 2013 £’000 480 28 51 559 2012 £’000 5,729 545 155 56 6,485 2012 No. 140 19 18 178 2012 £’000 297 24 33 354 Please see the Report of the Remuneration Committee on pages 20 to 22 for full details of Directors’ emoluments which have been audited. Included in the aggregate emoluments for the period ended 28 September 2013 are payments of £72,000 (2012: £30,000) made by the company to third parties. The highest paid Director received total emoluments of £202,000 including pension contributions of £15,000 (2012: total emoluments of £136,000 including pension contributions of £13,000). The Group believe that the Directors of Pressure Technologies plc are the only key management personnel under the definition of IAS 24 ‘Related party disclosures’. Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 42 Pressure Technologies plc Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 9. Taxation Current tax Current tax expense Over provision in respect of prior years Deferred tax Origination and reversal of temporary differences (Over)/under provision in respect of prior years Total taxation charge 2013 £’000 2012 £’000 775 (19) 756 (74) (4) 678 578 (2) 576 (76) 6 507 2012 £’000 1,778 444 (2) — — 4 64 (3) 507 Corporation tax is calculated at 23.5% (2012: 25%) of the estimated assessable profit for the period. Deferred tax is calculated at 20% (2012: 23%). The charge for the period can be reconciled to the profit per the consolidated statement of comprehensive income as follows: Profit before taxation Theoretical tax at UK corporation tax rate 23.5% (2012: 25%) Effects of: – non-deductible expenses – disallowable acquisition costs – Research and development allowance – adjustments in respect of prior years – effect of unrealised overseas losses – change in taxation rates Total taxation charge 2013 £’000 2,878 676 39 52 (115) (23) 121 (72) 678 10. Earnings per ordinary share Basic and diluted earnings per share have been calculated based on the net profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares in issue during the period. The calculation of the basic earnings per share is based on the earnings attributable to ordinary shareholders divided by the weighted average number of shares in issue during the period. The calculation of diluted earnings per share is based on the basic earnings per share, adjusted to allow for the issue of shares on the assumed conversion of all dilutive options. Profit after tax Weighted average number of shares – basic Dilutive effect of share options Weighted average number of shares – diluted Basic earnings per share Diluted earnings per share 2013 £’000 2,200 2012 £’000 1,271 No. No. 11,361,221 78,069 11,350,099 — 11,439,290 11,350,099 19.4p 19.2p 11.2p 11.2p 43 Pressure Technologies plc Annual Report 2013 11. Dividends The following dividend payments have been made on the ordinary 5p shares in issue: Final 2010/11 Interim 2011/12 Final 2011/12 Interim 2012/13 Rate 4.8p 2.5p 5.0p 2.6p Date 9 March 2012 6 August 2012 8 March 2013 8 August 2013 Shares in issue 11,356,179 11,356,179 11,362,229 11,362,229 2013 £’000 — — 568 295 863 2012 £’000 545 284 — — 829 At 28 September 2013 the 2012/13 final dividend had not been approved by Shareholders and consequently this has not been included as a liability. The proposed dividend of 5.2p per share, will if approved at the AGM, be paid on 7 March 2014 at a total cost of £591,000. 12. Goodwill Cost At 29 September 2012 and 28 September 2013 Engineered Product division Al-Met Limited The Hydratron Group Total £’000 1,964 Original cost £’000 272 1,692 1,964 Date of acquisition February 2010 October 2010 Goodwill arising on consolidation represents the excess of the fair value of the consideration given over the fair value of the identifiable net assets acquired. The Group has two separate cash generating units (CGUs) both held within the Engineered Product division, Al Met Limited and The Hydratron Group. The Group tests annually for impairment, or more frequently if there are indicators that goodwill might be impaired. The recoverable amounts of the cash generating units (CGUs) are determined from value in use calculations, covering a four year forecast and applying a discount rate of 3.1% which equates to the Group’s weighted average cost of capital. The same discount rate is used for both CGUs due to the similarities of the businesses. The forecast for year one is the forecast approved by management and used within the Group. The forecasts used for years two to four are conservative, with no assumed growth on year one cash flow figures and have been based on the extrapolated year one forecast. No terminal value has been assumed in this calculation. Management’s key assumptions are based on their past experience and future expectations of the market over the longer term. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and expected changes to selling prices and direct costs. Apart from the considerations described in determining the value-in-use of the cash generating unit above, the Group management does not believe that possible changes on the assumptions underlying the value in use calculation would have an impact on the carrying value of goodwill. After applying sensitivity analysis in respect of the results and future cash flows, in particular for presumed growth rates and discount rates, management believe that no impairment is required. Management is not aware of any other changes that would necessitate changes to its key estimates. Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 44 Pressure Technologies plc Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 13. Intangible assets Licence and distribution Development agreement expenditure £’000 £’000 Non contractual customer order book relationships £’000 Customer £’000 Total £’000 Cost At 29 September 2012 and 28 September 2013 1,200 234 197 937 2,568 Amortisation At 1 October 2011 Charge for the period Impairment losses At 29 September 2012 Charge for the period At 28 September 2013 Net book value At 28 September 2013 At 29 September 2012 183 70 — 253 70 323 877 947 Remaining useful economic life at 28 September 2013 13 years 10 50 174 234 — 234 — — — 197 — — 197 — 197 — — — 216 190 — 406 187 593 344 531 2 years 606 310 174 1,090 257 1,347 1,221 1,478 An impairment loss of £nil (2012: £174,000) was recognised for development expenditure reducing the value to £nil at the prior year end. All amortisation and impairment charges are included in the Consolidated statement of comprehensive income. The cumulative aggregate impairment loss is £174,000. 14. Property, plant and equipment Cost At 1 October 2011 Additions Disposals At 29 September 2012 Additions Disposals At 28 September 2013 Depreciation At 1 October 2011 Charge for the period Disposed of in the period At 29 September 2012 Charge for the period Disposed of in the period At 28 September 2013 Net book value At 28 September 2013 At 29 September 2012 Plant and machinery £’000 7,638 727 (593) 7,772 776 (391) 8,157 2,989 639 (510) 3,118 646 (374) 3,390 4,767 4,654 Included within the net book value of £4,767,000 is £nil (2012: £159,000) relating to assets held under finance lease agreements. The depreciation charged to the financial statements in the period in respect of such assets amounted to £nil (2012: £15,000). 45 Pressure Technologies plc Annual Report 2013 15. Subsidiaries A list of the significant investments in subsidiaries, including the name, country of incorporation and proportion of ownership interest is given in note 4 to the Parent Company’s separate financial statements as listed on page 57. 16. Inventories Raw materials and consumables Work in progress 2013 £’000 3,649 3,557 7,206 Included in the total net value above are gross inventories of £1,668,000 (2012: £751,000) over which provisions have been made of £707,000 (2012: £528,000). 17. Trade and other receivables Current Trade receivables Other receivables Prepayments and accrued income Non-current Accrued income 2013 £’000 6,796 399 1,510 8,705 2013 £’000 163 163 Included in non-current accrued income are debts not due for settlement for a number of years. Management have reviewed the book value of these assets and applied discounting to reduce the balances by £20,000 (2012: £31,000) to a fair value of £163,000 (2012: £152,000). The release during the year was £11,000 (2012: £25,000). The average credit period taken on the sale of goods and services was 63 days (2012: 54 days) in respect of the Group. One debtor accounted for over 10% of trade receivables and represented 24% of the total balance. In 2012, two debtors accounted for over 10% of trade receivables and represented 21% and 13% of the total balance respectively. Ageing of past due but not impaired receivables: 2012 £’000 4,002 2,920 6,922 2012 £’000 6,194 113 950 7,257 2012 £’000 152 152 2012 £’000 859 381 — 11 38 2013 £’000 825 365 106 20 100 1,416 1,289 Days past due: 0 – 30 days 31 – 60 days 61 – 90 days 91 – 120 days 121+ days Total Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 46 Pressure Technologies plc Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 18. Derivative financial instruments Derivatives carried at fair value not recognised for hedge accounting – Forward foreign currency contracts Asset/(liability) 19. Trade and other payables Amounts due within 12 months Trade payables Other tax and social security Accruals and deferred income Total due within 12 months Amounts due after 12 months Other payables Deferred income Total due after 12 months 2013 £’000 71 71 2013 £’000 2,903 329 6,004 9,236 337 256 593 2012 £’000 (23) (23) 2012 £’000 2,977 227 4,447 7,651 348 307 655 Other payables due after 12 months relate to rental lease incentives, the benefits of which are spread over the life of the lease. Deferred income due after 12 months relates to grant income received. There are no unfulfilled conditions or other contingencies attached to these grants. 20. Borrowings Secured borrowings Net obligations under finance leases Amounts due for settlement within 12 months The maturity profile of long-term loans is as follows: Due within one year Obligations under finance leases are secured on the plant & machinery assets to which they relate. 2013 £’000 2012 £’000 — — 2013 £’000 — 6 6 2012 £’000 6 47 Pressure Technologies plc Annual Report 2013 21. Financial instruments Capital risk management Pressure Technologies plc’s capital management objectives are to ensure the Group’s ability to continue as a going concern and to provide an adequate return to shareholders through the payment of dividends. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 20, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in the consolidated statement of changes in equity. Debt Cash and cash equivalents Net cash Equity 2013 £’000 — 4,044 4,044 2012 £’000 (6) 2,693 2,687 17,464 16,055 Debt is defined as long and short-term borrowings, as detailed in note 20. Equity includes all capital and reserves of the Group attributable to equity holders of the parent. The Group is not subject to externally imposed capital requirements, other than the minimum capital requirements and duties regarding a serious reduction of capital, as imposed by the Companies Act 2006 on all public limited companies. The Group held the following categories of financial instruments: Financial assets Loans and receivables: – Trade receivables – Other receivables – Cash and cash equivalents Fair value through the profit and loss (FVTPL): – Derivative instrument – forward currency contract not recognised for hedge accounting Financial liabilities Fair value through profit and loss (FVTPL): – Derivative instrument – forward currency contract not recognised for hedge accounting Financial liabilities – held at amortised cost: – Trade payables – Accruals Borrowings The fair value of the financial instruments set out above is not materially different from their book value. 2013 £’000 6,796 399 4,044 71 11,310 2013 £’000 — 2,903 2,129 — 5,032 2012 £’000 6,194 113 2,693 — 9,000 2012 £’000 23 2,977 1,476 6 4,482 Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 48 Pressure Technologies plc Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 21. Financial instruments continued Financial risk management objectives Management monitor and manage the financial risks relating to the operations of the Group through regular reports to the Board. These risks include currency risk, interest rate risk, credit risk and liquidity risk. The Group seeks to minimise the effects of currency risk by using derivative financial instruments. The use of financial derivatives is governed by the Group’s policies on foreign exchange risk, interest rate risk, credit risk, the use of financial derivatives and non-derivative financial instruments and the investment of excess liquidity. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. Whilst the Group enters into forward currency contracts during the period to mitigate foreign currency risk, it does not apply hedge accounting. Market risk The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates, particularly in US Dollars and Euros, and interest rates. The Group enters into derivative financial instruments to manage its exposure to foreign currency risk. Foreign currency risk management The Group purchases its principal raw materials in US Dollars, Euros and Pounds Sterling and receives payment for its products in Euros, US Dollars and Pounds Sterling. After netting off foreign currency receipts and payments, there is a net exposure to the risk of currency movements both in US Dollars and Euros. Where necessary, the net exposure is hedged using forward contracts. The carrying amounts of the Group’s foreign currency denominated monetary financial assets and monetary financial liabilities at the reporting date are as follows: Euro Norwegian Krone US Dollar Financial assets 2013 £’000 3,994 6 522 4,522 Financial assets 2012 £’000 Financial liabilities 2013 £’000 2,796 6 487 3,289 1,863 30 215 2,108 Financial liabilities 2012 £’000 2,695 — 290 2,985 Foreign currency sensitivity analysis The Group’s exposure to a 10% exchange rate movement on its foreign currency denominated financial assets and financial liabilities is as follows: Euro currency impact 2013 £’000 Norwegian Krone currency impact 2013 £’000 Euro currency impact 2012 £’000 Norwegian Krone currency impact 2012 £’000 US Dollar currency impact 2013 £’000 US Dollar currency impact 2012 £’000 Profit or loss 194 9 2 1 28 18 The use of a 10% movement in exchange rates is considered appropriate given recent movements in exchange rates. A substantial amount of the Group’s sales and purchases are made in foreign currencies. The exposure to foreign exchange rates varies throughout the year depending on the volume and timing of transactions in foreign currencies. 49 Pressure Technologies plc Annual Report 2013 21. Financial instruments continued Fair value hierarchy Financial instruments carried at fair value are required to be measured by reference to the following levels: Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs). The level within which the financial asset or liability is clarified is determined based on the lowest level of significant input to one fair value measurement. The only derivatives entered into by the Group are included in level 2 and consist of foreign currency forward contracts. Forward foreign exchange contracts The Group enters into forward foreign exchange contracts to cover specific foreign currency payments and receipts. The Group also periodically enters into forward foreign exchange contracts to manage the risk associated with anticipated sales and purchase transactions out to between 6-12 months. The Group does not hedge account for the forward currency exchange contracts. At 28 September 2013, the Group had contracts outstanding to sell €3.950 million for £3.393 million (2012: sell €3.525 million for £2.794 million). The fair value of forward foreign exchange contracts at 28 September 2013 gave rise to a gain of £71,000 (2012: loss of £23,000). Interest rate risk management If interest rates had been 0.5% higher/lower and all other variables were held constant, the impact on the results in the consolidated statement of comprehensive income and equity would be an increase/decrease of £15,000 (2012: £14,000). Price risk management Where possible the Group enters into contracts incorporating price escalation clauses to mitigate any significant exposure to material price risk. Credit risk management The Group’s credit risk is primarily attributable to its trade receivables. The two largest customers within trade receivables account for 33% (2012: 34%) of debtors. Management continually monitor this dependence on the largest customers and are continuing to seek acquisitions and are also developing new products, customers and markets to reduce this dependence. Credit risk is managed by monitoring the aggregate amount and duration of exposure to any one customer. The Group’s management estimate the level of allowances required for doubtful debts based on prior experience and their assessment of the current economic environment. The Group’s maximum exposure to credit risk is limited to the carrying value of financial assets recognised at the period end. The Group’s management considers that all financial assets that are not impaired or past due are of good credit quality. The credit risk on liquid funds is minimized by using counterparty banks with high credit-ratings assigned by international credit-rating agencies. Liquidity risk management The Group manages liquidity risk by maintaining adequate reserves and banking facilities, by continuously monitoring forecast and actual cash flows and by matching the maturity profiles of financial assets and liabilities. Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 50 Pressure Technologies plc Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 21. Financial instruments continued At 28 September 2013 the Group’s liabilities have contractual maturities summarised below: 2013 Trade and other payables 2012 Trade and other payables Amounts due under hire purchase agreements Current within Current Non-current 6 months 6-12 months 1 to 5 years £’000 £’000 £’000 Total net payable £’000 6,824 1,248 835 8,907 Current within 6 months 6-12 months £’000 £’000 Current Non-current 1 to 5 years £’000 6,733 6 6,739 — — — 691 — 691 Total net payable £’000 7,424 6 7,430 The Group had an un-drawn bank overdraft facility available at 28 September 2013 of £3,000,000 (2012: £2,000,000) which is due for renewal on 28 February 2014. The following amounts have been recognised in the consolidated statement of comprehensive income in respect of derivative financial instruments: Fair value through profit and loss (FVTPL) – Derivative instrument – forward currency contract not recognised for hedge accounting Amounts charged/(credited) to cost of sales within the consolidated statement of comprehensive income 2013 £’000 (71) (71) 2012 £’000 23 23 Fair values The fair values of financial assets and liabilities are determined as follows: – Outstanding foreign currency exchange contracts are measured using quoted forward exchange rates at the balance sheet date. The Group does not hedge account. The carrying value and fair value of the financial assets and financial liabilities are considered to be the same. 51 Pressure Technologies plc Annual Report 2013 22. Deferred tax The following are the major deferred tax assets/(liabilities) recognised by the Group and movements thereon during the current and prior reporting period. At 1 October 2011 Credit/(charge) to income At 29 September 2012 Credit/(charge) to income At 28 September 2013 Accelerated tax depreciation £’000 Intangible assets £’000 Short term temporary differences £’000 Share option costs £’000 Operating lease incentives £’000 (690) 224 (466) (4) (470) (102) (20) (122) 54 (68) 131 (114) 17 34 51 9 4 13 6 19 105 (25) 80 (12) 68 Total £’000 (547) 69 (478) 78 (400) The net deferred tax balance has been analysed as follows in the consolidated balance sheet: Non-current asset Deferred tax asset Non-current liabilities Deferred tax liabilities 23. Called up share capital Authorised Authorised ordinary shares of 5p each Allotted, issued and fully paid Ordinary shares of 5p each 2013 £’000 2012 £’000 138 110 (538) (400) (588) (478) 2013 No. 2012 No. 2013 £’000 2012 £’000 15,000,000 15,000,000 750 750 11,362,229 11,356,179 568 568 During the year, the Company issued 6,050 ordinary shares at a price of 150p increasing share capital by £303 and share premium £8,773. These shares were issued to employees exercising their rights to acquire shares under the company’s SAYE/share option plan. 24. Share based payments Save-as-you-earn Scheme Pressure Technologies plc introduced a share option scheme for all employees of the Group in November 2007. A fifth grant of options was made in July 2013. If the options remain unexercised after a period of 3 years and 6 months from the date of the grant, the options expire. Options are forfeited if the employee leaves the Group before the options vest. Members of the scheme are required to remain employees of the Group and make regular contributions. Details of the share options outstanding during the period are as follows: Outstanding and exercisable at the beginning of the period Granted during the period Lapsed during the period Exercised during the period Expired during the period Outstanding and exercisable at the end of the period The weighted average exercise price of the share options exercised in the period is 150p (2012: 150p). 2013 No. 128,537 57,213 (9,757) (6,050) (3,872) 166,071 2012 No. 106,815 52,440 (24,063) (6,655) — 128,537 Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 52 Pressure Technologies plc Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 24. Share based payments continued The exercisable options outstanding at 28 September 2013 had a weighted average exercise price of 152p (2012: 150p) and a weighted average remaining contractual life of 1.8 years (2012: 2.1 years). The terms of these options are as follows: Date of grant 28 July 2011 6 August 2012 29 July 2013 Total options outstanding at 28 September 2013 Options outstanding at 28 September 2013 64,725 46,440 54,906 166,071 Market value at date of grant (p) Vesting period 3 years 3 years 3 years 160 175 247.5 Exercise price (p) 150 150 156 Exercise period 6 months 6 months 6 months There are no performance conditions that apply to these options other than continued employment. Pressure Technologies plc Performance Share Plan – Enterprise Management Plan On 9 August 2013 options were granted over 153,000 ordinary shares under the rules of the Pressure Technologies plc Performance Share Plan – Enterprise Management Plan at an exercise price of 242.5p, being the market value at the date the options were granted. These options are exercisable between three and five years following the date of grant. Options are forfeited if the employee leaves the Group before the options vest. Details of the share options outstanding during the period are as follows: Outstanding and exercisable at the beginning of the period Granted during the period Lapsed during the period Outstanding and exercisable at the end of the period 2013 No. 104,768 153,000 — 257,768 2012 No. 73,117 53,156 (21,505) 104,768 The exercisable options outstanding at 28 September 2013 had a weighted average exercise price of 221.5p (2012: 190.9p) and a weighted average remaining contractual life of 3.8 years (2012: 3.2 years). The terms of these options are as follows: Date of grant 7 October 2009 23 February 2012 9 August 2013 Total options outstanding at 28 September 2013 Options outstanding at 28 September 2013 51,612 53,156 153,000 257,768 Market value at date of grant (p) Vesting period 3 – 5 years 3 – 5 years 3 – 5 years 232.5 150.5 242.5 Exercise price (p) 232.5 150.5 242.5 There are no performance conditions that apply to these options other than continued employment. 53 Pressure Technologies plc Annual Report 2013 24. Share based payments continued Pressure Technologies plc Performance Share Plan – Share Options Plan Pressure Technologies plc introduced this share option scheme in February 2012. These options are exercisable between 3 and 5 years following the date of grant. Options are forfeited if the employee leaves the Group before the options vest. Details of the share options outstanding during the period are as follows: Outstanding and exercisable at the beginning of the period Granted during the period Outstanding and exercisable at the end of the period 2013 No. 73,089 — 73,089 2012 No. — 73,089 73,089 The exercisable options outstanding at 28 September 2013 had a weighted average exercise price of 150.5p (2012: 150.5p) and a weighted average remaining contractual life of 3.4 years (2012: 4.4 years). The terms of these options are as follows: Date of grant 23 February 2012 Options outstanding at 28 September 2013 Market value at date of grant (p) Vesting period Exercise price (p) 73,089 3 – 5 years 150.5 150.5 There are no performance conditions that apply to these options other than continued employment. The options granted during the period have been valued using the Black-Scholes model. The inputs into the Black-Scholes model are as follows: Scheme: Date granted: Share price at date of offer Exercise price Expected volatility Expected life Risk free rate Expected dividend yield Enterprise Management Plan 09/08/2013 Save-As- You-Earn 29/07/2013 242.5p 242.5p 19% 3-5 years 1.4% 3.3% 195p 156p 15% 3 years 1.3% 5.1% Expected volatility was determined by calculating the historical volatility of the Group’s share price over the period since the Group was admitted to AIM. The expected option value used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The expected dividend yield was based on the Group’s dividend pay out pattern at the date of issue of the options. In line with HMRC approved schemes, share options under the Save-As-You-Earn scheme may be exercisable at a discount of up to 20% of the market value of the shares at the time of issue. The total charge to the consolidated statement of comprehensive income in the period in respect of share-based payments was £44,000 (2012: £56,000). A deferred tax credit of £6,000 (2012: £4,000) was recognised in the consolidated statement of comprehensive income during the period in respect of share based payments. Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 54 Pressure Technologies plc Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 25. Consolidated cash flow statement Profit after tax Adjustments for: Finance (income) – net Depreciation of property, plant and equipment Amortisation of intangible assets Share option costs Income tax expense (Profit)/ loss on derivative financial instruments Loss /(profit) on disposal of fixed assets Changes in working capital: (Increase) in inventories (Increase) in trade and other receivables Increase in trade and other payables Cash flows from operating activities 26. Financial commitments (a) Capital commitments Commitments for capital expenditure entered into were as follows: Contracted for, but not provided in the accounts 2013 £’000 2,200 (2) 646 257 44 678 (71) 8 (284) (1,448) 1,516 3,544 2012 £’000 1,271 (18) 639 484 56 507 23 (1) (1,910) (598) 2,120 2,573 2013 £’000 — 2012 £’000 — (b) Operating lease commitments The Group has entered into commercial leases on certain properties, motor vehicles and items of plant and equipment. At the balance sheet date, the Group had outstanding commitments for minimum lease payments under non-cancellable operating leases, which fall due as follows: Land and buildings, leases expiring: Within one year In the second to fifth years inclusive After more than five years Other assets, leases expiring: Within one year In the second to fifth years inclusive 2013 £’000 641 2,711 1,517 4,869 53 56 109 2012 £’000 624 2,624 2,167 5,415 44 35 79 The operating lease commitment on land and buildings includes the following significant commitments: • a 15 year lease commenced on 1 July 2005 with rent reviews every five years on the Group factory and offices at Meadowhall, Sheffield; • a secondary 15 year lease commenced on the same date with rent reviews every five years for the end bays at Meadowhall, Sheffield; • a third lease was entered into on 7 February 2010, expiring on the same date as the two leases above, for new offices at the above address; • a 15 year lease for Al-Met Limited’s property commenced on 10 November 2010 with rent reviews at the end of year 5 and year 10 of the term; and • Hydratron Limited’s 10 year property lease commenced on 28 October 2010 and has a rent review at the end of year 5. 27. Related party transactions The interests of Directors in dividends paid during the year are disclosed in the Report of the Remuneration Committee which has been audited. 55 Pressure Technologies plc Annual Report 2013 COMPANY BALANCE SHEET As at 28 September 2013 Fixed assets Investments Tangible fixed assets Current assets Debtors Cash at bank and in hand Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Provisions for liabilities Net assets Capital and reserves Called up share capital Share premium account Equity – non distributable Profit and loss account Equity shareholders’ funds The accounting policies and notes on pages 56 to 59 form part of these financial statements. Approved by the Board on 3 December 2013 and signed on its behalf by: JTS Hayward Director Notes 4 5 6 7 2013 £’000 6,373 4 6,377 4,528 2,181 6,709 (530) 6,179 2012 £’000 6,344 — 6,344 5,528 75 5,603 (338) 5,265 12,556 11,609 10 8 — 12,564 11,609 9 11 11 11 12 568 5,387 114 6,495 568 5,378 85 5,578 12,564 11,609 Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 56 Pressure Technologies plc Annual Report 2013 NOTES TO THE COMPANY FINANCIAL STATEMENTS 1. Accounting policies These financial statements have been prepared under the historical cost convention and in accordance with applicable UK accounting standards and the Companies Act 2006. Under section 408 of the Companies Act 2006 the Company is exempt from the requirement to present its own profit and loss account. The profit for the financial year dealt within the financial statements of the holding Company was £1,765,000 (2012: £2,302,000) after applying a tax credit (note 8) of £8,000 (2012: £nil) to the profit before tax of £1,757,000 (2012: £2,302,000). Investments Investments in subsidiary undertakings are stated at cost subject to provision for impairment where the underlying business does not support the carrying value of the investment. Where the ownership of investments has been transferred between Group undertakings, this has been accounted for at nominal value under the provisions of merger relief. Fixed assets and depreciation Fixed assets are stated at cost less accumulated depreciation and any reduction for recognised impairment in value with a corresponding charge to the profit and loss account. Cost reflects purchase price or construction cost of the asset together with any incidental costs of bringing the asset into use. Depreciation is applied on a straight-line basis so as to reduce the assets to their residual values over their estimated useful lives. The rates of depreciation used are: Plant and machinery One year Pensions The Company makes contributions to a defined contribution scheme with costs being charged to the profit and loss account in the period to which they relate. Share based payments The share option programme allows Pressure Technologies plc to grant options to Group employees to acquire shares in Pressure Technologies plc. The fair value is measured at the date of granting the options and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as fair value is adjusted to reflect the actual number of share options that vest except where forfeiture is due only to share prices not achieving the threshold for vesting. Deferred taxation is recognised over the vesting period. Where the individuals are employed by the parent Company, the fair value of options granted is recognised as an employee expense with a corresponding increase in equity. Where the individuals are employed by a subsidiary undertaking, the fair value of options to purchase shares in the Company that have been issued to employees of subsidiary companies is recognised as an additional cost of investment by the parent Company. An equal amount is credited to other equity reserves. 2. Employees Average weekly number of employees, including Executive Directors: Administration Staff costs, including Directors: Wages and salaries Social security costs Other pension costs Share based payments 2013 Number 5 2012 Number 5 2013 £’000 455 59 43 15 572 2012 £’000 389 46 39 21 495 Further details of Directors’ remuneration are provided in the Report of the Remuneration Committee on pages 20 to 22. 57 Pressure Technologies plc Annual Report 2013 3. Operating profit The Auditor’s remuneration for the audit and other services is disclosed in note 6 to the consolidated financial statements. 4. Investments Cost At 29 September 2012 Share options granted to subsidiary company employees At 28 September 2013 The principal subsidiaries which are all 100% owned, are: Name Country of incorporation Al-Met Limited Chesterfield BioGas Limited (“CBG”) Chesterfield Special Cylinders Limited (“CSC”) CSC Deutschland GmbH Hydratron Limited Hydratron Inc 5. Tangible fixed assets England & Wales England & Wales England & Wales Germany England & Wales USA Cost At 29 September 2012 Additions At 28 September 2013 Depreciation At 29 September 2012 Charge for the period At 28 September 2013 Net book value At 28 September 2013 At 29 September 2012 6. Debtors Amounts: falling due within one year Prepayments and accrued income Other debtors Amounts owed by Group companies Investment in subsidiary companies £’000 6,344 29 6,373 Principal activity Manufacturing Manufacturing Manufacturing Sales and marketing Manufacturing Manufacturing Plant and machinery £’000 — 12 12 — 8 8 4 — 2012 £’000 116 — 5,412 5,528 2013 £’000 194 100 4,234 4,528 Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 58 Pressure Technologies plc Annual Report 2013 NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED 7. Creditors: amounts falling due within one year Trade creditors Other tax and social security Corporation tax Accruals and deferred income Amounts owed to Group companies 8. Taxation Current tax Current tax expense Over provision in respect of prior years Deferred tax Origination and reversal of temporary differences Total taxation charge 2013 £’000 87 16 1 426 — 530 2013 £’000 1 (1) — (8) (8) Corporation tax is calculated at 23.5% (2012: 25%) of the estimated assessable profit for the period. Deferred tax is calculated at 20% (2012: 23%). 9. Share capital Details of the Company’s authorised and issued share capital and of movements in the year are given in note 23 to the consolidated financial statements. 10. Provisions for liabilities Deferred tax At 30 September 2012 Credit for the period The provision for deferred taxation is made up as follows: Cost of share options Accelerated capital allowance 2013 £’000 — (8) (8) 2013 £’000 (7) (1) (8) 2012 £’000 36 12 — 58 232 338 2012 £’000 — — — — — 2012 £’000 — — — 2012 £’000 — — — 59 Pressure Technologies plc Annual Report 2013 11. Reserves Share premium Equity – non account distributable 2013 £’000 2013 £’000 Profit and loss account 2013 £’000 Share premium Equity – non account distributable 2012 £’000 2012 £’000 At beginning of period Profit for the financial period Share option cost Share options granted to subsidiary employees Shares issued Dividends At end of period 5,378 — — — 9 — 5,387 85 — — 29 — — 114 5,578 1,765 15 — — (863) 6,495 5,369 — — — 9 — 5,378 12. Reconciliation of movements in equity shareholders’ funds Equity shareholders’ funds at beginning of period Profit for the financial period Dividends paid Share option cost Share options granted to subsidiary employees Shares issued Equity shareholders’ funds at end of period 50 — — 35 — — 85 2013 £’000 11,609 1,765 (863) 15 29 9 12,564 13. Related party transactions The company has taken advantage of the exemption available under FRS 8 not to disclose transactions with fellow members of the Pressure Technologies plc Group. The interests of Directors in dividends paid during the year are disclosed in the Report of the Remuneration Committee. 14. Ultimate controlling party The Directors consider there is no ultimate controlling party. Profit and loss account 2012 £’000 4,084 2,302 21 — — (829) 5,578 2012 £’000 10,070 2,302 (829) 21 35 10 11,609 Company Overview 01 – 05Business Review 06 – 17Governance 18 – 27Financial Statements 28 – 59 60 Pressure Technologies plc Annual Report 2013 NOTES Design and Production www.carrkamasa.co.uk This report is printed on UPM Fine Offset which is FSC® certified as well as having ISO14001 EMS, EMAS and the European EcoLabel. P R E S S U R E T E C H N O L O G I E S P L C A N N U A L R E P O R T 2 0 1 3 Pressure Technologies plc Meadowhall Road Sheffield S9 1BT UK Telephone +44 (0) 114 242 7500 Fax +44 (0) 114 242 7502 www.pressuretechnologies.co.uk