Final Results

RNS Number : 8470U

Tekmar Group PLC

03 August 2020

 

3 August 2020

TEKMAR GROUP PLC

("Tekmar Group", the "Group" or the "Company")

FINAL RESULTS FOR THE YEAR ENDED 31 MARCH 2020

Tekmar Group (AIM: TGP), a leading provider of technology and services for the global offshore energy markets, announces its final results for the year ended 31 March 2020 ("FY20" or the "Period").

Highlights:

·	Strong revenue growth across all divisions, increasing 46% to £40.9m
·	Order Book3 of £10.0m - up 39% YOY
·	Enquiry Book5 increased 15% YOY
·	Tekmar Energy revenues up by 14% YOY, representing 67% of Group revenue: - strong market growth continues
·	Overseas expansion progressing, with international markets (non-EU) now comprising 25% of Group revenue (FY19 8%)
·	Acquisition of Pipeshield International in October 2019: - contributed 8% of revenue in FY20 since acquisition in October 2019 - integrated well with other Group businesses, supplying multiple projects together
·	Record revenue growth for Subsea Innovation, representing 20% of Group revenue
·	Agiletek increased sales by over 200% and now represents 5% of group revenue
·	Healthy balance sheet, with positive cash balances of £2.1m

Key financials:

		FY20	FY19
·	Revenue	£40.9m	£28.1m
·	Adjusted EBITDA1	£4.7m	£4.8m
·	Cash	£2.1m	£4.2m
·	Market Visibility2	£65.5m	£50.2m

 Sales KPIs:

		FY20	FY19
·	Order Book3	£10.0m	£7.2m
·	Preferred Bidder4	£14.6m	£15.0m
·	Enquiry Book5	£224m	£195m
·	LTM sales conversion6	46%	62%

Current trading and outlook:

·	Market growing at >15% CAGR, as long-term structural growth prospects of the global offshore wind market accelerate
·	Strategy, primary focus on offshore wind and vision remain unchanged, despite short-term impacts of COVID-19
·	FY21 performance expected to be weighted to H2
·	Whilst continuing to explore accretive acquisition opportunities, near-term focus is on consolidation of the Group to ensure maximum benefit from integration of the acquired businesses
·	Healthy balance sheet ensuring long-term viability

Alasdair MacDonald, Non-executive Chairman of Tekmar Group, said:

" Whilst the level of growth in profitability in FY20 was inevitably affected by COVID-19 and the shutdown in China, our strong market position and track record in offshore wind cable protection projects remain unrivalled globally. Our overall confidence in the prospects for the business should not be understated. I now see a Group which has truly been transformed and, with a much wider portfolio of complementary technologies, is able to offer an international customer base a unique customer-value proposition. Coupled with a robust balance sheet, the Group is well positioned with a solid platform for growth over the next decade, which is supported by a positive market outlook, despite some short-term uncertainty as we transition through the COVID-19 recovery, which the Group has somewhat mitigated by receipt of a CBILS loan of £3m post year end." 

Notes:

(1)	Adjusted EBITDA is defined as profit before finance costs, tax, depreciation, amortisation, share based payments charge, and exceptional items is a non-GAAP metric used by management and is not an IFRS disclosure.
(2)	Market Visibility is defined as: Revenue + Order Book + Preferred Bidder.
(3)	Order Book is defined as signed contracts with clients. Expected revenue recognition within 6 months.
(4)	Preferred Bidder defined as being out of competitive tender process and selected as sole bidder in active contract negotiations. Expected revenue recognition within 12 months.
(5)	All active lines of enquiry within the Tekmar Group. Expected revenue recognition within 3 years.
(6)	Last Twelve Months conversion rate; Total Enquiry (Bid) to Win ratio.

Enquiries:

Tekmar Group plc James Ritchie-Bland, Chief Executive Officer Sue Hurst, Chief Financial Officer	[phone]
Grant Thornton UK LLP (Nominated Adviser) Philip Secrett / Jen Clarke	[phone]
Berenberg (Broker) Chris Bowman / Ben Wright / Richard Salmond	[phone]
Belvedere Communications (Financial PR) Cat Valentine Keeley Clarke	[e-mail] [phone] [phone]

About Tekmar Group plc  -  www.tekmargroup.com

Tekmar Group plc's vision is to be the partner of choice for the supply and installation support of subsea protection equipment to the global offshore energy markets. The Group has five primary operating companies; these are Tekmar Energy Limited, Subsea Innovation Limited, AgileTek Engineering Limited, Ryder Geotechnical Limited and Pipeshield International limited.

Tekmar Energy is a global market leader in protection systems for subsea cable, umbilical and flexible pipe. Tekmar have been trusted to protect billions of Euros worth of assets in the offshore wind, oil & gas, wave, tidal and interconnector markets since 1985.

Subsea Innovation is a global leader in the design, manufacture and supply of complex engineered equipment and technology used in the offshore energy market. Its products include large equipment handling systems which operate on the back of pipelay installation vessels; emergency pipeline repair clamps (EPRC) which protect major oil and gas pipelines, and bespoke equipment for use in the construction of offshore energy projects.

AgileTek Engineering is an award-winning subsea engineering consultancy for offshore energy projects. AgileTek helps its clients de-risk projects through advanced computer simulation and analysis.  AgileDat, a division of AgileTek, provides software development, cloud architecture and data analytics services. 

Ryder Geotechnical provides expert geotechnical design and consulting services to the offshore wind and subsea oil and gas sectors. Services include offshore structure foundation design, geohazard assessment and subsea cable routing and burial assessment.

Pipeshield International is a market leading provider of specialised subsea protection solutions in the form of concrete mattresses used for the stabilisation and impact protection of subsea equipment in areas where they cannot be buried and further to limit the development of scour (seabed erosion) particularly local to that of a foundation, pipeline or in marine ports.

Tekmar Energy and Tekmar Group plc is headquartered in Newton Aycliffe in the United Kingdom; AgileTek operates from an office in London; Subsea Innovation have their head office and manufacturing centre in Darlington, United Kingdom. Ryder operate in Newcastle and within AgileTek London, Pipeshield headquarters are in Lowestoft with manufacturing in Blyth. Tekmar Group plc also has representation in South Korea, USA, China and the Middle East.

Chairman's Statement

I am pleased to present Tekmar Group's results for the year ended 31 March 2020 ("FY20" or the "Period"), our second financial year since IPO in 2018. It has again been an exciting and productive 12 months for the Group, though not one without unexpected challenges, which I can confidently report the team is successfully navigating. The Group demonstrated its capability in FY20 by delivering substantial revenue growth across all businesses resulting in an increase of 46% and an order book increase of 39% to £10m. This was despite facing the impact of COVID-19 and the associated rapid shutdown in China affecting our most productive fourth quarter from January to March ("Q4"), which is detailed in the CEO's Statement. The Group has maintained its strong balance sheet, with net cash and zero leverage at the year end. The team have also continued to deliver on our strategic objective at IPO to diversify revenue streams and position the business for growth in the global subsea markets which are benefiting from high structural growth drivers.

In line with our strategy to broaden the Group's technology offering and ensure further project lifecycle opportunities are aligned with our shared customer base, we completed the acquisition of Pipeshield International in October 2019. We are delighted with its contribution to date and the very quick, successful integration into the Group.

Whilst the level of growth in profitability in FY20 was inevitably affected by COVID-19 and the shutdown in China, our strong market position and track record in offshore wind cable protection projects remain unrivalled globally. Our overall confidence in the prospects for the business should not be understated. I now see a Group which has truly been transformed and, with a much wider portfolio of complementary technologies, is able to offer an international customer base a unique customer-value proposition. Coupled with a robust balance sheet, the Group is well positioned with a solid platform for growth over the next decade, which is supported by a positive market outlook, despite some short-term uncertainty as we transition through the COVID-19 recovery, which the Group has somewhat mitigated by receipt of a CBILS loan of £3m post year end.

The results for FY20 demonstrate the strength of our management team and people within the business, delivering both organically through innovation and via complementary acquisitions and supporting the overall Group's long-term vision.

Vision for the future

We continued our expansion into international markets during the Period, with non-European revenues comprising over 25% of the Group's revenue, including 15% in APAC and 9% in the Middle East, with the USA emerging as a more prominent opportunity. We are content with this performance, despite the delay in China, which would, under the ordinary course of business, have yielded a higher revenue contribution.

With its well-established cable protection product, TekLink®, the Group's overall market share of this part of the global offshore wind market remains above 75%. I am pleased to report that we have successfully diversified into new areas of this market, increasing our product portfolio through acquisition and development. Total revenue delivered from offshore wind in FY20 was 63% of Group revenue in the Period, a record contribution of £26m compared to £20m in FY19. TekLink® now represents only 43% of Group sales.

People

During the year, we welcomed 23 new additions to the Tekmar family, taking our total headcount to over 200. I would like to take this opportunity to sincerely thank all our people. COVID-19 brought about an unforeseen business disruption which made this growth more challenging than anticipated. Our teams have shown an impressive resilience to deliver a strong H2 performance and, thanks to their efforts, our businesses have delivered the best possible outcome for shareholders in the circumstances and have maintained a sustainable strong position for our future.

Markets outlook

Offshore wind continues to show significant upside and expansion globally. Market commentators are forecasting a CAGR of >15% over the next decade for projects coming online from 28 GW today, with installations underway 216 GW by 2030. The speed and scale of offshore development continues to accelerate, as cost competitiveness and other social and technological benefits become even more apparent.

The Oil and Gas market has stalled, with the compounding oil price pressure in recent months. Although less than a fifth of the Group's revenue is delivered from this sector, it is clear that there will be no growth in this market in FY21.

New market opportunities continue to emerge, with increased demand for power interconnectors, telecoms, marine civils and other renewable energy activity.

Group outlook

Project delays are often a consequence of disruption in global markets, supply chains and production. Whilst we are confident in achieving our targets for FY21, given the ongoing uncertainty surrounding COVID-19, it would be unwise to rule out the possibility of further unforeseen challenges. This is particularly pertinent for our business, which is heavily weighted to project delivery in H2 . We therefore believe it prudent to continue to refrain from providing financial guidance for FY21.

The acquisitions that we have completed since IPO, along with new product development, have broadened our technologies in line with our diversification strategy, enabling us to capitalise on further project lifecycle opportunities. These acquisitions contributed 30% of Group revenue in FY20, which only included six months from Pipeshield.

Tekmar Group continues to have a healthy balance sheet to support further growth. Record revenues, a combined order book and preferred bidder status of £24.6m, increase in sales enquiries to £224m, and forecast market growth of >15% in offshore wind, gives the Board confidence in the Group's ability to continue delivering growth in the medium to long term.

The Board would like to thank all members of the Tekmar team for, once again, rising to the challenges and delivering on the strategy set out within our strategic plan which is the result of the experience, knowledge, expertise and commitment throughout the organisation. 

In addition the Board would also like to add gratitude to our clients, shareholders, suppliers and partners for their ongoing and continued support to the business, particularly recognising the recent global challenges we have all encountered as we continue to deliver on our strategy, vision and values.

Alasdair MacDonald

Non-Executive Chairman

Chief Executive Officer's Review

Our vision remains unchanged, to be the leading provider of subsea technology and services to the global offshore energy markets. We are achieving this vision by developing our portfolio to include complementary businesses that share market space, customer relationships and a strong drive for innovation. We are leveraging the unique, yet complementary skills and technologies that our family of companies offer and are enhancing what we deliver to the market.

I am proud of the strategic progress the Group has made over the last 12 months and the transformation we have created since our IPO over two years ago. Despite the impacts and challenges of COVID-19 I remain confident of the long-term prospects for the Group. 

We set out at IPO to make selective and practical acquisitions of businesses known to the Group. I believe we have executed this meticulously adding accretive benefit. These additions coupled with organic growth, delivered largely through Tekmar Energy's dominant and respected brand in offshore wind, has created a truly unique and compelling value proposition to the global subsea sector that will create sustainable growth opportunities long into the future.

We remain committed to our three core building blocks for strategic growth: organic growth in our core markets; accelerated growth through overseas expansion and the addition of new technologies in our product mix, and acquisitions that complement our overall vision. People and technology remain at the forefront of everything we do, and we will continue to expand organically. We will also continue to explore selective accretive technology M&A opportunities whilst maintaining a robust balance sheet.

COVID-19

Our high revenue growth and strategic progress was unfortunately overshadowed by the negative impact of COVID-19. We had stated with confidence in the half-year results announced on 3 December 2019, that seasonal weighting (Circa H1 40% H2 60%) in the Group's performance was in line with our management expectations and that the Group was firmly on track to meet market expectations for FY20, however this expectation included identified sales into China in Q4. In addition, we did not foresee the major price rise felt around the globe in components as a result of the shutdown. These points combined had a negative effect on our expected profitability. Despite this we are pleased to report that the Group continued to operate across all sites throughout the lockdown.

It is worth reiterating that Tekmar Group provides critical components to major energy infrastructure projects around the globe. The demand for such equipment is ever increasing, our value proposition is unrivalled, and we already have one of the largest track records in offshore wind.

Although the effects of COVID-19 have impacted Tekmar Group, our efficiency never dropped, we met all customer deliveries and we are slowly starting the transition back to normality.

We retain a solid balance sheet and see little negative effect on our longer-term prospects. If anything, we believe that countries are more likely to bring forward their planned investment in renewables to support economic growth.

We have included the Board's assessment of the key business risks associated with this changing global environment in our Final Results presentation (https://investors.tekmar.co.uk/investors/reports-and-presentations/) and in our 2020 Annual Report.

Offshore wind market (63% Group Revenue)

Tekmar Group now has an unrivalled value proposition for its core technology. Offshore renewables and offshore wind remain the focus for the business, representing over 63% of Group sales. Our technology development, acquisitions and strategic investment all support a drive towards the offshore wind market, which continues to pick up pace and is nearing 10x growth over the next decade. The Group is now well placed to capitalise on revenue opportunities through the offshore wind farm project life cycle.

The addition of and substantial growth in Agiletek Engineering has opened multiple new market opportunities in both initial front-end engineering and design ("FEED") and post construction operations and maintenance ("O&M"). This has been seamlessly supported by the addition of Ryder Geotechnical, which performs geotechnical evaluation of the seabed and provides us with first-mover advantage on projects (such as activity within the USA and France).

Tekmar Energy's core TekLink® product maintains its dominant market position in cable protection. TekLink® now represents 43% of Group revenue and saw a 57% increase in sales from FY19. Subsea Innovation increased its contribution to offshore wind in FY20, delivering bespoke back deck equipment and innovative cable repair solutions for the O&M phase of a project. O&M now represents 6% of Group revenue and, as installations continue, we expect it to play a larger role in the future, based on the circa 27 GW capacity already installed. With the addition of Pipeshield International in October 2019, we have a strong product offering across the project life cycle in offshore wind market and the Group is starting to tender combined packages for subsea protection.

Subsea market (37% Group revenue)

At IPO we set out to diversify revenues into other subsea markets including, oil and gas, interconnectors, telecoms, marine vessels, and more recently marine civils through Pipeshield International. These now contribute 37% to Group sales an increase of 56% over the prior year. This proportion is a fair example of the split we hope to see going forward and is a representation of the current enquiry book which is now circa £224m. Demand for oil and gas equipment has fallen materially in recent months due to the drop in the oil price to a ten year low, brought about by the sudden imbalance of supply and demand as a result of lockdown travel restrictions imposed by COVID-19. Although many analysts view this as a temporary impact, we have prudently revised our outlook. It is important to note that oil and gas specifically represented less than 20% of total Group revenue.

Tekmar Energy (67% Group revenue)

Tekmar Energy has grown revenue by 14% year-on-year and saw a major increase in the volume of TekLink® cable protection systems delivered with a 57% increase in sales. This supports our continued dominant market position for the technology, which is now on its 10th generation of product development. Key customers and projects include:

·	protecting 1.4 GW of electrical infrastructure on Ørsted's Hornsea 2 project, the largest offshore wind project in the world;
·	protecting 640 MW on behalf of Subsea 7 for WPD's Yunlin project, the largest offshore wind project in the emerging Taiwanese market; and
·	delivering products to Binhai for SPIC the largest wind development in China to-date.

Tekmar Energy also delivered an increased volume of sales in APAC representing over £5m of sales, 18.2% of Tekmar Energy's revenue. This number would have been higher but was cut short in the final quarter due to the rapid shut down in China. Hang-off solutions made an improved contribution of circa £2m or 7.3% of Tekmar Energy's revenue. In addition to this organic growth Tekmar Energy made some strategic developments including increasing sales into O&M, securing the first French offshore wind farm contract for TekLink® on the 480MW Saint-Nazaire project which is due to be manufactured in FY21, and finally delivering its largest ever scope into floating offshore wind, which now represents circa 3% of Tekmar Energy revenue. The biggest financial impact was due to increased supplier costs because of COVID-19 supply chain disruption, however, we feel this position will be recovered in FY21. Across the Group we are now looking at consolidation options and have already implemented efficiencies within Tekmar Energy, resulting in a reduction in headcount in the year from 115 to 105. We believe Tekmar Energy remains well positioned and has sufficient capacity to support the expected demand foreseen within offshore wind.

Agiletek Engineering including Ryder Geotechnical (5% of Group revenue)

Agiletek Engineering made a significant increase in revenue of over 200% supported in part by the first full year of Ryder Geotechnical which added £0.5m contribution in revenue, but also due to the large increase in external sales of circa £1.5m. Agiletek continues to provide a key differentiating offering combining traditional engineering with cutting edge software that saves our customers money, reduces project risk and provides the Group with early access to projects. Agiletek Engineering grew the team from 11 to 14 and opened a new office in Newcastle to support their growth, whilst Ryder Geotechnical started bilaterally recruiting team members based in Agiletek Engineering's London office.

Subsea Innovations (20% of Group revenue)

Subsea Innovation had a record year with sales increasing over 147% and headcount increasing from 40 to 45. The high growth rate was underpinned mainly by the supply of bespoke back deck equipment to Subsea7 via IHC. Although the financial performance of this project was not as initially expected when reported during our announcement in February 2020, we remain pleased with the skills and technical ability the engineering team offer. Harnessing the engineering capability of Subsea Innovation is critical to our ongoing development as a technology specialist for subsea equipment across the Group and provides unique opportunities. Subsea Innovation is currently engaged in the development of bespoke equipment for the maintenance of subsea cables support, an area in which the Group is increasing the rate of sales. Although most of Subsea Innovations revenue is currently classified within oil and gas, the engineering skills and enquiry opportunities are fully transferable into renewables and other subsea markets.

Pipeshield International (8% of Group revenue)

Pipeshield was acquired in October 2019 for consideration of £6.5m.  This was the Group's third acquisition since IPO and continues our strategy to acquire synergistic offshore energy engineering businesses with a clear focus on subsea technology and complementary customer bases, which will benefit from being part of a wider group. Pipeshield broadens our portfolio of complementary technologies, allowing the seamless supply of subsea protection products across the lifecycle of a project, and takes us closer to our vision. Pipeshield itself is a world leading technology provider of subsea concrete mattresses. These mattresses are used in the protection of subsea equipment such as pipelines and power cables within all marine environments, including offshore wind, marine renewables, oil and gas and marine civil engineering.

We are very pleased with the rapid and successful integration of the business into the Group, with Pipeshield contributing 8% of total Group revenue in just six months of trading since acquisition.

Outlook

Despite the short-term impacts of COVID-19, the Group's strategy, primary focus and vision remain unchanged. We have a solid balance sheet and we remain confident that the long-term growth prospects of the global offshore wind market are accelerating, and most importantly that we are well positioned to capitalise on this structural change in the energy market.

The Group is beginning to benefit from the collaboration and combined approach of its portfolio businesses, which have cross-sector capability and are already supplying multiple projects together and have many ongoing tendering opportunities.

Whilst we continue to explore accretive acquisitions that match our core values, our focus will shift internally in the near term, as we look to consolidate and maximise the benefits from our recently enlarged business and expanded technology offering.

Tekmar Group has progressed markedly since IPO, delivering on its diversification strategy at the same time as generating substantial revenue growth. We believe we have a created a strong foundation on which to continue growing the business, with our primary focus in FY21 being the offshore wind opportunity.

James Richie

Chief Executive Officer

Financial Review

Revenue increased across all businesses and markets and has nearly doubled since our IPO in June 2018.  In October 2019 we acquired Pipeshield International Limited, which contributed £3.1m revenue and gross profit of £1.1m. 

A summary of the Group's financial performance is as follows:

Year ended 31 March £m	FY20	Adjusted items	Adjusted FY20		FY19	Adjusted items	Adjusted FY19
Revenue	40.9		40.9		28.1		28.1
EBITDA	4.1	0.6	4.7		4.2	0.6	4.8
PBT	2.0	1.0	3.0		2.0	0.7	2.7
PAT	2.0	1.0	3.0		2.4	0.7	3.1
Adjusted EPS(1)			5.8p				6.2p

⁽¹⁾   Adjusted EPS is a key metric used by the Directors and measures earnings after adjusting for non-recurring items (see table below).

Overview

We achieved strong results at the half year with revenue up £10m and Adjusted EBITDA up £2.8m on HY19.  An improving order book and larger enquiry book at this point supported further growth in the second six months and we announced in our interims that we were firmly on track to meet market expectations for the year.  However, like many businesses, we have been impacted by COVID-19 and were one of the first businesses to announce to the market, on 18 February 2020, a foreseeable impact on trading.  This was largely due to delays to identified sales opportunities in China in the final quarter of the financial year, along with some of our estimated cost of sales being based on components sourced from China.  Our trading update stated we expected our results to be broadly in line with those achieved in FY19, and I am pleased to report this was achieved.

COVID-19

The outbreak of the virus in China, including the restriction of travel in the country, affected our performance materially in a number of ways:

·	projects scheduled for shipment to China were delayed due to the closure of ports;
·	the supply of components from China ceased for the same reason. We were able to source replacement components from Italy which was also subsequently caught up in the early impact of the virus.  These supply chain delays pushed revenue and margin out of the financial year, however, this has not affected contractual delivery schedules for clients; and
·	the Group's office in Shanghai, which services the whole of APAC, was placed on mandatory shutdown for several months, as were our clients' and suppliers' offices in the region.

China accounted for circa 10% of our revenue forecast in FY20 and represented 20% of our outstanding supply-chain commitments. 

Revenue

Revenue by business					Revenue by market
£m		FY20	FY19		£m	FY20	FY19
Tekmar Energy		27.5	24.1		Offshore wind	25.7	19.7
Subsea Innovation		8.8	3.5		Subsea	15.2	8.4
AgileTek		3.0	1.0
Pipeshield		3.1	-
Intercompany elimination		(1.6)	(0.5)
Total		40.9	28.1		Total	40.9	28.1

Offshore wind accounted for 63% of Group revenue and this sector increased by 30% on FY19.  Subsea revenue increased by 81% reflecting a full year of Subsea Innovation and six months of Pipeshield.  Intercompany revenue also increased significantly as a result of wider businesses collaborations on projects. 

Tekmar Energy achieved revenue growth of 14% despite the impact of COVID-19 in the final quarter.  Offshore wind accounted for 86% of turnover in this business, predominantly across five large European projects and three APAC projects.

Subsea Innovation continue to grow with revenue increasing by 26% (based on a FY equivalent for FY19). A significant proportion of this came from one customer, to whom we provided a number of design engineering packages followed by the associated build scopes across the year. 

AgileTek doubled its external revenues this year, including £0.6m from its subsidiary Ryder Geotechnical who were acquired in March 2019 and are included within AgileTek for reporting.  AgileTek also plays a crucial role delivering engineering services to the other businesses in the Group with internal sales of £0.9m to Tekmar Energy.

Pipeshield revenue related to the period from October 2019 to 31 March 2020.

Gross profit

Gross profit by business				Gross profit by market
£m	FY20	FY19		m	FY20		FY19
Tekmar Energy	7.7	8.2		Offshore wind		9.8	9.6
Subsea Innovation	2.0	1.1		Subsea		4.3	2.8
AgileTek	1.5	0.6
Pipeshield	1.1	-		Unallocated costs		(1.8)	(2.5)
Total	12.3	9.9		Total		12.3	9.9

Gross profit reduced in the year due to a change in project mix along with the impact of COVID-19. Within Tekmar Energy we experienced increased costs from the supply chain as a direct result of COVID-19, with the cost of procurement increasing significantly on our Hornsea Two project being executed at the end of the year.

Gross profit for Subsea Innovation was lower as a percentage against last year due to a higher weighting of build projects, which attract lower margins than the design and engineering contracts.

AgileTek, which usually derives its revenue from pure consultancy, secured a large project which included build elements, and which were executed by collaborating with the other Group businesses. 

Unallocated costs in the table above (gross profit by market) relate to the manufacturing costs within this business.  The reduction in costs reflect targeted savings and production efficiencies.

Operating expenses

Operating expenses increased from £7.0m to £10.2m due to the business expansion with an additional £2.4m relating to the full year impact of Subsea Innovation and Ryder Geotechnical, and the part year for Pipeshield. 

Adjusted EBITDA

Adjusted EBITDA is a primary reporting measure across the businesses to provide a consistent measure of trading performance. We adjust EBITDA to remove certain non-cash and exceptional items to provide a more accurate reflection of underlying earnings. The Board reviews all exceptional items to ensure resulting Adjusted EBITDA achieves this. For the period ended 31 March 2020, the adjustment includes costs relating to the acquisition activities and share based payment charges relating to the initial IPO options and SIP scheme as both were one-off awards relating to the IPO and not reflective of underlying trading. There were no charges relating to the SAYE scheme as this was only launched on 31 March 2020.

Adjusted EBITDA by business £m					Adjusted items
£m		FY20	FY19		£000	FY20	FY19
Tekmar Energy		3.9	4.6		IPO costs	-	204
Subsea Innovation		0.5	0.5		Professional fees - acquisition	109	117
AgileTek		0.4	0.1		Gain on bargain purchase	-	(95)
Pipeshield		0.4	-		Share based payment charge	454	418
Group		(0.5)	(0.4)		ADJUSTMENT to EBITDA	563	644
					Amortisation on acquired intangible assets	443	109
Total		4.7	4.8		ADJUSTMENT to PBT & PAT	1,006	753

Profit

Profit after tax is in line with last year after a small tax credit (£3k) reflecting the assumption we will benefit from R&D tax credits across the businesses, mitigating the tax charge on profits. Adjusted PBT and PAT are adjusted for the amortisation on the acquired intangible assets for Subsea Innovation and Pipeshield.

Foreign currency

We delivered four offshore wind contracts in Euros this year and purchased forward currency transactions to mitigate the risk of currency movements on payment milestones. The closing rate for revaluation of Euro balances at the year end was 1.1306 (FY19: 1.1605).

Acquisitions

We completed one acquisition this year:

Pipeshield - 100% of the share capital of Pipeshield International Limited was acquired in October 2019. Consideration of £7.2m was made up of £3m in cash, other consideration of £0.7m, £0.75m of Group shares and £2.75m of deferred consideration, with the first payment of £1.5m made in April 2020 and the balance due in October 2020. All consideration was recognised as either tangible or intangible assets and the deferred tax liability recognised on the acquired intangibles has in turn increased the goodwill recognised.

Balance Sheet

Balance Sheet
£m		FY20	FY19
Property, plant & equipment		5.9	5.5
Other non-current assets		26.3	21.8
Stock		2.5	1.9
Trade & other receivables		26.8	20.0
Cash		2.1	4.2
Trade & other payables		16.2	9.8
Other non-current liabilities		1.4	0.8

Property, plant & equipment

Fixed asset investments were largely in line with depreciation levels and the overall increase relates to £0.5m of production assets acquired within Pipeshield.

Other non-current assets

Goodwill of £19.6m relates to the goodwill arising on the original management buy-out in 2011.  Intangible assets and goodwill arising on the acquisition of Pipeshield increase our acquisition investments by £4.6m. We also invested £0.4m within Subsea Innovation on new product development.

Trade and other receivables

We closed the year with trade debtors of £9.9m and contract assets of £15m.  The majority of the latter sits within Tekmar Energy and relates to offshore wind projects that have large project milestones towards the end of the project that are not yet due for invoicing.

Cash

Cash is always a major focus of the Group as we monitor and manage the working capital lifecycle across projects. We remain self-funding in this degree, however, we have reviewed our position carefully in light of COVID-19 and were successful in securing a CBILS loan from Barclays for £3m in early April which was drawn down immediately.  This will support us in navigating any potential delays in receipts from customers should they arise.

Trade and other payables

Trade and other payables include the deferred consideration (£2.75m) due under the Pipeshield acquisition which is due across two tranches within 12 months.  The first payment (£1.5m) was made in April 2020 with the balance due in October 2020.

Other non-current liabilities

Other non-current liabilities relate to the lease liabilities in relation to IFRS16 and deferred grant income. There is also an increase of £0.3m in deferred tax liability relating to the Pipeshield acquisition.

Sue Hurst

Chief Financial Officer

Consolidated statement of comprehensive income

for the year ended 31 March 2020

	Note	2020	2019
		£000	£000
Revenue		40,943	28,082
Cost of sales		(28,671)	(18,190)
Gross profit		12,272	9,892
Operating expenses		(10,227)	(6,987)
Group operating profit		2,045	2,905
Analysed as:
Adjusted EBITDA[1]		4,695	4,833
Depreciation	9	(1,253)	(808)
Amortisation	8	(834)	(476)
Share based payments charge	11	(454)	(418)
Exceptional items		(109)	(226)
Group operating profit		2,045	2,905
Finance costs		(170)	(1,066)
Finance income		84	147
Net finance costs	5	(86)	(919)
Profit before taxation		1,959	1,986
Taxation	6	3	407
Profit for the year and total comprehensive income		1,962	2,393
Attributable to owners of the parent		1,962	2,393
Attributable to the non-controlling interest		-	-
		1,962	2,393
Profit per share (pence)
Basic	7	3.85	4.75
Diluted	7	3.73	4.63

There are no items of Other Comprehensive Income.  All results derive from continuing operations.

1: Adjusted EBITDA, which is defined as profit before net finance costs, tax, depreciation, amortisation, share based payments charge, and exceptional items is a non-GAAP metric used by management and is not an IFRS disclosure.

Consolidated balance sheet

as at 31 March 2020

	Note	2020	2019
		£000	£000
Non-current assets
Property, plant and equipment	9	5,892	5,501
Goodwill and other intangibles	8	26,294	21,837
Total non-current assets		32,186	27,338
Current assets
Inventory		2,536	1,914
Trade and other receivables	10	26,819	19,537
Corporation tax recoverable		-	459
Cash and cash equivalents		2,130	4,190
Total current assets		31,485	26,100
Total assets		63,671	53,438
Equity and liabilities
Share capital		513	507
Share premium		64,100	64,100
Merger relief reserve		1,738	993
Merger reserve		(12,685)	(12,685)
Retained losses		(7,690)	(10,098)
Total equity		45,976	42,817
Non-current liabilities
Other interest-bearing loans and borrowings		310	487
Trade and other payables		355	358
Deferred tax liability		469	3
Total non-current liabilities		1,134	848
Current liabilities
Other interest-bearing loans and borrowings		504	378
Trade and other payables		16,010	9,395
Corporation tax payable		47	-
Total current liabilities		16,561	9,773
Total liabilities		17,695	10,621
Total equity and liabilities		63,671	53,438

Consolidated statement of changes in equity

for the year ended 31 March 2020

	Share capital	Share premium	Merger relief reserve	Merger reserve	Retained earnings	Total equity attributable to owners of the parent	Non-controlling interest	Total  equity
	£000	£000	£000	£000	£000	£000	£000	£000
Balance at 1 April 2018	-	-	-	2,886	(12,867)	(9,981)	-	(9,981)
Profit for the year	-	-	-	-	2,393	2,393	-	2,393
Total comprehensive income for the year	-	-	-	-	2,393	2,393	-	2,393
Issue of shares on IPO	500	64,500	-	(15,571)	-	49,429	-	49,429
Expenses of the IPO	-	(400)	-	-	-	(400)	-	(400)
Issue of shares post IPO	7	-	993	-	-	1,000	-	1,000
Share based payments	-	-	-	-	376	376	-	376
Total transactions with owners, recognised directly in equity	507	64,100	993	(15,571)	376	50,405	-	50,405
Balance at 31 March 2019	507	64,100	993	(12,685)	(10,098)	42,817	-	42,817
Profit for the year	-	-	-	-	1,962	1,962	-	1,962
Total comprehensive income for the year	-	-	-	-	1,962	1,962	-	1,962
Issue of shares	6	-	745	-	-	751	-	751
Share based payments	-	-	-	-	446	446	-	446
Total transactions with owners, recognised directly in equity	6	-	745	-	446	1,197	-	1,197
Balance at 31 March 2020	513	64,100	1,738	(12,685)	(7,690)	45,976	-	45,976

Consolidated cash flow statement

for the year ended 31 March 2020

		2020	2019
		£000	£000
Cash flows from operating activities
Profit before taxation		1,959	1,986
Adjustments for:
Depreciation		1,253	808
Amortisation of intangible assets		834	476
Share based payments charge		488	345
Gain on bargain purchase		-	(95)
Finance costs		170	1,066
Finance income		(84)	(147)
		4,620	4,439
Changes in working capital:
(Increase) / decrease in inventories		(512)	176
(Increase) in trade and other receivables		(4,393)	(10,493)
Increase in trade and other payables		2,357	2,876
(Decrease) in provisions		-	(131)
Cash generated / (used in) from operations		2,072	(3,133)
Tax recovered		209	180
Net cash inflow/ (outflow) from operating activities		2,281	(2,953)
Cash flows from investing activities
Purchase of property, plant and equipment		(1,704)	(996)
Purchase of intangible assets		(729)	(865)
Proceeds on sale of property, plant and equipment		-	3
Acquisition of subsidiary net of cash acquired		(1,637)	(168)
Interest received		84	147
Net cash outflow from investing activities		(3,986)	(1,879)
Cash flows from financing activities
Repayment of borrowings		(355)	(33,282)
Repayment of other borrowings		-	(1,771)
Proceeds from issues of shares		-	49,429
Expenses of the IPO		-	(400)
Interest paid		-	(7,571)
Net cash  (outflow) /inflow from financing activities		(355)	6,405
Net (decrease) / increase in cash and cash equivalents		(2,060)	1,573
Cash and cash equivalents at beginning of year		4,190	2,617
Cash and cash equivalents at end of year		2,130	4,190

Notes to the Group financial statements

for the year ended 31 March 2020

1. GENERAL INFORMATION

Tekmar Group plc (the "Company") is a public limited company incorporated and domiciled in England and Wales. The registered office of the Company is Unit 1, Park 2000, Millennium Way, Aycliffe Business Park, Newton Aycliffe, County Durham, DL5 6AR. The registered company number is 11383143.

The principal activity of the Company and its subsidiaries (together the "Group") is that of design, manufacture and supply of subsea stability and protection technology, including associated subsea engineering services, operating across the global offshore energy markets, predominantly Offshore Wind.

Forward looking statements

Certain statements in this Annual report are forward looking. The terms "expect", "anticipate", "should be", "will be" and similar expressions identify forward-looking statements. Although the Board of Directors believes that the expectations reflected in these forward-looking statements are reasonable, such statements are subject to a number of risks and uncertainties and events could differ materially from those expressed or implied by these forward-looking statements.

2. BASIS OF PREPARATION AND ACCOUNTING POLICIES

The Group's principal accounting policies have been applied consistently to all of the years presented, with the exception of the new standards applied for the first time as set out in paragraph (c) below where applicable.

(a)  Basis of preparation

The results for the year ended 31 March 2020 have been prepared in accordance with International Financial Reporting Standards ("IFRS"), and their interpretations adopted by the European Union. The financial statements have been prepared on the going concern basis and on the historical cost convention modified for the revaluation of certain financial instruments.

Tekmar Group plc ("the Company") has adopted all IFRS in issue and effective for the year.

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 March 2020 or 2019. Statutory accounts for 2019 have been delivered to the registrar of companies, and those for 2020 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

(b)  Going concern

The Group meets its day-to-day working capital requirements through its available banking facilities which includes an overdraft facility of £1.5m currently available to 4 January 2021. This facility is an annual facility but has a history of annual renewal and is expected to be renewed again in January 2021. However, for the purpose of this assessment, the directors have assumed it will not be renewed. The Group held £2.1m of cash at the end of the year and also secured a CBILS loan of £3m in April 2020 (available through to April 2021) to ensure any short-term impact of Covid-19 is manageable. There are no financial covenants that the Group must adhere to.  The level of cash at 31 July 2020 was £1.9m. The Directors have prepared cash flow forecasts to 31 March 2022.  The base case forecasts include assumptions for annual revenue growth (c.15%) supported by current order book, known tender pipeline, and supported by publicly available market predictions for the sector.  They also assume higher than usual cost of materials in case of sourcing issues. These forecasts  show that the Group is expected to have a sufficient level of financial resources available through current facilities available.

The Directors do not believe that the Covid-19 pandemic will significantly impact the revenues included in the cash flow forecasts and since the year end the group has cash balances ahead of budget.  Whilst the lockdown period in the UK and China initially caused short term delays to completion of projects and a short term impact in terms of raw materials sourcing from China, the Group continued to trade throughout the lockdown period and project completion has returned to being on-schedule.  Nevertheless, given the unprecedented uncertainty Covid-19 has brought and the as yet unknown wider economic impact in the short to medium term, the Directors have sensitised their base case forecasts for a severe but plausible downside impact.  This sensitivity includes reducing revenue growth to close-to nil for the year to 31 March 2021 (taking into account a full year of Pipeshield revenues), including the loss or delay of a certain level of contracts in the pipeline that form the base case forecast,  and  a 10% drop in revenue and 5% increase in costs across the group as a whole for the same period.  The base case forecast also includes discretionary spend on capital outlay which has been withheld in the sensitised case. In addition, the directors note there is further discretionary spend within their control which could be cut if necessary, although this has not been modelled in the sensitised case given the headroom already available. Whilst these sensitivities have been modelled to give the Directors comfort in adopting the going concern basis of preparation, post year end performance and market visibility give confidence over our base case forecast. 

Based on this assessment, the Directors are satisfied that, taking account of reasonably foreseeable changes in trading performance, these forecasts and projections show that the Group is expected to have a sufficient level of financial resources available through current facilities to continue in operational existence and meet its liabilities as they fall due for at least the next 12 months from the date of approval of the financial statements and for this reason they continue to adopt the going concern basis in preparing the financial statements.

(c)  New standards, amendments and interpretations

There have been no material new standards, amendments or interpretations that the Group has to comply with during the year.  There are no standards endorsed but not yet effective that will have a significant impact going forward.

(d)  Revenue

Revenue (in both the subsea and offshore wind markets) arises from the supply of subsea protection solutions and associated equipment, principally through fixed fee contracts. There are also technical consultancy services delivered through Agiletek Engineering and Ryder Geotechnical.

To determine how to recognise revenue in line with IFRS 15, the Group follows a 5-step process as follows:

1.  Identifying the contract with a customer

2.  Identifying the performance obligations

3.  Determining the transaction price

4.  Allocating the transaction price to the performance obligations

5.  Recognising revenue when / as performance obligation(s) are satisfied

Revenue is measured at transaction price, stated net of VAT and other sales related taxes.

Revenue is recognised either at a point in time, or over-time as the Group satisfies performance obligations by transferring the promised services to its customers as described below.

i)  Fixed-fee contracted supply of subsea protection solutions

For the majority of revenue transactions, the Group enters into individual contracts for the supply of subsea protection solutions, generally for a specific project in a particular geographic location. Each contract generally has one performance obligation, to supply subsea protection solutions. All contracts meet one or more of the criteria within step 5 for recognition over time, including the right to payment for the work completed, including profit, should the customer terminate. An assessment is made as to the most accurate method to estimate stage of completion which in the majority of performance obligations is on an inputs basis (costs incurred as a % of total forecast costs). 

There are also contracts which include the manufacture of a number of separately identifiable products.  In such circumstances, as the deliverables are distinct, each deliverable is deemed to meet the definition of a performance obligation in its own right and do not meet the definition under IFRS of a series of distinct goods or services given how substantially different each item is.  Revenue for each item is stipulated in the contract and revenue is recognised over time as one or more of the criteria for over time recognition within IFRS 15 are met.  Generally for these items, an input method of estimating stage of completion is used as this gives the most accurate estimate of stage of completion.

In all cases, any advance billings are deferred and recognised as the service is delivered.

ii)  Manufacture and distribution of ancillary products, equipment and provision of consultancy services

The Group has a number of revenue transactions which are generally contracted with customers using purchase orders. There is generally one performance obligation for each order and the transaction price is specified in the order. Revenue is recognised at a point in time as the customer gains control of the products, which tends to be on delivery. There is no variable consideration.

Accounting for revenue is considered to be a key accounting judgement which is further explained in note 3.

(e)  EBITDA and Adjusted EBITDA

Earnings before Interest, Taxation, Depreciation and Amortisation ("EBITDA") and Adjusted EBITDA are non-GAAP measures used by management to assess the operating performance of the Group. EBITDA is defined as profit before net finance costs, tax, depreciation and amortisation. Exceptional items and share based payment charges are excluded from EBITDA to calculate Adjusted EBITDA.

The Directors primarily use the Adjusted EBITDA measure when making decisions about the Group's activities. As these are non-GAAP measures, EBITDA and Adjusted EBITDA measures used by other entities may not be calculated in the same way and hence are not directly comparable.

(f)  Exceptional costs

The Group presents as exceptional costs on the face of the income statement, those significant items of expense, which, because of their size, nature and infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better the underlying financial performance in the year, so as to facilitate comparison with prior years and assess trends in financial performance more readily.

3. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of the Group financial statements under IFRS requires the Directors to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

The Directors consider that the following estimates and judgements are likely to have the most significant effect on the amounts recognised in the Group financial statements.

(a)  Critical judgements in applying the entity's accounting policies

Revenue recognition

Judgement is applied in determining the most appropriate method to apply in respect of recognising revenue over-time as the service is performed using either the input or output method. Further details on how the policy is applied can be found in note 2(d). 

(b)  Critical accounting estimates

Revenue recognition - stage of completion when using input method

Revenue on contracts is recognised based on the stage of completion of a project, which, when using the input method, is measured as a proportion of costs incurred out of total forecast costs. Forecast costs to complete each project are therefore a key estimate in the financial statements and can be inherently uncertain due to changes in market conditions. 

For the partially complete projects in Tekmar Energy at year end if the percentage completion was 1% different to management's estimate the revenue impact would be £90,442. Within Subsea Innovation and Pipeshield International there were a number of projects in progress over the year end and a 1% movement in the estimate of completion would impact revenue in each by £28,854 and £38,287 respectively. However, the likelihood of errors in estimation is small, as the businesses have a history of reliable estimation of costs to complete and given the nature of production, costs to complete estimate are relatively simple.

Pipeshield International - valuation of intangibles

Accounting for the purchase price allocation on the Pipeshield International acquisition was a critical accounting estimate made during the year.  In particular, deriving the value of the intangible assets acquired (£1,975,000) and goodwill attributed (£2,590,000) were critical estimates.  The intangible assets relate to the value in the trade name and customer relationships, which were valued using the royalty relief method and the Multi-period excess earning method, respectively, based on forecast future cash flows assuming growth rates of 10%, discounted using a weighted average cost of capital of 9.6%. For each asset recognised, the discount rate would have to change to over 20% (with all other assumptions remaining the same) before there was a material difference in the valuation. However, if multiple assumptions changed reasonably at the same time then the impact on the valuation could be material. Furthermore, if these intangibles had not been identified as such, and instead the balance recognised as goodwill, profit for the year would have been higher by £221,000, which is the amortisation on the related Intangible Assets in the year. 

4. SEGMENTAL REPORTING

Management has determined the operating segments based upon the information provided to the Board of Directors which is considered the chief operation decision maker.  The Group is managed and reports internally by business entity and has changed the composition of its reportable segments for the year ended 31 March 2020 to reflect this. All previous periods were reported as one reportable segment.  Project performance is monitored by Offshore Wind and Subsea markets, but the Board does not measure profit or cash by market. All assets of the Group reside in the UK.

Major customers

In the year ended 31 March 2020 there were two major customers that individually accounted for at least 10% of total revenues (2019: three customers). The revenues relating to these in the year to 31 March 2020 were £11,079,395 (2019: £11,217,000). Included within this is revenue from multiple projects with different entities within each customer.

Analysis of revenue by region	2020	2019
	£000	£000
UK & Ireland	24,152	10,483
Rest of the World	16,791	17,599
	40,943	28,082

Analysis of revenue by market	2020	2019
	£000	£000
Offshore Wind	25,706	19,707
Subsea	15,237	8,375
	40,943	28,082

Revenue for the Offshore Wind market is reported separately from all other revenue, which reflects the focus on management on this key market.  All other revenue is included in Subsea.  Profit and cash are measured by business entity and the Board reviews this on the following basis.

	TEL 2020	SIL 2020	AEL 2020	PIL 2020	Group/ Eliminations	Total 2020
	£000	£000	£000	£000	£000	£000
Revenue	27,515	8,833	3,026	3,143	(1,574)	40,943
Gross profit	7,702	2,004	1,506	1,060	-	12,272
% Gross profit	28%	23%	50%	34%	-	30%
Operating profit/(loss)	2,476	346	275	295	(1,347)	2,045
Analysed as: Adjusted EBITDA	3,888	503	390	382	(468)	4,695
Depreciation	(959)	(132)	(75)	(87)	-	(1,253)
Amortisation	(366)	(25)	-	-	(443)	(834)
Share based payments	(87)	-	(35)	-	(332)	(454)
Exceptional	-	-	(5)	-	(104)	(109)
Operating profit/(loss)	2,476	346	275	295	(1,347)	2,045
Profit after tax	2,394	340	217	388	(1,377)	1,962

	TEL 2020	SIL 2020	AEL 2020	PIL 2020	Group/ Eliminations	Total 2020
	£000	£000	£000	£000	£000	£000
Other information
Reportable segment assets	32,086	8,100	1,810	4,586	17,089	63,671
Reportable segment liabilities	12,192	6,420	2,104	1,255	(4,276)	17,695

	TEL 2019	SIL 2019	AEL 2019	PIL 2019	Group/ Eliminations	Total 2019
	£000	£000	£000	£000	£000	£000
Revenue	24,062	3,476	1,028	-	(485)	28,082
Gross profit	8,140	1,112	640	-	-	9,892
% Gross profit	34%	32%	62%	-	-	35%
Operating profit/(loss)	3,522	49	(8)	-	(657)	2,905
Analysed as: Adjusted EBITDA	4,626	163	8	-	36	4,833
Depreciation	(663)	(71)	(74)	-	-	(808)
Amortisation	(348)	(19)	-	-	(109)	(476)
Share based payments	(72)	-	(32)	-	(314)	(418)
Exceptional	(21)	(24)	90	-	(271)	(226)
Operating profit/(loss)	3,522	49	(8)	-	(657)	2,905
Profit after tax	3,682	152	(86)	-	(1,355)	2,393

	TEL 2019	SIL 2019	AEL 2019	PIL 2019	Group/ Eliminations	Total 2019
	£000	£000	£000	£000	£000	£000
Other information
Reportable segment assets	28,392	5,012	817	-	19,217	53,438
Reportable segment liabilities	10,982	3,677	1,369	-	(5,407)	10,621

5. NET FINANCE COSTS

	2020	2019
	£000	£000
Interest payable and similar charges
On loan notes	-	144
On other loans	170	664
On preference shares classed as liabilities	-	258
Fair value movement on forward foreign exchange contracts	-	-
Total interest payable and similar charges	170	1,066
Interest receivable and similar income
Fair value movement on forward foreign exchange contracts	(80)	(142)
Interest receivable	(4)	(5)
Total interest receivable and similar income	(84)	(147)
Net finance costs	86	919

Interest expense on lease liabilities was £25,534 (2019: £29,054).

6. TAXATION

Analysis of credit in year	2020	2019
	£'000	£'000
Current tax
Current taxation charge for the year	55	-
Adjustments in respect of prior periods	(48)	(384)
Total current tax	7	(384)
Deferred tax
Origination and reversal of timing differences	(10)	(23)
Adjustments in respect of prior periods	-	-
Total deferred tax	(10)	(23)
Tax on profit on ordinary activities	(3)	(407)
Reconciliation of total tax credit:
Profit on ordinary activities before tax	1,959	1,986
Profit on ordinary activities multiplied by the rate of corporation tax in the UK of 19% (2018: 19%)	372	377
Effects of:
Non-deductible expenses	147	178
Non-taxable income	(208)	(55)
Enhanced R&D tax relief	(418)	(373)
Impact of unrecognised deferred tax assets	162	(145)
Effect of change in rates	(10)	(5)
Adjustments in respect of previous periods	(48)	(384)
Total taxation credit	(3)	(407)

Factors that may affect future tax charges

Changes to the UK corporation tax rates were substantively enacted as part of Finance Bill 2015 (on 26 October 2015) and Finance Bill 2016 (on 7 September 2016). The decision for the UK corporation tax rate to remain at 19% (effective from 1 April 2020) instead of a reduction to 17% was substantively enacted on 17 March 2020.  As a result, deferred tax balances have been measured at the effective rate of 19%.

Our expectation is that the Group will continue to benefit from incentives, such as Patent box, and this will lead to an effective tax rate that is lower than the main rate of corporation tax for future years.

7. EARNINGS PER SHARE

Basic earnings per share are calculated by dividing the earnings attributable to equity shareholders by the weighted average number of ordinary shares in issue. Diluted earnings per share are calculated by including the impact of all conditional share awards.

The calculation of basic and diluted profit per share is based on the following data:

	2020	2019
Earnings (£'000)
Earnings for the purposes of basic and diluted earnings per share being profit/(loss) for the year attributable to equity shareholders	1,962	2,393
Number of shares
Weighted average number of shares for the purposes of basic earnings per share	50,961,405	50,351,745
Weighted average dilutive effect of conditional share awards	1,625,000	1,336,986
Weighted average number of shares for the purposes of diluted earnings per share	52,586,405	51,688,732
Profit per ordinary share (pence)
Basic profit per ordinary share	3.85	4.75
Diluted profit per ordinary share	3.73	4.63

Adjusted earnings per ordinary share (pence)*	5.79	6.21
The calculation of adjusted earnings per share is based on the following data:
	2020	2019
	£000	£000
Profit for the period attributable to equity shareholders	1,962	2,393
Add back:
Amortisation on acquired intangible assets	443	109
Exceptional costs	109	226
Share based payment on IPO and SIP at Admission	454	418
Tax effect on above	2	-
Adjusted earnings	2,970	3,146
Number of shares in issue at year end	51,261,685	50,687,852

*Adjusted earnings per share is calculated as profit for the period adjusted for amortisation as a result of business combinations, exceptional items, share based payments and the tax effect of these at the effective rate of corporation tax, divided by the closing number of shares in issue at the Balance Sheet date.  This is the measure most commonly used by analysts in evaluating the business' performance and therefore the Directors have concluded this is a meaningful adjusted EPS measure to present.

8. GOODWILL AND OTHER INTANGIBLES

	Goodwill	Software	Product development	Trade name	Customer relationships	Total
	£000	£000	£000	£000	£000	£000
COST
As at 1 April 2018	23,471	151	1,229	-	-	24,851
On Acquisition	234	25	-	738	446	1,443
Additions	-	93	772	-	-	865
Disposals	-	(88)	-	-	-	(88)
As at 31 March 2019	23,705	181	2,001	738	446	27,071
On acquisition	2,587	-	-	551	1,424	4,562
Additions	-	89	640	-	-	729
Disposals	-	-	-	-	-	-
As at 31 March 2020	26,292	270	2,641	1,870	1,289	32,362
AMORTISATION AND IMPAIRMENT
As at 1 April 2018	4,109	130	607	-	-	4,846
Charge for the year	-	36	331	36	73	476
Eliminated on disposal	-	(88)	-	-	-	(88)
As at 31 March 2019	4,109	78	938	36	73	5,234
Charge for the year	-	10	381	97	346	834
Eliminated on disposals	-	-	-	-	-	-
As at 31 March 2020	4,109	88	1,319	133	419	6,068
NET BOOK VALUE
As at 31 March 2018	19,362	21	622	-	-	20,005
As at 31 March 2019	19,596	103	1,063	702	373	21,837
As at 31 March 2020	22,183	182	1,322	1,156	1,451	26,294

The remaining amortisation periods for software and product development are 6 months to 48 months (2019: 6 months to 36 months).

The goodwill, brand and customer relationships additions in the year relates to the acquisition of Pipeshield International Limited as set out in note 12.

Goodwill has been tested for impairment. The method, key assumptions and results of the impairment review are detailed below:

Goodwill is attributed to the CGU being the business entity in which the goodwill has arisen. The Group has four CGUs and the goodwill related to each CGU as disclosed below.

Goodwill	2020 £000	2019 £000
Tekmar Energy	19,362	19,362
Subsea Innovation	234	234
Pipeshield International	2,590	-
AgileTek Engineering	-	-

Goodwill was all allocated to one CGU last year and this has now changed following various acquisitions.  Goodwill has been tested for impairment by assessing the value in use of the cash generating unit. The value in use calculations were based on projected cash flows in perpetuity. Budgeted cash flows for 2020 to 2023 were used. These were based on a three-year forecast with growth in year one of between 20% and 40% built up from the detailed budget setting process, and target growth rates of 15% applied for the following two years. Subsequent years were based on a reduced rate of growth of 2.0% into perpetuity.

These growth rates are based on past experience and market conditions and discount rates are consistent with external information. The growth rates shown are the average applied to the cash flows of the individual cash generating units and do not form a basis for estimating the consolidated profits of the Group in the future.

The discount rate used to test the cash generating units was the Group's pre-tax WACC of 9.3%.  The goodwill impairment review has been tested against a reduction in EBITDA by 80% versus the original budget.

The value in use calculations described above, together with sensitivity analysis, indicate ample headroom and therefore do not give rise to impairment concerns. Having completed the impairment reviews no impairments have been identified. Management does not consider that there is any reasonable downside scenario which would result in an impairment.

All amortisation charges have been treated as an expense and charged to cost of sales and operating costs in the income statement.

9. PROPERTY, PLANT AND EQUIPMENT

	Freehold property	Leasehold improvements	Containers and racking	Plant and equipment	Fixtures and Fittings	Production tooling	Motor vehicles	Computer equipment	Right of use asset	Total
	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000
COST
As at 1 April 2018	-	878	1,135	1,899	-	1,082	11	367	-	5,372
Arising on acquisition	2,760	-	-	234	-	-	-	-	-	2,994
Right of use asset adjustment	-	-	-	-	-	-	-	-	2,360	2,360
Additions	-	41	13	176	-	600	-	60	106	996
Disposals	-	-	(30)	(3)	-	-	-	-	(97)	(130)
As at 31 March 2019	2,760	919	1,118	2,306	-	1,682	11	427	2,369	11,592
Arising on acquisition	576	1	-	151	-	-	-	5	-	733
Additions	-	1	86	244	21	632	-	61	316	1,361
Disposals	(450)	-	(63)	-	-	-	-	-	-	(513)
As at 31 March 2020	2,886	921	1,141	2,701	21	2,314	11	493	2,685	13,173
DEPRECIATION
As at 1 April 2018	-	818	1,113	913	-	836	11	280	-	3,971
Right of use asset adjustment	-	-	-	-	-	-	-	-	1,439	1.439
Charge for the year	20	50	16	194	-	188	-	48	292	808
Disposals	-	-	(30)	-	-	-	-	-	(97)	(127)
As at 31 March 2019	20	868	1,099	1,107	-	1,024	11	328	1,634	6,091
Charge for the year	50	36	17	277	1	450	-	41	380	1,253
Eliminated on disposal	-	-	(63)	-	-	-	-	-		(63)
As at 31 March 2020	70	904	1,053	1,384	1	1,474	11	369	2,014	7,281
NET BOOK VALUE
As at 31 March 2018	-	60	22	986	-	246	-	87	-	1,401
As at 31 March 2019	2,740	51	19	1,199	-	658	-	99	735	5,501
As at 31 March 2020	2,816	17	88	1,317	20	840	-	123	671	5,892

Depreciation charges are allocated to cost of sales and operating expenses in the income statement. The carrying value of the right of use asset relates to property leases.

10. TRADE AND OTHER RECEIVABLES

	2020	2019
	£000	£000
Amounts falling due within one year:
Trade receivables not past due	9,049	3,279
Trade receivables past due (1-30 days)	509	1,204
Trade receivables past due (over 30 days)	296	258
Trade receivables net	9,854	4,741
Contract assets	14,969	13,515
Other debtors	1,261	693
Prepayments and accrued income	593	441
Derivative financial assets	142	147
	26,819	19,537

Trade and other receivables are all current and any fair value difference is not material.  Trade receivables are assessed by management for credit risk and are considered past due when a counterparty has failed to make a payment when that payment was contractually due.  Management assesses trade receivables that are past the contracted due date by up to 30 days and by over 30 days.

The carrying amounts of the Group's trade and other receivables are all denominated in GBP. The derivative financial asset relates to forward foreign currency contracts.

There have been no provisions for impairment against the trade and other receivables noted above.  The Group has calculated the expected credit losses to be immaterial.

11.  SHARE BASED PAYMENTS

During the year the Group operated four equity-settled share-based payment plans as described below.

The Tekmar Group plc IPO Plan ("IPO Plan")

As part of the admission to trading on AIM in June 2018, the Group granted a total of 1,750,000 share options to key executives. All of the options granted are subject to service conditions, being continued employment with the Group until the end of the vesting period. The options include certain performance conditions which must be met, based upon earnings per share and total shareholder return targets for the financial year ending March 2020. The awards became exercisable on 20 June 2020 to the extent that the performance conditions have been satisfied.  The options were granted with an exercise price equal to the nominal value of the share (£0.01).

The Tekmar Group plc Long Term Incentive Plan ("LTIP")

The LTIP is a discretionary executive share plan under which the Board may, within certain limits and subject to any applicable performance conditions, grant to eligible employees nil or nominal cost options, options with a market value exercise price, conditional or restricted awards. All employees are eligible for selection to participate in the plan. No awards have been granted under the LTIP.

The Tekmar Group plc Share Incentive Plan ("SIP")

The SIP is an all-employee ownership plan under which eligible employees may be awarded free and/or matching shares. The SIP operates through a UK-resident trust (the "SIP Trust"). On 13 September 2018 the Company issued 42,691 shares of £0.01 each in the Company. The shares will be held in trust for a minimum holding period of 3 years and there is a forfeiture period of 3 years during which employees who participated in the SIP will lose their Award if they resign or are dismissed from their employment.

The Tekmar Group plc Save as you earn Plan ("SAYE")

The SAYE is an all-employee ownership plan under which eligible employees are invited to subscribe for options over the Company's shares which may be granted at a discount of up to 20%. On 31 March 2020 the Company launched the SAYE plan and options over 428,983 shares were granted to 52 staff.  There is a forfeiture period of 3 years during which employees who participated in the SAYE will lose their award if they resign or are dismissed from their employment.

A summary of the options granted is shown in the table below:

Plan	1 April 2019	Granted in the period	31 March 2020 share options outstanding	Vesting period	Exercise period
IPO Plan	1,625,000		1,625,000	2 years	10 years
SIP	42,691		42,691	3 years	10 years
SAYE	-	428,983	428,983	3 years	10 years

The Group has recognised a total expense of £454,000 (2019: £418,000) in respect of equity-settled share-based payment transactions in the year ended 31 March 2020. No options were exercised during the period.

Valuation model inputs

The key inputs to the Black-Scholes-Merton and Monte Carlo simulation models for the purposes of estimating the fair values of the share options granted in the year are as follows:

	Grant date	Share price on date of grant (p)	Expiry date	Expectation of meeting performance criteria
IPO Plan	20 June 2018	130.00	20 June 2028	75%
SIP	13 September 2018	161.50	13 September 2028	80%
SAYE	31 March 2020	83.00	31 March 2030	61%

12. BUSINESS COMBINATIONS

On 9 October 2019, the Company acquired the entire share capital of Pipeshield International Ltd for an initial cash payment of £3,000,000, other consideration of £674k, shares in the Group of £750,000 and deferred consideration of £2,750,000.  Other consideration is for assets, including a property, in Pipeshield that were immediately sold to the vendor for an equivalent sum post acquisition.  There was no cashflow impact of this transaction and the net effect leaves an receivables balance in Pipeshield which eliminates on consolidation.

Pipeshield International Limited are experts in subsea asset protection providing specialised equipment to support, protect and stabilise all kinds of subsea installations world-wide.

Consideration as at 9 October 2019	000
Cash	3,000
Other consideration	674
Shares	750
Deferred consideration to be settled	2,750
Total consideration	7,174

For cash flow disclosure purposes, the amounts are disclosed as follows:

	'000
Cash consideration	3,000
	3,000

Recognised amounts of identifiable assets acquired and liabilities assumed

	Fair value
	£'000
Assets
Property, plant and equipment	733
Investments	24
Other intangibles - customer relationships	1,424
Other intangibles - brand	551
Trade and other receivables	2,444
Inventories	109
Cash and cash equivalents	1,361
	6,646
Liabilities
Corporation tax payable	(242)
Trade and other payables	(1,338)
Deferred tax liabilities	(482)
	(2,062)
Total identifiable assets	4,584
Goodwill	2,590
Total	7,174

Pipeshield International Limited contributed £3,142,677 to revenue and £290,216 to profit before tax for the period from 9 October 2019 to 31 March 2020.

The fair value adjustments reflect finalisation of the purchase price allocation and presentation of the identified other intangible assets of customer relationships and brand, with the associated deferred tax liability provided.

On 20 September 2018, the Company acquired the entire share capital of Subsea Innovation Limited for an initial cash payment of £65,923, shares in the Group of £1,000,000 and contingent consideration of £1,000,000. The contingent consideration was payable on achieving target profitability within the business, which was achieved and the consideration paid to the vendor in January 2020.

Consideration	'000
Cash	66
Shares	1,000
Consideration paid in January 2020	1,000
Total consideration	2,066

Recognised amounts of identifiable assets acquired and liabilities assumed

	Fair value
	£'000
Assets
Property, plant and equipment	2,994
Other intangibles - software	25
Other intangibles - customer relationships	446
Other intangibles - brand	738
Trade and other receivables	303
Inventories	248
	4,754
Liabilities
Borrowings - overdraft	(115)
Trade and other payables	(671)
Directors Loan Account	(1,423)
Borrowings	(348)
Deferred tax liabilities	(234)
Provisions	(131)
	(2,922)
Total identifiable assets	1,832
Goodwill	234
Total	2,066

The fair value adjustments reflect:

· Uplift in the valuation of freehold property to fair value;

· Finalisation of the purchase price allocation and presentation of the identified other intangible assets of customer relationships and brand, with the associated deferred tax liability provided; and

· Settlement of certain liabilities on acquisition.

On 28 March 2019, the Group acquired 80% of the share capital of Ryder Geotechnical Limited for a cash payment of £2. Ryder Geotechnical Limited is involved in geotechnical consulting for subsea environments.

Consideration	'000
Cash	-
Total consideration	-

Recognised amounts of identifiable assets acquired and liabilities assumed

	Fair value
	£'000
Assets
Property, plant and equipment	11
Trade and other receivables	90
Cash and cash equivalents	13
	114
Liabilities
Trade and other payables	(14)
Borrowings	(5)
	(19)
Total identifiable assets	95
Gain on bargain purchase	(95)
Total	-

 

END

 

 

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