Pressure Technologies plc Annual Report 2017

Plain-text annual report

Annual Report 2017 Specialist engineering • Engineering excellence • Organic growth • Future growth • Acquisition of Martract • Unique solutions • Integrity management services • World leader • 120 years of engineering heritage • Highly skilled craftsmen • Creativity and ingenuity • Close collaboration with customers • Creation of PMC brand • Collaboration • Investment in people • Investment in IT • Investment in systems • Substantial potential • New customers • New markets • Product development • Trusted suppliers • Niche specialism • Niche markets • Precision Machined Components • Cylinders • Engineered Products • Alternative Energy • Oil and gas • Industrial gases • Defence • Design and development • Safety critical Pressure Technologies was founded on its leading market position as a designer and manufacturer of high pressure components and systems serving the global energy, defence, and industrial gases markets. Today it continues to serve those markets from a broader engineering base with specialist precision engineering businesses and has a worldwide presence in alternative energy as a global leader in biogas upgrading. P Visit us online at www.pressuretechnologies.com Our vision P See IFC To build a Group that is globally recognised within our markets as the leading provider of pressure containment and control products and services to customers who operate in highly- demanding, safety-critical environments where the consequences of product failure could be catastrophic. What we do P See p04 Our values P See p04 The three point strategy P See p05 • To be honest and open in the way we do business and maintain high standards of integrity. Our goal is to build a highly profitable group of companies by: • Consolidating and building on • To comply with both the spirit and the businesses. the letter of the law. • To operate in a safe and responsible way. • Identifying and developing profitable, niche opportunities in growth sectors. • Identifying and pursuing profitable acquisition opportunities. We work in close collaboration with our customers who require unique solutions when developing and manufacturing highly engineered products for use in harsh operating environments. We capitalise on our unrivalled 120 years of engineering heritage, by hiring and developing highly skilled craftsmen and design engineers who have the creativity and ingenuity required to solve complex design and manufacturing challenges. This differentiates us from our competitors and we are committed to continuously investing in our people and technologies to keep us at the forefront of engineering excellence. The world we serve P See p08 Structure P See IFC Where we operate P See IFC We serve four core market sectors • Oil and gas • Defence • Industrial gases • Alternative energy We have four Divisions within the Group, three are Manufacturing, serving oil and gas, defence and industrial gases and one is Contracting, serving alternative energy. All of our businesses are world class, with niche specialisms and technical capability, supported through ongoing investment programmes in skills, technology and capital equipment. Our manufacturing is UK based with our businesses serving a global blue chip customer base from operations around the globe, either wholly owned offices or through agents and distributors covering Europe, America, Asia, Africa and Australasia. Pressure Technologies plc Annual Report 2017 Section 1 Strategic Report The World of Pressure Technologies Our goal is to build a highly profitable group of companies, specialising in the technology for the containment and control of liquids and gases in pressure systems. Our businesses provide niche and highly specialised products and services, which set us apart from other companies. We do this by employing engineering and technical expertise and serving strong markets that we understand. Our vision is to build a Group that is globally recognised within our markets as the leading provider of pressure containment and control products and services to customers who operate in highly-demanding, safety-critical environments where the consequences of product failure could be catastrophic. Group Revenue 2017 £38.4m Group Revenue 2016 £35.8m Contracting Manufacturing Alternative Energy Precision Machined Components With an unrivalled installed base of over 100 upgraders world-wide, Greenlane is one of the world’s largest suppliers of biogas upgrading equipment. Founded on its leading water-wash technology, Greenlane is now the only company to offer the three main biogas upgrading technologies to a global market. Waste from agriculture, landfill, wastewater treatment plants and food and drink production can be used to produce biomethane, or Renewable Natural Gas (“RNG”) as it is also termed, for injection into the gas grid network or as a vehicle fuel. The market for biogas upgrading is driven at a global governmental level by the commitment to reduce greenhouse gases and meet renewable energy targets, while drivers at a local governmental level are to reduce waste and improve air quality. This Division comprises, Roota Engineering, Quadscot Precision Engineering, Al-Met and Martract. These businesses are leaders in their markets, with world-class lead times, highly specialised precision engineering skills and a blue chip customer base. Strong partnerships are formed with customers to develop technical solutions for their end product applications. They specialise in supplying key components, made to exacting standards and tolerances, that are destined for extreme or hostile environments such as deepwater and subsea oil exploration and wear parts for oil production, setting themselves apart from competitors with world- class lead times. The addition of Martract to the Division in December 2016 has brought exposure to new industrial markets and services such as refurbishment. Highlights Revenue £38.4m (2016: £35.8m) Adjusted operating profit* £1.1m (2016: £(0.4)m) Reported loss before tax £(1.9)m (2016: £(0.4)m) Adjusted earnings per share 6.3p (2016: (2.6)p**) Reported basic loss per share (7.9)p (2016: earnings 4.4p**) Operational cash inflow before working capital movement*** £2.5m (2016: £0.5m) Closing net debt £11.1m (2016: £6.6m) Post year-end fundraising of net £4.8m Net • Precision Machined Components Division (PMC) order intake more consistent with stronger second half • Manufacturing gross margins increased to 35% (2016: 31%) • Acquisition of Martract in December 2016 • Creation of PMC brand to give improved customer offer • Alternative Energy restructured from a regional to a functional model and broke even (2016: loss £(1.1) million) • Full review of management capability resulting in additional senior management appointments • Investment in IT systems to improve communication and promote collaboration * Before M&A costs, amortisation and exceptional charges and credits. ** From continuing operations. *** Before payment of redundancy and reorganisation costs. Cylinders Engineered Products Chesterfield Special Cylinders (“CSC”) has over a century of industry knowledge and expertise and is a world-leading provider of bespoke, high-pressure gas containment solutions and services. It is one of only five companies globally who can compete for ultra large cylinder contracts. CSC provides high pressure gas containment solutions over several markets and applications, from ultra large air pressure vessel systems used for motion compensation on floating oil rigs, high pressure ‘banana’ shaped cylinders on defence submarines, to oxygen cylinders in fighter jets as well as for the bulk storage of gases. Integrity Management services are a growing part of the business, where cylinders cannot be removed for routine maintenance and are inspected and certified in-situ. The service has been built on CSC’s unrivalled industry knowledge and experience. Hydratron is a manufacturer and global supplier of high pressure testing equipment. Its customers are high pressure original equipment manufacturers (“OEMs”), suppliers and service providers. The business has a strong global reputation for high quality products and service excellence. High pressure testing equipment is required wherever there is a need to test pressure for safety critical applications. Hydratron manufactures standard pumps as well as bespoke systems designed to exact customer specifications. The majority of their products go into the oil and gas market but the business also supplies into the petrochemical, aerospace, marine, automotive and power generation markets either directly to the end customer or through its distributor network, including covers North and South America, Norway, Italy, South and West Africa, the Middle East, South East Asia and Australia. Pressure Technologies plc Annual Report 2017 Contents 01 A specialist engineering Group supplying safety- critical products and services world-wide P Visit us online at www.pressuretechnologies.com S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Section 1 – Strategic Report < The World of Pressure Technologies < Highlights 02 Chairman’s Statement 04 How We Run Our Business 06 Why Invest? 08 Our Marketplace 10 Q&A 12 Business Review 16 Sustainable and Responsible Business 18 Financial Review 23 Key Performance Indicators 24 Risks and Uncertainties Section 2 – Governance 28 Introduction to Governance 30 Directors and Advisers 32 Report of the Remuneration Committee 35 Directors’ Report 39 Audit and Risk Committee Report 42 Independent Auditor’s Report to the Members of Pressure Technologies plc Section 3 – Financial Statements 48 Consolidated Statement of Comprehensive Income 49 Consolidated Balance Sheet 50 Consolidated Statement of Changes in Equity 51 Consolidated Statement of Cash Flows 52 Accounting Policies 62 Notes to the Consolidated Financial Statements 88 Company Balance Sheet 89 90 Company Statement of Changes in Equity Notes to the Company Financial Statements Pressure Technologies plc Annual Report 2017 02 Chairman’s Statement Long term growth through sustainable and responsible business We pride ourselves on our ethical principles and commitment to: Alan Wilson Chairman • Environmental • Social • Governance “The Board is optimistic that the Group is well prepared to capitalise on opportunities as they arise.” P To read more on our business practice see page 16 Overview I look back on this past year for the Group as one of preparing for future growth across all our Divisions, whilst at the same time maintaining stability against a backdrop of very challenging oil and gas market conditions. During the past three years, it is estimated that global oil and gas Capex and Opex spending has reduced by some 30%. Reports indicate that Capex and exploration spending will have reduced by $1 trillion from 2015 through 2020. The net impact on job losses worldwide is estimated at 440,000, with 124,000 in the UK alone. Within the Group, we have reacted to these unprecedented market conditions by reducing our headcount by 40%, but we have been careful to protect our knowledge and skills base, to be well positioned to respond to increased demand when it arrives. We have also invested in further development of our people and added key leadership and sales resources across the Group. Given the tough market conditions we’ve traded through for the past three years, I’d like to express my respect and admiration for the way our people have steadfastly risen to the various challenges we’ve encountered. In addition to developing and adding to our skills base, we have invested in systems and process that make us more efficient and productive and have restructured the Alternative Energy Division from a regional to a functional model, which will improve efficiency and the ways we win and execute projects. It is heartening to report that, towards year-end, we were approached by institutional investors who expressed a desire to make further investment in the Group. I see this as a sign that many market observers anticipate that the oil and gas market is about to rebound and they see Pressure Technologies as an enterprise that has been resilient in the downturn and is primed for growth. This investment gives us more fire power to react to opportunities as they arise. Whilst the oil and gas market has been in the doldrums, we have of course been busy pursuing other industrial sectors. The biogas market continues to offer substantial potential, but has been frustratingly slow to deliver due to a whole range of factors, but we remain committed to retaining and building on our position as the market leader within our sphere. CSC’s market leadership in large high-pressure cylinders maintains our enviable position as the company of choice for many of the world’s navies and air forces. In December 2016, we acquired Martract, a business that specialises in the grinding and lapping of ball valves. Martract is a company that we monitored for some time as a potential add-on to our PMC companies. It offered us potential for vertical integration by extending our core skill sets, along with pull-through opportunities into new industrial sectors, as 60% of Martract sales come from outside the oil and gas market. Results I am pleased to report that Group revenue increased to £38.4 million, a 7.5% increase on last year, whilst adjusted operating profits (operating profit before M&A costs, amortisation and exceptional charges and credits) were £1.1 million, a substantial improvement from a loss of £0.4 million recorded last year. The increase in revenue was primarily driven by a 40% increase in sales seen in Alternative Energy on the back of a strong opening order book. The improvement in adjusted operating profit was primarily driven by Alternative Energy, which broke even for the first time since the acquisition of Greenlane and the contribution from Precision Machined Components, including nine months of Martract. Operating cash inflow before movements in working capital and reorganisation and redundancy costs was £2.5 million, significantly better than £0.5 million recorded last year. Net debt was £11.1 million, an increase of £4.5 million versus last year, primarily due to the acquisition of Martract and net investment in working capital. Post year-end the Group completed a share placing, raising net proceeds of £4.8 million. Despite the fact that this year’s financial results are a clear improvement over last year, the Board has resolved that no dividend shall be paid to shareholders this year, as cash reserves will be key to funding profitable growth in the coming months. Pressure Technologies plc Annual Report 2017Section 1 Strategic ReportOutlook The level of optimism within the oil and gas market is increasing by the month. Major oil companies reported healthy profits for quarter-three 2017, which is a sure sign that their attentions will start to move towards investment and growth. Recent assurances by OPEC that production cuts will be sustained until supply-demand has been rebalanced is encouraging. Even the top three US-based shale producers have issued a cautionary note on the speed and level of investment that is prudent in order to sustain a profitable oil price. Renewable energy is becoming more topical amongst the public at large and governments are making bold statements about moving away from carbon-based fuel sources. Whether some of these rather ambitious political statements are achievable remains to be seen, but the general increase in awareness of what renewable energy has to offer is helpful. The potential market for biogas is enormous and we remain confident it will materialise and offer us substantial opportunities for increasing sales and profits. Given that we are already working on the design of cylinders for the Dreadnought- class of nuclear-powered submarines for the UK Ministry of Defence, which offers us a visible order pipeline for some years ahead, it is pleasing to conclude that all three of our major industrial markets look promising for the foreseeable future. Given a more positive outlook on our core markets and the recent fundraise that has bolstered our financial resources, supported by steps we’ve taken to ready our businesses for growth, the Board is optimistic that the Group is well prepared to capitalise on opportunities as they arise. Alan Wilson Chairman 11 December 2017 Our Board structure Every member of our Board is there for the benefit of Pressure Technologies plc. Each recognising their responsibility to the Company’s shareholders and employees. P To read more about our Board structure see page 29 03 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 04 How We Run Our Business What we do We work in close collaboration with our customers who require unique solutions when developing and manufacturing highly engineered products for use in harsh operating environments. We capitalise on our unrivalled 120 years of engineering heritage, by hiring and developing highly skilled craftsmen and design engineers who have the creativity and ingenuity required to solve complex design and manufacturing challenges. This differentiates us from our competitors and we are committed to continuously investing in our people and technologies to keep us at the forefront of engineering excellence. Defence Oil and gas Renewable energy Our Cylinders Division is the world leader in naval and aviation defence markets for high-pressure cylinders and integrity management services. Our Manufacturing Divisions design and manufacture bespoke components and products for customers who often face unique challenges in harsh operating environments. Greenlane Biogas has installed the largest population of biogas upgraders in the world. World leader in water-wash technology and the only company to also offer membrane and PSA technologies. Market sectors • Oil and gas • Defence • Renewable energy • Industrial gases O U R STRATEGY i d a t e and build the business n s o l o C 1 . Customer value proposition • World class • Niche specialism • Technical capability • Agility s r arket s e c t o M Custo pro m p e o r s i t v a i l o u n e Our purpose Push high pressure engineering forward G r o w t h m o del e n u e model v R e 3. I d e n t i f y a n d d e v e l o p p r o f t a b l e a c q Growth model • Organic development through investment and acquisition • Synergy • Value chain • Market and technical development u i sitio n o p portunities e d d n y a f i I d e n t 2. s r o t c e s h t w o r g n i s e i t i n u t r o p p e o h v elo p prof table nic Revenue model • Low volume/high margin • Strategic partnerships • Long-term relationships/ contracts • Services and aftercare Shareholders Employees Customers We deliver shareholder value by growing our businesses in profitable niche markets. We have demonstrated strong resilience in adverse market conditions. We strive to create a working environment where our employees can fulfil their potential. By doing so, we get the best from our people and they enjoy working with us. Our aim is to be the employer of choice within our industry. Our customers are pioneers in what they do and we work in close collaboration with them. These strong relationships are built on the honest and open way in which we do business and our culture of delivering excellence. Pressure Technologies plc Annual Report 2017Section 1 Strategic Report 05 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s How we do it Our strategy is to identify and develop profitable niche opportunities in growth sectors for pressure products and services through a combination of organic initiatives and by acquisitions. Our strategy 1 Consolidate and build the business 2 Identify and develop profitable niche opportunities in growth sectors 3 Identify and develop profitable acquisition opportunities How we delivered in 2017 How we delivered in 2017 How we delivered in 2017 Precision Machined Components is now being marketed as one company, four engineering businesses. New Divisional MD, Business Development and Technical Directors have been appointed. Alternative Energy restructured from a regional to a functional model, centred in Vancouver, Canada with sales and engineering support regionally based. Headcount reduced by 20%, whilst at the same time, sales resources have been strengthened. New President for the Division joined in November 2017. Precision Machined Components secured eight new customers following the appointment of the business development Director. Engineered Products appointed seven new distributors. Cylinders appointed a naval products expert as Director of US technical sales in its US office as it continues to develop its US operation. Alternative Energy developed and launched the world’s largest biogas upgrader, the Kauri and second generation of its entry level upgrader, the Kanuka. Further development of the Division’s technology agnostic position. Martract Limited acquired in December 2016 giving vertical integration and customer and market expansion for Precision Machined Components. Martact is a highly specialised engineering business with a significant technical capability and intellectual property. The majority of Martract’s revenue comes from a number of wide-reaching industrial sectors including nuclear and presents an opportunity to diversify from oil and gas. Related risk factors Related risk factors Related risk factors Global economic conditions Global economic conditions Global economic conditions Competitors and commercial relationships Funding Availability of key resources Technology and innovation Governmental policy and legislation Funding Funding Availability of key resources Availability of key resources Technology and innovation P To read more about our related risks and uncertainties see page 24 Pressure Technologies plc Annual Report 2017 06 Why Invest? Potential Entrepreneurship Heritage Our investment case Leadership Trusted Skilled Pressure Technologies plc Annual Report 2017Section 1 Strategic Report07 1 Potential P See p10 2 Heritage P See p04 • We have an enviable track record of delivering growth and profits in strong markets, yet we have proven resilient in the face of adverse market conditions. After re- aligning the businesses exposed to the downturn in the oil and gas market, we turned our focus to putting in the foundations for the market upturn and have been supported by our largest investors. • Investment in sales and productivity with the appointment of a Sales Director and a Technical Director, as well as a Divisional MD in PMC. • We have appointed an experienced Sales Director-Europe for the Greenlane Biogas business and a new President for the Division based in Vancouver. • Post year end fundraising of £5 million (gross). • We have an unrivalled heritage, with over 120 years of experience and knowledge making us clear leaders in our markets. • Chesterfield Special Cylinders is the world's leading supplier of cylinders and inspection services into the naval and aviation markets. • Our Precision Machined Components and Engineered Products businesses are trusted suppliers to the world’s leading oil and gas innovators. • Greenlane Biogas is the pioneer in biogas upgrading; a world leader with the largest installed base of upgraders, having supplied the world’s two largest upgrading projects and recently developed the world’s largest ever upgrader, the Kauri. 3 Trusted P See p12 4 Skilled P See p16 Our businesses supply products, components, systems and service for demanding applications, where failure is not an option, due to the potential threat to life, the environment or investment. Our customers require the security of knowing their products are of the highest possible standard, carefully designed to meet their exacting requirements. This trusting relationship creates significant barriers to entry into the sections of the market we serve and supports our global reputation for excellence. • We strive to attract the best employees and have a culture of not just retaining talent but investing in and developing our people to be the best that they can be. • Low staff turnover. • NVQ4 and Higher qualifications. • Higher education funded. 5 Leadership P See p17 6 Entrepreneurship P See p11 Ethical principles – at the heart of the business ethos. We have a strong culture, that is driven from the top. We are quick to recognise opportunities and threats and we always rise to the various challenges that come our way. We have systems that ensure high levels of awareness of what’s happening within our markets and businesses, so that we can inspire a dynamic and entrepreneurial culture throughout. Our investment in people ensures that we are developing our leaders of the future. Our entrepreneurial culture is supported by strong core values and ethics (see page 16) and a structure that enables rapid decision making at appropriate levels of the business. Our businesses work in close collaboration with pioneering companies who require our depth of knowledge, ingenuity and creative thinking to solve their most technically demanding problems. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 08 Our Marketplace Oil and gas 2017 % of Group Revenue 36% Division Manufacturing Market served by Cylinders Engineered Products Precision Machined Components 2017 Revenue £13.8m (2016: £15.5m) The markets we serve As a Group, our companies serve four main markets. Defence 2017 % of Group Revenue 17% Industrial gases 2017 % of Group Revenue 6% Division Manufacturing Market served by Cylinders Engineered Products 2017 Revenue £6.5m (2016: £6.5m) Division Manufacturing Market served by Cylinders Engineered Products 2017 Revenue £2.3m (2016: £2.4m) Renewable energy 2017 % of Group Revenue 41% Division Contracting Market served by Greenlane Biogas 2017 Revenue £15.8m (2016: £11.4m) Oil and gas Defence Industrial gases Renewable energy Pressure Technologies plc Annual Report 2017Section 1 Strategic Report 09 The market environment Market potential The contribution to Group revenue from oil and gas fell to an historic low in the year, as the well-documented downturn continued. However, during the second-half, some stability returned to the market as OPEC oil production cuts and consequent reduction in oil stocks began to have a positive effect on the oil price. More recently, oil majors reported a return to profit in their third-quarter results. Defence continues to be a key contributor to Group revenues. Although defence budgets are under pressure, submarine build programmes have continued apace. Chesterfield Special Cylinders (“CSC”) has specialist capability in the manufacture of high-pressure cylinders for submarines, surface warships and military aircraft. The market is less sensitive to competition due to our unrivalled knowledge, hard-won approvals, cutting-edge engineering design and highly skilled manufacturing techniques that are required to deliver complex products and integrity services. CSC is the principal supplier of high-pressure cylinders to NATO and NATO-friendly nations, with the exception of the USA. Germany is now our largest market. Oil and gas remains a key target market for growth across the Manufacturing Divisions, especially our precision machining businesses. We are now marketing the businesses within the Precision Machining Components Division under one brand, creating an opportunity to expand our customer base and the products we supply. Having four companies within the PMC Division enhances our competitive advantage by reducing the supply chain risk for customers as we are able to supply from multiple locations. Substantial rationalisation of the global supply chain has occurred during the market downturn, from which we have emerged strong and well positioned to take advantage of the upturn when it transpires. Work done over the last decade to expand our customer base for naval applications has stabilised our defence revenue and there is good visibility on potential projects. There are significant medium-term opportunities, the largest being the UK Successor Programme, Dreadnought, which replaces the Vanguard class of submarines, and we are already working with defence OEMs on initial prototyping. This programme has also provided the opportunity to promote CSC’s capabilities in the USA, where there is a substantial market. The industrial gases market has played an important role for CSC for over 100 years. The Group supplies a diverse range of products and inspection services, ranging from bulk gas storage for large industrial applications, to the reconditioning and retest of cylinders and road trailers. The growth of in-situ testing continues to be driven by a European Standard, developed at CSC, for the inspection of hard to reach, or impossible to move gas cylinders. CSC is currently the only company capable of delivering this strict new testing service. Trailers for the road transportation of bulk gases are also an important part of this market. The Group manufactures a range of high-pressure gas trailers, supported by a one-stop-shop reconditioning and retest service. CSC mainly serves the UK and European markets, but there are opportunities in other geographies such as the US where we are building a presence. On a macro level, there is growing potential for gas storage, which is being driven by the growth in alternative energy, particularly the need for power-to-gas storage. The global biogas upgrading market is growing at a CAGR of 28.7% pa, and is anticipated to reach $1.97 billion by 2022. It is supported globally by government incentives both at national and regional levels. Organic waste is an increasing global problem, primarily caused by population growth; particularly middle-classes in developing countries where consumption increases create more waste. Using our technology, biomethane, or Renewable Natural Gas, can be created from raw biogas produced from organic waste to give a renewable energy that is green and profitable. Significant opportunities exist in Europe, for example, Germany has 8,000 biogas to power, CHP installations many of which are forecast to convert to biomethane production. Italy has 1,000 natural gas refuelling stations with 800,000 gas fuelled vehicles and new legislation is expected which favours biomethane as a transport fuel. The UK is set for further expansion of biomethane production when the amended Renewable Heat Incentive legislation is passed in early 2018. While much comment has been made about President Trump’s move to withdraw from the Paris Climate Agreement, many of the market drivers in the US are at a State rather than Federal level. The US has more than 2,200 sites producing biogas and a recent industry assessment estimates nearly 14,000 sites are ripe for development. If 10% of these opted to upgrade to biogas, it represents a potential $2 billion market for Greenlane Biogas. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 10 Q&A with the new members of the team at Precision Machined Components Precision Machined Components is now the largest Division in the Group by number of employees and adjusted profit. It comprises Al-Met, Roota Engineering, Quadscot Precision Engineers and Martract, which was acquired in December 2016. As a consequence of the sustained downturn in the oil and gas market customers have become increasingly risk averse and the financial security of the Pressure Technologies Group has become a key strength for the Division. In addition customers are rationalising their supplier lists and there is clear evidence of major customers placing orders on the back of the Group’s financial stability and the Division’s ability to supply out of multiple locations, minimising supply chain risk. To capitalise on this growing trend we have strengthened the Divisional team. As well as a new Divisional MD, who will start with us early in 2018, a Business Development Director has been appointed to expand the customer base within oil and gas and find opportunities in new target markets. A Technical Director with a commercial focus has also been appointed to maximise productivity and efficiency, plan for future capacity, identify opportunities to expand the range of products we offer to existing customers and inform the investment decisions to support the growth of this Division. The aim of all these appointments is to sustainably grow the Division. Pressure Technologies plc Annual Report 2017Section 1 Strategic Report11 Phil Simpson Technical Director Shaun Newby Business Development Director We talked to the Division’s newest recruits, Shaun Newby, Business Development Director, and Phil Simpson, Technical Director, about how they see the future of PMC Q What sectors are a good or natural fit for PMC? A Shaun: Nuclear. There are currently 15 nuclear plants in decommissioning in the UK and our engineering skills and experience of working with exotic alloys are a natural fit. Martract already supplies into the nuclear industry, Al-Met has Fit for Nuclear status and the other businesses in the Division are working towards it. There are also opportunities for us for power station commissioning and our businesses are geographically well placed to serve this market. Phil: Renewable energy. At the development stage this market is well supplied but there is a significant opportunity for the aftermarket with spares and parts. Quadscot in particular is well situated to serve this market. Q How long you have been with PMC? A Shaun: I have been with PMC since March 2017 but I have been working in precision engineering in the subsea and oil gas markets for over 14 years. I began as an apprentice engineer before moving into project management and then sales. Phil: I have been with the Division for two years, originally working for Roota but then as Divisional Technical Director. I have been working in precision engineering for 20 years and like Shaun, and many of the senior management team around the Group, I began as an apprentice engineer. Q Can you tell me what your roles are here at PMC? A Shaun: There is plenty of work for niche businesses like ours. My job is threefold, to look at expanding the scope of the work we do with our existing customers, to bring new customers into the Division and to make introductions into new markets where our skills are relevant. Phil: My role is to inform the Division’s investment decisions ensuring we are using the best production techniques, making the most of the latest innovations available and to plan our future capacity. Investment is key to capitalising on the opportunities that are being presented by the new customers that Shaun is introducing to the Division. Q The downturn in the oil and gas sector has been well documented, how do you see the market now? A Shaun: While I think the days of three digit oil prices are over, the market only needs a consistent $60 per barrel to see new orders come in. We have been focusing our sales effort on operational expenditure but we are now seeing more capital expenditure projects as the oil price recovers and balance returns. Phil: And $60 is a good price, beyond that there is always the threat of increased production from US shale, which could upset the balance. I think the market is happy at this price. Q What excites you about the potential for this Division? A Shaun: Everything. The downturn has changed customer behaviour, they want a wider offering from their suppliers, which plays to our strengths. We have four engineering businesses within one Division. This means our customers only have to deal with one company but they get four highly skilled ones. There is substantial potential for growth just within our core oil and gas market as customers, both existing and new, consolidate their vendor lists. Phil: There are also a number of opportunities, again just within oil and gas, to expand our product lines, which will create significant potential for the Division. Being part of a larger group means we can make the investment needed to do this. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 12 Business Review John Hayward CEO “The reorganisation in recent years means that there are significant operational gearing gains to be made as volumes increase. The recent share issue improves the Group’s ability to support large-scale organic growth, and with no immediate major capital expenditure required the Group is in good shape.” Increasing order volumes have given more consistent order intake patterns for Roota and Al-Met. This has resulted in improvements in gross margins, as the benefits of latent capacity created by investment in new technology and better productivity have been realised. Quadscot remained affected by reduced customer spending throughout the majority of the year. A combination of increased activity from core and new customers lifted its final-quarter sales, which has continued into the new financial year. The appointment of a Business Development Director in March has resulted in winning work from new customers, a trend that is expected to continue. To date, the Division has secured orders from eight new customers, with a focus on technical equipment manufacturers. The purchase of Martract in December 2016 is giving further opportunities to secure new customers, since 60% of their customers are outside the oil and gas industry. As a result, opportunities exist to cross-sell the Division’s capabilities into other industries, such as chemical processing and nuclear decommissioning. The key points for the year are: Manufacturing Divisions Precision Machined Components Division PMC comprises Al-Met, Roota Engineering, Quadscot Precision Engineers and Martract – which was acquired in December 2016. Al-Met produces wear resistant components in a range of high alloy steels and tungsten carbide for using high- pressure control valves, designed to regulate flow volumes in extremely demanding applications in the subsea and surface oil and gas industries. Roota and Quadscot make a wide range of components for oil and gas pressure systems and down-hole tools, with Roota generally focusing on larger, longer product and Quadscot on smaller components, manufactured in a range of high alloy materials. Martract specialises in grinding and lapping ball and seat assemblies and gate valves, which is highly complementary to the Division, enabling it to offer a product that is unmatched by competitors. Significant progress has been made in the Division since the second-half of the 2016 financial year, which marked the low point for order intake from the core oil and gas market. In 2017, first and second-half sales were 1.7% and 10.4% higher than the second-half of 2016 respectively. The Group’s core technical skills are highly valued by our customers, many of whom are pioneers in what they do. They choose to work with us because of our ability to transform their innovative ideas into high- quality, safety-critical products where the opportunity cost of failure is often orders of magnitude higher than the cost of the product. This creates strong relationships built on the honest and open way in which we do business and our culture of delivering excellence. We have an unrivalled heritage, with over 120 years of experience and knowledge making us clear leaders in our markets. Chesterfield Special Cylinders is the world's leading supplier of cylinders and inspection services into the naval and military aerospace markets. Our Precision Machined Components and Engineered Products businesses are trusted suppliers to the world’s leading oil and gas innovators. Greenlane Biogas is a pioneer in biogas upgrading, a world leader with the largest installed base of upgraders, having supplied the world’s two largest upgrading projects and recently developed the world’s largest ever upgrader, the Kauri. The year witnessed further significant changes in the Group. The impact of major reorganisation in our three manufacturing Divisions: Precision Machined Components, Engineered Products and Cylinders undertaken in prior years began to show material bottom-line impact particularly in PMC and Cylinders. Further progress was made in the Alternative Energy Division, which broke- even, whilst at the same time undergoing a radical restructuring. Pressure Technologies plc Annual Report 2017Section 1 Strategic Report13 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Precision Machined Components Division Revenue £m 2017 2016 2015 2014 2013 10.4 10.7 18.8 13.0 6.4 Adjusted operating profit* £m 2017 2016 2015 2014 2013 1.8 1.4 1.0 4.5 3.0 Engineered Products Division Revenue £m 2017 2016 2015 2014 2013 3.9 4.1 6.7 8.1 7.3 Adjusted operating (loss) / profit* £m 2017 (0.5) (0.3) 0.1 2016 2015 2014 2013 1.6 1.1 * Before M&A costs, amortisation and exceptional charges and credits. The strategy for PMC is to grow revenue and profits by building on the existing businesses through collaboration, cross-selling, product and key-account expansion, as well as the development of new markets, that offer growth and strengthen the Division’s resilience. Any acquisitions will be complementary to this positioning. In furtherance of this strategy, a rebranding exercise has been completed to give a common “feel” to logos and websites. This involved the creation of a PMC brand, which is important when dealing with major customers, as it highlights the strength in depth of the Division. Promoting the brand highlights our ability to minimise supply chain risk, as we are able to move work between sites. At a time when our customers are also looking to reduce the number of companies on their Approved Vendor Lists (“AVL”), contracting with the PMC Division gives them four vendors for one entry in their AVL. Near-term prospects for PMC remain positive, with our core customers expressing a more upbeat outlook for 2018 and significant potential for growth from new customers and markets. The Division is recruiting additional skilled engineers and operators and investing in new equipment to benefit profitably from increasing sales revenue. Engineered Products Division EP manufactures a range of Hydratron- branded 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. The Division continued to be impacted by reduced capital expenditure and discretionary spend from its core oil and gas market, so sales were 7% lower than 2016. The second-half of the financial year saw some patchy improvement in order intake and the engineered systems sales team was expanded to meet this increased level of activity. Action taken in 2016 to reduce costs and improve productivity contained the losses in 2017. Considerable effort was focused on expanding the number and quality of distributors, with seven new distributors appointed, which should yield increasing revenues as 2018 progresses. The first quarter of this new financial year has seen a continuation of the improved ordering pattern, with a more profitable mix of projects but, as yet, there is no clear pattern of improvement in their core oil and gas market. Pressure Technologies plc Annual Report 2017 14 Business Review continued Cylinders Division Chesterfield Special Cylinders (“CSC”) supplies a range of high-pressure gas cylinder systems into the defence, oil and gas and industrial gases markets. Revenue for the year was lower by £1.1 million, as revenue from oil and gas reduced again. However, operating profit was maintained through a better mix of higher added value work in other markets. The defence market is now the mainstay of the business, where the Division has over 80 years of experience in providing cylinders and services to the naval and military aerospace markets. This heritage in a highly demanding market, makes CSC the natural choice for cutting edge product development, as evidenced by the award of cylinder design for the Dreadnought class submarine, Trident’s successor. Cylinders for the first boat-set will be delivered during 2018, along with further deliveries into overseas markets. Business Development efforts continue to focus on breaking into the substantial US defence market and the Pittsburgh sales team has recently been strengthened. For CSC, the oil and gas market remains depressed. The largest volume of sales has traditionally come from Air Pressure Vessels (APVs) for motion compensation systems on drillships and semi-submersible drilling rigs for the deepwater subsea sector. Fewer than 50% of the available vessels are currently utilised in this market and no major build program is forecast. Revenue in 2017 was limited to small projects for floating cranes; that said, CSC was awarded a contract to supply APVs for delivery in 2018 for a new drillship, the only such order placed in the last three years. Revenue in the industrial gases market has largely come from service work with an upturn in the volume of high- pressure gas trailer statutory re-test and refurbishment arising from the phasing of prior capital expenditure by the Gas Majors. This work is forecast to increase further in 2018 and, together with our integrity management offering into the defence and oil and gas markets, will help underpin continued profitability. It is worth noting that since 2014, higher margin service related revenue has grown by almost 45%. Capital investment in 2017 was centred on the ultra large cylinder forge project which is now complete. Investment in 2018 is planned to improve CSC’s small cylinder spinning capability, which will increase productivity and also the potential product range. The outlook for 2018 is positive, underpinned by the Dreadnought work and further expansion of CSC’s service offerings. Alternative Energy Division AE is a designer and supplier of equipment used to upgrade biogas produced by the anaerobic digestion of organic waste into high-quality methane, which is suitable either for injection into the gas grid, or used as vehicle fuel. It trades under the name of Greenlane, the long-established market leader in water-wash biogas upgrader equipment acquired by the Group at the beginning of financial year 2015. Against a backdrop of a further radical reorganisation, the Division broke-even, on an adjusted basis, for the first time since the acquisition of Greenlane. During the first-half of the year, a full review of the management structure and effectiveness was conducted. A functional structure has been implemented with the Division now centred in Vancouver, Canada. Sales and engineering support are still regionally based with Vancouver covering the Americas and China; Sheffield in the UK will be responsible for Europe, Africa and Asia. As a result of the reorganisation, headcount has been reduced by 20%, whilst at the same time, sales resources have been strengthened and a new President for the Division joined in November 2017. Product development remained a priority for the Division with a first order received for a Kauri upgrader, the world’s largest single upgrader plant, which is currently being commissioned in the USA. A second generation, entry level, Kanuka upgrader has also been installed and commissioned in Finland. In addition to core water-wash technology, Greenlane is currently commissioning a biogas plant using pressure swing adsorption technology (PSA) in California. The Division also offers membrane technology for cleaning gas, which Cylinders Division Revenue £m 2017 2016 2015 2014 2013 8.4 9.5 14.3 21.4 17.3 Adjusted operating profit* £m 1.1 1.1 2.1 2017 2016 2015 2014 2013 3.8 3.6 Alternative Energy Division Revenue £m 2017 2016 2015 2014 2013 8.4 1.1 15.8 11.3 14.0 Adjusted operating result* £m 2017 2016 (1.1) 2015 (1.1) 2014 2013 0.0 (0.5) 1.1 * Before M&A costs, amortisation and exceptional charges and credits. Pressure Technologies plc Annual Report 2017Section 1 Strategic Report15 Across all its markets, the Group is well positioned with solid, long-term relationships with global blue chip customers and a growing pool of new customers, distributors and partners. Renewed confidence in the oil and gas market will eventually extend to growth in Cylinders and Engineered Products, as it is currently doing in Precision Machined Components. The reorganisation in recent years means that there are significant operational gearing gains to be made as volumes increase. The recent share issue improves the Group’s ability to support large scale organic growth, and with no immediate large-scale capital expenditure required the Group is in good shape. John Hayward Chief Executive Officer 11 December 2017 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s differentiates Greenlane as the only “technology agnostic” provider of biogas upgraders in the world. The closing order book at year end was £5 million, compared to £14 million at the end of 2016. The significant pipeline of good quality sales opportunities proved frustratingly slow to convert to orders, partly due to the disruptive effect of the reorganisation, but in the main external factors were the root cause. In the UK, a proposed change to the Renewable Heat Incentive, which favoured biogas upgrading, was initially delayed by a drafting error in the legislation, then further delayed by the general election and is now expected at the end of the first quarter of calendar year 2018. In North and South America, several potential orders were delayed due to customer issues around project funding and environmental permits. Since year end, one contract has been secured in the UK and three projects are at final negotiation in the UK, USA and Brazil. The sales pipeline has a value in excess of $200 million and the market in the USA is set for rapid expansion, a major reason for the centring of the Division in North America. To rapidly extend market reach, AE is in negotiation with a number of potential collaborators with allied technology, for example anaerobic digester manufacturers, to pool opportunities and present a “one stop shop” to potential customers. Pooling will also give the opportunity to bring third-party funding into projects where our current individual projects are too small to warrant investors’ attention. At the same time, AE is looking to licence upgrading technology for markets that are either too small, or complicated for direct selling. People The Group has undergone substantial downsizing during the past three years in response to the downturn in the oil and gas market, resulting in a 40% reduction in headcount overall. We have, however, been careful to protect our knowledge and skill base and taken steps to prepare the Divisions for the inevitable market recovery. During the course of 2017, we have undertaken a thorough review of management competence, capability and bench strength throughout the Group. As a consequence of this review, a number of development programs have been implemented and additional management resource has been hired in the shape of a Head of HR at Group level and new Divisional Directors in AE and PMC. As ever, we remain committed to training, education and continuous development. The apprentice levy will have no impact on the Group as we expect to fully recover this through our apprentice and management training programmes. We work in a high-technology environment where continuous improvement in our levels of training and education is essential if we are to maintain competitive advantage. To improve communication and collaborative working across the Group, office systems are in the process of migration from local server based software to Google Suite, thereby allowing real time sharing and collaboration between individuals and businesses. This has been completed for Head Office and the Manufacturing Divisions and will be extended to Alternative Energy during 2018. Health and Safety management is now run on a Group-wide basis with regular meetings involving all Divisions and this model has been extended to include cyber security and information technology management in 2018. All manufacturing businesses in the Group, with the exception of Martract, now have OH SAS 18001 accreditation for health and safety. Martract will gain this as a branch of Roota Engineering during 2018. In the Alternative Energy Division, Vancouver does not yet have accreditation and is targeted to achieve this by the end of 2018 as is Head Office. Outlook The outlook for Cylinders and Precision Machined Components is much stronger than it was a year ago. Defence work in Cylinders and more stable ordering patterns in PMC gives far greater visibility and confidence in forecasts. Engineered Products is still experiencing unpredictable ordering patterns but at a level that makes the business sustainable. Alternative Energy remains in a position of unfulfilled promise but the reorganisation and market dynamics give cause for optimism. Pressure Technologies plc Annual Report 2017 16 Sustainable and Responsible Business Long term growth and profitability is enhanced when businesses behave in a sustainable and responsible manner, with respect for the environment and all their stakeholders, those who support the growth of the company as well as those who are critical to its success. Our ethical principles have been in place since the formation of the Group and they underline the way we do business and inform our responsible business practices. Here we have used the FTSE Russell Environmental Social Governance (“ESG”) Model as a base for showcasing how this works in practice. Environment Overview Social Overview As a Group we recognise that our activities have an impact on the environment and incidents are reported each year in this report as part of the Group’s Key Performance Indicators. Managing this impact is an integral part of our responsible corporate governance and good management practice. The Group has developed environmental policies that follow the principles of ISO14001, of which 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. Our stakeholders are our employees, our investors, our customers, our suppliers, our advisors and the communities in which we operate. Employees It is the policy of the Group to communicate with employees by employee representation on works and staff committees and by regular briefing meetings conducted by senior management. A long-term view of the business is encouraged through the provision of defined contribution pension schemes and SAYE share option schemes for UK based employees and Long Term Incentive Plans (“LTIPs”) for the senior management team. Equal opportunities The Group is an equal opportunity employer. The Group is committed to being a successful, caring and welcoming place for all employees. We want to create a supportive and inclusive environment where our employees can reach their full potential, without prejudice and discrimination. We are committed to a culture where respect and understanding is fostered and the diversity of people's backgrounds and circumstances will be positively valued. Whistleblowing The Group operates a third party whistleblowing procedure, which falls under the remit of the Audit and Risk Committee (see page 41) to ensure that every single employee has a route to raise a concern without prejudice. Health and Safety The Group has a Health and Safety Committee which consists of the Group Health and Safety manager, the CEO, a Non-Executive Director, the head of Group HR, and senior managers and health and safety managers from across the Group. This committee meets formally four times per year with ad-hoc working meetings in between. Health and safety is reported at every Board meeting and continual monitoring processes are in place. The Group Health and Safety manager coordinates with the individual health and safety managers from the Group’s subsidiary businesses, with regular site meetings and visits to ensure consistent best practice is maintained across the Group. Relevant training is ongoing for all employees at all levels. All our manufacturing businesses and the UK and New Zealand subsidiaries of the Alternative Energy Division hold OH SAS 18001 accreditation. The Canadian subsidiary of the AE Division and Group Head Office are in the process of gaining accreditation. Charity We support a number of local charities as well as our employees who individually raise money for causes close to their heart. In addition we host an annual Cross Company Quiz for our Sheffield based businesses, which raises money for the Sheffield Children’s Hospital. Training Training is at the very heart of our business fuelling the skills engine that turns us. From apprenticeships and industry qualifications to undergraduate and postgraduate degrees, the niche and highly specialised nature of our business relies on a highly skilled and motivated workforce, from the shop floor to the Boardroom and everyone in between. Modern Slavery The Group acknowledges its responsibilities in relation to tackling modern slavery and commits to complying with the provisions in the Modern Slavery Act 2015. The Group understands that this requires an ongoing review of both its internal practices in relation to its labour force and, additionally, its supply chains. We are currently conducting an internal review of our suppliers list and our position will be disclosed on the Group’s website on or before March 2018. A review of the jurisdictions and markets in which we operate shows that we have a low risk of exposure to human rights issues. Pressure Technologies plc Annual Report 2017Section 1 Strategic Report17 Governance Ethical principles The Board fully supports the underlying principles of corporate governance contained in the UK Corporate Governance Code (“the Code”). Although as an AIM listed company we are not required to comply with these recommendations, the Board is committed to adopting the Quoted Companies Alliance Corporate Governance Code for Small and Mid-Sized Quoted Companies (“the QCA Code”) as a demonstration of our belief in, and commitment to, good governance. Bribery and corruption policy The Group has put in place policies and procedures to ensure compliance with the Bribery Act 2010. We require compliance with our Bribery and Corruption policy, from everyone connected with our business, and demand the highest ethical standards. Integrity and transparency are of utmost importance to us and we have a zero tolerance attitude towards corrupt activities of any kind, whether committed by Group employees or by third parties acting for or on behalf of the Group. P Governance is also covered on pages 28 and 29 Pressure Technologies plc is proud of its reputation for being honest and fair in the way it does business. This reputation has been hard won over many years and would be easily lost if all employees do not hold to our ethical principles. These principles apply to the way we work with customers, suppliers, governments, employees, shareholders, competitors and our local communities and are summarised below: To be honest and open in the way we do business and maintain high standards of integrity • We will do business honestly. We will not over-promise and we will be realistic when we give a commitment to do something. Our business processes will be transparent and we will not seek to gain unfair advantage through misrepresentation and deceit. We will maintain high standards of integrity. Honesty, openness and integrity generate trust and trust is fundamental to the success of our business. • We will honour our contractual commitments. • We will not steal and we will respect the physical and intellectual property of others. • We will not make or take bribes and we will ensure that we have robust systems in place across the Group to ensure employees and agents of the Group understand and comply with our legal obligations under the Bribery Act. We will not offer or accept gifts except for small, token items neither will we offer or accept excessive business entertaining. • We will not take part in anti- competitive behaviour. To comply with both the letter and the spirit of the law • We are subject to many laws and regulations. We will observe these both to specific wording and the intended spirit of the law or regulation. To operate in a safe and responsible way • We will maintain strong health and safety systems to ensure that our employees, customers and the public are not in danger of injury from our operations or our products. • We will comply with all environmental legislation and ensure that we minimise the impact of our operations on the environment. • We will be good neighbours and ensure that our operations do not adversely impact the communities in which we are located. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 18 Financial Review “The Manufacturing Divisions are beginning to experience an uplift in activity: on a like-for-like basis, second-half oil and gas sector revenue was a further 3.4% up on the first-half, demonstrating that the second-half of 2016 was a clear low point.” Joanna Allen CFO Revenue Adjusted operating profit* Adjusted operating cash inflow** Acquisition of Martract Ltd £38.4m (2016: £35.8m) £1.1m (2016: loss £(0.4)m) £1.0m (2016: £5.1m) £3.6m Revenue per employee*** Return on revenue Closing net debt Post year-end fundraising £161k (2016: £126k) 2.9% (2016: (1.1)%) £11.1m (2016: £6.6m) £4.8m Net Excluding acquisition costs, amortisation on acquired businesses and exceptional charges and credits. Including nine months post-acquisition result of Martract. * ** Before payment of reorganisation and redundancy costs. *** Based on straight average number of employees. I am pleased to present the results of what has been a very busy and progressive year for the Group. The Manufacturing Divisions are beginning to experience an uplift in activity: on a like-for-like basis, second-half oil and gas sector revenue was a further 3.4% up on the first-half, demonstrating that the second-half of 2016 was a clear low point. We have also seen profitability continue to improve. Like-for-like, the 3.7ppt year-on-year increase in gross margin percentage is a reflection of both the impact of actions taken by management in recent years, plus the volume and mix of work in the high margin niche sectors supplied by the Group. Our acquisition of Martract was completed in December 2016 and in the nine months since acquisition the business has contributed £0.3 million of operating profit. Alternative Energy has delivered the contracts in the opening order book posting £15.8 million total revenue in the year (2016: £11.3 million) of which £12.6 million was for biogas upgrader projects (2016: £8.9 million). Expected gross margin improvement has, however, yet to be seen due to cost overruns on certain European projects, and reported gross margin is slightly lower than prior year at 17.3% (2016: 17.4%). Across the Group, we have continued to invest in new products and capital equipment for both production capability and IT systems. Some £0.3 million in plant and machinery has been invested in the Manufacturing Divisions, £0.6 million in new product development and a further £0.4 million in Group-wide IT. In the short-term, the financial priorities continue to focus on the reduction in net debt with working capital management to the fore. While debtor days are generally acceptable in the Manufacturing Divisions, we have seen certain oil and gas customers routinely stretch payment beyond terms at quarter-ends. Good progress has however been made in the control and reduction of raw material and consumable stock, particularly in the EP Division. This, combined with the phasing of contract revenue, has resulted in a net investment in working capital in 2017 of £1.5 million (2016: net benefit £4.6 million). The post year-end oversubscribed share placing, which resulted in net proceeds of £4.8 million, immediately reduced net debt and positions the Group well to capitalise on the clear momentum in market opportunity being experienced, particularly in the PMC Division. Trading result Manufacturing • Revenue down 7.4% to £22.6 million (2016: £24.4 million) • Gross profit margin 35.4% (2016: 31.0%) • Adjusted operating profit* up 12.5% to £2.4 million (2016: £2.2 million) • Return on revenue 10.7% (2016: 8.8%) • Revenue per employee** up 13.1% to £124,000 (2016: £109,000) • Adjusted operating cash inflow*** £2.7 million (2016: £5.0 million) • Cash conversion 1.1: 1 (2016: 2.4:1) • Restructuring costs £0.1 million (2016: £0.8 million) PMC and CSC are beginning to experience an uplift in activity, with increased confidence in the oil market providing PMC with a stabilised and increasing order-load, whilst strong defence contracts secured in CSC stretch into the medium-term. These two Divisions contributed £2.9m of operating profit in 2017, an increase of 18.4%. Return on revenue has increased by 3.4ppt to 15.5%, demonstrating the benefits of both the mix of work in CSC and the volume of activity in PMC, underpinned by cost reduction initiatives implemented in recent years. Pressure Technologies plc Annual Report 2017Section 1 Strategic Report19 profit and return on revenue, which in the second-half was adversely impacted by both the weighting of sales to the first-half and lower gross margins. The result for the full-year was in-line with the latest market expectations. Central costs Unallocated central costs (before M&A, amortisation on acquired businesses and exceptional charges) were £1.4 million (2016: £1.5 million). The reduction continues to reflect the Group-wide focus on cost reduction, investment in IT systems and combining of roles. In respect of the Group’s various share option plans a share based payment cost of £0.1 million has been recognised in adjusted operating profit (2016: £0.3 million). Exceptional items Reorganisation and redundancy costs in the year were £0.7 million (2016: £0.7 million), which predominantly relate to the AE Division and Group. M&A related exceptional items and amortisation costs were £2.0 million (2016: £1.1 million credit) and include the £0.6 million write-back of the deferred consideration of Martract Limited. Underlying amortisation charges were £2.4 million compared to £2.2 million in the prior year, the increase being solely due to the acquisition of Martract. Taxation The tax credit for the year was £0.8 million (2016: £1.0 million). The loss before tax, effect of the change in tax rates in the year and adjustments in respect of prior years have all contributed to the tax credit in the 2017. The applicable current tax rate for the year is 19.5% (2016: 20%). The reduction in rate of tax and the utilisation of losses have resulted in a lower effective tax rate than the current rate of tax. Corporation tax refunded in the year totalled £0.2 million (2016: £0.5 million), which relate to the UK and Canada. Foreign exchange The Group has exposure to movements in foreign exchange rates related to both transactional trading and translation of overseas investments. In the year under review, the principal exposure arising from trading activities, was to movements in the value of the Euro and the US Dollar relative to Sterling. As Group companies both buy and sell in overseas currencies, particularly the Euro and the US Dollar, there is a degree of natural hedge already in place. In the AE Division, currency exposure is actively managed at the outset of a project and where appropriate forward contracts taken out to cover the majority of the exposure. Exposure (both translational and transactional) to the movements in the USD versus the CAD and GBP are expected to increase as the focus of the AE Division turns to this market. In 2017 the net loss recognised in adjusted operating profit in respect of realised and unrealised transactions in Euro, US Dollar, Canadian Dollar and New Zealand Dollar was immaterial (2016: net gain £0.7 million). In 2016, a loss of £0.5 million was recorded below adjusted operating profit in respect of the retranslation of the deferred consideration liability denominated in New Zealand Dollars. As at 30 September 2017 there were no forward contracts in place (2016: none). At the present time, no cover is held against the value of overseas investments or intercompany loans with overseas entities as these are expected to be held for the long-term and over the next year dividend flows from these to Group are not expected to be significant. Acquisition of Martract On 7 December 2016, the Group acquired 100% of the issued share capital of Martract Limited for an initial consideration less net cash acquired of £3.6 million, plus maximum contingent deferred consideration of £0.6 million. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Restructuring benefits in EP are still to be reflected in the bottom-line, as low oil and gas volumes continue to impact. Second- half revenue increased 23% over the first- half, with a 7.6ppt increase in return on revenue. Whilst encouraging, this was not enough to exceed their break-even point. The current low market volumes magnify the effects of the mix of work and, together with the impact of lower spares sales in the summer months, was a contributory factor in the second-half operating loss. The Manufacturing Divisions’ £2.4 million adjusted operating profit for the full-year was slightly ahead of the latest market expectation (£2.3 million). Alternative Energy • Revenue £15.8 million (2016: £11.3 million) • Gross profit margin 17.3% (2016: 17.4%) • Adjusted operating profit* at break-even (2016: loss £(1.1) million) • Return on revenue 0.0% (2016: loss (9.4)%) • Revenue per employee** up 40% to £353,000 (2016: £242,000) • Adjusted operating cash outflow*** £(0.8) million (2016: inflow £0.9 million) • Closing order book £5.0 million (2016: £14.2 million) • Restructuring costs £0.4 million (2016: £0.8 million) Revenue from the installation and commissioning of biogas upgraders in the year was delivered from the opening order book. No new biogas upgrader projects commenced in the year, although there was a scope increase on one project. Non-upgrader sales for aftermarket support and other products were £3.2 million. Gross margins were adversely impacted in the second-half due to cost overruns on certain European projects, which negated the benefit of the 5.5ppt margin improvement in the first-half versus the second-half of 2016, resulting in a marginally reduced gross margin for the full year. The Division began restructuring in March 2017, and this was largely complete by the fourth-quarter. The benefits of this have yet to come through to the operating Pressure Technologies plc Annual Report 2017 20 Financial Review continued Intangible assets acquired with the business comprise £0.9 million in relation to non-contractual customer relationships and £2.8 million in relation to the manufacturing intellectual property. The contingent consideration was initially recorded at a fair value of £0.6 million, which had been estimated based on future earnings, with a discount rate of 3%, assuming that £0.6 million would become payable. Subsequently, the second-half performance and forecasts have been reviewed by the Directors and they consider it unlikely that the contingent deferred consideration will be paid and the provision has been released. A fair value adjustment related to an Employment Related Securities liability was made as a result of the vendors’ shareholder restructuring immediately prior to completion. This liability was funded by the vendors of Martract Limited and was settled in January 2017. Financing, cash flow and leverage Operating cash inflow before movements in working capital and reorganisation and redundancy costs was £2.0 million higher at £2.5 million (2016: £0.5 million). After a net investment in working capital of £1.5 million (2016: net reduction £4.6 million), cash generated from operations was £1.0 million (2016: £5.1 million). Our investment in working capital shows a significant increase during the year arising from the timing of large contract down payments, phasing of contract revenue and the adverse impact of certain major customers stretching payment terms at the end of 2017. Cash flows from investment activities total £4.5 million and comprise predominantly the acquisition of Martract. No item of capital expenditure is individually significant in the year, so the spend reflects general ongoing investment. Where appropriate new machines are now acquired using dedicated equipment finance and these assets are then self financing through trading cash inflow. The significant increase in adjusted EBITDA means the Net Debt to Adjusted EBITDA leverage ratio in respect of the revolving credit facility (RCF) reduced to 3.1:1 at 30 September 2017 (2016: 3.7:1). All facility covenants have been complied with throughout the period and the facility has now been extended to March 2019. Net debt was £11.1 million (2016: £6.6 million), the increase driven primarily by the acquisition of Martract and net investment in working capital. The Group’s £15 million RCF was fully drawn at the year- end. Post year-end the Group completed a share placing, raising net proceeds of £4.8 million. Some £2.7 million was repaid immediately as a tranche of debt, leaving the Group £12.3 million drawn at the time of writing. Earnings per share and dividends. Adjusted earnings per share increased to 6.3 pence (2016: (2.6) pence loss per share). Basic loss per share was (7.9) pence (2016: 4.4 pence from continuing operations). No dividends were paid in the year (2016: £0.8 million) and no dividends have been declared in respect of the year ended 30 September 2017 (2016: nil). Distributable reserves in the parent Company increased 20.1% to £22.1 million (2016: £18.4 million). Statement of financial position Goodwill and intangible assets (at cost) increased by £5.8 million to £37.9 million (2016: £32.1 million). £4.8 million related to the acquisition of Martract, the remainder was investment in new product development and investment in IT systems. Amortisation in the year was £2.4 million (2016: £2.2 million). Net current assets reduced to £9.1 million (2016: £10.0 million). This decrease is predominantly due to net investment in working capital in the year. Non-current liabilities increased to £18.0 million (2016: £15.8 million) after borrowings increased to £15.6 million (2016: £12.4 million). Net assets decreased by 2.9% to £33.8 million (2016: £34.8 million) and therefore net asset value per share decreased to 233 pence (2016: 241 pence). Had the post year-end fundraising taken place at the year-end date, the net asset value per share would have been 207 pence. Joanna Allen Chief Financial Officer 11 December 2017 Pressure Technologies plc Annual Report 2017Section 1 Strategic Report21 Financial dashboard Five year sales history by Division £m Five year operating proﬁt history by Division £m 60 50 40 30 20 10 0 13 14 15 16 17 12 10 8 6 4 2 0 (2) (4) 13 14 15 16 17 Manufacturing Alternative Energy Manufacturing Alternative Energy Central Group 2017 Cash ﬂow bridge £m (2.0) (3.0) (4.0) (5.0) (6.0) (7.0) (8.0) (9.0) (10.0) (11.0) (12.0) Operating cash inﬂow £1.0m t b e D t e N g n n e p O i g n i r u t c a f u n a M – t ﬁ o r p g n i t a r e p O g n i r u t c a f u n a M – w o ﬂ n i l a t i p a c g n i k r o W s t s o c l a r t n e C y c n a d n u d e R E A – t ﬁ o r p g n i t a r e p O E A – w o ﬂ t u o l a t i p a c g n i k r o W s d e e c o r p l a s o p s i d s s e l x e p a C n o i t i s i u q c a t c a r t r a M t s e r e t n I & x a T t b e D t e N g n i s o l C S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 22 Pressure Technologies plc Annual Report 2017Section 1 Strategic ReportKey Performance Indicators Measuring performance Key Performance Indicators Shareholders The Board uses Key Performance Indicators (“KPIs”) when assessing the performance of the Group. These KPIs are divided into three sections: Financial performance Growth and return Growth is measured in terms of sales revenue. The efficiency of converting sales into profits is measured in terms of return on revenue, calculated as operating profit divided by revenue. The Group targets an overall return on revenue of at least 15%. Revenue and return on revenue £m 60 50 40 30 20 10 0 % 18 16 14 12 10 08 06 04 02 00 -2 13 14 15 16 17 Revenue Return on revenue Cash conversion The cash conversion ratio measures the proportion of adjusted operating profit converted into cash in the period. This is calculated as “cash flows from operating activities (before reorganisation costs)” divided by adjusted operating profit. The minimum target cash conversion ratio is 1, although each Division has a separate target relevant to its business activity and cycle. Cash conversion in the Manufacturing Divisions was a ratio of 1.1:1 (2016: 2.4:1). Cash conversion for the Group was a ratio of 0.9:1 (2016: not calculated due to the losses in AE and overall Group adjusted operating loss). Net Debt ratio This is calculated as Net Debt (cash and cash equivalents less borrowings) divided by adjusted EBITDA. Revenue 3.06x (2016: 3.67x) 2017 2016 3.06 3.67 Adjusted earnings per share Adjusted earnings per share is used as a measure of shareholder return. Details of the calculation of adjusted EPS can be found in note 12 of the notes to the consolidated financial statements. Adjusted earnings per share pence 50 45 40 35 30 25 20 15 10 5 0 -5 13 14 15 16 17 Corporate Social Responsibility Health and Safety The measure used is reportable accidents where the target is zero across the Group. Reportable accidents 2 1 0 13 14 15 16 17 Environment The measure used is number of reportable environmental incidents. The target is zero across the Group. Environmental incidents are not graphed as there has been no reportable incident for the five year period. Environmental incidents 0 A full-time health, safety and environmental manager is employed by GBUK but has responsibility for these matters across the Group and reports directly to the Group CEO. 23 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 24 Risks and Uncertainties The principal risks identified by management are described below. This year we have changed the headings used, which the management believes better reflects the nature of the risk. Any changes to the risks are detailed below. Risk heatmap – impact and likelihood A reminder of our strategy Direction of change 1 Consolidate and build on the business 2 Identify and develop profitable niche opportunities in growth sectors 3 Identify and develop profitable acquisition opportunities  Increase  No change  Decrease Risk management process t c a p m I Risk context Risk monitoring and review Risk assessment (identification and analysis and evaluation) Risk treatment Likelihood Global economic conditions Governmental policy and legislation Competitors and commercial relationships Funding Availability of key resources Technology and innovation Risk and impact Management strategy Change 1. Global economic conditions 1 2 3 The Group is affected by the macro conditions in the oil and gas, defence and renewable energy markets • The Group has increased its exposure to other markets such as defence and alternative energy and revenues from these areas have risen.  • The businesses in the Group were aligned to the recent adverse conditions in oil and gas but have retained and invested in their core capability pending a return to normal market conditions. • The businesses serve both production and exploration of the oil and gas market, production being less volatile during a market downturn. • Increased sales focus to expand customer base and product lines. • As oil prices have increased, volumes are increasing in the Manufacturing Divisions and the Group is no longer solely dependent on the AE Division for short-term growth. Pressure Technologies plc Annual Report 2017Section 1 Strategic Report 25 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Risk and impact Management strategy Change 1. Global economic conditions 1 2 3 continued Brexit • Limited impact on the Group. • VAT and duty particularly related to the import of raw materials. • Exchange rate, which has gone in our favour to date. • The details of how a final deal may look and its impact on the Group will be monitored.  Foreign currency Pricing • Natural hedges are in place for the currencies the Group is exposed to and all FX trading is done from Group treasury including forward exchange contracts.  • As our AE business grows and becomes increasingly profitable the relationship between the USD and CAD will become more prominent. • Adverse market conditions in oil and gas can have a considerable impact on pricing. The Group has set minimum gross margins and does not reduce prices to unacceptable levels as experience indicates that the cost of failure of a part outweighs the initial product cost in the medium-term.  • AE contracts are complex with a number of third party variables upon which contract completion are dependent. The Division has seen a number of legacy costs on contracts where initial pricing negatively affected the overall profit on the contract. Robust pricing procedures and a global procurement structure are now in place. 2. Governmental policy and legislation 2 Revenue generated from defence contracts and alternative energy contacts are impacted by government policies and legislation. • Changes that impact our defence contracts have enough visibility for management to implement plans that could mitigate them. NEW • Globally AE revenue is impacted by political initiatives to support the uptake of biogas upgrading. For example, the UK has suffered order slippage with the delay of the UK’s Renewable Heat Incentive (RHI) but the business is benefiting from State landfill policies in the US. In addition the business operates across multiple geographies and jurisdictions adapting its sales strategy accordingly, which mitigates much of the risk from any one in particular. 3. Competitors and commercial relationships 1 The Group has a number of major competitors in its key markets who offer a wider variety of products and some of which who are also suppliers. • Requirements from suppliers are split out and a constant review is maintained.  • Investment in product expansion and development to maintain leading market position. • Strategic acquisition of Martract strengthened our position in the supply chain and other similar opportunities are frequently reviewed. • Branding and marketing of the PMC Division as one entity increases the number of products available to existing customers and strengthens the Division’s standing alongside major competitors. • Increased investment in sales and technical efficiencies. Pressure Technologies plc Annual Report 2017 26 Risks and Uncertainties continued Risk and impact Management strategy Change 3. Competitors and commercial relationships 1 continued Customer concentration 4. Funding 1 2 3 • There are a number of individual businesses within the Group with a high dependence on a very small number of customers and much work has been done to develop the distribution channels and expand the customer base.  • Key account management is a focus of all the businesses across the Group and we have a history of strong customer relationships. The Group’s growth requires access to funding • The Group recently raised £4.8 million net of expenses as a result of investor interest, which it will use primarily to underpin its operational gearing ahead of an upturn in the oil and gas market.  • The Group extended its banking facilities until the end of March 2019. The facility provides access to £15m in total which was fully drawn at the year end date. Robust procedures and reliable and accurate reporting ensures covenants are well managed. 5. Availability of key resources 1 2 3 Management resource • The Group has a small management team with reliance on a number Key employee knowledge and skill base of key Directors, senior management and specialists. A policy restricts the number of Directors permitted to travel together. • Investment in recruitment extends and enhances existing skills within the Group and strengthens succession planning. • A Human Resource specialist has recently joined the Group management team. • The high added value products and services provided by all the businesses are reliant on the skills and knowledge of our employees and there is a programme of training around the Group to ensure the development and retention of these key skills and employees. The training programme includes apprenticeships, industry qualifications and through to postgraduate degrees. • The Group is seen as a good employer, with attractive employment terms, SAYE schemes and career and skill development opportunities.   Major capital assets • Certain of the Group’s businesses rely on large or critical pieces of equipment. These key assets are subject to ongoing maintenance programmes and strategic spares are held. NEW • The risk is further mitigated in the Precision Machined Components Division by the number of manufacturing sites. • Investment in capital assets is constantly reviewed. Pressure Technologies plc Annual Report 2017Section 1 Strategic ReportRisk and impact Management strategy Change 6. Technology and innovation 1 2 Product development Disruptive technologies Cyber security • Investment in product development and services is key to the continued growth of the Group and maintaining a leading market position. • The monitoring of evolving technologies that may disrupt the market is ongoing, looking to both capitalise on the opportunities they may provide as well offsetting any potential threats. • Cyber security is a growing risk for all businesses. The Group operates a Cyber Security committee comprising members of the Board, the senior management team and our IT providers. • A full assessment of cyber security arrangements has been carried out at each of the Group’s businesses and actions to mitigate risk are ongoing. • The Group recently invested in collaborative working systems with cloud storage where there are increased security advantages for data protection.  NEW NEW What's changed • The impacts of low cost competitors has been removed from the principal risks as the Group is now competitive in the markets where this was an issue, in addition many of the markets we serve are focused on the cost of failure rather than cost to produce. • The tax and compliance risks have been removed as at the current levels, they are not considered a principal risk. However, as overseas profits grow it may become relevant. Its inclusion in the principal risks will be reviewed annually. 27 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 28 Introduction to Governance Alan Wilson Chairman “The Group has clearly defined values that emanate from the top down and dictate how we conduct our business and engage with all our stakeholders.” As a Group we comply with the 12 principles set out in the QCA Code, however at the time of writing last year there were three elements which we did not comply with. We have progressed two of these. In this year’s report you will find our first Audit and Risk Committee Report set out on page 39 and on our website you will find the detailed results of shareholder voting. Only details of the performance evaluation procedures for each Director, the whole Board and each committee are not disclosed but this will be reviewed in the coming year. How the code works in practice for Pressure Technologies Dealing code The Company has adopted the Quoted Companies Alliance Code for Directors’ Dealings and, as applicable to AIM companies, this provides a clear process for compliance by our Directors and relevant employees. Communication with Shareholders The Company actively encourages good communication with all its shareholders from the largest to the smallest. Presentations to institutional and mid-sized investors are offered at the full year and half year and all investor presentations are posted to the Group website. Our Annual General Meeting, which is the platform for our private investors to directly question the Board, is held at Group company offices where presentations are given by the Chairman and Chief Executive as well as by an MD from a Group company. This is a well attended event. A tour of the site is also offered for anyone who wishes to see the sharp end of the business. Culture and ethics We believe that an effective Board, which provides strong leadership and engages well with both management and the senior management team, is essential to underpinning the culture within the Group from the top down. The Board does this by holding Board meetings at subsidiary sites and is active on sub-committee groups, such as, Health and Safety and Cyber Security. In addition Divisional managers are regularly invited to present to the Board and can gain valuable feedback drawn from the considerable experience of the Non-Executive Directors. The Group has clear ethical values, which are set out in the Sustainable and Responsible Business section on page 16 of this report, implemented through sound procedures. Alan Wilson Chairman 11 December 2017 Pressure Technologies plc Annual Report 2017Section 2 Governance29 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s How we govern our Company Every member of our Board is there for the benefit of Pressure Technologies plc. Each recognising their responsibility to the Company’s shareholders and employees. Board The Board comprises a Non-executive Chairman, three Non-executive Directors and two Executive Directors. Across the members there is fair balance of skills, experience, independence and knowledge of the Company, representing industry experience and knowledge from engineering, operational, finance and investment. Board meeting attendance Alan Wilson Philip Cammerman Brian Newman Neil MacDonald John Hayward Joanna Allen 12/12 10/12 12/12 11/12 12/12 12/12 A Audit and Risk Committee N Nomination Committee R Remuneration Committee Chaired by Neil MacDonald Chaired by Alan Wilson Chaired by Philip Cammerman The Nomination Committee meets at least once a year and at such other times as the Chairman of the Committee shall require. It has the responsibility for leading the process for Board appointments and making recommendations to the Board accordingly via a formal, transparent and rigorous appointment procedure. The Committee is also responsible for succession planning. The Remuneration Committee meets at least four times a year and reviews the performance of the Executive Directors and sets the scale and structure of their remuneration and the basis of their service agreements with due regard to the interests of shareholders. It also determines the allocation of share options to employees. It is a rule of the Remuneration Committee that a Director shall not participate in discussions or decisions concerning his / her own remuneration. The Committee meets not less than four times a year and is responsible for making recommendations to the Board on the appointment of the auditors and the audit fee, for reviewing the conduct and control of the annual audit and for reviewing the operation of the internal financial controls. It also has responsibility for the reporting of the financial performance of the Company and for reviewing financial statements prior to publication. The Audit and Risk Committee has unrestricted access to the Group’s auditors and will ensure that auditor independence has not been compromised. Risk is reviewed and updated as to whether it has increased, deceased, remained the same or is no longer a risk. New risks are also addressed at these meetings. Pressure Technologies plc Annual Report 2017 30 Directors and Advisers 5 3 1 2 4 6 Company information Registered office Newton Business Centre Newton Chambers Road Chapeltown Sheffield South Yorkshire, S35 2PH Registered number 06135104 Website pressuretechnologies.com Company Secretary Joanna Allen Investor relations Keeley Clarke Auditor Grant Thornton UK LLP No 1 Whitehall Riverside Leeds, LS1 4BN Solicitors hlw Keeble Hawson LLP Commercial House Commercial Street Sheffield, S1 2AT Bankers Lloyds Bank 14 Church Street Sheffield, S1 1HP Nominated adviser Cantor Fitzgerald Europe 1 Churchill Place London, E14 5RB Registrars Neville Registrars Neville House 18 Laurel Lane Halesowen, B63 3DA Pressure Technologies plc Annual Report 2017Section 2 GovernanceCommittee key A Audit and Risk Committee N Nomination Committee R Remuneration Committee Chairman Member 31 1 Alan Wilson A N R 2 John Hayward 3 Joanna Allen Independent Non-executive Chairman Chief Executive Officer Chief Financial Officer Appointed • February 2013 Appointed • June 2007 Appointed • July 2015 Relevant strengths • Engineering expertise • Oil and gas sector knowledge • Growing businesses and funding Relevant experience • Alan is a degree-qualified Chartered Engineer with 37 years of experience from working in the oil and 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. External commitments • Alan serves as Chairman of two private equity-backed businesses and is a Non- executive Director of a privately owned company operating within the oil and gas sector. He also chairs another listed company, Modern Water plc. Relevant strengths • Entrepreneurship • Management and leadership Relevant strengths • Audit and M&A • Financial due diligence Relevant experience • 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. • In 2008 he was the UK Ernst and Young Entrepreneur of the Year® for manufacturing. • John is a qualified accountant and has finance and general management experience in the steel, chemicals and engineering sectors. • He holds a degree in Physics from Oxford University. Relevant experience • Audit and Transaction Services Director with PWC. Her experience covers both audit and corporate transaction services with a particular focus on working in the manufacturing and engineering sectors. • In 2017 she was shortlisted in the Northern Finance Director Awards • Qualified Chartered Accountant with the ICAEW. • She has a degree in Business Studies from the University of Sheffield. 4 Philip Cammerman A N R 5 Brian Newman A N R 6 Neil MacDonald A N R Independent Non-executive Independent Non-executive Independent Non-executive Appointed • April 2008 Appointed • September 2015 Appointed • June 2013 Relevant strengths • SME managerial expertise in UK and USA Relevant strengths • Engineering expertise • Knowledge of global industrial • Funding and investment expertise • Growth funding and M&A expertise businesses, including cross-border M&A. • Divisional management experience Relevant strengths • M&A expertise • Growing businesses • Chartered Accountant Relevant experience • Philip has over 20 years’ industrial Relevant experience • Brian is a Chartered Engineer with a 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. • Mentoring SMEs and Early Stage Businesses. • Non-executive directorships across listed businesses, private companies and early stage businesses. External commitments • Following his retirement from the YFM Group in 2008, Phil developed a small but proactive portfolio of Non-executive directorships in the engineering and finance sectors. degree in Engineering from Cambridge University and an MBA from Penn State University, USA. • He has been a Divisional Director at two FTSE 100 companies, latterly at Melrose plc as EMEA Managing Director at its subsidiary, Bridon International Group. • Prior to that he spent nine years as a Divisional Managing Director at international engineering group GKN plc, with responsibility for its global Wheels and Axles Divisions. • He has over 40 years’ experience in engineering having also previously served on the boards of two listed companies. External commitments • He is currently a Non-executive Director with The Shrewsbury and Telford Hospital NHS Trust and a number of other organisations. Relevant experience • 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 the international mechanical seals manufacturer; and previously Group Finance Director of the international aerospace company, Firth Rixson. • He has held numerous non executive roles in the public and private sector. External commitments • Neil is a Governor of Sheffield Hallam University, a private sector Board Member of the Sheffield City Region Local Enterprise Partnership and a trustee of various charitable organisations. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 32 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 four 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, retain 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 operates a Long Term Incentive Plan whereby, at the discretion of the Remuneration Committee, share options are granted to Executive Directors and senior managers on a rolling annual basis. The extent to which options granted vest is 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 follows: 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 is 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 is set at the outset and is 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. Pressure Technologies plc Annual Report 2017Section 2 Governance 33 Directors’ remuneration Particulars of Directors’ remuneration are as follows: Non-executive: Alan Wilson Philip Cammerman Brian Newman Neil MacDonald Executive: John Hayward Joanna Allen Total remuneration Salary and fees £’000 64 41 50 40 205 154 554 Benefits £’000 Pension £’000 — — — — 2 1 3 — — — — 22 19 41 Total 2017 £’000 64 41 50 40 229 174 598 Employers’ Employers’ national insurance 2016 £’000 national insurance 2017 £’000 Total 2016 £’000 56 38 40 38 225 164 561 5 4 5 4 27 20 65 2 4 4 4 27 19 60 Part of the remuneration of Alan Wilson and Brian Newman were paid to management companies which they control. The number of Directors who accrued benefits under money purchase pension arrangements in the period was two (2016: two). 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: Philip Cammerman Executive: John Hayward Total dividends paid to Directors Total 2017 £’000 — — — Total 2016 £’000 2 56 58 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 34 Report of the Remuneration Committee continued Directors’ options The Directors’ interests in share options are as follows: Scheme Date granted Number Option price John Hayward John Hayward John Hayward Joanna Allen Joanna Allen Long Term Incentive Plan Long Term Incentive Plan Long Term Incentive Plan Save-as-you-earn Scheme Long Term Incentive Plan 3 April 2014 12 December 2014 21 December 2015 30 July 2015 21 December 2015 24,972 38,028 104,219 4,466 71,366 720.80p 473.33p 196.17p 161.20p 196.17p The movements in share options held by Directors in the period is as follows: Outstanding at the beginning of the period Granted during the period Outstanding at the end of the period On behalf of the Board Philip Cammerman Chairman, Remuneration Committee 11 December 2017 John Hayward Joanna Allen No. No. 167,219 — 167,219 75,832 — 75,832 Pressure Technologies plc Annual Report 2017Section 2 Governance Directors’ Report 35 The Directors present their report and the audited financial statements for the period from 2 October 2016 to 30 September 2017. Principal activities During the period, Pressure Technologies plc (“PT”) was 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. CSC has one subsidiary, CSC Deutschland GmbH, based in Germany. Also within the Cylinders Division is our US sales team, Chesterfield Special Cylinders Inc, based in Pittsburgh. The Company holds a 40% investment in Kelley GTM, LLC, whose principal activity is the manufacture of high pressure vessels for gas transport solutions. Kelley GTM, LLC is based in Amarillo, Texas. Precision Machined Components Al-Met Limited (“Al-Met”) whose principal activity is the manufacture of precision engineered valve components for use in the oil and gas industry. Roota Engineering Limited (“Roota”) whose principal activity is the manufacture of precision engineered products for use in the oil and gas industry. The Quadscot Group of Companies (“Quadscot Holdings Limited” and “Quadscot Precision Engineers Limited”) whose principal activity is the manufacture of precision engineered products for use in the oil and gas industry. Martract Limited (“Martract”) whose principal activity is the provision of grinding and lapping services for ball and seal assemblies and gate valves. Engineered Products Hydratron Limited 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 The Greenlane Group of Companies (“Greenlane Biogas UK Limited”, “Greenlane Biogas Europe Limited”, “Greenlane Biogas North America Limited”, “Greenlane Technologies Limited”, “PT Biogas Technologies Limited” and “PT Biogas Holdings Limited”) whose principal activities are the provision of turnkey solutions for the cleaning, storage and dispensing of gas for injection into the grid or use as a vehicle fuel, and the sale of heat exchange and gas compression units. Results and dividends The consolidated statement of comprehensive income is set out on page 48. The profit on ordinary activities before taxation of the Group for the period ended 30 September 2017 amounted to £1.1 million (2016: £0.4 million). No interim dividend was paid in the period (2016: nil). The Directors do not recommend the payment of a final dividend (2016: nil). 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 2017 (2016: nil). S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 36 Directors’ Report continued Substantial shareholdings As at 15 November 2017, the following held or were beneficially interested in 3% or more of the Company’s issued ordinary share capital: Artemis Investment Management LLP Liontrust Asset Management City Financial Canaccord Genuity Group Inc Schroder Investment Management John Hayward James Sharp Hargreaves Lansdown A J Bell Securities Unicorn Asset Management Directors and their interests The present Directors of the Company are set out on pages 30 and 31. All Directors were Directors throughout the period and since unless otherwise stated. Ordinary shares John Hayward Philip Cammerman Neil MacDonald Alan Wilson Joanna Allen Brian Newman Share options Number of Percentage of issued share shares capital owned 2,648,648 1,766,619 1,694,754 1,517,178 1,232,304 1,002,221 999,529 623,880 577,389 567,167 14.24% 9.50% 9.11% 8.16% 6.63% 5.39% 5.38% 3.36% 3.11% 3.05% 30 September 2017 No. 1,002,221 30,000 5,200 — — — 1 October 2016 No. 1,002,221 33,395 5,200 — — — No share options were granted during the period. 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 loans 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 24 to the consolidated financial statements. Pressure Technologies plc Annual Report 2017Section 2 Governance 37 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 The financial statements have been prepared on a going concern basis. The Company’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The principal risks and uncertainties are set out from page 24. The Financial Reporting Council issued “Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity risks” in 2016. The Directors have considered this when preparing these financial statements. The Group’s existing bank borrowings have been extended to March 2019 and management have 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 2017/2018 and beyond and that the Group has sufficient cash reserves and bank facilities to enable it to meet its obligations as they fall due for a period of at least 12 months from when these financial statements have been signed. Management have modelled the financial covenants in the forecasts and no breach is expected. 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. Statement of Directors’ responsibilities for the financial statements The Directors are responsible for preparing the Strategic Report, the Directors’ 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 Financial Reporting Standard 101 – ‘The Reduced Disclosure Framework’ (“FRS 101”) (UK Accounting Standards). 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. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 38 Directors’ Report continued Statement of Directors’ responsibilities for the financial statements 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. Corporate governance The Group’s corporate governance is set out on its website under the AIM rule 26 section. 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 John Hayward Chief Executive Officer 11 December 2017 Pressure Technologies plc Annual Report 2017Section 2 GovernanceAudit and Risk Committee Report 39 Members and meetings The Group’s Audit and Risk Committee (“the Committee”) is chaired by Neil MacDonald. Its members and their attendance at meetings during the year are highlighted in our report on governance. The Committee meets not less than four times a year in a formal capacity and forms sub-groups to address specific matters as necessary outside of these meetings. Role of the Committee The Committee’s primary responsibilities are to: • Oversee the relationship with the external auditor and make recommendations to the Board on the appointment and remuneration of the auditors • Review the conduct and control of the annual audit and the operation of the internal controls and advise the Board on principal risks and uncertainties • Report on the financial performance of the Company and review financial statements prior to publication • Review annually the Company’s anti-bribery and corruption policy • Review the Company’s procedures for handling reports by ‘whistleblowers’ Terms of Reference The Board fully supports the underlying principles of corporate governance contained in the UK Corporate Governance Code (“the Code”). Although as an AIM listed company we are not required to comply with these recommendations, the Board is committed to adopting the Quoted Companies Alliance Corporate Governance Code for Small and Mid-Size Quoted Companies (“the QCA Code”) as a demonstration of our belief in, and commitment to, good governance. The Terms of Reference for this Committee are available for inspection on the Company’s website. External audit The Group’s external auditors are Grant Thornton UK LLP (“Grant Thornton”). They were appointed at the Group’s 2008 AGM following a casual vacancy that was filled by them after their merger with RSM Robson Rhodes LLP, the Group’s incumbent auditors at that time, in July 2007. The Committee will ensure that at least once every ten years the audit services contract is put out to tender to enable comparison of the quality and effectiveness of the services provided by the incumbent auditor with those of other audit firms. The audit will therefore be put out to tender once the 2017 audit is complete. The Committee has unrestricted access to the Group's auditors and will ensure that auditor independence has not been compromised. The Committee met with Grant Thornton twice during the year to approve the annual audit plan and after the conclusion of the audit when the audit findings were presented. In order to ensure the independence of the external auditors, the Committee monitors the non-audit services provided by them to the Group. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 40 Audit and Risk Committee Report continued Market Abuse Regulation The Committee has reviewed the impact of the Market Abuse Regulation including its treatment of inside information; the relationship with our stockbrokers and analysts; the obligations of Persons Discharging Managerial Responsibilities; and the Company’s share dealing code. We have taken appropriate measures to ensure compliance with the implementation of the EU Market Abuse Regulation which came into effect from 3 July 2016. Significant matters addressed during the year During the year in carrying out its main responsibilities the Committee has spent its time in the following proportions: How the Committee has spent its time Governance 35% Risk management 30% Financial reporting 20% Audit 15% Internal controls Details of the key risks which the Group faces, the key controls in place to control those risks and the system of risk management adopted by the Group are set out on pages 24 to 27. The Committee has evaluated the effectiveness of the internal controls and the risk management system operated. The evaluation covered all controls including financial, operational, risk management and compliance. The Alternative Energy Division (“AE”) has been an area of particular focus in the year given the global restructuring and nature of the business being different to the other Manufacturing Divisions. Post-acquisition integration has also been considered, particularly where the acquired businesses are SMEs and unfamiliar with some aspects of corporate governance. The Group continues to evolve and the Committee will review and advise on the design and operation of internal controls. Pressure Technologies plc does not have a specific internal audit department. The need for an internal audit department is considered from time to time but currently it is regarded that the costs would outweigh the benefits. If required, external specialists are brought in to perform specific reviews of areas considered a risk. The Committee has reviewed the following areas: Contract accounting judgements As explained more fully in our accounting policies on page 53, the Cylinder and Alternative Energy Divisions derive a significant proportion of their turnover from contracts that span one or more years and are accounted for under the relevant accounting standards. Contract costs and revenues may be affected by a number of uncertainties that are dependent on the outcome of future events and therefore estimates may need to be revised as events unfold and uncertainties are resolved. During the year, the Committee examined the judgements and methodologies applied to key contract judgements and were in agreement with the position adopted. Pressure Technologies plc Annual Report 2017Section 2 Governance41 Impairment and going concern The Committee reviewed and considered the papers relating to the impairment and going concern disclosures in the Annual Report and Financial Statements. The Strategic Report discloses the conclusion of these reviews on page 37. Contingent liabilities The Committee reviewed the contingent liabilities disclosure set out in note 31 of the financial statements and were satisfied it fairly reflects the current circumstances. Other The Group has operated a ‘whistleblowing’ policy and arrangement for many years so that all employees of the Group are able, via an independent external third party, to confidentially report any malpractice or matters of concern they have regarding the actions of employees, management and Directors and any breaches of the Company’s Anti-Bribery and Corruption policy. No matters have been reported to the Chair of the Committee, who is the nominated contact for the third party provider, in the year. One isolated case of employee expenses fraud was reported to the Committee during the year. Upon review, they were satisfied that the internal controls that detected the fraud were adequate and had operated effectively. Approved by the Board and signed on its behalf by Neil MacDonald Chairman of the Audit and Risk Committee 11 December 2017 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 42 Independent Auditor’s Report to the Members of Pressure Technologies plc Opinion Our opinion on the financial statements is unmodified We have audited the financial statements of Pressure Technologies plc (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 30 September 2017 which comprise the Consolidated statement of comprehensive income, the Consolidated balance sheet, the Consolidated statement of changes in equity, the Consolidated statement of cash flows, the Company balance sheet, the Company statement of changes in equity and the notes to the financial statements, including a summary of significant accounting policies. 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, including Financial Reporting Standard 101 Reduced Disclosures Framework (United Kingdom Generally Accepted Accounting Practice). 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 30 September 2017 and of the group’s loss for the year 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. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Who we are reporting to This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of 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. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: • The Directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or • The Directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. Overview of our audit approach • Overall materiality: £169,000, which represents 0.4% of the group’s revenue. • The key audit matters were identified as revenue recognition, the contingent liability in relation to the Chesterfield Special Cylinders Limited (“CSC”) incident and the accounting for the acquisition of Martract Limited. • We have assessed the components within the group and performed a combination of comprehensive audits, targeted audit procedures and analytical procedures. Pressure Technologies plc Annual Report 2017Section 2 Governance43 Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those that had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matter – Group How the matter was addressed in the audit – Group Risk 1 – Revenue recognition There is a risk that revenue may be misstated due to the improper recognition of revenue. In respect of revenue recognised for sale of goods, there is a risk that revenue is recognised before the risk and rewards of ownership have transferred to the customer. In respect of contractual arrangement with the customers there is a risk that revenue is misstated as each contract’s outcome and stage of completion required management judgement. Therefore, we identified revenue recognition as a significant risk, and as one of the most significant assessed risks of material misstatement (whether due to fraud or error). Our audit work included, but was not restricted to: • Walkthrough of the systems and controls in place around the recording of revenue. • Evaluation of the revenue recognition policies for appropriateness with IAS 18 ‘Revenue’ and IAS 11 ‘Construction Contracts’, as applicable and consistency with the prior period. • Testing a sample of revenue transactions in respect of sale of goods and agreeing them to supporting documentation to vouch that income has been appropriately recognised in accordance with IAS 18 ‘Revenue’ and the accounting policy. • Testing revenue from contracts, on a sample basis to determine whether the revenue has been recognised in accordance with IAS 11 ‘Construction Contracts’ and the accounting policy. • For a sample of contracts, testing the percentage of completion calculations by inspection of contract checklist documents and challenging the operations team as to the stage of completion, to determine if the revenue was recognised in accordance with accounting policy. • We have compared the revenue from the sale of goods and from contractual arrangements with the revenues in the prior year and obtained explanations for significant or unusual variances. The group’s accounting policy on revenue recognition including the key sources of estimation uncertainty are shown in the Accounting policies section and related disclosures are included in note 1. The Audit Committee identified revenue recognition as a significant issue in its report on page 40 where the Audit Committee also described the action that it has taken to address this issue. Key observations Based on our audit work, we have found that revenues were being accounted for in line with the Group's accounting policies, IAS 18 ‘Revenues’ and IAS 11 ‘Construction Contracts’. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 44 Independent Auditor’s Report to the Members of Pressure Technologies plc continued Key Audit Matter – Group How the matter was addressed in the audit – Group Risk 2 – Contingent liability in relation to the CSC incident Following the fatal accident in June 2015 the Health and Safety Executive (“HSE”) opened an investigation into this accident. The group are cooperating with the HSE and have performed their own inquiries to investigate the root cause of the accident. Until the investigation is complete, the Group are unable to assess what charges may be brought. Management have concluded that it is not possible to determine with any degree of certainty what, if any, financial penalties may be levied on the group. Our audit work included, but was not restricted to: • Reading the correspondence between HSE and the group • Inquiring of management and the group’s legal advisor. • Assessing the adequacy of the disclosure included within the financial statements. The group’s accounting policy on provisions is shown in the Accounting policies section and related disclosures are included in note 31. The Audit Committee identified this matter as a significant issue in its report on page 41 where the Audit Committee also described the action that it has taken to address this issue. No provision has been recorded within the financial statements however disclosure has been made in accordance with IAS 37 ‘provisions, contingent liabilities and contingent assets’. Key observations Based on our audit work, no audit findings were noted. We consider that the disclosure in note 31 to the financial statements appropriately describes this matter. Therefore, we identified this incident as a significant risk, and as one of the most significant assessed risks of material misstatement (whether due to fraud or error). Risk 3 – Accounting for the acquisition of Martract Limited On 7 December 2016, the group acquired 100% of the issued share capital of Martract Limited. IFRS 3 ‘Business Combinations’ require acquired assets and liabilities in the consolidated financial statements to be recorded at their fair value. There is management judgement in relation to the fair value of the assets and liabilities acquired and the consideration paid. Therefore, we identified acquisition accounting as a significant risk, and as one of the most significant assessed risks of material misstatement. Our audit work included, but was not restricted to: • Obtaining an understanding of the valuation methodology used by management to calculate the fair value of the customer relationships and intellectual property intangible assets and comparing with accepted valuation methods. • Using internal valuation specialists to check the integrity of valuation calculation. • Assessing the appropriateness of the assumptions used in the valuation calculations for consistency with other financial information and forecasts of the acquired company. • Checking the accounting for the consideration by reference to the clauses in the acquisition agreement. • Challenging management as to the amount of the contingent consideration recognised. • Assessing the adequacy of the disclosures included within the financial statements. The group’s accounting policy on business combinations including the key sources of estimation uncertainty are shown in the Accounting policies section and related disclosures are included in note 29. Key observations Based on our audit work, we have concluded that the acquisition of Martract Limited was accounted for in line with the Group’s accounting policies and IFRS 3 ‘Business Combinations’. We consider that the disclosure in note 29 to the financial statements appropriately describes the management judgement. Pressure Technologies plc Annual Report 2017Section 2 Governance45 Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality in determining the nature, timing and extent of our audit work and in evaluating the results of that work. Materiality was determined as follows: Materiality measure Group Parent Financial statements as a whole £169,000 which is 0.4% of revenue. This benchmark is considered the most appropriate because revenue is a key performance indicator of the group and is a stable base. Materiality for the current year is consistent with the level that we determined for the year ended 1 October 2016. Materiality is based on 0.5% of total assets, capped to 75% of group materiality, which is £127,000. This benchmark is considered the most appropriate given the activities of the parent company primarily being a holding company and its major activities relate to fixed assets included in the financial statements. Materiality for the current year is consistent with the level that we determined for the year ended 1 October 2016. Performance materiality used to drive the extent of our testing Tolerance for potential uncorrected misstatements Communication of misstatements to the audit committee 75% of financial statement materiality. 75% of financial statement materiality 25% of financial statement materiality 25% of financial statement materiality £8,000 and misstatements below that threshold that, in our view, warrant reporting on qualitative grounds. £6,000 and misstatements below that threshold that, in our view, warrant reporting on qualitative grounds. Component materiality Our audit work at the components is executed at levels of materiality appropriate for such components, which in all instances are capped at 75% of group materiality. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 46 Independent Auditor’s Report to the Members of Pressure Technologies plc continued An overview of the scope of our audit Our audit approach was a risk-based approach founded on a thorough understanding of the group’s business, its environment and risk profile and in particular included: • Documenting the processes and controls covering all of the Key Audit Matters. • The group has components across Europe, North America and New Zealand. We have assessed the risk of material misstatement for each of these components to conclude which components are in scope for a comprehensive audit approach. • A comprehensive audit approach included a combination of transactional testing and analytical procedures. • The components subject to a comprehensive audit approach cover 96% of the consolidated revenues. • The audit was performed such that we had appropriate oversight of the component auditor. This included briefing the component audit team, directing the risk assessment and fraud discussions and evaluating and reviewing the work performed by the component auditor for the purpose of the group audit. • For those components where a comprehensive audit was not performed, we have carried out a combination of targeted audit procedures and analytical procedures. Other information The Directors are responsible for the other information. The other information comprises the information included in the annual report set out on pages 2 to 3, 30 to 34 and 39 to 41 other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Our opinion on other matters prescribed by the Companies Act 2006 is unmodified In our opinion, based on the work undertaken in the course of the audit: • the information given in the Strategic Report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the Strategic Report and the Directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report under the Companies Act 2006 In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors’ report. Matters on which we are required to report by exception We have nothing to report in respect of the following matters in relation to which 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 Pressure Technologies plc Annual Report 2017Section 2 Governance47 Responsibilities of directors for the financial statements As explained more fully in the statement of directors’ responsibilities statement set out on page 37 the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Mark Overfield BSc FCA Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountant Leeds 11 December 2017 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 48 Consolidated Statement of Comprehensive Income For the 52 week period ended 30 September 2017 52 weeks ended 30 September 2017 £’000 Notes Revenue Cost of sales Gross profit Administration expenses Operating profit / (loss) before M&A costs, amortisation and exceptional charges and credits Separately disclosed items of administrative expenses: Amortisation and M&A related exceptional items Other exceptional charges and credits Operating loss Finance income Finance costs Loss before taxation Taxation (Loss) / profit for the period from continuing operations Discontinued operations Loss for the year from discontinued operations Loss for the period attributable to owners of the parent Other comprehensive income Items that may be reclassified subsequently to profit or loss: Currency translation differences on translation of foreign operations Total comprehensive income for the period attributable to the owners of the parent Basic earnings per share From continuing operation From discontinued operations From (loss) / profit for the period Diluted earnings per share From continuing operation From discontinued operations From (loss) / profit for the period The accounting policies and notes on pages 52 to 87 form part of these financial statements. 1 1 5 6 2 3 4 11 7 12 12 12 12 52 weeks ended 1 October 2016 £’000 35,753 (26,211) 9,542 (9,923) 38,418 (27,710) 10,708 (9,611) 1,097 (381) (1,968) (703) (1,574) 4 (343) (1,913) 766 (1,147) 1,123 (798) (56) 32 (335) (359) 1,002 643 — (1,147) (1,331) (688) (4) (426) (1,151) (1,114) (7.9)p — (7.9)p (7.9)p — (7.9)p 4.4p (9.2)p (4.8)p 4.4p (9.2)p (4.8)p Pressure Technologies plc Annual Report 2017Section 3 Financial Statements Consolidated Balance Sheet As at 30 September 2017 Non-current assets Goodwill Intangible assets Property, plant and equipment Deferred tax asset Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Borrowings Current tax liabilities Non-current liabilities Other payables Borrowings Deferred tax liabilities Total liabilities Net assets Equity Share capital Share premium account Translation reserve Retained earnings Total equity 49 30 September 2017 £’000 Notes 1 October 2016 £’000 14 15 16 25 19 20 21 22 21 22 25 26 16,062 13,658 12,583 343 42,646 4,986 11,339 4,791 21,116 63,762 (11,748) (219) (23) (11,990) (238) (15,642) (2,089) (17,969) (29,959) 33,803 725 21,637 (405) 11,846 33,803 15,020 11,329 13,765 544 40,658 5,210 11,279 6,073 22,562 63,220 (12,069) (242) (258) (12,569) (1,398) (12,411) (2,027) (15,836) (28,405) 34,815 724 21,620 (401) 12,872 34,815 The accounting policies and notes on pages 52 to 87 form part of these financial statements. The financial statements were approved by the Board on 11 December 2017 and signed on its behalf by: Joanna Allen Director Company number: 06135104 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 50 Consolidated Statement of Changes in Equity For the 52 week period ended 30 September 2017 Balance at 3 October 2015 Dividends Share based payments Shares issued Transactions with owners Loss for the period Other comprehensive income: Exchange differences on translating foreign operations Total comprehensive income Balance at 1 October 2016 Dividends Share based payments Shares issued Transactions with owners Loss for the period Other comprehensive income: Exchange differences on translating foreign operations Total comprehensive income Balance at 30 September 2017 Notes 13 27 26 13 27 26 Share capital £’000 721 — — 3 3 — — — 724 — — 1 1 — — — 725 Share premium account £’000 21,539 — — 81 81 — — — 21,620 — — 17 17 — — — Translation reserve £’000 25 — — — — — (426) (426) (401) — — — — — (4) (4) 21,637 (405) Profit and loss account £’000 14,056 (810) 314 — (496) (688) — (688) 12,872 — 121 — 121 (1,147) — (1,147) 11,846 Total equity £’000 36,341 (810) 314 84 (412) (688) (426) (1,114) 34,815 — 121 18 139 (1,147) (4) (1,151) 33,803 The accounting policies and notes on pages 52 to 87 form part of these financial statements. Pressure Technologies plc Annual Report 2017Section 3 Financial Statements Consolidated Statement of Cash Flows For the 52 week period ended 30 September 2017 51 Operating activities Cash flows from operating activities Finance costs paid Income tax refund Net cash inflow from operating activities Investing activities Proceeds from sale of fixed assets Purchase of property, plant and equipment Cash outflow on purchase of subsidiaries net of cash acquired Cash outflow on payment of deferred consideration Net cash used in investing activities Financing activities New borrowings Repayment of borrowings Dividends paid Shares issued Net cash from financing activities Net (decrease) / increase 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 52 to 87 form part of these financial statements. 52 weeks ended 30 September 2017 £’000 Notes 52 weeks ended 1 October 2016 £’000 28 29 319 (324) 216 211 21 (961) (3,597) — (4,537) 3,350 (324) — 18 3,044 (1,282) 6,073 4,791 4,405 (228) 504 4,681 84 (883) — (2,500) (3,299) 2,300 (342) (810) 84 1,232 2,614 3,459 6,073 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 52 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 Financial Reporting Standard 101 (FRS 101). These are presented on pages 90 to 98. The financial statements are made up to the Saturday nearest to the period end for each financial period. Pressure Technologies plc, company number 06135104, is incorporated and domiciled in the United Kingdom. The registered office address is Unit 6b Newton Business Centre, Newton Chambers Road, Chapeltown, Sheffield, South Yorkshire, S35 2PH. The Group has applied all accounting standards and interpretations issued relevant to its operations for the period ended 30 September 2017. The consolidated financial statements have been prepared on a going concern basis. The Group’s existing bank borrowings have been extended to March 2019 and management have 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 2017/2018 and beyond and that the Group has sufficient cash reserves and headroom in borrowing costs 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. Management have modelled the financial covenants in the forecasts and no breach is expected. 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 15 Revenue from Contracts with Customers (effective 1 January 2018) • Clarification of Acceptable Methods of Depreciation and Amortisation – Amendments to IAS 16 and IAS 38 (effective date 1 January 2016) • Annual Improvements to IFRSs 2014-2016 Cycle (effective 1 January 2018) • IFRS 16 Leases (effective date 1 January 2019) • Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealised Losses (effective 1 January 2017) • Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions (effective 1 January 2018) • Amendments to IAS 7: Disclosure Initiative (effective date 1 January 2017) Management are in the process of assessing the impact that the implementation of IFRS 15 will have on revenue recognition, particularly with reference to construction contracts and other income streams. Changes have been made to internally reported management information to ensure complete and accurate data capture. Other than in respect of IFRS 16 Leases, the application of these standards and interpretations is not expected to have a material impact on the Group’s reported financial performance or position. IFRS 16 will not come into effect until our 2020 year end, therefore the impact assessment will be done nearer the time. However, it is likely to result in the current operating leases being recognised on the balance sheet (see note 30). Pressure Technologies plc Annual Report 2017Section 3 Financial Statements53 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: Critical accounting judgements Revenue recognition 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. Stage of completion on construction contracts The Group assesses the stage of completion of a contract based on internal estimates, with reference to the proportion of costs incurred and the proportion of work performed. Impairment reviews – intangible & tangible 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 indefinite life 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 recoverable amount 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 their recoverable amount. Deferred consideration The Group has acquired, as a result of acquisition activity, significant liabilities in respect of deferred consideration. The payment of this consideration is contingent on the results of the potential acquired entities. Upon acquisition, deferred consideration is recognised at fair value. The Directors review the amount of deferred consideration alongside forecast results for the relevant businesses and assess the amount considered to be payable. Where an adjustment to deferred consideration is deemed necessary, the difference is recognised in profit and loss as an exceptional item. Business combinations – retention cash The Group records retention cash balances for business combinations as part of the consideration, where it is expected to be paid. 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. The level of inventory provisions is disclosed in note 19 to the financial statements. Valuation of intangible assets acquired through business combinations The Directors estimate the value of intangible assets with reference to any advice received, based on their experience of the value of such assets in similar businesses and under similar market conditions. The carrying value of intangible assets is disclosed in note 15 to the financial statements. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 54 Accounting Policies continued Key sources of estimation uncertainty continued Warranty provisions Under certain contractual arrangements, the Group provides a warranty in relation to some products sold, which could result in the future transfer of economic benefits from the entity. The Directors review the products for which a warranty is provided, and assess the amount of provision required to meet future potential liabilities. This includes judgements based on historical warranty spend and consideration of contracts that are currently within a warranty period. Warranty periods vary between products but are typically one year in duration. The level of warranty provisions is disclosed in note 21 to the financial statements. Stage of completion on construction contracts The carrying amount of construction contracts and revenue recognised from construction contracts reflects management’s best estimate about each contract’s outcome and stage of completion but are subject to estimation uncertainty. Deferred consideration The Directors have assessed the carrying value of deferred consideration that is contingent on the future results of acquired entities by reviewing forecasts. These forecasts by nature are subject to an element of estimation uncertainty. See notes 5 and 29 for further details. Contingent liabilities There is judgement in respect of the accounting for provisions and contingent liabilities. Further details are disclosed in note 31 to the financial statements. Basis of consolidation The Group financial statements consolidate those of the Company and all of its subsidiary undertakings drawn up to 30 September 2017 (2016: to 1 October 2016). Subsidiaries are all entities over which the Group has the power to control. 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. Control is achieved when the Company: • Has the power over the investee; • Is exposed, or has rights, to variable return from its involvement with the investee; and • Has the ability to use its power to affect returns. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. 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. Pressure Technologies plc Annual Report 2017Section 3 Financial Statements55 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s 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 consideration transferred, the excess amount (i.e. gain on a bargain purchase) is recognised in profit or loss immediately. Deferred 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. Where this deferred consideration arises in a currency other than Sterling, the liability is revalued at each period end date. 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 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, • 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. Sale of goods 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. Rendering of services 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. Contracts revenue Contracts revenue is recognised in accordance with IAS 11, ‘Construction Contracts’. Once a contract is sufficiently advanced and the outcome of the contract can be measured reliably, contract revenue, costs and profits are recognised over the period of the contract by reference to the stage of completion of each contract. The stage of completion of a contract is determined by internal estimates, with reference to the proportion of costs incurred. Revenue is recognised in proportion to the total revenue expected on the contract. Prior to this recognition, stage payments received from customers and made to suppliers are recorded in the consolidated balance sheet as trade and other receivables and trade and other payables as appropriate. If contract costs are expected to exceed contract revenue, then the expected loss is recognised immediately in the consolidated statement of comprehensive income. Contract revenue includes an assessment of the amounts agreed in the contract, plus or less any variations in contract work and claims to the extent that they are approved and can be measured reliably. Once revenue has started to be recognised on an individual contract, the Group reports the position for each contract as either an asset or a liability. In instances where costs incurred plus recognised profits exceed billings to date an asset is recognised. Similarly, a liability is recognised where billings to date exceed costs incurred and profits recognised. Pressure Technologies plc Annual Report 2017 56 Accounting Policies continued 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, EPS and sales growth targets). All share-based remuneration is ultimately recognised as an expense in the consolidated statement of comprehensive income 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. Property, plant and equipment is held at historical cost with the exception of assets acquired on business combinations. These are added at their fair value and depreciated accordingly. Land is not depreciated. Assets under construction are recognised when costs are incurred in the construction of an asset and are not depreciated until the asset is ready for use. Depreciation on other assets 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: Buildings Plant and machinery 50 years 3 – 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. Intangible assets Development costs Development costs are recognised at cost, net of amortisation or provision for impairment, where the recognition requirements under IAS 38 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. Pressure Technologies plc Annual Report 2017Section 3 Financial Statements57 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 consolidated 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. Amortisation on intangible assets is charged in cost of sales, with the exception of that on intangible assets acquired on business combinations, which is disclosed separately in the consolidated statement of comprehensive income. Such intangible assets are amortised on a straight-line basis over their estimated useful lives as follows: Customer order book License and distribution agreement Non-contractual customer relationships Technology Intellectual Property IT systems & software licenses Development expenditure Impairment testing of non-current assets Over life of the order book – typically one year 15 years 5 – 10 years 7.5 – 15 years 15 years 5 years 5 – 15 years 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. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 58 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); • 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 categorised as at fair value through profit or loss are recognised initially at fair value with transaction costs expensed through 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. Loans and receivables are initially recognised at fair value plus transaction costs, and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Receivables are considered for impairment on a case-by-case basis, and impairment is recognised 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 initially held at fair value (including transaction costs) after discounting and the difference is recognised in the consolidated statement of comprehensive income under financing costs, or asset. 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. Pressure Technologies plc Annual Report 2017Section 3 Financial Statements59 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s 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. Discounting on financial liabilities is omitted where the effect is immaterial. However, where it is required, the liability is initially recognised at fair value after discounting and the difference is recognised in the consolidated statement of comprehensive income under financing costs. Deferred consideration on acquisitions are the main balances where such treatment is required. Measurement of fair value financial instruments The Group’s finance team performs valuations of financial items for financial reporting purposes, including Level 3 fair values, in consultation with third party valuation specialists for complex valuations. Valuation techniques are selected based on the characteristics of each instrument, with the overall objective of maximising the use of market-based information. The finance team reports directly to the Group Finance Director and to the audit committee. Valuation processes and fair value changes are discussed at least every year, in line with the Group’s reporting dates. 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. At certain times the Group has foreign currency forward contracts that fall into this category. 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. 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 consolidated statement of comprehensive income. 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. As a result of corporate acquisition activity, the Group has significant potential deferred consideration balances denominated in foreign currencies. Any exchange differences arising on these balances are recognised in profit and loss. Given the large balances and therefore the potential effect on the results of the Group, the Directors consider it appropriate to disclose these foreign exchange movements as an exceptional item. Pressure Technologies plc Annual Report 2017 60 Accounting Policies continued Foreign currency translation continued 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 four 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. • Precision Machined Components: the manufacture of specialised, precision engineered valve wear parts used in the oil and gas industries. • Engineered Products: the manufacture of precision engineered products, 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. Investments in associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting. Under the equity method, the investments are initially recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. The Group’s share of post-acquisition profit or loss is recognised in the income statement. When the Group’s share of losses in an associate equals or exceeds this interest in the associate, the Group does not recognise further losses unless it has incurred legal or constructive obligation or made payments on behalf of the associate. The Group determines at each reporting date whether there is any objective evidence that the associate is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount adjacent to ‘share of profit / (loss) of associates’ in the consolidated statement of comprehensive income. Pressure Technologies plc Annual Report 2017Section 3 Financial Statements61 The Group considers that it has significant influence over another entity when it has less than 50% but more than 20% of the voting rights of that entity. Given Pressure Technologies has 40% of the voting rights of Kelley GTM, the Directors consider that it has significant influence and therefore it is treated as an associate. Exceptional items One off, non-trading items with a material effect on results are disclosed separately on the face of the consolidated statement of comprehensive income. The Directors apply judgement in assessing the particular items, which by virtue of their scale and nature, should be classified as exceptional items. The Directors consider that separate disclosure of these items is relevant to an understanding of the Group’s financial performance. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates. Operating profit Operating profit is stated before finance costs, finance income, share of profits and losses from associates and finance related exceptional costs. Adjusted operating profit is stated after adding back any other exceptional items. Discontinued operations A discontinued operation is a component of the Company that has either been disposed of or meets the criteria to be classified as held for sale and represents a separate major line of business or geographical area of operations or is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations. The results of discontinued operations are analysed separately from continuing operations on the face of the statement of comprehensive income and the related notes. Where there is a newly identified discontinued operation in the year, the prior year statement of comprehensive income and the related notes are restated as if the operation was classified as discontinued at that time. The results of discontinued operations include the post-tax profit or loss on the discontinued operation along with the post-tax gain or loss recognised on the re-measurement of the non-current assets of the discontinued operation to fair value less costs to sell, and the subsequent gain or loss on disposal of the discontinued operation. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation with an outflow of economic benefits and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. Where a liability is contingent on the occurrence or non-occurrence of uncertain future events or circumstances it is only recognised if a reliable estimate can be made of the amount of obligation. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 62 Notes to the Consolidated Financial Statements 1. Segment analysis The financial information by segment detailed below is frequently reviewed by the Chief Executive who has been identified as the Chief Operating Decision Maker (CODM). The Manufacturing and Alternative Energy Divisions are distinct due to the nature of the underlying businesses and as such are grouped on that basis. For the 52 week period ended 30 September 2017 Precision Machined Engineered Products £’000 Cylinders Components £’000 £’000 Manu- facturing Alternative Energy sub total £’000 £’000 Central costs £’000 Revenue – total – revenue from other segments Revenue from external customers 8,403 — 10,703 (340) 3,861 (9) 22,967 (349) 15,800 — 8,403 10,363 3,852 22,618 15,800 — — Total £’000 38,767 (349) 38,418 Gross profit 3,408 3,591 1,002 8,001 2,731 (24) 10,708 Operating profit / (loss) before M&A costs, amortisation and exceptional charges and credits Amortisation and M&A related exceptional items Other exceptional charges Operating profit / (loss) Net finance (costs) / income Profit / (loss) before tax 1,062 1,840 (471) 2,431 3 (1,337) 1,097 — (34) 1,028 (9) 1,019 (1,691) (57) 92 (6) 86 — (36) (507) — (507) (1,691) (127) 613 (15) 598 (708) (413) (1,118) 4 (1,114) 431 (163) (1,069) (328) (1,397) (1,968) (703) (1,574) (339) (1,913) Segmental net assets* 6,271 24,370 2,526 33,167 14,736 (14,100) 33,803 Other segment information: Capital expenditure Depreciation Amortisation (37) 403 — 166 700 1,691 23 108 — 152 1,211 1,691 72 105 708 68 122 8 292 1,438 2,407 * 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. Pressure Technologies plc Annual Report 2017Section 3 Financial Statements 63 Total £’000 36,355 (602) 35,753 9,542 1. Segment analysis continued For the 52 week period ended 1 October 2016 Precision Machined Cylinders Components £’000 £’000 Engineered Products £’000 Manu- facturing sub total £’000 Alternative Energy £’000 Central costs £’000 Revenue – total – revenue from other segments Revenue from external customers 9,538 — 11,319 (576) 4,163 (23) 25,020 (599) 11,335 (3) 9,538 10,743 4,140 24,421 11,332 Gross profit 3,226 3,350 994 7,570 1,972 — — — — Operating profit / (loss) before M&A costs, amortisation and exceptional charges and credits Amortisation and M&A related exceptional items 1,053 1,398 (291) 2,160 (1,060) (1,481) (381) — (1,462) — (1,462) (703) 3,288 1,123 Other exceptional charges Operating profit / (loss) Net finance (costs) / income Profit / (loss) before tax (84) 969 — 969 (359) (423) (11) (434) (333) (624) — (624) (776) (78) (11) (89) (22) (1,785) 29 (1,756) — 1,807 (321) 1,486 (798) (56) (303) (359) Segmental net assets* 7,132 22,153 2,868 32,153 13,876 (11,214) 34,815 Other segment information: Capital expenditure Depreciation Amortisation 419 330 — 268 822 1,462 140 128 — 827 1,280 1,462 92 95 703 42 102 1 961 1,477 2,166 * 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. The following table provides an analysis of the Group’s revenue by geographical destination. Revenue United Kingdom Europe Rest of the World 2017 £’000 15,451 7,050 15,917 38,418 2016 £’000 17,235 7,817 10,701 35,753 The Group’s largest customer contributed 12% to the Group’s revenue (2016: 7%) and is reported within the Alternative Energy segment. No other customer contributed more than 10% in the period to 30 September 2017 (2016: nil). S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 64 Notes to the Consolidated Financial Statements continued 1. Segment analysis continued The following table provides an analysis of the Group’s revenue by market. Revenue Oil and gas Defence Industrial gases Alternative energy 2017 £’000 13,775 6,471 2,347 15,825 38,418 2016 £’000 15,527 6,469 2,372 11,385 35,753 The above table is provided for the benefit of shareholders. It is not provided to the PT Board or the CODM on a regular monthly basis and consequently does not form part of the Divisional segmental analysis. Revenue Sale of goods Rendering of services Total sales – continuing operations Discontinued operations Sale of goods Total sales 2017 £’000 34,420 3,998 38,418 2016 £’000 32,591 3,162 35,753 — 38,418 1,230 36,983 The following table provides an analysis of the carrying amount of non-current assets and additions to property, plant and equipment. United Kingdom £’000 42,594 240 Rest of the World £’000 52 52 2017 Total £’000 42,646 292 United Kingdom £’000 40,581 859 Rest of the World £’000 77 102 Non-current assets Additions to property, plant and equipment 2. Finance income Interest receivable on bank deposits 3. Finance costs Interest payable on bank loans and overdrafts Interest payable on finance leases Discounting adjustment on trade and other payables 2016 Total £’000 40,658 961 2016 £’000 32 32 2016 £’000 246 14 75 335 2017 £’000 4 4 2017 £’000 309 19 15 343 Pressure Technologies plc Annual Report 2017Section 3 Financial Statements 65 S t r a t e g i c R e p o r t 2016 £’000 1,387 90 9 2,166 (99) 12,911 20,538 323 90 (711) 311 209 G o v e r n a n c e 2016 £’000 (2,166) — 3,766 (477) 1,123 2017 £’000 1,382 56 21 2,407 (94) 11,058 21,418 353 89 37 121 — 2017 £’000 (2,407) (158) 597 — (1,968) 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 Loss on disposal of fixed assets Amortisation of intangible assets acquired on business combinations Amortisation of grants receivable Staff costs – excluding share based payments (see note 9) Cost of inventories recognised as an expense Operating lease rentals: – Land and buildings – Machinery and equipment Foreign currency loss / (gain) Share based payments Research and development 5. Amortisation and M&A related exceptional items Amortisation of intangible assets M&A costs Deferred consideration write back Foreign currency loss on revaluation of deferred consideration liability The deferred consideration write back in this period relates to the deferred consideration arising from the acquisition of Martract Limited. The deferred consideration write back in the prior period related to the deferred consideration arising from the acquisition of the Greenlane Group of Companies. The payment of these considerations are contingent on the future results of the acquired entities. The Directors reviewed forecasts in relation to Martract and Greenlane and considered that it was unlikely that the considerations would be paid, and as such they were released. Given the magnitude of the amounts released and the fact that they are non-trading, the Directors considered it appropriate to disclose them as exceptional items. The revaluation of the deferred consideration liability related to the exchange differences calculated on the deferred consideration arising from the acquisition of The Greenlane Group, which was denominated in New Zealand Dollars, before it was written back. Given the large balance and therefore the effect on the results of the Group, the Directors considered it appropriate to disclose this foreign exchange movement as an exceptional item. i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 66 Notes to the Consolidated Financial Statements continued 6. Other exceptional (charges) / credits Reorganisation and redundancy Costs in relation to HSE investigation Write back of KGTM loan previously provided for 2017 £’000 (710) (21) 28 (703) 2016 £’000 (732) (66) — (798) The reorganisation costs relate to costs of restructuring across the Group, the Divisional split is given in note 1. They are recognised in accordance with IAS 19. Costs in relation to the HSE investigation are costs borne by the Group as a direct result of the accident at Chesterfield Special Cylinders which are not recoverable through insurance. Given the non-trading nature of these costs, the Directors consider it appropriate to disclose this as an exceptional item. Further details on the HSE investigation can be seen in note 31. The write back of KGTM loan previously provided for, relates to a receipt from KGTM for a loan amount that was previously provided for (reversal of the provision). 7. Results of discontinued operation Revenue Expenses Operating profit pre-exceptional costs Exceptional costs: Reorganisation and redundancy Impairment of assets on closure Loss before taxation Taxation Loss for the year 2017 £’000 — — — — — — — — 2016 £’000 1,267 (1,865) (598) (278) (455) (1,331) — (1,331) Due to the oil and gas market conditions that continued into the second half of the prior accounting period, as part of the Group’s restructuring, the US operation of the Engineered Products Division was closed during the prior year. The manufacturing facilities were wound down and fully closed in early September 2016. Cash flows from discontinued operations Net cash used in operating activities Net cash from investing activities Net cash from financing activities Net cash flows for the year 2017 £’000 — — — — 2016 £’000 (679) 27 783 131 Pressure Technologies plc Annual Report 2017Section 3 Financial Statements 8. Auditor’s remuneration Fees payable to the Company’s Auditor for the audit of the Company and consolidated 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 Company’s Auditor for non-audit services: – Tax compliance services – Other services – All other assurance services 9. Employee costs Particulars of employees, including Executive Directors: Wages and salaries Social security costs Pension costs Share based payments The average monthly number of employees (including Executive Directors) during the period was as follows: Production Selling and distribution Administration The total number of employees, employed by the Group on 30 September 2017 was 240 (2016: 244). 67 2017 £’000 46 2016 £’000 40 115 107 32 6 10 34 17 — 2017 £’000 9,739 852 467 122 11,180 2017 No. 144 30 65 239 2016 £’000 11,422 1,042 447 311 13,222 2016 No. 175 41 74 290 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 68 Notes to the Consolidated Financial Statements continued 10. Directors’ remuneration Particulars of Directors’ remuneration are as follows: Emoluments Pension costs Employers’ national insurance Share based payments 2017 £’000 557 41 65 63 726 2016 £’000 520 41 60 65 686 Please see the Report of the Remuneration Committee on pages 32 to 34 for full details of Directors’ emoluments which have been audited. No Directors exercised any share options in the year. During the year retirement benefits were accruing to two (2016: two) Directors in respect of defined contributions schemes. Included in the aggregate emoluments for the period ended 30 September 2017 are payments of £27,050 (2016: £36,000) made to company’s controlled by the Directors. The highest paid Director received total emoluments of £207,000 and pension contributions of £22,000 (2016: total emoluments of £204,000 and pension contributions of £21,000). 11. Taxation Current tax (credit) / expense Current tax Over provision in respect of prior years Foreign tax Deferred tax (credit) / expense Origination and reversal of temporary differences Over provision in respect of prior years 2017 £’000 2016 £’000 — (405) 49 (356) (534) 124 (410) — (163) — (163) (839) — (839) Total taxation credit (766) (1,002) Corporation tax is calculated at 19.5% (2016: 20%) of the estimated assessable profit for the period. Deferred tax is calculated at the rate applicable when the temporary differences unwind. Pressure Technologies plc Annual Report 2017Section 3 Financial Statements 69 2016 £’000 (359) (72) 131 (658) — (54) (160) 126 (315) — — (1,002) 11. Taxation continued The charge for the period can be reconciled to the profit per the consolidated statement of comprehensive income as follows: Loss before taxation Theoretical tax at UK corporation tax rate 19.5% (2016: 20%) Effect of (credits) / charges: – non-deductible expenses and other timing differences – disallowable release of deferred consideration – other disallowable acquisition costs – research and development allowance – adjustments in respect of prior years – effect of unrealised overseas – change in taxation rates – differences in corporation tax rates – losses not previously recognised now utilised Total taxation credit 12. Earnings per ordinary share 2017 £’000 (1,913) (373) 204 (113) (49) — (281) — (2) (68) (84) (766) 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 adjusted earnings per share is also calculated based on the basic weighted average number of shares. 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. Additional shares were issued post year end as part of a share placing, see note 33. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 70 Notes to the Consolidated Financial Statements continued 12. Earnings per ordinary share continued For the 52 week period ended 30 September 2017 Loss after tax Weighted average number of shares – basic Dilutive effect of share options Weighted average number of shares – diluted Basic loss per share Diluted loss per share The Group adjusted earnings per share is calculated as follows: Loss after tax Amortisation and M&A related exceptional items (note 5) Other exceptional charges and credits (note 6) Theoretical tax effect of above adjustments Adjusted earnings Adjusted earnings per share For the 52 week period ended 1 October 2016 Profit / (loss) after tax Weighted average number of shares – basic Dilutive effect of share options Weighted average number of shares – diluted Basic earnings / (loss) per share Diluted earnings / (loss) per share The Group adjusted loss per share is calculated as follows: Profit / (loss) after tax Amortisation and M&A related exceptional items (note 5) Other exceptional charges and credits (note 6) Impairment of assets on closure Theoretical tax effect of above adjustments Adjusted loss Adjusted loss per share Continuing Discontinued £’000 £’000 (1,147) — Total £’000 (1,147) (7.9)p (7.9)p (1,147) 1,968 703 (606) 918 6.3 — — — — — — — — Continuing Discontinued £’000 £’000 643 (1,331) No. 14,485,099 75 14,485,174 (7.9)p (7.9)p (1,147) 1,968 703 (606) 918 6.3 Total £’000 (688) No. 14,449,195 1,983 14,451,178 4.4p 4.4p (9.2)p (9.2)p (4.8)p (4.8)p 643 (1,123) 798 — (688) (370) (2.6)p (1,331) — 278 455 (56) (688) (1,123) 1,076 455 (744) (654) (4.5)p (1,024) (7.1)p Pressure Technologies plc Annual Report 2017Section 3 Financial Statements 71 S t r a t e g i c R e p o r t 2017 £’000 — — 2016 £’000 810 810 Total £’000 15,020 — 15,020 1,042 16,062 G o v e r n a n c e Date of Original cost £’000 acquisition February 2010 March 2014 October 2014 December 2016 272 5,117 3,079 1,042 October 2010 1,692 October 2014 4,860 16,062 i F n a n c i a l S t a t e m e n t s 13. Dividends The following dividend payments have been made on the ordinary 5p shares in issue: Final 2014/15 5.6p 18 March 2016 14,471,481 Rate Date Shares in issue No dividends have been declared in respect of the year ended 30 September 2017 or 1 October 2016. 14. Goodwill Cost and gross carrying amount At 3 October 2015 Acquired through business combinations At 1 October 2016 Acquired through business combinations (note 29) At 30 September 2017 Precision Machined Components Al-Met Limited Roota Engineering Limited The Quadscot Group Martract Limited Engineered Products Hydratron Limited Alternative Energy The Greenlane Group At 30 September 2017 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 goodwill in relation to six acquisitions shown above. 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 11.6% (2016: 11.6%). The same discount rate is used for all CGUs due to the businesses having common sources of finance and operating in very similar markets. The forecast is approved by management and the Board of Directors, and is based on a bottom up assessment of costs and uses the known and estimated pipeline. In the Manufacturing Divisions, the forecasts used for years two to four assume revenue growth, returning to levels achieved in 2014 by 2021 and into perpetuity, no long-term rate of growth or inflation is incorporated into perpetuity. In the Alternative Energy Division, the forecasts used for years two onwards, prudently assume no revenue growth. A perpetuity is used as a terminal value in this calculation. Pressure Technologies plc Annual Report 2017 72 Notes to the Consolidated Financial Statements continued 14. Goodwill continued 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 in 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. At 30 September 2017, no reasonable expected change in the key assumptions (including a 5% decrease in forecast cash flows) would give rise to an impairment charge for any CGU. 15. Intangible assets Cost At 3 October 2015 Additions At 1 October 2016 Additions Acquired through business combination (note 29) At 30 September 2017 Amortisation At 3 October 2015 Charge for the period At 1 October 2016 Charge for the period At 30 September 2017 Net book value At 30 September 2017 At 1 October 2016 IT systems Intellectual & Software Development Licenses expenditure £’000 Property £’000 £’000 Non contractual customer Technology relationships £’000 £’000 5,316 — 5,316 — — 5,316 720 703 1,423 708 2,131 11,702 — 11,702 — 944 12,646 2,847 1,462 4,309 1,535 5,844 Total £’000 17,018 44 17,062 996 3,740 21,798 3,567 2,166 5,733 2,407 8,140 — — — 564 — 564 — — — — — 564 3,185 6,802 13,658 — 3,893 7,393 11,329 — — — — 2,796 2,796 — — — 155 155 2,641 — — 44 44 432 — 476 — 1 1 9 10 466 43 Remaining useful economic life at 30 September 2017 14 years 5 years 10 years 5 years 6 years Pressure Technologies plc Annual Report 2017Section 3 Financial Statements 73 Total £’000 19,276 961 (204) (69) 34 19,998 292 16 (76) — (11) 1 20,220 4,928 1,477 (112) (60) 6,233 1,438 (34) 7,637 Assets under construction £’000 Land and Plant and buildings machinery £’000 £’000 1,837 359 — — — 2,196 — — — (2,008) — — 188 — — — — — — — — 4,894 75 — (17) — 4,952 6 — — — — — 4,958 66 63 — (11) 118 76 — 194 12,545 527 (204) (52) 34 12,850 286 16 (76) 2,008 (11) 1 15,074 4,862 1,414 (112) (49) 6,115 1,362 (34) 7,443 188 4,764 7,631 12,583 2,196 4,834 6,735 13,765 16. Property, plant and equipment Cost At 3 October 2015 Additions Disposals Impairment Net exchange differences At 1 October 2016 Additions Acquired through business combinations (note 29) Disposals Transfers Impairment Net exchange differences At 30 September 2017 At 3 October 2015 Charge for the period Disposed of in the period Impaired in the period At 1 October 2016 Charge for the period Disposed of in the period At 30 September 2017 Net book value At 30 September 2017 At 1 October 2016 Included within the net book value of £12,583,000 is £374,000 (2016: £828,000) 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 £56,000 (2016: £90,000). 17. Subsidiaries A list of 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 94. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 74 Notes to the Consolidated Financial Statements continued 18. Investments in associates The investment in Kelley GTM, LLC was fully written down in the period ended 3 October 2015. Had this not been the case the Group’s share of the results of its principal associates and its aggregated assets (including goodwill) and liabilities, would be as follows: At 1 October 2016 Kelley GTM, LLC. At 30 September 2017 Kelley GTM, LLC. Country of incorporation Assets £’000 Liabilities £’000 Revenues £’000 Loss £’000 USA 473 (6,202) 918 (195) USA 1,004 (7,189) 908 (652) Interest held % 40 40 KGTM has a year-end date of 31 December. The period for which the results of KGTM have been shown in the table above is from 2 October 2016 to 30 September 2017. The Group’s share of the results of KGTM are not included in the Group’s financial statements as the investment and loans made to KGTM are fully written down and there is no legal or constructive obligation to recognise any further losses and no further payments have been made on behalf of the associate. The total losses recognised against the investment and other receivables from KGTM for the period were £nil (2016: nil) leaving unrecognised losses of £652,000 (2016: £195,000). 19. Inventories Raw materials and consumables Work in progress Finished goods Inventories are stated net of provisions of £547,000 (2016: £498,000). 2017 £’000 2,959 1,982 45 4,986 2016 £’000 2,917 402 1,891 5,210 Pressure Technologies plc Annual Report 2017Section 3 Financial Statements 75 2017 £’000 8,820 1,256 216 1,047 2016 £’000 7,536 1,827 602 1,314 11,339 11,279 20. Trade and other receivables Current Trade receivables Amounts due from customers for construction contract work Other receivables Prepayments and accrued income The average credit period taken on the sale of goods and services was 61 days (2016: 47 days) in respect of the Group. One debtor individually accounted for over 10% of trade receivables and represented 14% of the total balance. In 2016, one debtor accounted for over 10% of trade receivables and represented 26% of the total balance. Ageing of past due but not impaired receivables: Days past due: 0 – 30 days 31 – 60 days 61 – 90 days 91 – 120 days 121+ days Total The Group’s doubtful debt provision is not a significant balance. 21. Trade and other payables Amounts due within 12 months Trade payables Progress billings on construction contracts in excess of work completed Other tax and social security Accruals, deferred income and other payables Total due within 12 months Amounts due after 12 months Accruals, deferred income and other payables Total due after 12 months 2017 £’000 1,702 310 360 50 84 2,506 2017 £’000 5,030 1,368 757 4,593 2016 £’000 1,310 242 220 65 389 2,226 2016 £’000 6,903 931 301 3,934 11,748 12,069 238 238 1,398 1,398 Deferred income due after 12 months includes grant income received and customer prepayments for contracts in delivery in a number of years. There are no unfulfilled conditions or other contingencies attached to these grants. The warranty provision at 30 September 2017 is £491,000 (2016: £306,000). S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 76 Notes to the Consolidated Financial Statements continued 22. Borrowings Non-current Bank borrowings Finance lease liabilities Current Finance lease liabilities Total borrowings 2017 £’000 15,000 642 15,642 2016 £’000 12,300 111 12,411 219 219 242 242 15,861 12,653 At the balance sheet date, the above bank borrowings were due for repayment on 30 September 2018, being exactly 12 months from the balance sheet date. The Group’s next accounting period ends on 29 September 2018. Accordingly the Directors have concluded that it is appropriate to present the loan as due for repayment after one year. The borrowing facility repayment date has since been extended to March 2019. The bank loan bears average coupons of 2% above LIBOR annually. Total borrowings include secured liabilities of £15 million. Bank borrowings are secured on the property, plant and equipment of the Group (note 16). Obligations under finance leases are secured on the plant & machinery assets to which they relate. The carrying amounts of the Group’s borrowings are all denominated in GBP. The maturity profile of long-term loans is as follows: Due within one year Finance lease liabilities Due for settlement after one year Bank borrowings Finance lease liabilities The Group has the following undrawn borrowing facilities: Expiring beyond one year 2017 £’000 2016 £’000 219 242 15,000 642 12,300 111 2017 £’000 — 2016 £’000 2,700 The facility also includes an accordion feature option allowing for an additional facility for £10 million subject to certain conditions set out in the agreement. Pressure Technologies plc Annual Report 2017Section 3 Financial Statements 77 23. Construction contracts Construction contracts are accounted for in accordance with IAS 11, ‘Construction Contracts’ and IAS18, ‘Revenue’. The position on individual contracts is held as ‘Amounts due from customers for contract work’ within trade and other receivables or as ‘Progress billings on construction contracts in excess of work completed’ within trade and other payables as applicable. Costs incurred and profit recognised to date Less: Progress billings Net balance sheet position for ongoing contracts 24. Financial instruments 2017 £’000 19,862 (19,974) (112) 2016 £’000 16,083 (15,187) 896 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 22, 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 debt Equity 2017 £’000 (15,861) 4,791 (11,070) 2016 £’000 (12,653) 6,073 (6,580) 33,803 34,815 Debt is defined as long and short-term borrowings, as detailed in note 22. 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 2017 £’000 8,820 216 4,791 2016 £’000 7,536 602 6,073 13,827 14,211 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 78 Notes to the Consolidated Financial Statements continued 24. Financial instruments continued Financial liabilities Financial liabilities – held at amortised cost – Trade payables – Accruals – Borrowings 2017 £’000 2016 £’000 5,030 2,081 15,861 22,972 6,903 2,792 12,653 22,348 The fair value of the financial instruments set out above is not materially different from their book value. 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, CAN Dollars, NZ Dollars and Euros, and interest rates. The Group enters into derivative financial instruments to manage its exposure to foreign currency risk. There are no open contracts at 30 September 2017 (2016: none). Foreign currency risk management The Group purchases its principal raw materials in US Dollars, CAN Dollars, NZ Dollars, Euros and Pounds Sterling and receives payment for its products in US Dollars, CAN Dollars, NZ Dollars, Euros and Pounds Sterling. After netting off foreign currency receipts and payments, there is a net exposure to the risk of currency movements in US Dollars, CAN Dollars, NZ 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 US Dollar CAN Dollar NZ Dollar Financial assets Financial liabilities 2017 £’000 1,107 2,159 777 169 4,212 2016 £’000 1,853 3,563 540 21 5,977 2017 £’000 1,347 478 936 53 2,814 2016 £’000 1,087 2,514 653 71 4,325 Pressure Technologies plc Annual Report 2017Section 3 Financial Statements 79 S t r a t e g i c R e p o r t 24. Financial instruments continued 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: Profit or loss Profit or loss Euro currency impact CAN Dollar currency impact US Dollar currency impact 2017 £’000 22 2016 £’000 70 2017 £’000 14 2016 £’000 10 2017 £’000 148 2016 £’000 95 NZ Dollar currency impact 2017 £’000 10 2016 £’000 5 G o v e r n a n c e 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. 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 Group holds level 2 financial instruments as detailed below. No transfers in either direction have been made between the levels of fair value hierarchy. Forward foreign exchange contracts – Level 2 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 30 September 2017, the Group had no contracts outstanding (2016: no contracts outstanding). Forward exchange contracts gave rise to a loss of £nil in the period ended 30 September 2017. The fair value of forward foreign exchange contracts at 1 October 2016 gave rise to a loss of £26,000. 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 decrease/increase of £48,000 (2016: £31,000). Price risk management Where possible the Group enters into contracts incorporating price escalation clauses to mitigate any significant exposure to material price risk. i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 80 Notes to the Consolidated Financial Statements continued 24. Financial instruments continued Credit risk management The Group’s credit risk is primarily attributable to its trade receivables. The two largest customers within trade receivables account for 22% (2016: 36%) 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 minimised 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. The following tables detail the Group’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The contractual maturity is based on the earliest date on which the Group may be required to pay. 2017 Trade and other payables Bank borrowings Amounts due under hire purchase agreements 2016 Trade and other payables Bank borrowings Amounts due under hire purchase agreements Current within 6 months £’000 Current 6 to 12 Non-current 1 to 5 years months £’000 £’000 7,111 — 123 7,234 Current within 6 months £’000 9,540 — 143 9,683 — — 96 96 — 15,000 642 15,642 Current 6 to 12 Non-current 1 to 5 years months £’000 £’000 155 — 99 254 — 12,300 111 12,411 Total net payable £’000 7,111 15,000 861 22,972 Total net payable £’000 9,695 12,300 353 22,348 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 to cost of sales within the consolidated statement of comprehensive income Fair values The fair values of financial assets and liabilities are determined as follows: 2017 £’000 — — 2016 £’000 26 26 • Outstanding foreign currency exchange contracts are measured using quoted forward exchange rates at the reporting 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. Pressure Technologies plc Annual Report 2017Section 3 Financial Statements 81 25. 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. Accelerated tax depreciation £’000 Intangible assets £’000 Short term temporary Share differences option costs £’000 £’000 At 3 October 2015 Credit / (charge) to income At 1 October 2016 Prior year adjustment Credit / (charge) to income Acquired through business combinations At 30 September 2017 (758) 40 (718) (3) 291 — (430) (1,770) 514 (1,256) — 325 (673) (1,604) 111 (16) 95 (13) 68 — 150 95 (29) 66 56 16 — 138 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 Unused losses £’000 — 330 330 (40) (290) — — Total £’000 (2,322) 839 (1,483) — 410 (673) (1,746) 2017 £’000 2016 £’000 343 544 (2,089) (1,746) (2,027) (1,483) Deferred tax is expected to be recoverable against future profits generated by the Group. 26. Called up share capital Allotted, issued and fully paid Ordinary shares of 5p each 2017 No. 2016 No. 2017 £’000 2016 £’000 14,495,165 14,471,481 725 724 The Company issued 11,189 ordinary shares at a price of 156p to employees exercising their rights to acquire shares under the company’s SAYE scheme throughout the year. The Company issued 12,495 ordinary shares at a price of 5p to an employee exercising their rights to acquire shares under an Enterprise Management Plan issued. The effect of these issues has been to increase share capital by £1,000 and share premium by £17,000. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 82 Notes to the Consolidated Financial Statements continued 27. 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. The scheme rules were reviewed and updated in 2017 as required by HMRC. If the options remain unexercised after a period of three years and six months from the date of the grant, the options expire. Options are forfeited if the employee leaves the Group before the options vest and are treated as a cancellation if the employee chooses to stop contributing. 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 at the beginning of the period Granted during the period Lapsed during the period Forfeited during the period Cancelled during the period Exercised during the period Expired during the period Outstanding at the end of the period Weighted average exercise price 169.4p — — 164.6p 171p 156p 156p 2016 No. 355,293 85,440 — (79,912) (59,957) (6,551) (1,800) 174p 292,513 Weighted average exercise price 186.9p 150p — 189.1p 221.8p 153.4p 150p 169.4p 2017 No. 292,513 — — (63,758) (56,820) (11,189) (20,878) 139,868 5,217 of the outstanding options were exercisable at the end of the period. The options outstanding at 30 September 2017 had a weighted average remaining contractual life of 1.1 years (2016: 1.8 years). The terms of these options are as follows: Date of grant 31 July 2014 30 July 2015 2 August 2016 Total options outstanding at 30 September 2017 Options outstanding at 30 September 2017 5,217 92,771 41,880 139,868 Market value at date of grant (p) Vesting period 3 years 3 years 3 years 719 238 147.5 Exercise price (p) 593 161.2 150 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 Annual Report 2017Section 3 Financial Statements 83 27. Share based payments continued Pressure Technologies plc Performance Share Plan – Enterprise Management Plan Pressure Technologies plc introduced this share option scheme in October 2009. 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 and are treated as a cancellation if the employee chooses to stop contributing. Details of the share options outstanding during the period are as follows: Outstanding at the beginning of the period Granted during the period Lapsed during the period Exercised during the period Outstanding at the end of the period Weighted average exercise price 210.6p — 150.5p 150.5p 242.5 2017 No. 153,156 — (40,661) (12,495) 100,000 Weighted average exercise price 210.6p — — - 210.6p 2016 No. 153,156 — — — 153,156 All of the outstanding options were exercisable at the end of the period. The options outstanding at 30 September 2017 had a weighted average remaining contractual life of 0.8 years (2016: 1.3 years). The terms of these options are as follows: Date of grant 9 August 2013 Total options outstanding at 30 September 2017 Options outstanding at 30 September 2017 100,000 100,000 Market value at date of grant (p) Vesting period Exercise price (p) 3 years 242.5 242.5 There are no performance conditions that apply to these options other than continued employment. The options will lapse if not exercised by five years from the date of grant. All of the options were exercisable under this scheme as at the period end. Pressure Technologies plc – Long Term Incentive Plan Pressure Technologies plc introduced this share option scheme in April 2014. These options are exercisable between three and six years following the date of the grant. Options are forfeited if the employee leaves the Group before the options vest, unless certain conditions are met and are treated as a cancellation if the employee chooses to stop contributing. Details of the share options outstanding during the period are as follows: Outstanding at the beginning of the period Granted during the period Lapsed during the period Outstanding at the end of the period Weighted average exercise price 285.5p — 262.5p 296.1p 2017 No. 646,647 — (204,490) 442,157 Weighted average exercise price 421.2p 196.2p 225p 285.5 2016 No. 259,589 410,391 (23,333) 646,647 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 84 Notes to the Consolidated Financial Statements continued 27. Share based payments continued None of the outstanding options were exercisable at the end of the period. The outstanding options outstanding at 30 September 2017 had a weighted average remaining contractual life of 3.9 years (2016: 4.9 years). The terms of these options are as follows: Date of grant 3 April 2014 12 December 2014 25 June 2015 21 December 2015 Total options outstanding at 30 September 2017 Options outstanding at 1 October 2016 45,239 68,893 46,666 281,359 442,157 Market value at date of grant (p) Vesting period 3 years 3 years 3 years 3 years 720.8 473.3 212 196.2 Exercise price (p) 720.8 473.3 225 196.2 There are performance related conditions that apply to these options. The figures disclosed above show the options exercisable if all performance conditions are met. Full details of the performance conditions can be found in the report to the remuneration committee. The options lapse if not exercised six years after the grant date. No options were exercisable as at the reporting date. 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 £121,000 (2016: £311,000). The charge is calculated in accordance with IFRS 2, ‘Share Based Payments’. A deferred tax credit of £16,000 (2016: £29,000) was recognised in the consolidated statement of comprehensive income during the period in respect of share based payments. 28. Consolidated cash flow statement Loss after tax Adjustments for: Finance costs – net Depreciation of property, plant and equipment Amortisation of intangible assets Share option costs Income tax credit Loss on derivative financial instruments Loss on disposal of property, plant and equipment Exceptional deferred consideration released and revaluation Exceptional impairment of assets Changes in working capital: Decrease in inventories Decrease in trade and other receivables (Decrease) / increase in trade and other payables Cash flows from operating activities 2017 £’000 (1,147) 339 1,438 2,407 121 (766) — 21 (597) 11 243 413 (2,164) 319 2016 £’000 (688) 303 1,477 2,166 314 (1,002) 26 8 (3,289) 464 1,749 1,948 929 4,405 Pressure Technologies plc Annual Report 2017Section 3 Financial Statements 85 29. Business combinations On 7 December 2016, the Group acquired 100% of the issued share capital of Martract Limited for an initial consideration of £3,997,000, plus maximum deferred consideration of £600,000. In calculating goodwill below, the contingent consideration is held at fair value of £583,000. This has been estimated based on future earnings. The fair value estimate is based on a discount rate of 3% and assumes that £583,000 of deferred consideration is payable. Subsequently the post acquisition performance and forecasts have been reviewed by the Directors and they consider that it is unlikely that the consideration will be paid, and as such it has been released (note 5). Martract has unique capabilities in spherical grinding that ensures the perfect sphericality of new and refurbished ball valves, such that the valve will seal in any position, through the opening and closing process. It is based in Barton-upon-Humber. The transaction has been accounted for by the acquisition method of accounting. The table below summarises the consideration paid for Martract and the fair value of the assets and liabilities acquired. Intangible assets recognised on acquisition £’000 Book value £’000 Fair value adjustment £’000 Fair value £’000 Recognised amounts of identifiable assets acquired and liabilities assumed: Property, plant and equipment Intangible assets Inventories Trade and other receivables Cash and cash equivalents Trade and other payables Current tax liabilities Deferred tax liabilities Goodwill Total consideration Satisfied by: Initial cash Retention cash Deferred cash consideration Net cash outflow arising on acquisition Initial & retention cash consideration Cash and cash equivalents acquired Initial consideration less net cash acquired 16 — 19 162 400 (101) (25) — 471 — 3,740 — — — — — (673) 3,067 — — — 363 — (488) 125 — — 16 3,740 19 525 400 (589) 100 (673) 3,538 1,042 4,580 3,634 363 583 4,580 3,997 (400) 3,597 The intangible assets acquired with the business comprise £944,000 in relation to non-contractual customer relationships and £2,796,000 in relation to the manufacturing intellectual property. The fair value adjustment relates to an Employment Related Securities liability that arose as a result of the vendors shareholder restructuring immediately prior to completion. This liability was funded by the vendors of Martract Limited. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 86 Notes to the Consolidated Financial Statements continued 29. Business combinations continued The goodwill of £1,042,000 arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of Martract with the rest of the PMC Division. None of the goodwill recognised is expected to be deductible for income tax purposes. Martract contributed £671,000 revenue and £236,000 to the Group’s profit after tax for the period between the date of acquisition and the balance sheet date. The effect of the inclusion of the acquisition had it been completed on the first day of the financial year is considered to be immaterial upon the Group’s revenue and profit after tax. 30. Financial commitments (a) Capital commitments Commitments for capital expenditure entered into were as follows: Contracted for, but not provided in the accounts 2017 £’000 — 2016 £’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: Within one year In the second to fifth years inclusive After more than five years Other assets: Within one year In the second to fifth years inclusive 2017 £’000 322 972 594 2016 £’000 293 936 729 1,888 1,958 67 61 128 75 92 167 The operating lease commitment on land and buildings includes the following significant commitments: • 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; • Hydratron Limited’s 10 year property lease commenced on 28 October 2010 and had a rent review at the end of year 5; and • A five year lease for the Group’s head office commenced on 31 July 2014, at Chapeltown, Sheffield. Pressure Technologies plc Annual Report 2017Section 3 Financial Statements 87 31. Contingent liabilities Following the fatal accident at Chesterfield Special Cylinders (“CSC”) in June 2015, other than the submission by CSC of written responses to questions from the Health and Safety Executive (“HSE”), there have been no further developments since the interim statement on 13 June 2017 and the HSE investigation into this accident remains ongoing. On 1 February 2016 the Sentencing Council’s new “Health and Safety Offences, Corporate Manslaughter and Food Safety and Hygiene Offences Definitive Guideline” (2016) came into force. The guidelines set a range of fines dependent on the levels of harm and culpability. These levels are assessed by the Judge when sentencing and not at the time of charges being brought. We continue to cooperate fully with the HSE. Until the HSE investigation is complete CSC’s management and legal adviser are not in a position to assess what charges may be brought. As a result of this and the nature of the sentencing guidelines it is not possible to determine with any degree of certainty what, if any, financial penalties may be levied on CSC or any other group company as a result of this investigation. At such time as the quantum and likelihood of any penalty is able to be reliably determined further disclosure or provision will be made in accordance with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”. 32. Related party transactions Key management personnel are considered to be the Executive and Non-Executive Directors of the Group. Details of their remuneration is set out below: Short-term employee benefits (including Employers’ NI) Post-employment benefits Share based payments Total remuneration 2017 £’000 622 41 63 726 2016 £’000 580 41 65 686 The interests of Directors in dividends paid during the year are disclosed in the Report of the Remuneration Committee. During the period ended 30 September 2017, Pressure Technologies spent £64,779 with Vias Digital Limited of which one of the Non-Executive Directors, Alan Wilson, is a connected person. During the period ended 3 October 2015, Pressure Technologies purchased five GTMs from Kelley GTM, LLC, in which the Group owns a 40% stake. These GTMs were purchased at a cost of £391,000 with the intention of entering them into a lease fleet of GTMs in operation, in which they remain at the period end. The GTMs owned by the Pressure Technologies Group are disclosed within property, plant and equipment at their carrying value. The transaction was completed on an arm’s length basis. The Group also has loans outstanding from Kelley GTM, LLC of $3,500,000. The Directors consider that the recoverability of these loans is not certain and therefore have made full provision against the full value of the loans in the period ended 3 October 2015. 33. Post balance sheet event On 6 November 2017, a total of 4,100,000 new Ordinary Shares of 5 pence each in the Company were placed at a price of 122 pence, raising proceeds of £5,002,000 before expenses. Net proceeds of the placing were £4,764,000. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 88 Company Balance Sheet As at 30 September 2017 Fixed assets Investments Intangible fixed assets Tangible fixed assets Current assets Debtors Cash at bank and in hand Creditors: amounts falling due within one year Net current assets Creditors: amounts falling due after more than one year Net assets Capital and reserves Called up share capital Share premium account Profit and loss account Equity shareholders’ funds 30 September 2017 £’000 Notes 1 October 2016 £’000 4 5 6 7 8 41,092 291 3,587 44,970 14,745 585 15,330 (717) 36,430 42 3,640 40,112 13,575 57 13,632 (607) 14,613 13,025 8 (15,090) (12,369) 44,493 40,768 10 12 12 725 21,637 22,131 44,493 724 21,620 18,424 40,768 The Company reported a profit for the financial year ended 30 September 2017 of £3,586,000 (2016: £5,924,000). The accounting policies and notes on pages 90 to 98 form part of these financial statements. Approved by the Board on 11 December 2017 and signed on its behalf by: Joanna Allen Director Pressure Technologies plc Annual Report 2017Section 3 Financial Statements Company Statement of Changes in Equity For the 52 week period ended 30 September 2017 Balance at 3 October 2015 Dividends Share based payments Share options granted to subsidiary companies Shares issued Transactions with owners Profit for the period Balance at 1 October 2016 Dividends Share based payments Share options granted to subsidiary companies Shares issued Transactions with owners Profit for the period Balance at 30 September 2017 Share capital £’000 Share premium account £’000 Profit and loss account £’000 Notes 721 — — — 3 3 — 724 — — — 1 1 — 725 21,539 — — — 81 81 — 21,620 — — — 17 17 — 21,637 12,994 (810) 99 217 — (494) 5,924 18,424 — 39 82 — 121 3,586 22,131 The accounting policies and notes on pages 90 to 98 form part of these financial statements 89 Total equity £’000 35,254 (810) 99 217 84 (410) 5,924 40,768 — 39 82 18 139 3,586 44,493 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 90 Notes to the Company Financial Statements 1. Accounting policies Statement of compliance These financial statements have been prepared in accordance with applicable accounting standards and in accordance with Financial Reporting Standard 101 –’The Reduced Disclosure Framework’ (FRS 101). The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have all been applied consistently throughout the year unless otherwise stated. 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 £3,586,000 (2016: £5,924,000) after applying a tax credit (note 9) of £117,000 (2016: charge £nil) to the profit before tax of £3,469,000 (2016: £5,924,000). Going concern The financial statements have been prepared on a going concern basis. The Company’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Group Strategic Report. The principal risks and uncertainties are set out from page 24. The Financial Reporting Council issued “Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity risks” in 2016. The Directors have considered this when preparing these financial statements. 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 2017/2018 and beyond and that the Group has sufficient cash reserves and bank facilities to enable it 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. Disclosure exemptions adopted In preparing these financial statements the Company has taken advantage of all disclosure exemptions conferred by FRS 101. Therefore these financial statements do not include: 1 A statement of cash flows and related notes 2 The requirements of IAS 24 Related Party Disclosures to disclose related party transactions entered into between two or more members of the Group as they are wholly owned within the Group 3 Capital management disclosures 4 The effect of future accounting standards not adopted 5 Certain share based payment disclosures Investments Investments in subsidiary undertakings, associates and joint ventures are stated at cost less any applicable provision for impairment. Contingent consideration classified as an asset or liability is subsequently remeasured through profit or loss. Intangible assets Intangible assets are accounted for using the cost model whereby capitalised costs are amortised on a straight-line basis over their estimated useful lives. Cost reflects purchase price of the asset together with any incidental costs of bringing the asset into use. Residual values and useful lives are reviewed at each reporting date. The following useful lives are applied: IT systems & software – 3-5 years Pressure Technologies plc Annual Report 2017Section 3 Financial Statements91 1. Accounting policies continued Tangible assets Property, plant and equipment (“PPE”) is initially recognised at acquisition cost or manufacturing cost, including any costs directly attributable to bringing the assets to the location and condition necessary for them to be capable of operating in the manner intended by the Company’s management. PPE is subsequently measured at cost less accumulated depreciation and impairment losses. Depreciation is recognised on a straight-line basis (unless otherwise stated) to write down the cost less estimated residual value of PPE. The following useful lives are applied: Plant and machinery Buildings Computer equipment 3-4 years 50 years 3-5 years Material residual value estimates and estimates of useful life are updated as required, but at least annually. Gains or losses arising on the disposal of property, plant and equipment are determined as the difference between the disposal proceeds and the carrying amount of the assets and are recognised in profit or loss within other income or other expenses. Finance leases Leases of assets that transfer substantially all the risks and rewards incidental to ownership are classified as finance leases. Management applies judgement in considering the substance of a lease agreement and whether it transfers substantially all the risks and rewards incidental to ownership of the leased asset. Key factors considered include the length of the lease term in relation to the economic life of the asset, the present value of the minimum lease payments in relation to the asset’s fair value, and whether the Company obtains ownership of the asset at the end of the lease term. Finance leases are capitalised at commencement of the lease as assets at the fair value of the leased asset or, if lower, the present value of the minimum lease payments calculated using the interest rate implicit in the lease. Where the implicit rate cannot be determined the Group’s incremental borrowing rate is used. Incremental direct costs, incurred in negotiating and arranging the lease, are included in the cost of the asset. Assets are depreciated over the shorter of the lease term and the estimated useful life of the asset. Assets are assessed for impairment at each reporting date. The capital element of lease obligations is recorded as a liability on inception of the arrangement. Lease payments are apportioned between capital repayment and finance charge, using the effective interest rate method, to produce a constant rate of charge on the balance of the capital repayments outstanding. For leases of land and buildings, the minimum lease payments are first allocated to each component based on the relative fair values of the respective lease interests. Each component is then evaluated separately for possible treatment as a finance lease, taking into consideration the fact that land normally has an indefinite economic life. All other leases are treated as operating leases. Post-employment benefit plans Contributions to defined contribution pension schemes are charged to profit or loss in the year to which they relate. Prepaid contributions are recognised as an asset. Unpaid contributions are reflected as a liability. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 92 Notes to the Company Financial Statements continued 1. Accounting policies continued Share based payments Where equity settled share options are awarded to employees of this Company the fair value of the options at the date of grant is charged to profit or loss over the vesting period with a corresponding entry in the profit and loss account. The fair value of awards made with market performance conditions has been measured by a Black-Scholes model. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Non-vesting conditions and market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied. Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the statement of comprehensive income over the remaining vesting period. Equity, reserves and dividend payments Financial instruments issued by the Company are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Company’s ordinary shares are classified as equity. Transaction costs on the issue of shares are deducted from the share premium account arising on that issue. Dividends on the Company’s ordinary shares are recognised directly in equity. Interim dividends are recognised when they are paid. A liability for unpaid dividends is recognised when the dividends have been approved in a general meeting prior to the reporting date. Income taxes Tax expense recognised in profit or loss comprises the sum of deferred tax and current tax not recognised in other comprehensive income or directly in equity. Calculation of current tax is based on tax rates and laws that have been enacted or substantively enacted by the end of the reporting period. Deferred income taxes are calculated using the liability method. Calculation of deferred tax is based on tax rates and laws that have been enacted or substantively enacted by the end of the reporting period that are expected to apply when the asset is realised or the liability is settled. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the entity expects to recover the related asset or settle the related obligation. Deferred tax assets are recognised to the extent that it is probable that the underlying tax loss or deductible temporary difference will be utilised against future taxable income. This is assessed based on the Company’s forecast of future operating results, adjusted for significant non-taxable income and expenses and specific limits on the use of any unused tax loss or credit. Deferred tax assets are not discounted. Deferred tax liabilities are generally recognised in full with the exception of the following: • On the initial recognition of a transaction that is not a business combination and at the time of the transaction affects neither accounting or taxable profit. Deferred tax liabilities are not discounted. Pressure Technologies plc Annual Report 2017Section 3 Financial Statements93 2017 Number 2016 Number 10 10 12 12 2017 £’000 993 125 84 39 1,241 2016 £’000 1,065 128 116 88 1,397 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 Further details of Directors’ remuneration are provided in the Report of the Remuneration Committee. 3. Operating profit The Auditor’s remuneration for the audit and other services is disclosed in note 8 to the consolidated financial statements. 4. Investments in subsidiary companies Cost and net book value At 1 October 2016 Investments made in the year Share options granted to subsidiary company employees At 30 September 2017 The Company acquired 100% of the issued share capital of Martract Limited on 7 December 2016. Investment in subsidiary companies £’000 36,430 4,580 82 41,092 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 94 Notes to the Company Financial Statements continued 4. Investments in subsidiary companies continued The subsidiaries as at the balance sheet date, which are all 100% owned, are: Name Country of incorporation Principal activity Al-Met Limited Greenlane Biogas Uk Limited (“GBUK”) Chesterfield Special Cylinders Limited (“CSC”) CSC Deutschland GmbH* Hydratron Limited Chesterfield Special Cylinders Inc (formerly Hydratron Inc) Roota Engineering Limited Pressure Technologies US, Inc Quadscot Precision Engineers Limited* Quadscot Holdings Limited Greenlane Biogas Europe Limited* PT Biogas Holdings Limited PT Biogas Technology Limited* Greenlane Technologies New Zealand* Greenlane Biogas North America* Chesterfield Tube Company Limited Chesterfield Pressure Systems Group Limited Chesterfield Cylinders Limited Martract Limited PT Precision Machined Components Limited Precision Machined Components Limited * Indirectly held subsidiaries England & Wales England & Wales England & Wales Germany England & Wales USA England & Wales USA Scotland Scotland England & Wales England & Wales England & Wales New Zealand Canada England & Wales England & Wales England & Wales England & Wales England & Wales England & Wales Manufacturing Manufacturing Manufacturing Sales and marketing Manufacturing Manufacturing Manufacturing Holding company Manufacturing Holding company Manufacturing Holding company Research and development Manufacturing Manufacturing Dormant Dormant Dormant Manufacturing Holding company Holding company The Company also has an indirect holding of 40% in Kelley GTM, LLC, a manufacturing company based in the USA. 5. Intangible fixed assets Cost At 1 October 2016 Additions At 30 September 2017 Amortisation At 1 October 2016 Charge for the period At 30 September 2017 Net book value At 30 September 2017 At 1 October 2016 IT systems & software £’000 43 258 301 1 9 10 291 42 Pressure Technologies plc Annual Report 2017Section 3 Financial Statements 95 Total £’000 3,839 66 3,905 199 119 318 3,587 3,640 Land and Plant and buildings machinery £’000 £’000 Computer equipment £’000 3,355 — 3,355 20 10 30 3,325 3,335 442 1 443 178 90 268 175 264 42 65 107 1 19 20 87 41 6. Tangible fixed assets Cost At 1 October 2016 Additions At 30 September 2017 Depreciation At 1 October 2016 Charge for the period At 30 September 2017 Net book value At 30 September 2017 At 1 October 2016 Land and buildings relate to the Meadowhall Road site, which is leased to other Group companies. The Meadowhall Road site is recorded at costs less depreciation. 7. Debtors Amounts: falling due within one year Prepayments and accrued income Other debtors Amounts owed by Group companies Deferred tax (note 11) 2017 £’000 144 8 14,575 18 14,745 2016 £’000 138 92 13,324 21 13,575 S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 96 Notes to the Company Financial Statements continued 8. Creditors Amounts: falling due within one year Trade creditors Other tax and social security Accruals and deferred income Other payables Corporation tax Amounts due on hire purchase contracts Amounts: falling due after one year Bank loan Amounts due on hire purchase contracts Details of bank borrowings are set out in note 22 to the consolidated financial statements. 9. Taxation Current tax Current tax credit Over provision in respect of prior years Deferred tax Origination and reversal of temporary differences Total taxation credit 2017 £’000 2016 £’000 237 28 325 99 — 28 717 2017 £’000 15,000 90 15,090 99 42 329 — 120 17 607 2016 £’000 12,300 69 12,369 2017 £’000 2016 £’000 — (120) (120) 3 (117) — — — — — Corporation tax is calculated at 19.5% (2016: 20%) of the estimated assessable profit for the period. Deferred tax is calculated at 18% (2016: 17%). 10. Share capital Details of the Company’s authorised and issued share capital and of movements in the year are given in note 26 to the consolidated financial statements. Pressure Technologies plc Annual Report 2017Section 3 Financial Statements 97 2016 £’000 21 — 21 2016 £’000 30 (9) — 21 Profit and loss account 2016 £’000 12,994 5,924 99 217 — (810) 18,424 11. Deferred tax Opening balance for the period Credit for the period Closing balance for the period The provision for the deferred taxation asset is made up as follows: Cost of share options Accelerated capital allowance Other temporary differences 12. Reserves 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 2017 £’000 21 (3) 18 2017 £’000 37 (20) 1 18 Share premium account 2017 £’000 21,620 — — — 17 — 21,637 Profit and loss account 2017 £’000 18,424 3,586 39 82 — — 22,131 Share premium account 2016 £’000 21,539 — — — 81 — 21,620 See note 26 in the Group financial statements for details of the movements on share capital and share premium in the year. S t r a t e g i c R e p o r t G o v e r n a n c e i F n a n c i a l S t a t e m e n t s Pressure Technologies plc Annual Report 2017 98 Notes to the Company Financial Statements continued 13. Related party transactions As permitted by FRS 101 related party transactions with wholly owned members of the Pressure Technologies plc Group have not been disclosed. The interests of Directors in dividends paid during the year are disclosed in the Report of the Remuneration Committee. For details on other related party transactions, see note 32 in the Group financial statements. 14. Ultimate controlling party The Directors consider that there is no ultimate controlling party. 15. Post balance sheet event On 6 November 2017, a total of 4,100,000 new Ordinary Shares of 5 pence each in the Company were placed at a price of 122 pence, raising proceeds of £5,002,000 before expenses. Net proceeds of the placing were £4,764,000. Pressure Technologies plc Annual Report 2017Section 3 Financial StatementsPhotography: www.charliefawell.com Newton Business Centre Newton Chambers Road Chapeltown Sheffield South Yorkshire S35 2PH UK Telephone +44 (0) 114 257 3616 pressuretechnologies.com

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