Pressure Tech Regulatory News (PRES)

23 June 2020

Pressure Technologies plc

("Pressure Technologies" or the "Group")

2020 Interim Results

Pressure Technologies (AIM: PRES), the specialist engineering group, announces its interim results for the 26 weeks to 28 March 2020.

Financial Highlights*

* All results presented for continuing operations only

** Continuing operations only excluding cash outflow for exceptional costs

Operational Highlights

Chris Walters, Chief Executive of Pressure Technologies commented:

"The operational changes and strategic progress made over the past year have put the Group in a stronger position to face the challenges and uncertainty in the current trading environment.

The impact of Covid-19 continues to be felt to varying degrees across our markets. Strong order books in both divisions at the half year are encouraging, but it remains difficult to foresee how the pandemic and an uncertain oil and gas market will impact performance throughout the remainder of the year, particularly in the PMC division.

Management actions will seek to preserve cash and core capability in the business, without undermining the strategic and operational progress already made in both divisions to establish resilience and a foundation for future growth. New long-term strategic supply agreements with key customers demonstrate the progress being made and we remain focussed on advancing further with the Group's strategic plans.

I am proud to see the tremendous commitment and hard work of our teams across the Group as we continue to support business continuity for our customers during this period."

For further information, please contact:

COMPANY DESCRIPTION

www.pressuretechnologies.com

With its head office in Sheffield, the Pressure Technologies Group was founded on its leading market position as a designer and manufacturer of high-integrity, safety-critical components and systems serving global supply chains in oil and gas, defence, industrial gases and hydrogen energy markets.

The Group has two divisions, Chesterfield Special Cylinders and Precision Machined Components.

Chesterfield Special Cylinders (CSC) - www.chesterfieldcylinders.com 

● Chesterfield Special Cylinders, Sheffield, includes CSC Deutschland GmbH and Chesterfield Special Cylinders Inc.

Precision Machined Components (PMC) - www.pt-pmc.com

● Precision Machined Components includes the Al-Met, Roota Engineering, Quadscot Precision Engineers and Martract brands.

CHAIRMAN'S STATEMENT

Having joined the Board of Pressure Technologies in January 2020, my first few months as Chairman have given me a good insight into this business as we continue to navigate through unprecedented times. Pressure Technologies has a long heritage in the markets that it serves and under new leadership the Group has outlined a clear growth strategy to realise its significant potential and good progress is being made.

Covid-19 has brought challenges to nearly all global industries and few businesses are immune. I would like to acknowledge the hard work of our employees and the support from our valued customers and suppliers. Businesses and their employees are being truly tested and I have been impressed and reassured by the leadership and the commitment shown by all colleagues to maintain safety and business continuity throughout this recent period.

While the crisis has resulted in economic headwinds and uncertainty for some of our markets and customers, the operational changes and strategic progress made over the past year have helped put the Group in a stronger position to cope with the uncertainty.

TRADING REVIEW

Overall Group revenue for the period was £13.9 million (2019: £14.5 million), gross profit £4.0 million (2019: £5.0 million) resulting in an overall adjusted operating loss of £0.1 million (2019: profit £1.3 million). 

The Chesterfield Special Cylinders division (CSC) delivered revenue of £6.3 million (2019: £7.7 million) and an adjusted operating profit of £0.4 million (2019: £1.4 million), both in line with expectations and reflecting the phasing of large defence contracts between half-year periods. Gross margin of 33% (2019: 39%) reflected the expected margins for sectors supplied in the period and at the period end £2.8m of contracted revenue remains to be invoiced on projects which are in progress. Return on sales was 7% (2019: 18%).

Strong order intake within the Precision Machined Components division (PMC) over the past six months across a broadening customer base underpinned a 12% increase in external revenue to £7.6 million (2019: £6.8 million). Despite this progress, a significant delay to the output of new large complex components, the onboarding of new customers and the late commissioning of new machining centres adversely impacted gross margins in the first quarter. Recovery of output and margin performance in the second quarter was slower than expected and gross margin reduced to 25% for the first half (2019: 31%). This, along with higher indirect costs from the investment in sales and engineering functions, resulted in a significantly lower adjusted operating profit of £0.3 million (2019: £0.8 million) and return on sales was 4% (2019: 11%).

Over the past six months, we have continued to demonstrate the strategic potential in both divisions, with increased sales from existing customers across a broader product range, new customer acquisitions and major contract wins in target markets.

CHESTERFIELD SPECIAL CYLINDERS

Significant management changes in December 2019 have already helped drive operational improvements, better customer service and stronger colleague engagement across the division.

We continue to make good progress with UK and export naval contracts, which will see us supply bespoke, safety critical systems for the UK's Dreadnought submarine and Type-26 frigate programmes as well as the French navy's Barracuda programme. In June 2020, CSC has secured an order for the supply of cylinders to the Dreadnought class submarine programme, covering the raw material milestone for the second boat set which confirms commitment from UK MOD and BAE Systems to the programme.

Allied to this activity, is our market development of prospective Asian customers, including a collaboration on a significant new build submarine programme.

We remain on track to complete the significant contract with EDF Energy for the supply of high-pressure nitrogen storage solutions to four UK nuclear power stations. This sector remains a focus area for further growth, with good prospects in the pipeline.

Despite several opportunities in late 2019, the oil and gas market has deteriorated sharply, with several ultra-large cylinder prospects being deferred to 2021 and beyond. Further progress was made during the period in the hydrogen refuelling market, which remains an area of strategic focus and significant growth potential. Recent contract wins for McPhy Energy and Haskel Hydrogen Systems represent continued market penetration within this growing market.

In May 2020, CSC was also pleased to be awarded a £0.6 million revenue contract by a new customer, Parker, to provide ultra-large cylinders for a major wastewater treatment project in Abu Dhabi. This significant contract represents a new market for CSC's ultra-large cylinders and through-life support services.

As testament to the progress made in this sector, since the period end we were pleased to have signed a five-year framework agreement with Shell, under which CSC becomes the approved supplier of Type 1 steel cylinders to prospective operators of Shell-branded hydrogen refuelling stations across Europe. While the number of potential refuelling stations to be built over the next few years remains uncertain, the selection of CSC as preferred supplier is a major strategic step.

Integrity Management services performed well during the period, with new contract wins for in-situ revalidation projects and testing of diving support vessels in Azerbaijan and Dubai. These services are highly valued by existing customers and have tremendous growth potential in the UK and worldwide. However, Covid-19 enforced travel restrictions towards the end of March 2020 caused disruption and delays, with the deferral of several deployments, albeit some UK defence related deployments have been able to continue in line with supporting national infrastructure during the Covid-19 outbreak. We anticipate that Covid-19 restrictions will continue to impact performance in the second half of the year, but periodic inspection regimes will require revalidation once travel restrictions are safely lifted.

PRECISION MACHINED COMPONENTS

The operating result in the period was disappointing, however we continue to make strategic progress across this division as changes made over the past year deliver operational improvements. The divisional leadership structure and new management appointments are driving important cultural change that is more focused on performance and customer service.

A stronger sales team and maturing sales processes have underpinned increased sales effectiveness and better customer relationship management. This has been evidenced primarily through an increase in sales revenue and order intake in the period, but also through positive customer feedback and new customer acquisition. At the end of the first half of the year, the PMC order book value was in excess of £5.0 million however intake has fluctuated in Q3 and there is uncertainty in orderbook development which is expected to continue through the second half.

Investment in new skills and systems for production planning, engineering, quality control and purchasing functions are starting to show returns through operational efficiencies, better utilisation, cost savings and margin improvements, significantly improving on-time delivery performance for key customers during the period. 

Oil and gas remains the primary market for this division and excellent progress has been made to extend and diversify the customer base within this market. We have made further progress over the period in strengthening our relationships with our major OEM customers in these markets and remain focused on achieving key supplier status to these accounts as they look to rationalise their supplier base. 

Dominance of the top three customers by revenue has also reduced from 83% to 69% over the last two years. Diversification of product scope also continues, with a far broader range of components now being delivered to established and newly acquired customers. With the current low oil price impacting demand for drilling and exploration projects, we have increased our focus on decommissioning opportunities and accelerated our evaluation of new geographies and adjacent markets, such as renewable energy, nuclear power and defence, where we have an established customer base with CSC.

In December 2019, we reported that further changes had been made to improve operational and financial performance at the Quadscot Precision Engineers facility in Blantyre, South Lanarkshire, after more than four years of loss-making performance. These changes failed to deliver significant improvement and the decision was taken to consolidate Quadscot's operations, order book and customers into the Roota Engineering facility in Rotherham, South Yorkshire. This decision followed a period of collective staff consultation that concluded on 12 June 2020 and the site is now closed.

BALANCE SHEET AND LIQUIDITY

As at 28 March 2020 the Group's £12.0 million Revolving Credit Facility (RCF) was drawn at £9.3 million, down from £10.8 million at 28 September 2019. Cash and cash equivalents increased in the period to £2.6 million (28 September 2019: £2.2 million) taking the net RCF debt down from £8.6 million at 28 September 2019 to £6.7 million at 28 March 2020. The reduction in net RCF debt is predominantly due to the receipt in February 2020 of a £2.1 million repayment of the Greenlane Renewables Inc. Promissory Note and associated interest which was used to repay a tranche of drawn RCF. Positive operating cash inflow has been partially utilised in net capital investment of £0.7 million, leaving a £0.4 million increase in cash and cash equivalents in the period.

Finance leases at 28 March 2020 totalled £2.9 million, up slightly from £2.8 million at 28 September 2019 with further leases of £0.5 million for key capital equipment in PMC off-set by lease repayments in the period.

IFRS 16 was adopted in the period and as a result £1.2 million of 'Right-of-use asset' debt has been recognised in respect of the leases, predominantly in respect of property, that were previously classed as operating leases.

Total net borrowings, excluding right of use assets, has therefore reduced to £9.6 million at 28 March 2020 from £11.4 million at 28 September 2019.

We continue to be in regular and constructive dialogue with Lloyds Bank regarding ongoing facility requirements and the impact of Covid-19 disruption on operations and the leverage covenant, which is tested quarterly. In support of the Group, Lloyds Bank have agreed a waiver of the June 2020 test and an increase in the test point for the September and December 2020 quarter ends, to give additional headroom given the uncertainty in the outlook for EBITDA and associated cash flow.

The Directors have assessed the risks presented by Covid-19 and reforecast the original 2020 Budget and the 2021 and 2022 Projections ("the forecasts") to reflect the current and likely future impact of Covid-19 on the Group's operations and financial results. 

These baseline forecasts reflect:

● Limited impact of Covid-19 on the CSC division, other than a significant temporary reduction in the level of Integrity Management business due to UK and global travel restrictions and potential supply chain disruption

● Some reductions in the level of activity across the PMC division as a result of Covid-19, reflecting the impact of a reduction in revenue, supply chain disruption and some limited employee absence

● The enactment of a number of cash deferral measures

Throughout the forecast period, the Group generates underlying operating profit and is cash-generative, and along with the amendments to the RCF, therefore believe there is sufficient liquidity and covenant headroom for the foreseeable future.

On 15 June 2020, the Group received un-forecast cash proceeds of £0.6 million from the sale of 2,525,610 shares in Greenlane Renewables Inc. ('Greenlane') which has further reduced the drawn RCF debt at 22 June 2020 to £8.9 million. The Group continues with its strategy to liquidate its remaining investment in Greenlane at the earliest opportunity.

COVID-19

As a supplier to customers who support UK Critical National Infrastructure and Strategic Defence Contracts, we have worked hard to ensure business continuity whilst maintaining our primary focus on safeguarding the health and wellbeing of our teams.

We have written and implemented specific policies which have successfully allowed us to adapt working practices to meet UK government guidelines on workforce protection, enabling social distancing across all our facilities, encouraging working from home wherever roles permit and promoting employee health and wellbeing across the business. Investments made in our central group functions including Human Resources and IT infrastructure over the course of the previous year have underpinned the support we have been able to offer our teams through this difficult period, reinforced by regular and open communications with colleagues working both on site and at home.

Whilst both divisions experienced some early operational disruption and capacity issues during March as the UK entered lockdown, we have been able to keep all sites open and operational, working on the basis of 'business as usual, with caution'. 

It remains difficult to predict the duration and severity of the impact that Covid-19 will have on the business. We have continued to support our customers, maintaining close dialogue with them throughout the period and remain focused on safely delivering their orders. However, our Integrity Management business in the CSC division continues to be impacted by the domestic and international travel restrictions which have resulted in the postponement of several deployments. Whilst some domestic deployments are now resuming as UK lockdown restrictions begin to lift, these will continue to be limited due to the necessary ongoing health and safety constraints.

This uncertainty is compounded by a depressed oil price which has resulted in some oil and gas customers deferring project spend and applying pricing pressure throughout the supply chain. We continue to monitor this closely and remain focused on the diversification of our customer portfolio, in line with our growth strategy.

Whilst this uncertainty remains, we are taking a number of prudent measures to manage cost and conserve cash and core capability in the business without undermining the progress already made in both divisions to establish resilience and a foundation for future growth in strategic focus areas. We continue to review possible scenarios should there be further changes to trading conditions and will take actions should the market conditions require us to do so. 

HEALTH AND SAFETY

On 26 November 2019, the Group confirmed that its CSC business had been found guilty of a charge brought by the Health & Safety Executive (HSE) pursuant to Section 2 of the Health and Safety at Work Act 1974 following a fatal accident in June 2015. On 13 January 2020, the Group was sentenced to a fine of £0.7 million along with prosecution costs of £0.2 million. The Company has been given by the Court a period of four years over which to pay the combined fine and costs, which it will do from operational cash flows. The Group fully respects the verdict of the jury and deeply regrets the events that resulted in the death of our colleague and long-standing employee John Townsend, which has left a terrible gap in the lives of his family, friends and colleagues, with whom our deepest sympathies remain.

This tragic incident occurred over five years ago in June 2015 and in the period since then we have made significant changes and improvements to the way we operate at the CSC site and across all Group sites. The health and safety of our people is of paramount importance and these enhanced measures, which are being consistently applied across the business, will help ensure that this is continually reinforced throughout every area of our operations. We will continually assess our health and safety measures and implement changes where necessary.

Following several key Health and Safety personnel appointments across the PMC business last year, we have been pleased to see significant improvements in our health and safety maturity and KPIs for the division. The appointment of a new Health and Safety Manager at CSC at the end of the period completes the strengthening of our Quality, Health, Safety and Environmental teams and supports effective safety leadership that underpin our commitment to the highest safety standards across the Group.

BOARD

I was delighted to join the Board of Pressure Technologies in January 2020. The Group has a long heritage in its core markets, and I look forward to working with the Executive team and my fellow Non-Executive Directors as the Group continues to make further progress against its strategy for growth. I would particularly like to thank Neil MacDonald for his services to the group since his appointment in June 2013 and wish him well on his retirement from the Board.

As part of our plans to further strengthen the Board and reinforce governance, the Group was pleased to announce the appointment of Tim Cooper as Non-Executive Director in January 2020 and today confirms that Mike Butterworth will join the Board as Non-Executive Director and Chair of the Audit and Risk Committee with immediate effect. Both Tim and Mike bring complementary skills and experience which will be invaluable as we grow the business and realise its significant potential.

OUTLOOK

The impact of Covid-19 continues to be felt to varying degrees across our markets and uncertainty remains over the pace of recovery and possible operational disruption. Both divisions remain in close contact with customers and suppliers and we will continue to take all appropriate steps to maintain business continuity and safely deliver customer orders. 

Despite strong order books in both divisions at the half year, it remains difficult to predict the length and depth that the impact of Covid-19 and oil and gas market uncertainty will have on performance throughout the remainder of the year. 

The PMC order book is currently valued in excess of £4.0 million. Order intake since the half-year end has been lower than run rate, but we are encouraged by recent levels of enquiry and pipeline development alongside new strategic supply agreements with key OEM customers. With a solid defence order book and recent major orders from target sectors, the outlook for CSC remains positive, notwithstanding the delays to Integrity Management projects due to Covid-19 restrictions.

Whilst the Board continues to review possible scenarios and determine the actions we may take as the outlook becomes clearer, market forecasts remain withdrawn. Management actions will seek to preserve cash and core capability in the business without undermining the progress already made in both divisions to establish resilience and a foundation for future growth in strategic focus areas.

The Group remains focussed on delivering further progress against its strategic plans as the year progresses.

Sir Roy Gardner

Chairman

Condensed Consolidated Statement of Comprehensive Income

For the 26 weeks ended 28 March 2020

Condensed Consolidated Statement Of Financial Position

As at 28 March 2020

Condensed Consolidated Statement of Changes in Equity

For the 26 weeks ended 28 March 2020

For the 26 weeks ended 30 March 2019

Condensed Consolidated Statement of Changes in Equity (continued)

For the 26 weeks ended 28 March 2020

Condensed Consolidated Cash Flow Statement

For the 26 weeks ended 28 March 2020

Notes to the Condensed Consolidated Interim Financial Statements

1. Basis of preparation and statement of compliance with IFRS

The Group's interim results for the 26 weeks ended 28 March 2020 are prepared in accordance with the Group's accounting policies which are based on the recognition and measurement principles of International Financial Reporting Standards ("IFRS") as adopted by the EU and effective from 29 September 2019. As permitted, this interim report has been prepared in accordance with the AIM rules and not in accordance with IAS 34 "Interim financial reporting" and therefore the interim information is not in full compliance with IFRS. The principal accounting policies of the Group have remained unchanged from those set out in the Group's 2019 annual report and financial statements, with the exception of the adoption of IFRS 16 'Leases' as detailed below. The Principal Risks and Uncertainties of the Group are also set out in the Group's 2019 annual report and financial statements and, with the exception of risks arising from the Covid-19 pandemic, are unchanged in the period.

The Group's 2019 financial statements for the 52 weeks ended 28 September 2019 were prepared under IFRS. The auditor's report on these financial statements was unmodified and did not contain statements under Sections 498(2) or (3) of the Companies Act 2006 and they have been filed with the Registrar of Companies.

The Directors have assessed the risks presented by Covid-19 and reforecast the original 2020 Budget and the 2021 and 2022 Projections ("the forecasts") to reflect the current and likely future impact of Covid-19 on the Group's operations and financial results. These baseline forecasts reflect:

● Limited impact of Covid-19 on the CSC division, other than a significant temporary reduction in the level of Integrity Management business due to UK and global travel restrictions and potential supply chain disruption

● Some reductions in the level of activity across the PMC division as a result of Covid-19, reflecting the impact of a reduction in revenue, supply chain disruption and some limited employee absence

● The enactment of a number of cash deferral measures

Throughout the forecast period, the Group generates underlying operating profit and is cash-generative.

On 10 December 2019, the Group agreed a two-year revolving credit facility with Lloyds Bank plc for a maximum amount of £12 million up to 9 December 2020 and £10 million up to 9 December 2021. This facility included, inter alia, three financial covenants to be tested quarterly, namely (i) Net debt (on a pre-IFRS 16 basis) to Adjusted EBITDA ('Leverage Covenant'), (ii) Net finance costs (on a pre-IFRS 16 basis) to Adjusted EBITDA, and (iii) CAPEX covenant. In response to the Covid-19 situation, on 26 May 2020 the Group agreed with Lloyds Bank plc the following changes to the financial covenants:

● the testing of the leverage covenant as at 30 June 2020 to be waived

● the Leverage Covenant as at 30 September and 31 December 2020 to be relaxed to a maximum of 5.0 times (from a maximum of 3.25 times and 3.0 times respectively). The covenant would revert back to the previously agreed level of a maximum of 3.0 times thereafter

● the Net finance cost to EBITDA and Capex covenants remain unchanged

● the amount of the facility remains unchanged

Based on the baseline reforecasts prepared on the assumptions described above and severe but plausible downside scenario modelling for the PMC division, for the period at least 12 months from the signing of this interim financial information, the Group's net debt would remain within the amount of the facility and the Group would operate within the revised financial covenants.

On 15 June 2020, the Group received un-forecast cash proceeds of £0.6 million from the sale of 2,525,610 shares in Greenlane Renewables Inc. ("Greenlane"). The Group continues with its strategy to liquidate its remaining investment in Greenlane at the earliest opportunity.

On the basis of the above, including consideration as to the ongoing uncertainty as to the future impact of the Covid-19 pandemic, the Group believes it has sufficient headroom to be able to continue its operations for the foreseeable future. The Directors believe that the Group is in a position to manage its financing and other business risks satisfactorily and have a reasonable expectation that the Group will have adequate resources to continue in operation for at least 12 months from the signing date of this interim financial information. They therefore consider it appropriate to adopt the going concern basis of accounting in preparing the financial statements.

The consolidated financial statements are prepared under the historical cost convention as modified to include the revaluation of financial instruments.

The financial information for the 26 weeks ended 28 March 2020 and 30 March 2019 has not been audited or reviewed and does not constitute full financial statements within the meaning of Section 434 of the Companies Act 2006. The unaudited interim financial statements were approved for issue by the Board of Directors on 22 June 2020.

2. New Standards adopted as at 29 September 2019

IFRS 16 'Leases' replaced IAS 17 'Leases' along with three interpretations (IFRIC 4 'Determining whether an Arrangement contains a Lease', SIC 15 'Operating Leases-Incentives' and SIC 27 'Evaluating the Substance of Transactions Involving the Legal Form of a Lease'). The new Standard has been applied using the modified retrospective approach, with the cumulative effect of adopting IFRS 16 being recognised in equity as an adjustment to the opening balance of retained earnings for the current period. Prior periods have not been restated.

For contracts in place at the date of initial application, the Group has elected to apply the definition of a lease from IAS 17 and IFRIC 4 and has not applied IFRS 16 to the arrangements that were previously not identified as lease under IAS 17 and IFRIC 4.

The Group has elected not to include initial direct costs in the measurement of the right-of-use asset for operating leases in existence at the date of initial application of IFRS 16, being 29 September 2019. At this date, the Group has also elected to measure the right-of-use assets at an amount equal to the lease liability adjusted for any prepaid or accrued lease payments that existed at the date of transition.

Instead of performing an impairment review on the right-of-use assets at the date of initial application, the Group has relied on its historic assessment as to whether leases were onerous immediately before the date of initial application of IFRS 16.

On transition, for leases previously accounted for as operating leases with a remaining lease term of less than 12 months and for leases of low-value assets, the Group has applied the optional exemptions to not recognise right-of-use assets but to account for the lease expense on a straight-line basis over the remaining lease term.

For those leases previously classified as finance leases, the right-of-use asset and lease liability are measured at the date of initial application at the same amounts under IAS 17 immediately before the date of initial application.

On transition to IFRS 16 the weighted average incremental borrowing rate applied to lease liabilities recognised under IFRS 16 was 4.25%.

The Group has benefited from the use of hindsight for determining a lease term when considering options to extend and terminate leases.

The following is a reconciliation between total operating lease commitments as at 28 September 2019 to the leases recognised at 29 September 2019:

2.1 Standards and interpretations not yet applied

The following standards and amendments that are effective for the first time in 2020 and could be applicable to the Group are:

● IFRIC 23 - Uncertainty over Income Tax Treatments

● IFRS 9 - Prepayment Features with Negative compensation (Amendments to IFRS 9)

● IAS 28 - Long-Term Interests in Associates and Joint-Ventures (Amendments to IAS 28)

These amendments do not have a significant impact on these interim financial statements and therefore the disclosures have not been made.

3. Significant accounting policies

The interim financial statements have been prepared in accordance with the accounting policies adopted in the Group's most recent annual financial statements for the 52 weeks ended 28 September 2019, except for the effects of applying IFRS 16.

3.1 Leases 

As described in Note 2, the Group has applied IFRS 16 using the modified retrospective approach and therefore comparative information has not been restated. This means comparative information is still reported under IAS 17 and IFRIC 4.

3.1 Leases (continued)

Accounting policy applicable from 29 September 2019

The Group as a lessee

For any new contracts entered into on or after 29 September 2019, the Group considers whether a contract is, or contains a lease. A lease is defined as 'a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration'. To apply this definition the Group assesses whether the contract meets three key evaluations which are whether:

• the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being identified at the time the asset is made available to the Group

• the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract

• the Group has the right to direct the use of the identified asset throughout the period of use. The Group assesses whether it has the right to direct 'how and for what purpose' the asset is used throughout the period of use.

Measurement and recognition of leases as a lessee

At lease commencement date, the Group recognises a right-of-use asset and a lease liability on the balance sheet. The right-of-use asset is measured at cost, which is made up of the initial measurement of the lease liability, any initial direct costs incurred by the Group, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in advance of the lease commencement date (net of any incentives received).

The Group depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The Group also assesses the right-of-use asset for impairment when such indicators exist.

At the commencement date, the Group measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the Group's incremental borrowing rate.

Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification, or if there are changes in in-substance fixed payments.

When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of-use asset, or profit and loss if the right-of-use asset is already reduced to zero.

The Group has elected to account for short-term leases and leases of low-value assets using the practical expedients. Instead of recognising a right-of-use asset and lease liability, the payments in relation to these are recognised as an expense in profit or loss on a straight-line basis over the lease term.

On the statement of financial position, right-of-use assets have been included in property, plant and equipment and lease liabilities have been included in borrowings.

Accounting policy applicable before 29 September 2019

The Group as a lessee

Finance leases

Management applies judgment 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 Group obtains ownership of the asset at the end of the lease term.

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.

See the accounting policy note in the year-end financial statements for the depreciation methods and useful lives for assets held under finance leases. The interest element of lease payments is charged to profit or loss, as finance costs over the period of the lease.

Operating leases

All other leases are treated as operating leases. Where the Group is a lessee, payments on operating lease agreements are recognised as an expense on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred.

4. Segmental analysis and Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA)

Revenue by destination - continuing operations

Revenue by sector - continuing operations

Revenue by activity - continuing operations

4. Segmental analysis and Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA) (continued)

The Group's revenue disaggregated by pattern of revenue recognition and category is as follows:

The following aggregated amounts of transaction values relate to the performance obligations from existing contracts that are unsatisfied or partially unsatisfied as at 28 March 2020:

(Loss)/profit before taxation by activity - continuing operations

The Operating (loss)/profit by activity is stated before the allocation of Group management charges which are included within 'Unallocated central costs'.  

4. Segmental analysis and Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA) (continued)

Earnings before interest, taxation, depreciation, and amortisation (EBITDA) - continuing operations

Amortisation on acquired businesses as set out above consists of the amortisation charged on intangible assets acquired as a result of business combinations in previous periods.

5. Amortisation

Amortisation of intangible assets is shown separately in the Condensed Consolidated Statement of Comprehensive Income. A breakdown of those costs can be seen below.

6. Other exceptional charges

Items that are material either because of their size or their nature, or that are non-recurring are considered as exceptional items and are disclosed separately on the face of the Condensed Consolidated Statement of Comprehensive Income.

An analysis of the amounts presented as exceptional items in these financial statements is given below:

The reorganisation costs relate to various costs of restructuring across the Group. They are recognised in accordance with IAS 19.

Given that these costs do not relate to underlying trading, the Directors consider it appropriate to disclose these as exceptional items.

HSE Fine

On 26 November 2019, the Group, announced that its subsidiary Chesterfield Special Cylinders ("CSC") had been found guilty of a charge brought by the Health & Safety Executive ("HSE") pursuant to Section 2 of the Health and Safety at Work Act 1974 following a fatal accident in June 2015. The sentencing hearing was held on 13 January 2020 at Sheffield Crown Court, at which a fine of £700,000 was determined and prosecution costs of £169,499 were set. The fine is due to be paid over five six-monthly instalments of £140,000 commencing 31 January 2021.

7. Other financial items

Following the application of IFRS 9, the investment in Greenlane Renewables Inc. is categorised at Fair Value through Profit and Loss (FVTPL). Therefore the investment has been measured at fair value at the period end with any subsequent gain or loss being recognised in profit or loss.

The fair value of the shareholding in Greenlane Renewables Inc. was determined by reference to published price quotations in an active market on the Toronto Stock Exchange (TSX-V) and using a valuation technique to discount relevant future flows of value beyond the period end date.

8. Taxation

9. (Loss)/earnings per ordinary share

The calculation of basic earnings per share is based on the earnings attributable to ordinary shareholders divided by the weighted average number of shares in issue during the period.

The calculation of diluted earnings per share is based on basic earnings per share, adjusted to allow for the issue of shares on the assumed conversion of all dilutive options.

Adjusted earnings per share shows earnings per share, adjusting for the impact of the amortisation charged on intangible assets acquired as a result of business combinations and any exceptional items, and for the estimated tax impact, if any, of those costs. Adjusted earnings per share is based on the profits as adjusted divided by the weighted average number of shares in issue.

For the 26 week period ended 28 March 2020

The Group adjusted earnings per share is calculated as follows:

9. (Loss)/earnings per ordinary share (continued)

For the 26 week period ended 30 March 2019

The Group adjusted earnings/(loss) per share is calculated as follows:

For the 52 week period ended 28 September 2019

9. (Loss)/earnings per ordinary share (continued)

The Group adjusted earnings/(loss) per share is calculated as follows:

For the 52 week period ended 28 September 2019

10. Asset Impairment Review

The Group tests annually for impairment, or more frequently if there are indicators that goodwill, other intangibles and tangible fixed assets might be impaired. The occurrence of the Coronavirus is a global issue affecting every single business sector and every country to some degree. It has already had a significant impact on the global economy, and its impacts are expected to continue for the foreseeable future. Consequently, the impact of the pandemic is considered to be an indicator that the carrying value of our intangible and tangible assets in the Group's only cash generating unit (CGU) - the Precision Machined Components (PMC) division - may be impaired.

In light of the pandemic, the Group has considered a range of economic conditions for the sectors in which the Group operates that may exist over the next three years. These economic conditions, together with reasonable and supportable assumptions, have been used to estimate the future cash inflows and outflows for the PMC CGU over the next three years. The assumptions underlying these forecasts are detailed in note 1 to these interim financial statements.

These forecasts have been approved by management and the Board of Directors, and are based on a bottom up assessment of costs and uses the current and estimated future sales pipeline. The forecasts used for years two to three assume revenue growth, but no long-term rate of growth or inflation is incorporated into the perpetuity calculation at the end of year three. A value in use calculation has been calculated by applying a discount rate of 12.0% (Sep 2019: 14.7%) to the cash flows in these forecasts. The discount rate has reduced from the prior year due to the change in the mix of the Group's businesses following the disposal of the Alternative Energy division in June 2019.

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 the discount rates, growth rates and expected changes to selling prices and direct costs. A baseline reforecast was produced reflecting management's best estimate of the likely impact of the pandemic on the Group's businesses, along with a more pessimistic but plausible downside scenario in respect of the PMC division.

Carrying amount of assets allocated to the PMC CGU

10. Asset Impairment Review (continued)

The value in use calculation for the PMC CGU based on the baseline reforecast resulted in headroom of £0.3 million over the total carrying value of £21.3 million, such that no impairment is required for the PMC division in these interim results. The recoverable amount is most sensitive to the assumptions regarding expected future cash inflows and the discount rate. Given the limited headroom, a relatively small change in the assumptions used in the baseline forecasts for the division's profitability and/or the discount rate applied to the cash flows could cause the carrying value to exceed the recoverable amount, thus indicating that an impairment may be required. This will be next reviewed at the annual impairment test in September 2020.

11. Reconciliation of net borrowings

During the period the bank committed to extend the revolving credit facility termination date to 9 December 2021. Accordingly, the directors have concluded that it is appropriate to present the loan as due for repayment after one year.

12. Dividends

No final or interim dividend was paid for either of the 52 week periods ended 29 September 2018 or 28 September 2019. No interim dividend for the 53 week period ending 3 October 2020 is proposed.

A copy of the Interim Report will be sent to shareholders shortly and will be available on the Company's website: www.pressuretechnologies.com.