13 April 2021

Northbridge Industrial Services Plc

("Northbridge" or the "Group" or the "Company")

Audited results for the Year Ended 31 December 2020

Northbridge Industrial Services plc, the industrial services and rental company, today announces its audited results for the year ended 31 December 2020, which are in line with market expectations.

Highlights:

·  Group revenue up 1.1% to £34.0 million (2019: £33.6 million)

o  Sales of equipment up 16.9% - data centres particularly strong (now 22% of total Crestchic equipment sales)

o  Hire sales down 7.9% - primarily due to impact of COVID-19

o  Sales mix from hire to sales impact on gross margin - down to 43.2% from 47.0%

·  Pre-exceptional profit before tax of £0.4m (2019 £0.3m) - up despite the challenges of the pandemic

·  £7.8m exceptional impairment of Tasman division intangibles and other assets due to impact of COVID-19 on trading which is unchanged from the interim report

·  Strong balance sheet with net debt¹ down 11.9% to £6.8 million (2019: £7.8 million)

·  Net debt¹ to EBITDA¹ ratio decreased to 0.9X (2019: 1.0X)

·  Following strategic review, advisors appointed to pursue the potential disposal of Tasman drilling tools

·  Started the year with record equipment sales order book for power reliability division and strong pipeline

·  Global increase in demand for data centres and power resilience/renewable energy generation providing accelerating demand for Northbridge products and services

¹ including IFRS 16, reconciliation to pre-IFRS-16 figures included in the Financial Review

Peter Harris, Executive Chairman, commenting on the results said:

"It is testament to the swift, decisive decision making of the management team and the commitment of our employees that Northbridge has delivered such robust results in what has been a year of unprecedented challenge. For the Group to continue to trade profitably and generate cash during the year highlights the strength of our business and ongoing demand for our services, particularly the relevance of our power reliability assets as the global new economy increasingly offers opportunities in areas including data centres, power resilience and clean and renewable energy.

Following the strategic review of the Group's activities, our decision to focus on Crestchic, our power reliability division, places Northbridge at an exciting point in its journey. We are focused on expanding both the traditional and emerging opportunities for the business by extending our presence in major geographies such as the USA and continental Europe. As Northbridge moves into the next financial year with record order books for sales of equipment and a strong pipeline, the Board is confident that Northbridge is emerging from the pandemic as a leaner, more robust and better focused organisation".

For further information

Northbridge Industrial Services plc                                                                                                                          01283 531645

Peter Harris, Executive Chairman                                                                                                                             

Iwan Phillips, Finance Director

Shore Capital (Nominated Adviser and Broker)                                                                                                    020 7408 4050

Robert Finlay / Antonio Bossi / Henry Willcocks

Buchanan Communications                                                                                                                                       020 7466 5000

Charles Ryland / Stephanie Watson

About Northbridge:

Northbridge Industrial Services plc hires and sells specialist industrial equipment. With offices or agents in the UK, USA, The Middle East, Belgium, Germany, France, Australia, New Zealand, Singapore, China and South Korea, Northbridge has a global customer base. This includes utility companies, renewables, the oil and gas sector, data centres, shipping, banking, mining, construction and the public sector. The product range includes loadbanks, transformers, and drilling tools. Northbridge was admitted to AIM in 2006 since when it has grown by providing a high level of service, responsiveness and flexibility to customers.

EXECUTIVE CHAIRMAN'S REPORT

2020 will go down in history as the year of the COVID-19 pandemic, which has significantly impacted on almost every aspect of business and personal life over the last twelve months and Northbridge was no exception. At the time of writing this statement last year we were already seeing the early signs of disruption to our markets and were implementing plans to ensure that we could withstand the effects of the pandemic. We reduced costs, secured our supply chains while optimising working capital, minimised discretionary capital expenditure and refinanced to secure the ongoing liquidity of the Group.

Though the scale, impact and duration of the pandemic, which is far from over yet, was greater than most people dared imagine a year ago, I am to report that the prompt and decisive action that was taken at the time enabled the Group to continue to trade profitably and generate cash during the year to 31 December 2020. This was despite a number of channels to our traditional markets being closed or constricted due to restrictions on the freedom of movement of people and materials, and the increased cost of working due to social distancing and other measures to protect the wellbeing of our colleagues, suppliers and customers.

Group revenue increased by 1% to £34.0 million (£33.6 million) and pre-exceptional profit before tax increased to £0.4m (2019: £0.3m).

We have entered 2021 with the benefit of new year record orders for the sale of Crestchic products and signs of strengthening rental pipelines across both of our operating divisions.

Crestchic - Power Reliability

Crestchic manufactures, sells and rents loadbanks and transformers to domestic and international customers all around the world. Our products are used to assure reliability for generators and distributors of power, for industries critically dependent on backup power to ensure business continuity in the event of a failure of their primary power supply, and to commission power generation in remote sites such as mining and drilling activities for the extraction of natural resources.

We have particularly benefited from growth in two sectors that have either been relatively unaffected by the pandemic or even benefited from it: renewable energy and data centres.

The accelerating transition from coal and oil-based energy sources towards cleaner and renewable energy is resulting in a proliferation of smaller energy generators whose sites both require commissioning and also create unique challenges for connection into established distribution networks. These in turn create an increased need for testing that is driving the demand for our products, both for outright sale and for rental, as Crestchic loadbanks are on par with the most advanced and resilient systems available in the western economies for this purpose.

The continuing worldwide growth in data centres continues to provide Crestchic with tangible and significant opportunities for both the sale and rental of our equipment. We expect global investment in this type of "big data" to grow for many years to come and we are actively expanding our geographic penetration and the range of products and services that we supply to this rapidly growing market.

Crestchic's total turnover for the year was £24.6 million, down slightly from £25.4 million in 2019.

Outright sales of manufactured goods performed strongly, up 18.0% year on year, and this growth would have been higher still, save for the constraints on manufacturing capacity which was exacerbated by the safe working practices introduced due to the pandemic. Demand was particularly strong from the data centre sector which, unsurprisingly, saw its already strong growth accelerate with the increase in homeworking patterns in developed economies, and from the renewables sector, particularly for DC loadbanks, which are now emerging as a real area of opportunity for the division. Gross margin on outright sales declined from 37.8% to 34.4%, primarily due to the increased costs of working in the factory as a result of COVID-19 restrictions. Encouragingly, for the third year running, we exited the year with a record sales order book.

Rental was more severely impacted by the pandemic and turnover was down 19.6% year on year. Though rental demand remained strong from data centres and the renewables market, larger tests for energy and marine projects in the Middle and Far East were severely impacted by the difficulty of deploying people to sites, which curtailed exploration and development activity.  Gross margin on rental also declined - from 61.5% in 2019 to 55.7% in 2020, mainly due to the lower recovery of fixed depreciation costs. Although turnover fell in 2020, few of the anticipated larger rental projects were cancelled - most have been delayed into later periods, awaiting the return of more normal site conditions post the pandemic. The success of the development and roll out of vaccines around the world is now restoring business confidence and we are now seeing these larger projects beginning to re-emerge.

Our business in the USA continued to develop and the sheer scale of the market creates a strategic growth opportunity for Crestchic. On top of our normal business, we benefited in 2020 from a rental contract in California where our equipment was used to assure power supply resilience in the face of ongoing problems to the grid infrastructure caused by wildfires - which is likely to be an increasing issue around the world in the face of climate change. Demand for DC loadbanks has also been strong in the USA and we plan to increase investment in our DC loadbank hire fleet. 

To meet the expected increase in demand for our products for both outright sales and rentals, we are now at an advanced stage of planning to enlarge the factory in Burton on Trent. We expect to break ground on a new building in the second half of 2021 with the new facility scheduled to be up and running in early 2022. The extension, together with reconfiguration of the existing facilities, is expected to increase production capacity by some 50%.

Tasman - Drilling tools

Our tool rental operations in Australia, New Zealand, Malaysia, Singapore and the Middle East enjoyed a strong first quarter but were then significantly impacted by the effects of the pandemic. As seen in the rental side of our power reliability division, from the second quarter onwards larger drilling projects were affected by the difficulty of deploying people to sites. This curtailed exploration and development activity and resulted in some of the anticipated larger rental projects slipping into later periods, awaiting the return of more normal site conditions post COVID-19.  At the half year, in response to the increased level of uncertainty as to the future trading prospects of the division, we recorded an exceptional write down, primarily relating to intangible assets, of £7.8 million. Although we are now starting to see increased levels of enquiries for such projects for the second half of 2021 and confidently expect markets to start to recover within this time frame, this write down was still considered to be appropriate at the year end.

Despite the pandemic, the division again achieved a year-on-year improvement, with total revenue up 14.6% to £9.4 million (2019: £8.2 million). EBITDA was strongly positive at £2.0 million (2019: £0.5 million) and the operating loss (after the allocation of central costs) was reduced to £0.7 million (2019: £2.5 million). But for COVID-19, we believe that the division would have comfortably returned to profit for the year as a whole.

We anticipate that the prospects for the division are now more favourable as markets generally recover and, more specifically, through exploiting emerging opportunities such as natural gas exploration in Eastern Australia and geothermal drilling activity in New Zealand.

Post pandemic future of the Group - strategic update

2020 was a year of unprecedented challenge and I am very proud of the way in which we responded to and overcame the difficulties presented by the COVID-19 pandemic. That response was all down to our people - our staff, management and the Board. We recognised the problem early, we took decisive action and we focused on our strengths, which are many. Northbridge is emerging from the pandemic as a leaner, more robust and better focused organisation.

Financially, we are conservatively geared and benefit from the stability and support afforded by longstanding relationships with committed core shareholders and our lenders.

We are taking the opportunity afforded by our strong financial position to renegotiate our banking facilities to provide flexible, committed support to fund the ongoing growth and development of the business. This process should be completed in the second quarter of 2021. These facilities should also provide the financial headroom to crystallise the £4.0 million convertible loan notes and to accommodate whatever election that the holders of the loan notes may make in respect of early redemption for cash or conversion into ordinary shares.

The future performance of the Group will be refocused around delivering superior returns on capital ahead of our cost of capital by effectively deploying our assets in the markets and sectors that can provide higher utilisation and returns.

Following a strategic review of the activities of the Group, which concluded in the first quarter of 2021, and an expression of interest in the possible acquisition of its drilling tools division, Tasman, the Board has appointed advisors to investigate the potential disposal of its drilling tools activities. As the impact of the pandemic diminishes, the Board expects that Tasman will continue to generate cash and return to profitability. However, disposal of the division will be considered should a firm offer be received that, in the opinion of the Board and its advisors, represents greater value to shareholders than that which would be created by retaining these activities within the Group.

Our power reliability assets include a portfolio of market-leading products that are uniquely aligned to emerging demand for support in areas such as data centres, power resilience and clean and renewable energy, and the business enjoys a well-earned reputation for the quality of our products and our expertise in their deployment.

We have opportunities to extend our reach into our traditional and emerging growth markets by broadening our presence in major geographies such as the USA, continental Europe and Asia-Pacific and ongoing development of the range and application of our products.

Organisationally, our Board has given clear strategic leadership and exercised strong governance. Our management team is stable and experienced, and possesses a deep knowledge of our products and markets, and our staff are second-to-none in their skills, experience and loyalty. Each member of our team has been challenged during the last year and each has risen to and overcome the challenges he or she faced. And there have been sacrifices - voluntary salary reductions, furlough schemes, unusual working conditions and locations and uncertainty to name but a few. I cannot thank my colleagues enough for all they have done to ensure the future success and prosperity of the business.

On 31 March 2021, Eric Hook retired from the Board and I would like to express my gratitude to Eric for his 15 years of exemplary service and wish him well in his retirement. Eric, as the founder of the Company, was principally responsible for creating the global business that we have today.

We have taken the opportunity of Eric's retirement to streamline the Board structure. The roles of Chairman and Chief Executive have been combined into the single role of Executive Chairman, and Chris Caldwell, Managing Director of the Crestchic division, has joined the Board. Chris has already been attending Board meetings for several years in preparation for this new responsibility.

Also stepping down from the Board is Ash Mehta, Non-executive Director and Chair of the Audit Committee. He will leave the Board following completion of the 2020 audit once this annual report is approved at the Annual General Meeting in June. Ash has been a Director of the Company for 14 years, in several capacities, and the Board is immensely grateful for his contribution to the success of the Group. Judith Aldersey-Williams will become the Chair of the Audit Committee.

To maintain an appropriate balance between the Executive and independent, Non-executive members of the Board, we have introduced the role of Senior Independent Director. Stephen Yapp, who joined the Board in 2020, is stepping up to this position.

While we expect to benefit from the recovery of the global economy as the world emerges from the pandemic, we know that the real levers for sustained value creation lie firmly in our own hands. We will use our strong platform of financial stability, product excellence, innovation, market opportunity and outstanding people to drive growth in revenue, profits and return on capital.

Outlook

We entered 2021 with a strong order book for our core Crestchic products and optimism for continued improvement in our trading performance in both Crestchic and Tasman. Alongside this, we are continuing to manage costs efficiently, optimise working capital, and focus our capital expenditure on areas of strategic significance to our ambitions for growth. All of this should deliver a strong performance in 2021 and build the foundations for long-term growth.

In the first quarter of the year the Group performed in line with management's expectations and we expect growth in revenues and profit over the remainder of the year. We expect profit for the first half to be ahead of 2020 and for this to continue during the second half of the year.
 

FINANCIAL REVIEW

Revenue and profit before tax

The Group's revenue is derived principally from the rental of its hire fleet and the sale of manufactured equipment. Notes 2 and 3 to the financial statements show the Group's revenue split by segment, geography and revenue type.

As many of the Group's costs are largely of a fixed nature in the short to medium term (with significant movements in the cost base being attributable to acquisitions, large capital expenditure and divestments) any revenue movement, however small, will be highlighted at the operating profit level.

Although overall revenue increased by 1% when compared with 2019, rental revenue made up 58% of total revenue in 2020 compared with 64% in 2019. This shift in mix towards sales from rental, together with the pandemic-driven decrease in the equipment sales margin, decreased the overall margin from 47.0% in 2019 to 43.2% in 2020.

Operating costs decreased from £13.6 million to £13.3 million with costs controlled due to the pandemic. £0.4 million of pandemic related non-repayable Government support was received during the year which included £0.3 million received in Australia. The UK factory remained open throughout the year and very few UK-based staff were placed on furlough.

Net finance costs decreased in 2020 with the level of debt decreasing. A pre-exceptional profit before tax of £0.4 million was generated in the year compared with £0.3 million in 2019.

Exceptional items for the year, all related to the Tasman division, totalled £7.3 million net of deferred tax. Full details can be found in note 4 to the financial statements.

Earnings per share

The basic and diluted loss per share ("LPS"), both of 26.9 pence (2019: 0.8 pence), have been arrived at in accordance with the calculations contained in note 11 to the financial statements. This LPS is after exceptional items of £7.3 million.

Balance sheet and debt

Total net assets at 31 December 2020 were £27.7 million compared with £35.0 million in 2019. The decrease in net assets during the year is mainly due to the exceptional costs of £7.3 million relating to the impairment of intangible assets and amounts owed by joint ventures within the Tasman division. Further details are included in notes 4 and 11 to the financial statements.

Net assets per share at the year end were 98 pence (2019: 125 pence) after the impairment of Tasman intangible assets.

Hire fleet additions in the year totalled £3.8 million (2019: £3.7 million) with investment made in both the Crestchic and Tasman businesses. Proceeds from the sale of hire fleet were £0.8 million (2019: £1.6 million) resulting in a net spend of £2.9 million (2019: £2.0 million). The majority of this capital expenditure was planned before the pandemic and leaves the Group well-positioned to benefit from the post-COVID-19 recovery without requiring significant capital expenditure.

Inventory levels increased during the year to £4.5 million (2019: £3.5 million) mainly due to the increased production levels and the prudent approach applied to stock levels to decrease the risk of COVID-19 and Brexit related supply chain issues.

Despite COVID-19, cash collection has been strong during the year and year-end trade receivables have decreased from £6.7 million to £6.6 million in the year. Debtor days have not been adversely affected by COVID-19 and the Group maintained its usual trading terms to supplier, including at the year end.

During 2020 the bank and convertible loan note facilities were extended by one year to June 2022. The bank facilities were extended on the original terms and the convertible loan notes' exercise price was decreased from 125 pence to 90 pence. The option to extend the loan notes was included in the original agreement and as detailed in that agreement the interest rate will increase from 8% to 10% for the one-year extension period.

As noted in the Executive Chairman's Statement, advanced discussions are currently being held to secure longer-term debt facilities for the Group which will give the Board the ability to crystallise the convertible loan notes. We expect this to occur during the second quarter of 2021.

Net debt decreased by £1.0 million during the year to £6.8 million (£5.4 million pre-IFRS 16) (2019: £7.8 million, £6.4 million pre-IRS 16) which includes £4.0 million debt convertible to equity at 90 pence per share. During the year the Group made investments in both fixed assets and working capital while decreasing debt.

Notwithstanding the investment seen during the year and the pandemic-driven decrease in EBITDA, the Group's leverage, as calculated by dividing net debt by EBITDA, decreased from 1.0X as at 31 December 2019 to 0.9X as at 31 December 2020. On a pre-IFRS 16 basis this ratio decreased from 0.9X to 0.8X during the year.

Cash flow

The Group continued to generate significant levels of cash despite the COVID-19 driven decrease in EBITDA and increase in inventory levels, and has seen the cash generated from operations decrease from £8.8 million to £7.1 million in the year. During the year no payments of employment taxes, rates, VAT or GST were deferred.

Tax expense

The overall tax charge for the year totalled £0.1 million (2019: £0.6 million) after a £0.4 million exceptional credit for the deferred tax related to impaired intangibles with the Tasman division.

Losses relating to the Group's Australian entities have prudently not been recognised as a deferred tax asset at the balance sheet date, but the losses are available to be utilised against future profits. Any future recognition of a deferred tax asset will be dependent on these future profits by jurisdiction becoming more certain.

The Group manages taxes such that it pays the correct amount of tax in each country that it operates in, utilising available reliefs and engaging with local tax authorities and advisors as appropriate.

Return on investment (ROI)

As noted in the Executive Chairman's Statement, a key metric for the Group is the return generated on the investments it makes in assets and working capital. Our ROI measure is defined by the pre-exceptional operating profit divided by the net operating assets.

The Group is focused on delivering an ROI well above its weighted average cost of capital. The Group's pre-tax cost of capital has been calculated at 12.5% by a third-party advisor and the Board is targeting a Group ROI of 15% in the medium term.

To achieve this the Board will focus on the following:

-     The prioritisation of ROI in all capital expenditure and asset disposal decisions

-     Maintaining Crestchic's ROI as investment into its growth continues

-     Accelerating the improving trends seen in the Tasman ROI

-     Ensuring that the PLC overhead is appropriate

Divisional and Group ROI

* 2018 net operating assets defined below; for 2019 and 2020 see note 3

** See note 3 for divisional allocation

Crestchic rental revenue was the revenue stream most severely impacted by COVID-19 and we are confident of the division returning to an ROI of over 20% in the short term and the changes to the PLC Board structure will decrease the impact of central costs on the Group's ROI.

Tasman has benefited from strong investment over the past three years and we expect this division to generate positive returns in the medium term as activity levels resume to at least pre-pandemic levels. The previous investment will ensure that significant revenue growth can be achieved with only modest levels of future investment and we expect free cash flow to be positive in 2021 and beyond.

Reconciliation to reported figures

Net operating assets 31 December 2018

The ROI ratio uses the average net operating assets during the year. The net operating assets by division for 31 December 2018 were:

Reconciliation of pre-IFRS 16 and post-IFRS 16 Net debt, EBITDA and Cash generated from operations

The following tables reconcile the pre and post-IFRS 16 balances of some of the Group's key metrics: EBITDA, cash generated from operations and net debt. This is to enable user to compare these metrics to pre-IFRS 16 metrics from 2018 and previous periods.

* - Any leases which would have been classified as finance leases prior to IFRS 16 have been added to loans and borrowings.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2020

All amounts relate to continuing operations.

CONSOLIDATED BALANCE SHEET

As at 31 December 2020

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2020

For the year ended 31 December 2019

CONSOLIDATED CASH FLOW STATEMENT

1.            ACCOUNTING POLICIES

1.1 BASIS OF PREPARATION OF FINANCIAL STATEMENTS

While the financial information included in the annual financial results announcement has been prepared in accordance with the recognition and measurement principles of International Financial Reporting Standards (IFRSs), this announcement does not contain sufficient information to comply with IFRSs.

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2020 or 2019, but is derived from those accounts. Statutory accounts for the year ended 31 December 2019 have been delivered to the Registrar of Companies and those for the year ended 31 December 2020 will be delivered following the company's annual general meeting.

The auditors have reported on those accounts and their reports were unqualified.

Going concern

After making appropriate enquiries, the Directors have formed a judgement, at the time of approving the financial statements, that the Group can have a reasonable expectation that adequate resources will be available for it to continue its operations for the foreseeable future, and consequently it is appropriate to adopt the going concern principle in the preparation of the financial statements.

In forming this judgement, the Directors have reviewed the Group's latest forecasts for 2021 and 2022 (including downside sensitivity scenarios and reverse stress testing), cash flow forecasts, contingency planning, the sufficiency of banking facilities and forecast compliance with banking covenants.

The Group has shown to be resilient in the face of COVID-19 and with the vaccine rollout pressing ahead at pace it is expected that trading in 2021 will be ahead of 2020 and trading in the first quarter of 2021 supports this assumption.

Even with a reasonable downside scenario considering the continued effect of COVID-19 there is sufficient cash flow to pass all bank covenants and to sustain the requirements of the business.

This model includes some mitigation that is under the Directors' control including a reduction in capital expenditure and a modest reduction in costs. The model does not contain the sale of any assets, but that option would be open to the Directors if required.

The main bank facilities and convertible loan note facilities are not due for repayment until June 2022 and advanced discussions are ongoing related to longer-term debt facilities as noted in the Executive Chairman's Statement and Financial Review. The going concern assessment and future cash flow forecasts are not contingent on any refinancing negotiations or proceeds from the proposed disposal of Tasman.

1.2 BASIS OF CONSOLIDATION

Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

De-facto control exists in situations where the company has the practical ability to direct the relevant activities of the investee without holding the majority of the voting rights. In determining whether de-facto control exists the company considers all relevant facts and circumstances, including:

-              The size of the company's voting rights relative to both the size and dispersion of other parties who hold voting rights substantive potential voting rights held by the company and by other parties.

-              Other contractual arrangements

-              Historic patterns in voting attendance

The consolidated financial statements present the results of the company and its subsidiaries ("the Group") as if they formed a single entity. Intercompany transactions and balances between group companies are therefore eliminated in full.

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases.

2.            REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of revenues

The Group has disaggregated revenue into various categories in the following table which is intended to:

·  depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic date; and

·  enable users to understand the relationship with revenue segment information provided in note 3.

Revenue type and timing of transfer

of goods or service

Contract liabilities

Contract liabilities are included within "trade and other payables" on the face of the balance sheet. There were no contract assets in the current or prior year.

Contracts liabilities arise when customers pay advanced deposits on units manufactured by Crestchic. These are generally recognised as revenue within six months and no deposits were recognised as revenue in a period longer than twelve months.

3.         SEGMENT INFORMATION

The Group currently has two main reportable segments:

·    Crestchic loadbanks and transformers - this segment is involved in the manufacture, hire and sale of loadbanks and transformers. It is the largest proportion of the Group's business and generated 76% (2018: 78%) of the Group's revenue. This includes the Crestchic, NTX, Crestchic France, NME, CME, CAP, USA and China businesses; and

·    Tasman oil tools- this segment is involved in the hire and sale of oil tools and loadcells and contributes 24% (2018: 22%) of the Group's revenue. This includes the TOTAU, TOTNZ, TOTAE, TOTSEA and TOTAP and the Group's 49% share of OTOT and TSPG.

Factors that management used to identify the Group's reportable segments

The Group's reportable segments are strategic business units that offer different products and services.

Measurement of operating segment profit or loss, assets and liabilities

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies.

The Group evaluates performance on the basis of profit or loss before tax.

Segment assets and liabilities include an aggregation of all assets and liabilities relating to businesses included within each segment. All inter-segment transactions are at arm's length. The segmental allocation of costs, assets and liabilities has been revaluated during the year and balances relating to goodwill, intangibles, fair value adjustments and deferred tax arising on acquisitions and the resulting amortisation and depreciation of these balances have been full allocated to segments. In previous years, these balances were not included in their related segments.
 

4.          EXCEPTIONAL COSTS

Exceptional items totalling £7,326,000 (2019: nil) have been recognised in the consolidated statement of comprehensive income. £7,751,000 has been recognised as an exceptional cost and a £425,000 credit has been recognised within the deferred tax charge.

£7,136,000 of the amount recognised in exceptional costs and the £425,000 deferred tax credit relates to the impairment of goodwill and intangibles and the remaining £615,000 included within exceptional costs relates to amounts owed by joint ventures.

Impairment of goodwill and intangibles

Due to COVID-19 being an indicator of impairment, an impairment review of the Group's goodwill was conducted on the interim report date of 30 June 2020 and again on 31 December 2020. The recoverable amounts of the CGUs were determined from value-in-use calculations based on the latest cash flow projections derived from forecasts covering a five-year period to 31 December 2024.

The recoverable amount of the Tasman New Zealand goodwill has been sensitive to relatively small changes in the growth rate and discount rates for some time. Tasman New Zealand cash flows have been discounted using a nominal pre-tax rate of 15% and an average future revenue growth rate of 5% (7% decrease in 2020, 0% in 2021, 10% growth from 2022 to 2024) has been used.

The model used at 31 December 2019 used a growth rate of 30% which assumed a return to larger and more frequent offshore campaigns and some significant geothermal projects including new power stations.

The Directors now believe that a return to large, frequent offshore campaigns and large-scale geothermal projects is unlikely in the medium term and the future growth rates have been decreased to reflect this.

The key factor affecting the Directors' view on future offshore drilling is COVID-19 and its effect on investment in the oil and gas industry in New Zealand. Although 2020 started well, COVID-19 led to the early end to an offshore campaign and the severe delay of another. From 2014 to 2016 many international drilling entities left New Zealand and retrenched to their traditional core markets and have to date not returned. With COVID-19 decreasing the current price of oil and weighing on anticipated global demand for oil and gas it seems unlikely that that they will return in the medium term and will concentrate their investment on their core markets. The previously announced moratorium on granting any further offshore drilling permits will also hinder any new investment into the country.

A factor affecting the Directors' view on future large-scale geothermal projects, which involves a very high level of drilling, is the news that the future of the Tiwai Point aluminium smelter is highly uncertain. The smelter currently uses a significant proportion of all of New Zealand's generation capacity so it is unlikely any further capacity will be required from new geothermal power stations in the medium term.

Notwithstanding this impairment, the Group continues to believe that the entity will have a successful future, albeit not at the revenue and profit levels previously anticipated.

Provision against amounts owed by joint ventures

The Directors have reviewed the recoverability of the balance owed from Olio Tasman Oil Tools which is a joint venture based in Malaysia. A balance of £615,000, net of the joint venture losses suffered to date, was owed from the joint venture and a full provision has been made against this balance.

The joint venture's performance improved significantly in the first quarter of 2020 and losses were greatly reduced but due to the impact of COVID-19, trading in the second quarter and its prospects for the remainder of 2020 have suffered. It is therefore unlikely to have the necessary resources to repay the amounts owed to the Group.

This provision has been made due to the direct impact of COVID-19 on market conditions and the trading prospects on the joint venture and is classified as an exceptional cost.

5.            INCOME TAX EXPENSE

6.         EARNINGS PER SHARE

At the end of the year, the Company had in issue 2,332,951 (2019: 2,086,951) share options and £4,000,000 of convertible loan notes which can be converted to 4,444,444 (2019: 3,200,000) ordinary shares at a price of 90 pence (2019: 125 pence) per share which have not been included in the calculation of diluted EPS because their effects are anti-dilutive. These share options and convertible loan notes could be dilutive in the future.