TIDMNCC
RNS Number : 8473U
NCC Group PLC
17 July 2018
17 July 2018
NCC Group plc
NCC Group plc (LSE: NCC, "NCC" or "the Group"), the independent
global cyber security and risk mitigation expert, has reported its
full year results for the 12 months to 31 May 2018.
Year end results[1]
-- Group revenue from continuing operations grew by 8.3% to
GBP233.2m (2017: GBP215.3m), Adjusted organic growth*[2] was
11.8%
-- Group Gross Margin (GM%) gains of 4.9% pts with 5.3% pts in
Assurance driven by improved utilisation of professional
consultancy staff
-- Adjusted*[3] EBITDA from continuing operations up 29% to GBP42.5m (2017: GBP33.0m)
-- Adjusted* EBIT from continuing operations grew 22% to GBP31.0m (2017: GBP25.5m)
-- Profit before tax recovered to GBP11.9m (2017: loss GBP44.8m)
-- Adjusted* basic earnings per share 8.3p (2017: 6.2p), adjusted effective tax rate of 22.4%
-- Net debt*[4] reduced to GBP27.8m (2017: GBP43.7m)
-- Total dividend maintained at 4.65p per share with final
dividend proposed of 3.15p per share
Strategic and Operational highlights
-- Good progress made on the implementation of the strategic
review, new initiatives in place to broaden and deepen the
strategic plan
-- Transformation programme launched under the brand 'Securing
Growth Together' to invest GBP3.0m - GBP4.0m p.a. for the next two
years. EBIT margin gains of c.1% p.a. targeted in the same
period
-- Organisational restructure completed around geographical units and customer segments
-- Completed portfolio rationalisation with sales of Web Performance and Software Testing
-- Significant changes to the Board and Executive management team
-- Initiatives now underway to develop skills and capabilities
as well as deepening industry specialisms and alignment
Chris Stone, Chairman, comments:
"We have made good progress against the strategic goals that we
set for ourselves at the start of the year. The business has been
successfully stabilised following a period of volatility. We have
reorganised our senior management teams to improve our go-to market
strategy. We have also maintained double digit organic* growth in
our Assurance division, improved our Gross Margin ratio and
completed the divestment of the two business units identified as
non-core in the Strategic Review.
While much remains to be done, I am confident that the building
blocks for long term sustainable improvement in business
performance and shareholder returns are starting to be put in
place.
The combination of continuing growth and improving margins in
the two operating divisions will deliver year on year improvements
in adjusted EBIT in 2019 while also allowing us to make considered
and targeted investments to support the business transformation
programme. Overall the Board's expectations for Adjusted EBIT in
2019 remain unchanged."
[1] The footnotes below refer to the use of Alternative
Performance Measures (APMs). These terms and their calculations are
explained in note 3. Throughout this document, we indicate APMs
with a *.
[2] Organic growth excludes the impact of FX, acquisitions and
the planned cut in third party product re-sales in the UK.
[3] Adjusted figures exclude the impact of Individually
Significant Items, amortisation of acquired intangibles, share
based payments, profit or loss on disposal of subsidiaries, the
unwind of discount on acquisition consideration and any associated
tax on these items.
[4] Net debt is calculated as total borrowings less cash and
cash equivalents.
Adam Palser, Chief Executive Officer, comments:
"The Group has excellent foundations on which to build a world
leading cyber security and risk mitigation business. We are working
to broaden and deepen the strategic plan developed in the early
part of the year, its core findings remain robust and relevant and
it is now being expanded with our 'Securing Growth Together'
transformation programme.
Our markets remain buoyant, our high quality customer base
continues to see us providing value added technical expertise and
our staff remain committed to building a genuinely differentiated
global cyber security and business continuity group of
companies."
A briefing for analysts will be held at 9:00am at the offices of
Maitland, 3 HKX Building, Pancras Square, London N1C 4AG. The
briefing will also be webcast live and can be accessed via this
link:
https://www.investis-live.com/nccgroup/5b23ba5f770844160050c3aa/1876
or on the NCC Group website www.nccgroup.trust
Enquiries:
NCC Group (www.nccgroup.com) +44 (0)161 209 5432
Adam Palser, CEO
Brian Tenner, CFO
Maitland
Neil Bennett / Al Loehnis +44 (0)20 7379 5151
Chairman's statement
Introduction
"NCC Group has a unique opportunity: we hold leading positions
in growing markets around the world, our customers value us, and
our workforce is exceptionally skilled. These foundations will
allow us to create significant value for all of our
stakeholders."
In my second annual statement to shareholders, I am pleased to
report that good progress has been made against the goals we set
for ourselves at the start of the year. The business has been
successfully stabilised following a period of volatility. We have
reorganised our senior management teams to improve our go-to market
strategy. We have also maintained double digit Adjusted organic*
growth in our Assurance division, improved our Group Gross Margin
ratio (GM%) and completed the divestment of the two business units
identified as non-core in the Strategic Review.
Business Performance
The financial performance for the year represented a strong
recovery from the declining trajectory experienced at the end of
the prior financial year. We delivered 13.8% Adjusted organic*
growth in our retained assurance businesses while Escrow delivered
the expected more modest Adjusted organic* growth of 2.7%, in line
with its more mature UK market position (excluding the impact of
prior year revenue correction).
Improving our Group GM% ratio was a key strategic objective
following significant declines in the last few years. I am pleased
to say that both divisions improved strongly in the year: Assurance
GM% grew by 5.3% points to 34.2% and Escrow by 4.5% points to
76.3%. Both results were largely due to improved cost control and
utilisation gains. There is more to be achieved in this area.
Adjusted Operating Profit* from continuing operations grew by
21.6%, to GBP31.0m (2017: GBP25.5m). Operating profit* grew
significantly to a profit of GBP13.7m compared to the loss of
GBP42.9m in the prior year, primarily reflecting improved business
performance and lower exceptional costs in the current year.
Strategy update
The results of the Strategic Review were announced in our final
results presentation in July 2017. Since then we have been busy
implementing the plans that we set out to address the findings of
the review. Firstly, we implemented a new organisational approach
to our market places and sectors of operation with a new Target
Operating Model. Secondly, we started to mobilise a number of
initiatives, both tactical and strategic, to make long-term process
improvements which are expected to deliver returns in the coming
years. Thirdly, the non-core Web Performance and Software Testing
businesses were both sold to different purchasers for net cash
consideration of GBP9.2m after disposal costs and GBP0.7m of cash
disposed of.
Dividend
The Board has reviewed business performance in the current year
alongside our historical progressive dividend policy. The Board is
mindful of balancing the improving trend in performance with the
clear need for investment over the next few years. The Board
therefore recommends that the dividend is maintained at the current
level.
A final dividend of 3.15p is therefore being recommended by the
Board, making a total for the year of 4.65p. If approved, the final
dividend in respect of the year ended 31 May 2018 will be paid on 5
October 2018 to shareholders on the register as at 7 September 2018
(ex-dividend date of 6 September 2018).
Board Composition
There have been a number of changes to the Board during the
year. On 1 December 2017 we announced Adam Palser as the Group's
new Chief Executive Officer. Adam brings a track record of success
in the professional services, B2B and cyber security sectors. At
that time, Brian Tenner stood down from his role as interim Chief
Executive Officer and returned full-time to his duties as Chief
Financial Officer.
During the year we were pleased to welcome Mike Ettling and
Jennifer Duvalier to the Board as Non-Executive Directors. Mike
brings with him a wealth of experience of both the digital and
cloud sectors. Jennifer adds invaluable experience in corporate
culture and organisational matters - factors which are critical to
NCC Group's future success.
In line with best practice, after nine years' tenure, Debbie
Hewitt MBE, Senior Independent Director, stepped down from the
Board on 28 March 2018. In addition, as part of the broader Board
succession planning, Thomas Chambers, Non-Executive Director,
relinquished his role as Chairman of the Audit
Committee in April 2018. After six years' tenure he will resign
from the Board following the Company's AGM on 26 September 2018. We
thank Debbie and Thomas for their valuable contributions during
their tenures. The Board is appreciative of the roles that Debbie
and Thomas have both played and wish them well for the future.
Chris Batterham, Non-Executive Director, became Senior
Independent Director from 29 March 2018 and Chairman of the Audit
Committee from 1 April 2018. Jonathan Brooks, Non-Executive
Director, became
Chairman of the Remuneration Committee as of 29 March 2018.
With Adam and Brian in their permanent roles, I relinquished my
executive responsibilities on 1 December 2017 and reverted to my
role of Non-Executive Chairman with additional responsibilities as
Chairman of both the Nomination Committee and the Cyber Security
Committee.
Finally, following the year end, we announced that Brian Tenner
would be leaving the Group in August 2018 to pursue other
interests. I would like to thank Brian for the enormous
contribution he made at NCC Group. He joined at a critical time,
combining his role as CFO with that of interim CEO to great effect
during the 2017 Strategic Review and the months that followed.
I am pleased to announce that Brian's successor will be Tim
Kowalski, an experienced public company finance director, who will
join the Group and the Board on 23 July 2018 and assume the
responsibilities of the CFO when Brian leaves the Company.
Board effectiveness
As Chairman, I am responsible for the leadership of the Board
and ensuring its effectiveness in all aspects of its performance.
We note that the recent changes in membership represent an ongoing
transition period for the Board as well as the Group.
The Board continues to actively oversee the Group's strategic
development, monitoring the delivery of its business objectives and
the evolving implementation of new organisational and management
structures. We maintain our focus on an effective corporate
governance framework that keeps pace with the rate of growth and
change inside and outside of NCC Group.
Employees
Our employees continue to show their commitment to our business
and to delivering excellent service to our customers. We have seen
active engagement in our internal projects and many great ideas for
improving our systems and processes.
We acknowledge that it is only through offering rewarding career
paths for our staff that we can expect to attract and retain the
very best talent.
On behalf of the Board I therefore offer our sincere thanks and
appreciation to all of the Group's employees for their continued
dedication in delivering excellent service to our customers while
rebuilding the foundations of NCC Group.
Current trading and outlook
Shareholders will remember that last year, I reflected on a very
challenging period in the Group's history with operational and
financial performance having been well below expectations. This was
accompanied by significant Board and management change. While much
remains to be done, I am confident that the building blocks for
long-term sustainable improvement in business performance and
shareholder returns are starting to be put in place.
In the trading outlook for the financial year ending 31 May
2019, the Board expects Escrow to maintain its low single digit
organic* revenue growth while investing in additional sales and
delivery capability as well as a new client portal to enhance our
customers' experience. The Assurance business will continue to
deliver steady double digit Adjusted organic* revenue growth with
improving net margins.
The combination of double digit Adjusted organic* growth and
steadily improving margins in the two operating divisions are
expected to deliver improvements in Adjusted Operating Profit*
margins of c.1% p.a. for the next two years in line with the
Board's current expectations, while also allowing us to make
considered and targeted investments to support the business
transformation programme.
Chris Stone
Chairman
Chief Executive's Market Review
Introduction
In the sections below, I set out my view of the market dynamics
that we face as NCC Group, our competitive position, and the
opportunities and challenges both of those things bring. I also
give a short overview of our transformation programme, "Securing
Growth Together", which is designed to build on the strong
foundations the Group already possess to create long term
sustainable growth in value for all of our stakeholders.
The Markets
The landscape
For better or worse, last year was memorable across the
technology and cyber security landscapes. Data breaches were
massive and numerous, global ransomware outbreaks brought
organisations to a standstill and disruptive technologies and
organisations - including various cryptocurrencies - was (and still
is) the talk of the town although at times coupled with high
volatility.
On top of that, our increasingly connected society has become a
playground for malicious threat actors be they nation state,
organised crime or lone individuals. And when everything is
connected, everything is vulnerable. The consequences of an attack
range from the frustrating to the kinetic. Our global society is
now built on digital connectivity, and these connections are
growing at lightning speed.
It wasn't long ago that digital connectivity meant a desktop PC
and a modem. Now it encompasses mobile phones, tablets, cars,
trains, planes and homes - communicating with each other over
networks such as the internet, ZigBee or similar. The internet of
things (IoT) has made the physical world digital, as we attempt to
connect anything and everything to make our lives simpler and more
enjoyable.
With more and more devices comes an avalanche of data. Many
still reference the IBM statistic from 2015, that 90% of data in
the world had been created in the previous two years. This is an
unstoppable trend.
As a truly global society we are becoming reliant on this data.
In business it informs strategy, allows for personalised customer
interaction and streamlines processes. For consumers it enables
improved health and fitness measurements, frictionless travel
experiences and tailored products and services.
The reliance on data by both businesses and consumers is
inextricably linked. Consumers are demanding a certain type of
experience from the brands they engage with. Businesses are
reacting accordingly.
Privacy and security
Against this backdrop, global policy makers are working hard to
create legislation and regulation that can cope with this data
explosion, focusing predominately on privacy and security. In the
European Union (EU) that manifested itself as the General Data
Protection Regulation (GDPR), a set of sweeping changes that
affected all 28 EU member states and those that trade with
businesses in the EU from 25 May 2018. Any data that businesses
collect, process and share about employees, contractors,
consultants, customers, suppliers, clients or visitors must comply
with the principles of GDPR. Hefty punishment can be levelled
against the non-compliant, with the Supervisory Authority in each
country (the Information Commissioner's Office (ICO) in the UK) now
able to fine offenders a maximum EUR20 million, or four % of global
turnover (whichever is greater). The ICO previously had a fine
ceiling of GBP500,000.
While GDPR affects all businesses, the Network and Information
Security (NIS) Directive aims to ensure critical infrastructure and
digital services are more resilient from cyber-attacks and failure.
Another directive from the EU, the rules apply to roughly 600
organisations in the UK across digital infrastructure, energy,
drinking water supply and distribution, health and transport, as
well as digital services including cloud providers.
The UK government and its regulators have indicated that there
will be reasonable expectations of compliance. The stated ambition
for the first year of the NIS Directive is to develop a clear
picture of the UK's critical national infrastructure's network and
information system security. Organisations are expected to invest
up to GBP17.5 million additional security spending in the first
year as they review and assess their cyber security readiness.
Regulations are moving forward in North America too, with
discussions around their own version of GDPR continuing apace.
While the Cambridge Analytica data scandal brought digital privacy
into the spotlight, the USA was ahead of the curve in respect of
government standards with its FedRAMP accreditation which it
unveiled in December 2011. This programme promotes data security
and a cloud-first mindset in federal agencies. Any commercial cloud
storing federal data has to go through a FedRAMP accreditation
process and it's proved a success thus far with the 100th cloud
service offering certified in April.
In China, a new data protection law became effective on 1 May
2018, providing much stricter guidelines around the protection of
personal information. This trend for greater security and integrity
in data storage and processing is very much global.
This international movement has been a reaction to a growing
threat. The security of this data is at risk from a range of actors
- from nation states to organised crime and 'script kiddies'
operating from everywhere and anywhere.
What motivates these actors in turn informs their attack
strategies. Nation states driven by geopolitics are more likely to
focus on espionage through highly advanced attacks, although Russia
also demonstrated the desire to disrupt. Organised criminals will
follow the cash, looking to make as much money for as little effort
as possible. Hacktivists want to make a political point and will
opt for online vandalism or disruptive attacks, while
script-kiddies are often simply pushing the boundaries and seeing
what's possible.
The concern for organisations is that the time taken for the
advanced threats - often developed by nation states - to fall into
the hands of the other actors is falling. Threats that were only a
worry for the biggest targets can now be turned on the
majority.
Online security still seems to be behind the curve in keeping
pace with the numerous types of organisations and individuals that
seek to disrupt the internet and organisations' use of systems and
data. The threat of being hacked or having valuable data stolen
continues to evolve rapidly and at a seemingly unstoppable pace.
Attacks using phishing, fake payment requests and ransomware are
now everyday events. These attacks often cause significant
operational disruption whose economic consequences can vastly
outweigh any cost of remediation or prevention. Our challenge is to
ensure that customers understand that a relatively modest upfront
investment in advice or other cyber services can ultimately save
significant sums in remediation and reputational damage clean-up
costs.
An evolving security market
This macro environment is contributing to a flourishing cyber
security market. The unstoppable growth in connectivity - coupled
with the complexity of the likes of artificial intelligence and
next-generation transport systems - will only increase the
potential vulnerabilities let alone address the legacy latent
technical security debt. This puts both businesses and individuals
at greater risk.
The wave of regulatory change has made compliance an even more
important discussion point for boards across the world, while
increasing the costs of compliance failure in tandem. All of this
provides ample opportunities for cyber security businesses as both
advisors and technical experts.
While the cyber security market itself has reached a
satisfactory level of maturity, cyber security still isn't
normalised across other industries - particularly complementary
sectors like insurance and law. As this process continues we expect
it to drive further market growth for security businesses.
At a high level, we expect the market to continue growing with
ever more competition and increasing demand of deep sectoral or
technology knowledge be it in advisory, technical, operations or
response.
-- Cyber will increasingly become a science.
-- Trend of using cyber insurance and other risk transfer
mechanisms increasingly in overall risk management strategies is
set to continue.
-- Much as GDPR and NIS have driven national legislation, we
expect governments and their regulators around the globe to
legislate further.
-- Further regulation to control cyber security proliferation and national capabilities.
-- Growing demand for advice on secure implementation of machine
learning/artificial intelligence.
-- IoT and general growth of embedded devices will drive the hardware security market.
-- Companies will demand their cyber security partners to have
deep sector expertise relevant to them.
-- Security of start-ups becomes a requirement.
-- An increase in companies using cryptocurrency, block chains
and smart contract to create sustainable valuable companies.
The world in which we live cannot be made completely safe from
cybercrime.
As the number and range of threats proliferate, being innovative
and using our experience and skills to help organisations prepare
and become more resilient becomes more important than ever.
Our competitive position
We must continue to drive innovation and thought leadership in
our key market segments. The key is to ensure that our thought
leadership also leads to practical new solutions to apply to the
challenges and issues that our customers face. Finding the right
balance of 'blue sky' thinking and ideas that can be rapidly
commercialised.
Innovation and creativity are two key foundations for the
Group's continued development and growth. Our Target Operating
Model is designed to ensure that these remain a core feature of the
business.
The recent well publicised cyber-attacks on a wide range of
public and private enterprises around the world are a reminder of
the need to constantly innovate.
Securing Growth Together transformation programme
All businesses go through transitional phases and we are no
exception. NCC Group has a great future, but only if we build it
ourselves. It is after all 'Only Us', a phrase we use to
encapsulate the need for each one of us to materially contribute to
success.
We know that we must change so that NCC Group can survive, and
thrive, and we have established our Securing Growth Together
programme as a supportive structured framework through which we
will improve NCC Group.
It isn't just about avoiding the challenges, and perhaps the
mistakes of the recent past - it is about fulfilling our
potential.
We have the opportunity to drive the new cyber agenda in this
complex, changing landscape but we must organise ourselves
correctly in order to succeed.
Vision and strategic alignment
Crucial to our success on this journey is engaging our whole
organisation around a common set of goals, a shared purpose and
values; working together to create enduring success for NCC Group.
Crystallising our vision and strategic priorities for the next
three years is an essential prerequisite. It provides us with the
basis to understand where we need to change and adapt; to make the
right choices and invest judiciously to fuel our growth and
strengthen our position in the market; and to create an
organisation where all of us together are energised and supported
to make NCC Group the most rewarding place to be.
We are making significant progress in charting our future. Our
leadership team is actively engaged in a strategy clarification and
implementation process which will deliver our three-year strategy
roadmap, and the critical performance metrics and priority
initiatives we need to focus on. This process is enabling us to
challenge past assumptions, and foster open constructive debate
while delivering a robust, logical roadmap connecting the different
parts of our organisation and clearly articulating how we deliver
value to our markets, customers, and shareholders.
None of this can happen without recognising that our future
success depends on the excellence and talent of our people - that
is the foundation of our strategy roadmap. We are committed as a
leadership team to create the conditions for our people to thrive
and be fully engaged with NCC Group's vision and journey.
The vision and strategy alignment process will help us embed the
NCC Group strategy within the organisation. It will support every
individual to understand the strategy, what it means with respect
to their role; and how each of us can contribute to the corporate
goals with clarity and confidence.
Our strategic goals
Our continually evolving strategic plan is designed to deliver
more sustainable revenue growth at improved margins, increases in
shareholder value and an improved service and product offering to
customers. Our strategic goals build on those established in the
prior year, all of which remain fundamentally sound, with
additional metrics focused on cash generation, a key attribute for
a healthy business.
Rationale and
Strategic current KPIs and our performance Focus and goals
priorities status in 2018 for 2019
1 Grow In attractive Adjusted Organic* revenue Continue
At a managed and growing growth (metric unchanged) roll-out
pace and in markets where 2018: 11.8% (2017: 7.6%) of value-based
areas of core NCC enjoy * Medium-term goal of above market growth rates while sales skills
strength strong controlling costs Align sales
competitive specialisms
differentiators, to market
we aim to * Adjusted Organic* growth in retained Assurance sectors
deliver medium (13.8%) and Escrow (2.7%) where
term growth in appropriate
excess Support
of market rates. internal
By focusing development of
on higher value an integrated
added "Manage,
services we will Detect
avoid & Respond"
growth for its (MDR)
own sake service offer
while
simultaneously
protecting
our margins.
Having
implemented the
structure of a
new operating
model, we need
to overlay
new go-to market
strategies
that match our
capabilities
to customer
needs, markets
and buying
power. This
will enrich the
quality
of growth that
the business
delivers.
------------------ --------------------------------------------------------------- -----------------
2 Execute The Strategic GM% to improve (metric Our
our new Review unchanged) transformation
operating identified 2018: 41.2% (2017: 36.3%) programme,
model that we do not * Significant benefit from revenue growth effectively "Securing
organise delivered by an unchanged number of delivery staff Growth Together"
ourselves in a aims to LEAN the
way that organisation and
brings * Just under 1% benefit from mix improved by planned improve the GM%
simplicity and cut in resale of third party products ratio in the
efficiency to medium-term
our service Potential for
delivery. * Medium-term goal to drive up margin, building major benefits
foundations for sustainable growth for customer
We will execute service,
a new efficiency and
and clear working capital
operating model
that delivers
better customer
service at an
improving
gross margin.
------------------ --------------------------------------------------------------- -----------------
3 Improve Our existing G&A* ratio to improve (metric "Securing Growth
Business business unchanged) Together" will
processes processes are 2018: 27.9% (2017: 24.5%) require
and systems inefficient, * Overhead increases this year were largely committed investment
and in many in 2017 (new premises and full year impact of new of approximately
cases difficult support staff) GBP3.0m-GBP4.0m
to scale. They in additional
often rely costs in 2019
on manual * Many improvement projects underway in delivery and and 2020 Expect
activity and back office functions benefits to flow
disparate in the following
information years
systems that can Cash conversion ratio*
lead (metric unchanged)
to a lack of 2018: 90% (2017: 87%)
clarity in * Improving as earnings quality rises in parallel with
decision making. better working capital management
We will design
and implement
improved
business
processes
with reduced
manual
interventions
to lower in our
costs
to serve.
------------------ --------------------------------------------------------------- -----------------
4 Lead The market is Launch of CENTA service Continued
Technical evolving (Centre for Evolved Next demonstration
thinking and so quickly that Generation Threat Assurance) that NCC GROUP
product we need has a holistic
development to be at the Unique high value offering view of cyber
in a rapidly forefront in regulated financial security
evolving and of developing services and governments Understanding
dynamic market new services of opportunities
sector and responses to Continued release of leading-edge and risk
address research on cloud and container associated
emerging technologies with emerging
threats. Our technologies
customers' needs Brand
are also growth with
changing: not non-traditional
just in audiences
response to new
threats
but also in
respect of
how and where
they carry
out their
businesses.
We need to
respond to
those changes in
how we
position
ourselves and
our services.
------------------ --------------------------------------------------------------- -----------------
5 Develop All of our key Employee turnover 23.5% We will
our people strategic (2017: 21.8%) develop
to allow them goals will rely Strategic Review feedback and
to reach their fundamentally told us our staff feel implement
full potential on our people valued and enjoy working employee
and contribute and their at NCC performance
fully to NCC skills. So we Group appraisal
Group need to and
ensure that we Values and leadership training development
attract being developed systems
and retain high Creation of
quality Staff retention rates at the
staff. We need Group level are unchanged NCC Group
to ensure year on year Academy
they are focusing on
properly helping
trained, our staff
gain the right achieve
experiences their full
and are also potential
properly
incentivised -
by recognition
and the working
environment
as much as by
reward.
------------------ --------------------------------------------------------------- -----------------
Chief Executive's Performance review
"Continuing Adjusted organic* revenue growth and significantly
improved gross margins demonstrate the Group's ability to deliver
high quality earnings growth."
Group revenue[5]
Group revenue from continuing operations increased by 8.3% to
GBP233.2m (2017: GBP215.3m). Adjusted organic* growth was 11.8%.
The results of the Web Performance and Software Testing businesses
have been treated as discontinued operations in the current and
prior year Income Statements following their disposal during the
year. The disposal of Domain Services in the prior year has also
been treated as a discontinued operation. The Income Statement
therefore shows the profit after tax of the discontinued operations
as a one line item. More detailed analysis of the results
attributable to the discontinued operations are set out in note
5.
[5] Unless stated to the contrary, the narrative that follows
refers to continuing operations for the financial year ended 31 May
2018.
The table below shows an analysis of the movements in revenue
between 2017 and 2018:
FY FX Acq'ns Disposals Third Escrow Adjusted FY2018 Organic
2017 party PY correction Organic* Growth
products GBPm Growth Ratio
GBPm GBPm GBPm GBPm GBPm GBPm %
GBPm
----------------- ------ ------ ------- ---------- ---------- --------------- ---------- ------- --------
Escrow 37.2 (0.4) - - 1.0 1.0 38.8 +2.7%
Assurance 178.1 (2.2) 4.0 - (8.6) - 23.1 194.4 +13.8%
----------------- ------ ------ ------- ---------- ---------- --------------- ---------- ------- --------
Continuing
total 215.3 (2.6) 4.0 - (8.6) 1.0 24.1 233.2 +11.8%
Domain Services 2.6 - - (2.6) - - - - (100%)
Web Performance 9.3 - - (1.5) - - (0.9) 6.9 (11.5%)
Software
Testing 17.3 - - - - - (2.7) 14.6 (15.6%)
----------------- ------ ------ ------- ---------- ---------- --------------- ---------- ------- --------
Discontinued
total 29.2 - - (4.1) - - (3.6) 21.5
----------------- ------ ------ ------- ---------- ---------- --------------- ---------- ------- --------
Group total 244.5 (2.6) 4.0 (4.1) (8.6) 1.0 20.5 254.7 +8.8%
================= ====== ====== ======= ========== ========== =============== ========== ======= ========
Adjusted organic* growth ratio is calculated as Adjusted
organic* growth divided by FY2017 less FX, third party products and
PY Escrow revenue correction. The FX reduction above is the
translational impact resulting from a 6.1% weakening in the
weighted average FX rate for the US$ which was partly offset by a
3.2% strengthening of the weighted average Euro FX rate. The
movement related to "Acquisitions" reflects the fact that PSC Inc
and VSR LLC were bought half way through the prior year and hence
the current year benefited from an additional six months of
ownership.
The disposals column shows the impact of not owning the
discontinued operations for the full year. Web Performance was sold
in March 2018 and hence just over two months of revenue were
excluded, whereas there was a negligible impact from the sale of
Software Testing in May 2018.
Last year, as a result of the Strategic Review, we reported that
we would seek to rebalance the business away from single
transaction reselling of third party products, unless they
complemented our professional services or our monitoring
activities. The GBP8.6m reduction above represents the completion
of this strategic objective. In addition, we have moved to new
lower risk terms and conditions for the Group so that if we do
facilitate the procurement of a third party product for a customer,
we act as an agent only and record a commission on the transaction
as opposed to the gross revenue and cost values. This change was
made midway through the financial year with an estimated additional
full year impact next year to reduce revenue by GBP2.6m (all else
being equal). We expect no further material reductions in this
revenue line.
The balance of revenue movements are attributable to organic
drivers. Adjusted organic* growth was robust at GBP24.1m (11.8%)
with the bulk of the growth being driven by strong Assurance
organic performance up 13.8%.
The amount of Group revenue earned outside the UK increased by
GBP19.6m, reflecting strong growth in all overseas territories. The
apparent GBP1.7m reduction in the UK reflects the GBP8.6m impact of
the withdrawal from third party products without which the UK would
show year-on-year growth of GBP6.9m or 6.8%. This lower UK growth
rate reflects the higher proportion of UK sales from our Escrow
division which typically grows at a much lower rate than the
Assurance business.
The Group continued to have minimal reliance on any one customer
or sector. Within Assurance the largest customer represents 3.9% of
Assurance revenue. The largest customer in Escrow represents just
over 1% of Escrow revenue.
Group revenue - impact of IFRS 15, Revenue Recognition
The Group has undertaken an in-depth risk-based analysis of the
likely impact of IFRS 15 on its reported results. The analysis
showing what the reported 2018 revenue, profit and opening reserves
adjustments would have been if IFRS 15 had been applied is shown in
note 1. In summary, revenue and profit in the year would have been
unchanged. The lack of a material impact of the new standard
reflects the fact that the vast majority of the Group's revenue was
effectively already recognised in accordance with the principles of
IFRS 15.
Group profitability - alternative performance measures
(APMs)
The Group makes use of alternative performance measures in
addition to GAAP measures in order to assist the reader in forming
an understanding of the underlying performance of the business. The
explanation and derivation of the Groups APMs are set out in note
3.
Group profitability
The financial performance of the Group was ahead of the Board's
expectations, with a firm second half performance. Operating
profit* from continuing operations was GBP13.7m which was a
significant improvement on the operating loss in the prior year of
GBP42.9m. The prior year saw GBP57.6m of ISI's whereas these
totalled GBP7.6m in the current year. A detailed listing and
explanation of each ISI is shown in note 6. In summary, GBP48.6m of
the prior year ISI's were in respect of the impairment of goodwill
of two business units.
The larger ISI's in the current year were in respect of a loss
making contract provision (GBP2.5m), onerous lease provisions and
property costs (GBP2.7m) and restructuring costs (GBP1.6m).
Adjusted operating profit* from continuing operations increased
by 21.6% to GBP31.0m (2017: GBP25.5m). The primary drivers for this
improvement were the Adjusted organic* revenue growth discussed
above, which combined with gains in GM% in both business segments,
to deliver a GBP17.9m (22.9%) increase in gross profit. GM% itself
improved by 4.9% points in 2018 to 41.2% (2017: 36.3%). The gross
profit margin improvement of each division is discussed further
within the Operating Segments' performance reports below. Key
highlights were the improvement in the utilisation of professional
consultancy staff in Assurance coupled with a reduction of sales of
low margin third party products.
The improvement from growth and GM% gains was then partly offset
by a GBP12.4m (23.5%) increases in general and administrative
expenses, which includes a GBP1.3m (26.5%) increase in depreciation
and a GBP2.7m (103.8%) increase in the amortisation charge for the
year (excluding the amortisation of acquired intangibles).
Property costs increased GBP1.8m, most of which was driven by
the already committed investments in new offices, the key one being
the relocation of the UK Head Office in Manchester (August 2017).
New staff to support both operating divisions as well as the full
year impact of staff recruited in 2017 and their associated
on-costs added a further increase of GBP3.5m. We invested GBP1.6m
of our gross profit gains in professional fees to support our
change programme. Finally, we experienced transactional FX losses
in the current year of GBP0.6m versus a prior year gain of GBP0.6m
resulting in an adverse swing of GBP1.2m.
The GBP1.3m increase in depreciation charges was primarily
driven by charges linked to the start of depreciation of the fit
out costs of the new premises noted above. The GBP2.7m increase in
amortisation costs was driven by a number of factors:
-- During the year, we conducted a strategic review of our
capitalised product portfolio and software assets linked directly
to each product. This resulted in the commercial decision to
withdraw from some revenue generating product sales. It also
identified some projects as having slower commercial ramp ups than
previously expected. We therefore accelerated the amortisation on
those products projects which resulted in a one-off charge of
GBP1.5m. This has been treated as an ordinary operating charge and
not an Individually Significant Item because it relates to a number
of individually smaller items and such project portfolio reviews
are an ongoing part of normal product lifecycle management.
-- The same risk-based review led to a decision to shorten the
useful economic lives of a number of capitalised development
projects from ten years to five years with effect from the start of
the current financial year. This change in estimate increased the
year's amortisation charge by GBP0.4m and this impact will continue
in future until the end of the useful lives of those assets.
-- The GBP0.8m balance of the increase in amortisation charges
was the direct result of a full year's amortisation of the Fox CTMp
MSS technology platform as well as the start of amortisation of
spend in the current year that saw all existing Fox customers
transfer to the new platform. The platform also went live
internally in NCC Group in preparation for the UK commercial launch
of services which occurred on 1 June 2018.
The improvements in Adjusted operating profit* shows that the
immediate actions taken at the start of the financial year to
control cost of sales, combined with implementing the findings of
the Strategic Review, are delivering real improvements that
reversed the significant decline seen in the second half of the
prior year.
Central costs and allocations
In a number of territories the different reporting segments of
Assurance and Escrow are often co-located with each other or with
head office functions. Equally, in order to benefit from economies
of scale, purchases and head office supporting functions are often
run on a shared basis. In order to arrive at a more accurate
picture of operating segment performance, it is necessary to
allocate centrally collected shared costs to each segment.
Allocations are made directly where possible and in other cases are
made on the basis of activity costing or another mechanical
attribution basis (such as ratio of shared space or a per user
basis).
During this financial year, a full review of central costs and
their allocation bases has been completed as the previous model,
which had last been updated a number of years ago, was no longer an
accurate reflection of how resources were being consumed in the
Group due to the much higher growth rates seen in Assurance. The
updated review resulted in an increased proportion of central costs
to the Assurance division and a lower proportion to Escrow. We have
restated the prior year allocation to give a more accurate
comparable figure in both segments, as the reallocation basis in
the current year is equally appropriate to the prior year. There is
no overall impact of the reallocation on the Group's total result.
The impact of the restatement is set out in note 4.
Assurance Division - Business Performance Review
Assurance revenue
The Assurance division accounts for 83.4% of continuing Group
revenue (2017: 82.7%). The table below shows the primary drivers of
growth in Assurance revenue.
Revenue (continuing operations) Growth
GBPm
Year ended 31 May 2017 178.1
Impact of FX movements (2.2)
Prior year acquisitions 4.0
MSS - third party re-sales (8.6)
Adjusted organic* growth (analysed further below) 23.1
---------------------------------------------------- ---------
Total Assurance revenue growth 16.3
Year ended 31 May 2018 194.4
---------------------------------------------------- ---------
In the year, Assurance revenue benefited from the full year
impact of the PSC and VSR acquisitions completed in 2017, adding
GBP4.0m to current year revenue. The adverse impact in FX movements
of GBP2.2m is mainly driven by the average USD FX rate weakening
compared to GBP by 6.1% with a partial offset from a 3.2%
strengthening in the Euro FX rate.
As noted earlier, the Group consciously decided to de-emphasise
the sale of third party products and the steps to achieve this
started in the prior year and completed in the current year. This
sales reduction, while not a discontinued operation, does represent
a decision to significantly reduce an individual revenue line that
was acquired with the Accumuli plc group of businesses. As
previously reported in the Interim Results, there is no material
allocation of Group resources in this area to deliver growth,
although we do expect the current revenue level to continue. The
Group therefore excludes it when calculating Assurance Adjusted
organic* growth.
Assurance Adjusted organic* growth in the year was GBP23.1m or
13.8%. This strong performance was supported by all four of our key
territories, as shown in the table below.
Adjusted Organic* Assurance growth by selling Change Change
territory GBPm %
----------------------------------------------- --------- --------
UK and RoW 8.9 +11.1%
North America 8.3 +15.9%
Netherlands 5.0 +17.2%
Denmark and Baltics 0.9 +21.3%
----------------------------------------------- --------- --------
Total Adjusted organic* Assurance growth 23.1 +13.8%
----------------------------------------------- --------- --------
The disappointment was the revenue performance in UK MSS (though
its operating profit* was in line with expectations). There have
been a number of change initiatives impacting the MSS business
unit, particularly amongst the sales and management teams during
the year. A new market approach is now underway with greater
business integration between the UK and Fox. Managed Security
Services are seen as a scalable offering within the Group. The
management team has now settled down and the Fox CTMp technology
has now been deployed to support SOC services in the UK. The
commercial launch of the UK SOC services was held on the first day
of the new financial year. We therefore aim to set the business
back on the road to growth, albeit from a low starting point.
The table below analyses Assurance revenue streams by type of
service/product.
2018 2017
GBPm % of total GBPm % of total
----------------------------- ----- ---------- ----- ----------
Professional services 159.1 81.9% 135.6 76.1%
Managed services 25.5 13.1% 22.8 12.8%
Product sales (own and third
party) 9.8 5.0% 19.7 11.1%
----------------------------- ----- ---------- ----- ----------
Total 194.4 100.0% 178.1 100.0%
----------------------------- ----- ---------- ----- ----------
As noted previously, the analysis groups our revenue streams
into distinct types of revenue as opposed to representing
management units or profit centres. The professional services
growth above is slightly flattered by the full-year impact of the
VSR and PSC acquisitions, but even with those removed, we delivered
good Adjusted organic* growth. Our growth is supported by our scale
which allows us to capture share when others face more pressing
resource constraints. In the UK, our RM&G consultancy service
line that focuses on Board or Strategic level cyber risk has
continued to show good year-on-year revenue growth (27.6%). This
has been supported by an improved effectiveness in identifying
opportunities from other cyber consultancy activities, coupled with
our overseas business units working with the UK team to grow this
service offering. We have also started to implement value-based
pricing that had a modest impact in the current year, but will have
an increasing role in the future.
Professional Services in the Netherlands, which were
historically a smaller part of the overall business, are being
supported in their growth efforts by other parts of the Group and
in the year delivered growth of 11.4%. In managed services
(sometimes known as CTMp or MSS), our Dutch business continued to
show good growth of GBP2.8m (22.0%). In addition, our High
Assurance service line grew by GBP2.1m (29.9%). This demonstrates
the recovering profile of some key customer relationships in the
Netherlands.
Assurance gross profit
The growth in revenue (whether by geography or by
service/product type) contributed to the improvement in gross
profit and GM% with the latter increasing by 5.3% to 34.2% (FY17
28.9%). In absolute terms, the gross profit improved GBP15.0m to
GBP66.5m (2017: GBP51.5m). The increase was the result of growing
revenues being serviced by a more controlled approach to headcount
growth than in prior years - which in turn improved utilisation
rates.
An exception to this was in our business in the Netherlands,
where costs increased ahead of revenue resulting in lower
operational leverage than would have been expected. Plans are in
place to remedy the situation going forward under the new Managing
Director. In addition, Assurance benefited from the full year
impact of the higher margin activity acquired in North America (VSR
and PSC). Lastly, the dilutive effect of low margin third party
product re-selling was reduced by the completion of the initiative
to resize this income line (improved mix).
Assurance overheads
General and administrative costs increased by GBP3.8m to
GBP34.6m (2017: GBP30.8m) and this offset some of the gross profit
gains. The division invested GBP2.3m in support of the additional
revenue, in indirect staff and their associated costs such as
travel expenditure. Amortisation in the division increased by
GBP1.6m, with GBP0.5m relating to a full year charge for the CTMp
platform which saw all Netherlands customers migrated in the
financial year. A further GBP1.1m came from the strategic product
review discussed in the Group overview section as well as the
associated shortening of useful economic lives.
Assurance operating profit*
The improved revenue and GM%, less the increase in overheads and
central cost allocations, resulted in the overall operating profit*
margin, improving by 2.9% to 8.7% (2017: 5.8%). The central cost
allocation includes property costs, which increased significantly
during the year as a result of the investment in new office
locations, notably the head office building in Manchester but also
refurbished or expanded presences in a number of other UK and North
American offices.
During the year, we identified a loss making contract (in the
Fox-IT business) that started in 2014. A detailed project review
identified that the contract would require significant additional
effort to complete and this additional effort would result in the
contract being loss making over its life. A provision was made,
during the year, for the remaining net loss to be incurred and
GBP1.5m of costs during the year were charged to this contract
provision. A similar programme of work to that required in the rest
of the Group to professionalise the challenging internal business
processes of Fox-IT is underway. The objectives and initiatives of
Securing Growth Together are also being applied to Fox-IT. In the
current year, those challenging internal processes mean that the
growth delivered in the year did not translate into operating
profit* gains.
The table below shows the adjusting operating profit* result for
continuing operations in the Assurance division.
2018 2017
GBPm GBPm
----------------------------------- -------- --------
Revenue 194.4 178.1
Cost of sales (127.9) (126.6)
----------------------------------- -------- --------
Gross profit 66.5 51.5
GM% 34.2% 28.9%
G&A before adjusting items (34.6) (30.8)
Central cost allocation (14.9) (10.3)
----------------------------------- -------- --------
Adjusted operating profit* 17.0 10.4
Adjusted operating profit margin* 8.7% 5.8%
Adjusting items (note 4) (12.5) (63.9)
----------------------------------- -------- --------
Operating profit*/(loss) 4.5 (53.5)
----------------------------------- -------- --------
The central cost allocation for 2017 reported in the prior year
Annual Report and Accounts was GBP6.1m. The figure in the table
above provides the reader with a comparator which is more closely
aligned to the current central cost allocation model of the
Group.
Escrow Division Business Performance Review
Revenue performance
The Escrow division now accounts for 16.6% of Group revenues
(2017: 17.3%). Escrow revenue for the year grew by GBP1.6m (4.3%)
to GBP38.8m (2017: GBP37.2m). However, as explained below,
approximately half of this growth resulted from a prior year
revenue recognition issue in UK Escrow. Adjusting for this
correction, Escrow Adjusted organic* growth therefore was closer to
2.7%.
31 May 31 May
2018 2017
Escrow revenue GBPm GBPm % Change
--------------------- ------ ------ --------
UK and RoW 27.5 25.4 +8.3%
USA 7.5 7.9 (5.1%)
Europe 3.8 3.9 (2.6%)
--------------------- ------ ------ --------
Total Escrow revenue 38.8 37.2 +4.3%
--------------------- ------ ------ --------
Escrow UK
Escrow UK revenue was GBP27.5m (2017: GBP25.4m), with
verifications increasing year on year by GBP2.0m to GBP8.2m. The
Escrow revenue comparison benefited from a one-off change in
revenue recognition as noted at the end of last year which reduced
revenue in that year, accounting for approximately GBP1.0m of
revenue growth in the current year. Adjusting for this correction
in the prior year would have seen reasonable UK growth of 4.2%. The
division also started to reorganise the process to deliver
verification testing and this led to an increase in the volume of
work actually delivered in the current period to further enhance
the quality of revenue and earnings in the year.
Escrow UK recurring revenues remained stable at GBP14.1m (2017:
GBP14.1m) and terminations remain at around 11% with just under 90%
of all contracts renewed (2017: 90%). We expect UK growth to remain
modest given the relative market maturity and our market share.
Escrow USA
Escrow USA revenues fell by 5.1% to GBP7.5m (2017: GBP7.9m). All
of this reduction came from adverse FX movements, with the business
remaining broadly flat which was still a disappointing result. The
US business continues to receive management focus with new
appointments being made to the sales team, coupled with secondment
of experienced UK sales team members that we anticipate will allow
us to build our market share in the USA in the new financial year.
In addition, we intend to invest some of our gross profit gains
made in the year ending 31 May 2018 in further initiatives to
support growth in North America including the relocation of the
divisional managing director to the US business which also signals
our intent in that marketplace.
Escrow Europe
Escrow Europe revenues fell 2.6% to GBP3.8m (2017: GBP3.9m) with
recurring revenues of GBP2.3m (GBP2.1m 2017). This was despite a
3.2% strengthening in the Euro FX rate in which much of our
European business is transacted. The European business continues to
provide the division with a foothold in Europe from which to
generate growth. Europe, like the USA business unit, will be
invested in with new headcounts to drive enhanced market share and
return the region to growth.
Escrow Rest of the World
During the year a review of the satellite office in Dubai was
carried out and while we do believe there are customer
opportunities in the region, we have decided to forgo a physical
presence and any customers will be serviced from our UK business
going forward.
Escrow revenues can be further analysed by service lines as
follows:
2018 2017
GBPm GBPm % Change
--------------------- ----- ----- --------
Escrow contracts 26.3 26.3 -
Verification testing 11.3 9.6 +17.7%
Other services 1.2 1.3 (7.7%)
--------------------- ----- ----- --------
Total Escrow revenue 38.8 37.2 +4.3%
--------------------- ----- ----- --------
This analysis is presented to provide the reader with an
understanding of the different revenue types within the operating
segment. They do not represent separate management units or profit
centres.
Escrow profitability analysis
The table below shows a summarised Income Statement for the
Escrow division as a whole:
2018 2017
GBPm GBPm
----------------------------------- ------ -------
Revenue 38.8 37.2
Cost of sales (9.2) (10.5)
----------------------------------- ------ -------
Gross profit 29.6 26.7
GM% 76.3% 71.8%
G&A before adjusting items (3.9) (3.7)
Central cost allocation (4.1) (2.8)
----------------------------------- ------ -------
Adjusted operating profit* 21.6 20.2
Adjusted operating profit margin* 55.7% 54.3%
Adjusting items (note 4) 0.2 (1.0)
----------------------------------- ------ -------
Operating profit* 21.8 19.2
----------------------------------- ------ -------
Growth in Escrow operating profit* was primarily driven by GM%
gains that resulted from the unwinding of additional costs added to
the division in the first half of FY17. These had been all but
removed by the end of FY17. In addition, the change in application
of revenue recognition criteria in the prior year also led to a
one-off GBP1.0m increase in gross and net margin in the current
year. GM% grew by 4.5% to 76.3% (2017: 71.8%). The prior year
revenue correction had artificially suppressed GM% and hence 2.6%
points of the current year recovery were attributable to the
unwinding of that factor.
The GM% gains support the operating profit margin* gains for the
year of 1.4%, growing to 55.7% (2017: 54.3%). The combination of
lower direct costs and revenue recognition step change were partly
offset by additional overhead costs and the start of an investment
programme designed to consolidate our position in the US
market.
As explained earlier, the central cost allocation for 2017
reported in the prior year Annual Report and Accounts was GBP3.9m.
The figure in the table above provides the reader with a comparator
that is more closely aligned to the current central cost allocation
model of the Group.
Escrow strategic goals
Our over-arching goal is to return Escrow to confident growth.
This includes the following short-term goals:
-- To maintain our market-leading position in the UK, delivering
modest annual Adjusted organic* growth;
-- To continue to develop evolving solutions for customers in a SaaS and cloud-based world;
-- To build on our scalable capability in the USA;
-- To explore opportunities for collaboration with the Assurance
division in potential new territories and also to review
opportunities to benefit from shared customer relationships;
and
-- To begin to grow our European operations.
Chief Financial Officers review
"The Group has delivered improving cash flows to match growth in
profitability. Further gains in both can be achieved as we improve
internal processes and systems."
Adjusting items
The Group separately identifies those items which, in
management's judgement, need to be disclosed by virtue of their
nature, size or incidence in order for the users of the Annual
Report and Accounts to obtain a proper understanding of the
performance of the business (known as "Adjusting Items", see note
3).
Individually Significant Items (see note 6) are one type of
adjusting item and those incurred during the year and prior year
are set out in the table below:
Individually Significant Items (ISIs) 2018 2017
GBPm GBPm
--------------------------------------------------- ----- ------
Loss-making contract (2.5) -
Revisions to deferred and contingent consideration (0.6) (2.9)
Restructuring costs (1.6) (1.3)
Onerous leases and other property-related costs (2.7) (2.2)
Market-related costs (0.2) -
Impairment of goodwill - (48.6)
Acquisition costs - (0.8)
Vacation pay catch-up provision - (1.8)
--------------------------------------------------- ----- ------
Total ISIs - continuing operations (7.6) (57.6)
--------------------------------------------------- ----- ------
Impairment of goodwill - (5.7)
Impairment of other intangible assets - (7.7)
Total ISIs - discontinued operations - (13.4)
--------------------------------------------------- ----- ------
Total all ISIs (7.6) (71.0)
--------------------------------------------------- ----- ------
Current period
During the year we carried out an in depth review of a project
underpinning a long-term contract to develop a prototype product
and then to convert that into an actual product, once approved, for
supply to a customer. The review identified that the three-year-old
project would require significant additional effort to complete and
that costs were higher than the original cost estimates when the
contract was first signed. A financial assessment of the project
was then carried out using the latest estimated time and costs to
complete and it was identified that over the course of the life of
the contract it would be loss making. We have therefore recognised
a provision in the period for the expected net loss that will be
incurred in completing the contract.
The change in value of deferred and contingent consideration (in
the current and prior period) is driven by changes in FX rates on
outstanding payments denominated in foreign currencies. As
explained in note 14, the final tranche of deferred consideration
on Fox-IT was paid in full after the year end.
Restructuring costs in the current year relate to the costs of
completing the Strategic Review and subsequent work to develop and
implement the Target Operating Model. In addition, there were some
redundancy costs amongst the senior management team that were a
direct result of the new operating model as well as consultancy
support in delivering the ongoing change programme.
Market-related costs in the current year were in respect of the
shareholder circular issued ahead of the AGM in September 2017 to
remedy a number of invalid dividend payments made in previous
years.
Onerous leases and property-related costs were in respect of a
number of items. During the year, the Group carried out a review of
its UK property portfolio and capacity requirements. This led to
the identification of two onerous property leases where the
facilities in question were either empty or significantly
under-utilised. As a result, a provision has been established for
the forecast discounted net cash flows that will result on both
properties after allowing for estimated income from potential
subletting. Both properties were empty and unused as at 31 May
2018. Other property costs included here related to pre-occupancy
double running costs of the Manchester head office that started in
the prior year and were completed in the first half of the year
when the building was occupied.
Prior period
In the prior year, a number of impairments were recognised in
respect of goodwill and other intangible assets. The Fox-IT and
former Accumuli businesses had underperformed against their
original growth forecasts since their acquisition dates.
Integration and leveraging of value from the acquisitions was also
slower than anticipated. The net result of those factors was to
recognise an impairment of the goodwill that arose on the
acquisition of Accumuli plc by GBP24.3m and a coincidentally
identical figure for Fox-IT. The carrying value of goodwill in our
Web Performance business was impaired by GBP5.7m as a result of a
slower than expected ramp-up in revenue from a number of new
service lines.
Details of the other ISIs in the prior year are disclosed more
fully in the prior year Annual Report and Accounts.
Taxation
The Group's adjusted* effective tax rate is 22.4% (2017: 29.3%),
which is a significant reduction on the prior year. The improvement
in the effective tax rate reflects a combination of lower federal
tax rate in the US from 1 January 2018 and also some basic tax
planning implemented as part of a low risk approach to managing the
Group's tax affairs. This was possible following the appointment of
the Group's first Tax and Treasury Manager at the start of the
financial year. The effective tax rate remains marginally above the
UK standard rate of corporation tax reflecting the origin of a
reasonable proportion of Group profits in overseas territories with
higher rates of tax than the UK.
The Group has also been active in identifying tax incentives
offered by different governments in respect of R&D activities,
where the Group had not been as diligent as we should have been in
claiming these entitlements. In the US in particular, the Group has
identified a risk weighted claim for unclaimed R&D tax credits
dating back four years that amounts to GBP2.5m of net tax benefit.
The Group will additionally benefit from an ongoing annual credit
estimated at GBP0.7m per annum of tax value.
The adjusted* effective tax rate above excludes the benefit of
the historical R&D tax claim as this is not considered to be
part of the Group's underlying business performance. Including this
item, the Group's reported effective tax rate would be 17.4%.
The historical USA R&D tax claim and the ongoing annual
claims will create real tax cash flow benefits for the Group in the
short term as well as reducing the overall tax burden and effective
rate going forward.
The Group's longer term strategy for tax and treasury matters is
based on a low risk appetite and any new strategies will operate
inside those parameters. All else being equal, the Group expects to
be able to operate with an ongoing adjusted* effective tax rate of
approximately 22-23%. This would change if a significant proportion
of Group profits started to arise in territories with higher
corporate tax rates than the UK or US.
The Group's total reported post-tax profit from all operations
was GBP6.9m (2017: loss of GBP56.6m).
Earnings per share
The Adjusted* basic earnings per share from operations was 8.3p
(2017: 6.2p).
The table below reconciles basic EPS to Adjusted* EPS on the
Group's definitions of adjusting items including their tax
impact.
2018 2017
Pence Pence
------------------------------------------------------- ------ ------
Basic EPS/(loss per share) as per the income statement 2.5 (20.4)
Discontinued operations 2.0 3.5
Amortisation of acquired intangibles 2.0 2.7
Individually Significant Items 2.2 20.2
Share-based payments - -
Unwinding discount on deferred consideration 0.1 0.2
Deferred tax on US historical R&D tax credits (0.8) -
Impact of US tax rate change 0.3 -
Adjusted* basic EPS 8.3 6.2
------------------------------------------------------- ------ ------
The adjusted* fully diluted earnings per share from continuing
operations was 8.3p (2017: 6.2p) while reported fully diluted
profit per share was 2.5p (2017: loss of 20.4p).
Dividend
The Board is recommending a final dividend of 3.15p per ordinary
share, making a total for the year of 4.65p. This represents a
dividend equal to that paid in the prior year. While dividend cover
is now positive (2017: negative coverage based on a basic adjusted*
loss per share from continuing operations) the Board is conscious
of the need to invest in short-term initiatives to build
sustainable longer term growth and margin improvement. The dividend
policy will therefore remain under review.
In the first half of the current financial year, shareholders
voted at the AGM in September 2017 to pass a series of resolutions
to rectify an administrative non-compliance issue that had been
identified at the end of the prior year in respect of distributable
reserves and the payment of previous dividends. Additional controls
are now in place to ensure that this situation does not arise
again.
Cash
The table below summarises the Group's cash flow for the
year.
2018 2017
GBPm GBPm
----------------------------------------- ------- -------
Cash inflow before changes in working
capital 40.0 33.8
Changes in working capital (0.5) (2.1)
----------------------------------------- ------- -------
Operating cash flow before interest and
tax 39.5 31.7
Interest paid (1.8) (1.9)
Income taxes paid (4.7) (1.8)
----------------------------------------- ------- -------
Net cash flow from operating activities 33.0 28.0
Net capital expenditure (7.7) (6.9)
Capitalised development costs (5.0) (7.4)
----------------------------------------- ------- -------
Free cash flow(*) 20.3 13.7
Acquisitions (3.1) (26.5)
Net proceeds from business disposals 9.2 -
(Repayment)/Drawdown of loans (5.4) 18.9
Dividends (12.8) (12.8)
Share issues 1.5 0.7
----------------------------------------- ------- -------
Net cash flow 9.7 (6.0)
----------------------------------------- ------- -------
The Group generated GBP39.5m of cash from operating activities
before interest and tax (2017: GBP31.7m), an increase of 24.6% in
the year and compares favourably to an increase of 21.5% in
adjusted* EBITDA. This figure is used in calculating the Group's
Cash conversion ratio*.
Working capital benefited from improved collection processes and
a reduction in overdue debt. Overdue trade debt fell in the year by
7% as a result of additional management focus and improved
processes.
In addition, good progress has been made on accelerating our
accrued income processes so that accrued income is billed to
clients at a faster and more appropriate rate. The total value of
accrued income that was aged over two months fell during the year
from GBP4.8m to GBP3.2m at the end of May 2018, a fall of 33.3%.
Most of the gains were at the older end of the age range. The
proportion of current accrued income also rose from 59% to 70%.
In absolute terms the Group actually has relatively low levels
of net working capital*. Trade and other receivables (including
accrued income) less trade and other creditors and deferred income
(where the Group has been paid in advance for services), arrives at
a traditional net working capital* figure of GBP3.5m (2017:
GBP2.5m). The small increase reflects the sale of Web Performance
which typically had net negative working capital as customers paid
in advance for monitoring services.
The Group measures how effectively adjusted operating profit* is
converted into actual cash flows. This is done using the cash
conversion ratio*. The calculation of the cash conversion ratio* is
set out below:
Continuing and discontinued 2018 2017
GBPm GBPm
---------------------------------------- ----- -----
Net operating cash flow before interest
and tax (A) 39.5 31.7
Adjusted* EBITDA (B) 44.0 36.2
---------------------------------------- ----- -----
Cash conversion ratio* (%) (A)/(B) 90% 87%
---------------------------------------- ----- -----
While our progress this year is good, there remains much to be
achieved in working capital management.
Interest cash costs remained modest though increased slightly on
last year as leverage (calculated for banking purposes) in the
second half was over 1.5 times and hence Group debt attracted a
higher interest margin.
The difference in cash tax paid from 2017 to 2018 is a result of
payments on account in 2016 covering lower actual payments in the
UK in 2017 that resulted from lower profitability in that year. The
current year cash tax figure is therefore more representative of
the likely ongoing cash tax profile.
Net capital expenditure was GBP12.7m (2017: GBP14.3m), and
includes tangible expenditure of GBP7.7m (2017: net GBP7.3m after a
GBP3.7m capital contribution from the landlord of the Manchester
head office) and capitalised development costs of GBP5.0m (2017:
GBP3.7m). Tangible expenditure will fall next year by approximately
GBP4.0m following the completion of the Manchester head office
fit-out during the year.
The decrease in capitalised development expenditure and software
expenditure reflects a reduction in capitalised internal costs as
new systems and products moved from a build phase to business as
usual activity, offset in part by additional investment in the year
on the Fox-IT CTMp monitoring platform prior to the migration of
all Netherlands customers to the platform and the start of roll-out
of commercial services in the UK at the end of the year. The
outlook for total capital expenditure (tangible and intangible) is
to fall to around GBP8.0m-GBP10.0m per annum.
Acquisition expenditure relates to the payment of contingent
consideration in respect of the acquisition of PSC and VSR in the
USA in the prior year and the part payment of 10% of the second
tranche of Fox-IT deferred consideration in November 2017. Both US
businesses performed well in the first year of their earn-outs and
achieved 100% of the maximum potential pay-out based on profit
targets set at the time of acquisition. The remaining portion of
the Fox-IT deferred consideration was paid in full after the year
end as set out in note 14. Disposal proceeds were in respect of the
sale of Web Performance and Software Testing which are detailed
further in note 5.
The table below reconciles the net cash flow in the year to the
change in net debt*.
2018 2017
GBPm GBPm
Opening net debt* (43.7) (12.7)
Net increase in cash and cash equivalents 9.7 (6.0)
Foreign exchange impacts 0.8 (6.1)
Change in net debt* from cash flows 5.4 (18.9)
------------------------------------------- ------- -------
Closing net debt* (27.8) (43.7)
------------------------------------------- ------- -------
Financing facilities
The Group's facilities and covenants are summarised below:
-- Maximum facility GBP100.0m (GBP20.0m amortising term loan and
GBP80m revolving credit facility) with an addition accordion
facility of GBP50.0m on top - current net debt* is GBP27.8m (2017:
GBP43.7m)
-- Liability for deferred acquisition consideration is included
in net debt* for covenant purposes giving banking net debt* as at
31 May 2018 of GBP37.7m. The fact that this was paid in respect of
Fox-IT after rather than before the year end therefore had no
impact on the Group's covenant or interest margin calculations (see
note 14 Post Balance Sheet Events).
-- Leverage limit of 2.5 times Adjusted* EBITDA - current leverage 0.89 times.
-- Net interest (Adjusted* EBITDA/Net interest) cover minimum
3.5 times - current ratio 28.3 times.
The Group remains comfortably within its banking facilities and
covenants. The terms and ratios above are specifically defined in
the Group's banking documents (in line with normal commercial
practice) and are materially similar to GAAP or the Group's
Alternative Performance Measures of the same name. The exception is
net debt* which as described above includes unpaid deferred
consideration. There are commercially confidential documents and
hence further details of any immaterial differences are not
disclosed.
Principal risks and uncertainties
Risks are evaluated at a number of levels of the organisation,
commencing with those which link to the Group achieving its
strategic objectives. These risks are summarised below under our
principal risks and uncertainties. A more detailed explanation of
our approach to risk management in general is included in our
Annual Report and Accounts.
Risk areas and potential impact Mitigation
1 Business Strategy
A comprehensive business strategy Members of the Board have significant
is essential to the continued success experience in evolving business strategies.
of the Group as we strive to maximise Following the recent appointment
shareholder value. of the current CEO, the Group is
A poor strategy or ineffective execution in the process of reviewing and updating
of a strategy would have a material the strategy. The results are expect
negative impact on the Group's financial to help shape and refine the Group's
performance and value. It would potentially already established Transformation
weaken the Group compared to its Programme.
competitors and risk the Group's
established position in the market
place.
----------------------------------------------
2 Management of Strategic Change
As the Group adapts and executes During the year the Group has established
its strategy there are a number of a Strategic Change Management capability.
complex projects and initiatives This includes access to Programme
that not only need to be delivered Management professionals and the
but also require understanding and deployment of associated change management
support from all staff. processes, for example the operation
Poor change management could lead of senior change oversight committees.
to ineffective implementation of
projects that then cost more to deliver,
take longer to deliver, result in
fewer benefits being realised (or
all three). Poor deliver of change
could ultimately impair business
performance.
----------------------------------------------
3 Availability of critical information
systems The Group has made significant investment
The Group is heavily reliant on continued in its IT infrastructure to ensure
and uninterrupted access to its IT it continues to support the growth
systems. As well as environmental of the organisation.
and physical threats, the Group is The Group has controls in place in
a natural target for individuals order to reduce the risk of actual
who may seek to disrupt the Group's loss of critical systems. Further,
commercial activities. controls are operated to ensure the
If the Group's systems failed, this availability of back-up media in
could affect the Group's ability the event of prolonged loss of systems.
to provide services to our customers. Initiating to standardise and simplify
while increasing resilience continue
to be implemented. Additional focus
is being periodically given to proving
the recoverability of systems and
data.
----------------------------------------------
4 Attracting and retaining appropriate
staff capacity and capability Staff are offered a rewarding career
The Group would be adversely impacted structure and attractive salary packages,
if it were unable to attract and which can include participation in
retain the right calibre of skilled share schemes.
staff. Linked to the development of our
Some roles within the Group operate people, the Group is reviewing our
in highly technical and extremely values, personal performance management
specialised areas in which there processes and aligned development
are shortages of skilled people. programmes.
Loss of key employees or significant
staff turnover could result in a
lack of necessary expertise or continuity
to execute the Group's strategy.
An inability to attract and retain
sufficient high-calibre employees
could become a barrier to the continued
success and growth of NCC Group.
----------------------------------------------
5 Cyber risk (including GDPR)
As a provider of security services, The Board operates a Cyber Security
the Group is a high profile target Committee chaired by a Senior Non-Executive
and could therefore be subject to Director. The CISO reports to each
attacks specifically designed to meeting, in line with the new Group
disrupt the Group's business and Risk Management Policy.
harm the Group's reputation. Security testing is regularly carried
There could also be implications out on the Group's infrastructure
relating to our GDPR control obligations. and there are extensive response
Such events could adversely affect plans, which were reviewed during
the market's perception of the Group the year, in the event of a major
as well as causing business disruption. security incident.
Failure to maintain control over Comprehensive plans are in place
customer, colleague, commercial and/or and being delivered associated with
operational data could lead to a discharging our GDPR obligations.
range of impacts including reputational Progress is monitored by the Cyber
damage. The misuse of personal data, Security Committee.
for example without the customer's Employees also receive regular security
consent or retaining for longer than training and updates.
is necessary, may also result in During the remainder of 2018, the
reputational harm, regulatory investigations Group expects to commission a health
and potential fine. check of Cyber security governance
and control.
----------------------------------------------
6 Quality of Management Information
Systems (MIS) and internal business The Group finance function has developed
processes a forward-facing Finance Functional
In addition to meeting statutory Strategy. Enhancements were identified
reporting obligations, ensuring that covering system and process standardisation.
trusted and relevant MIS is available A comprehensive milestone plan is
on a day-to-day basis to inform management in place and progress is tracked
decisions and drive performance. and reported to each Audit Committee.
Suboptimal business decision-making Standardised business process control
and performance as key financial standards where recently issued across
performance data is not available all parts of the Group. As the new
or trusted. financial year progresses, control
self-assessment techniques will be
implemented along with an aligned
programme of Internal Audits.
----------------------------------------------
7 Quality and Security Management
Systems We operate a comprehensive programme
We aspire to attain and retain key to ensure the retention of our core
internationally recognised standards standards. This includes a portfolio
which form an important component of aligned policies and cascading
for many of our customers. business processes. A programme of
The risk of the Group failing to internal audit provides assurance
retain a core standard e.g. 9001, over the design and application of
27001 or PCI, with a consequential these policies and procedures. External
loss of key customer accounts or assessors provide a further layer
ability to operate. of review and challenge, confirming
during the year the retention of
our Quality and Security standards.
----------------------------------------------
On behalf of the Board
Adam Palser Brian Tenner
Chief Executive Officer Chief Financial Officer
17 July 2018
Consolidated income statement
For the Year ended 31 May 2018
2018 2017
2018 Adjustments 2018 2017 Adjustments 2017
Total (note 3) Adjusted* Total (note 3) Adjusted*
Notes GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- ----- -------- ------------ ---------- ------- ------------ ----------
Revenue 4 233.2 - 233.2 215.3 - 215.3
Cost of sales (137.1) - (137.1) (137.1) - (137.1)
Gross profit 96.1 - 96.1 78.2 - 78.2
Administration expenses
comprising: (82.4) 17.3 (65.1) (121.1) 68.4 (52.7)
----------------------------- ----- -------- ------------ ---------- ------- ------------ ----------
General and administrative
expenses (65.1) - (65.1) (52.7) - (52.7)
Amortisation of acquired
intangibles 3 (9.4) 9.4 - (10.3) 10.3 -
Individually Significant
Items 3, 6 (7.6) 7.6 - (57.6) 57.6 -
Share-based payments 3 (0.3) 0.3 - (0.5) 0.5 -
----------------------------- ----- -------- ------------ ---------- ------- ------------ ----------
Operating profit*/(loss) 3 13.7 17.3 31.0 (42.9) 68.4 25.5
Interest expense (1.5) - (1.5) (1.4) - (1.4)
Discount on acquisition
consideration (0.3) 0.3 - (0.5) 0.5 -
----------------------------- ----- -------- ------------ ---------- ------- ------------ ----------
Net financing costs (1.8) 0.3 (1.5) (1.9) 0.5 (1.4)
----------------------------- ----- -------- ------------ ---------- ------- ------------ ----------
Profit/(loss) before
taxation 11.9 17.6 29.5 (44.8) 68.9 24.1
Taxation 7 0.5 (7.1) (6.6) (2.1) (4.8) (6.9)
----------------------------- ----- -------- ------------ ---------- ------- ------------ ----------
Profit/(loss) - continuing
operations 12.4 10.5 22.9 (46.9) 64.1 17.2
(Loss) - discontinued
operations, net of tax 5 (5.5) 5.5 - (9.7) 9.7 -
----------------------------- ----- -------- ------------ ---------- ------- ------------ ----------
Profit/(loss) for the
year 6.9 16.0 22.9 (56.6) 73.8 17.2
Earnings per share 9
Basic EPS - continuing 4.5p (17.0)p
Diluted EPS - continuing 4.4p (17.0)p
Basic EPS - discontinuing (2.0)p (3.5)p
Diluted EPS - discontinuing (1.9)p (3.5)p
Basic EPS - all operations 2.5p (20.4)p
Diluted EPS - all operations 2.5p (20.4)p
----------------------------- ----- -------- ------------ ---------- ------- ------------ ----------
The Company has elected to take the exemption under section 408
of the Companies Act 2006 from presenting the parent company profit
and loss account.
Consolidated statement of comprehensive income
For the Year ended 31 May 2018
2018 2017
GBPm GBPm
------------------------------------------------------ ----- ------
Profit/(loss) for the year 6.9 (56.6)
------------------------------------------------------ ----- ------
Items that may be reclassified subsequently to profit
or loss (net of tax)
Foreign exchange translation differences 0.3 17.9
Total comprehensive income/(loss) for the year, net
of tax 7.2 (38.7)
------------------------------------------------------ ----- ------
Attributable to:
------------------------------------------------------ ----- ------
Equity holders of the parent 7.2 (38.7)
------------------------------------------------------ ----- ------
Consolidated statement of financial position
at 31 May 2018
2018 2017
------------------------------------ -----
Notes GBPm GBPm GBPm GBPm
------------------------------------ ----- ------ ----- ----- -----
Non-current assets
Plant and equipment 19.4 18.3
Intangible assets 10 240.0 267.6
Investments 0.4 0.4
Deferred tax assets 7 4.5 4.2
------------------------------------ ----- ------ ----- ----- -----
Total non-current assets 264.3 290.5
------------------------------------ ----- ------ ----- ----- -----
Current assets
Trade and other receivables 11 67.5 66.7
Inventories 0.8 1.1
Cash and cash equivalents 21.2 12.3
------------------------------------ ----- ------ ----- ----- -----
Total current assets 89.5 80.1
------------------------------------ ----- ------ ----- ----- -----
Total assets 353.8 370.6
------------------------------------ ----- ------ ----- ----- -----
Current liabilities
Trade and other payables 35.7 29.7
Provisions 12 2.6 1.5
Consideration on acquisitions 11.9 12.9
Deferred revenue 29.0 35.6
Current tax payable 1.3 3.0
------------------------------------ ----- ------ ----- ----- -----
Total current liabilities 80.5 82.7
------------------------------------ ----- ------ ----- ----- -----
Non-current liabilities
Deferred tax liability 7 9.8 14.2
Provisions 12 6.3 3.5
Consideration on acquisitions - 2.1
Interest-bearing loans 49.0 56.0
------------------------------------ ----- ------ ----- ----- -----
Total non-current liabilities 65.1 75.8
------------------------------------ ----- ------ ----- ----- -----
Net assets 208.2 212.1
------------------------------------ ----- ------ ----- ----- -----
Equity
Issued capital 2.8 2.8
Share premium 149.5 148.0
Merger reserve 42.3 42.3
Retained earnings (12.8) (7.1)
Currency translation reserve 26.4 26.1
------------------------------------ ----- ------ ----- ----- -----
Total equity attributable to equity
holders of the parent 208.2 212.1
------------------------------------ ----- ------ ----- ----- -----
These financial statements were approved by the Board of
Directors on 17 July 2018 and were signed on its behalf by:
Adam Palser Brian Tenner
Chief Executive Officer Chief Financial Officer
17 July 2018
NCC Group plc
4627044
Consolidated statement of cash flows
for the year ended 31 May 2018
Cash flow from operating activities (includes continuing and
discontinued operations)
2018 2017
Notes GBPm GBPm
------------------------------------------------------- ----- ------------------ ------
Profit/(loss) for the year 6.9 (56.6)
Adjustments for:
Depreciation 6.5 5.2
Depreciation - Individually Significant Items - 0.9
Share-based charges 0.2 0.6
Amortisation of acquired intangible assets 10 9.4 10.3
Amortisation of internally developed intangible
assets and software 5.9 3.5
Net financing costs 1.8 1.9
Profit on sale of plant and equipment - (0.1)
Individually Significant Items (non-cash impact) 3.5 68.0
Loss/(profit) on disposal of subsidiaries 5 6.4 (1.2)
Income tax expense 7 (0.6) 1.3
------------------------------------------------------- ----- ------------------ ------
Cash inflow for the year before changes in working
capital 40.0 33.8
------------------------------------------------------- ----- ------------------ ------
Increase in trade and other receivables (5.0) (2.3)
Increase in trade and other payables 4.5 0.2
------------------------------------------------------- ----- ------------------ ------
Cash generated from operating activities before
interest and tax 39.5 31.7
Interest paid (1.8) (1.9)
Income taxes paid (4.7) (1.8)
------------------------------------------------------- ----- ------------------ ------
Net cash generated from operating activities 33.0 28.0
Cash flows from investing activities
Purchase of plant and equipment (7.7) (11.0)
Capital contribution for property, plant and equipment - 3.7
Proceeds from disposal of property - 0.4
Software and development expenditure 10 (5.0) (7.4)
Acquisition of businesses (3.1) (28.4)
Cash acquired with subsidiaries - 1.9
Net proceeds from sale of subsidiaries 5 9.9 1.7
Cash disposed of from sale of subsidiaries 5 (0.7) (1.7)
------------------------------------------------------- ----- ------------------ ------
Net cash used in investing activities (6.6) (40.8)
Cash flows from financing activities
Proceeds from the issue of ordinary share capital 1.5 0.7
Drawdown of borrowings 7.5 45.5
Repayment of borrowings (12.9) (26.6)
Equity dividends paid (12.8) (12.8)
------------------------------------------------------- ----- ------------------ ------
Net cash used in financing activities (16.7) 6.8
Net increase/(decrease) in cash and cash equivalents 9.7 (6.0)
Cash and cash equivalents at beginning of year 12.3 20.7
Effect of foreign currency exchange rate changes (0.8) (2.4)
------------------------------------------------------- ----- ------------------ ------
Cash and cash equivalents at end of year 21.2 12.3
------------------------------------------------------- ----- ------------------ ------
Reconciliation of net change in cash and cash equivalents to
movement in net debt*
2018 2017
GBPm GBPm
------------------------------------------------------- ------ ------
Net increase/(decrease) in cash and cash equivalents 9.7 (6.0)
Change in net debt* resulting from cash flows 5.4 (18.9)
Effect of foreign currency on cash flows (0.8) (2.4)
Foreign currency translation differences on borrowings 1.6 (3.7)
------------------------------------------------------- ------ ------
Change in net debt* during the year 15.9 (31.0)
------------------------------------------------------- ------ ------
Net debt* at start of year (43.7) (12.7)
------------------------------------------------------- ------ ------
Net debt* at end of year (27.8) (43.7)
------------------------------------------------------- ------ ------
Net debt* comprises
2018 2017
GBPm GBPm
-------------------------- ------ ------
Cash and cash equivalents 21.2 12.3
Total borrowings (49.0) (56.0)
-------------------------- ------ ------
Net debt* at end of year (27.8) (43.7)
-------------------------- ------ ------
Statements of changes in equity
for the year ended 31 May 2018
Group
Issued Currency Reserve
share Share Merger translation for own Retained
capital premium reserve reserve shares earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------------- -------- -------- -------- ------------ -------- --------- ------
Balance at 1 June 2017 2.8 148.0 42.3 26.1 - (7.1) 212.1
Profit for the year - - - - - 6.9 6.9
Foreign currency translation
differences - - - 0.3 - - 0.1
----------------------------------------- -------- -------- -------- ------------ -------- --------- ------
Total comprehensive income for
the year - - - 0.3 - 6.9 7.2
----------------------------------------- -------- -------- -------- ------------ -------- --------- ------
Transactions with owners recorded
directly in equity
Dividends to equity shareholders - - - - - (12.8) (12.8)
Share-based payment transactions - - - - - - -
Current and deferred tax on share-based
payments - - - - - 0.2 0.2
Shares issued - 1.5 - - - - 1.5
Total contributions by and distributions
to owners - 1.5 - - - (12.6) (11.1)
----------------------------------------- -------- -------- -------- ------------ -------- --------- ------
Balance at 31 May 2018 2.8 149.5 42.3 26.4 - (12.8) 208.2
----------------------------------------- -------- -------- -------- ------------ -------- --------- ------
Issued Currency Reserve
share Share Merger translation for own Retained
capital premium reserve reserve shares earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------------- -------- -------- -------- ------------ -------- --------- ------
Balance at 1 June 2016 2.8 147.3 42.3 8.2 (0.2) 62.5 262.9
Loss for the year - - - - - (56.6) (56.6)
Foreign currency translation
differences - - - 17.9 - - 17.9
----------------------------------------- -------- -------- -------- ------------ -------- --------- ------
Total comprehensive income for
the year - - - 17.9 - (56.6) (38.7)
----------------------------------------- -------- -------- -------- ------------ -------- --------- ------
Transactions with owners recorded
directly in equity
Dividends to equity shareholders - - - - - (12.8) (12.8)
Share-based payment transactions - - - - - 0.2 0.2
Current and deferred tax on share-based
payments - - - - - (0.4) (0.4)
Shares issued - 0.7 - - - - 0.7
Purchase of own shares - - - - 0.2 - 0.2
----------------------------------------- -------- -------- -------- ------------ -------- --------- ------
Total contributions by and distributions
to owners - 0.7 - - 0.2 (13.0) (12.1)
----------------------------------------- -------- -------- -------- ------------ -------- --------- ------
Balance at 31 May 2017 2.8 148.0 42.3 26.1 - (7.1) 212.1
----------------------------------------- -------- -------- -------- ------------ -------- --------- ------
Notes
(forming part of the preliminary Financial Statements)
1 Accounting policies
Basis of preparation
The financial information set out herein does not constitute the
Company's statutory financial statements for the years ended 31 May
2018 or 31 May 2017, but is derived from those financial
statements. Statutory financial statements for 2017 have been
delivered to the Registrar of Companies, and those for 2018 will be
delivered in due course. The financial statements were approved by
the Board of directors on 17 July 2018. The auditor has reported on
those financial statements; their reports were (i) unqualified,
(ii) did not include a reference to any matters to which the
auditors 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.
Copies of the Company's statutory financial statements will be
available on the Group's corporate website. Additional copies will
be available upon request from the Company Secretary.
The Group financial information has been prepared in accordance
with International Financial Reporting Standards (IFRS) as adopted
for use within the European Union and in accordance with the
accounting policies included in the Annual Report for the year
ended 31 May 2017.
Changes in accounting policies and disclosures
The Group has adopted all applicable amendments to standards
with an effective date from 1 June 2017. Adoption of these
standards did not have any material impact on financial performance
or position of the Group.
Going concern
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out in the Strategic Report which can be found in the
Annual Report and Accounts. The financial position of the Group,
its cash flows, liquidity position and borrowing facilities are
described in the Business and Financial Review in the Annual Report
and Accounts as are the Group's policies and processes for managing
its capital, its financial risk management objectives, details of
its financial instruments and its exposures to credit risk and
liquidity risk.
The Group funds its strategic acquisitions and meets its
day-to-day working capital requirements via a multi-currency
revolving credit facility of GBP80.0m, a GBP20.0m multi-currency
term loan that amortises by GBP2.5m every six months and an
overdraft of GBP5m. At 31 May 2018, the amount drawn down under the
facilities was GBP49.0m. This facility was agreed in November 2015
and is due for renewal in November 2020.
The Directors have reviewed the trading and cash flow forecasts
of the Group as part of their going concern assessment and have
taken into account reasonable downside sensitivities which reflect
uncertainties in the current operating environment. The possible
changes in trading performance show that the Group is able to
operate within the level of the banking facilities and, as a
consequence, the Directors believe that the Group is well placed to
manage its business risks successfully. After making enquiries, the
Directors have a reasonable expectation that the Company and the
Group have adequate resources to continue in operational existence
for a period of at least 12 months. Accordingly, they continue to
adopt the going concern basis in preparing the annual report and
accounts.
New IFRS and amendments to IAS and interpretations
At the date of authorisation of these financial statements, the
following Standards and Interpretations which have not been applied
in these financial statements were in issue but not yet effective
(and in some cases had not yet been adopted by the EU). The Group
does not intend to early adopt these standards:
IFRS 15 Revenue from Contracts with Customers: Summary financial
impact of transition to IFRS15
The summary impacts of the transition to IFRS 15 on the Group's
revenue, Operating Profit*, Adjusted Operating Profit*, Profit
after Tax for the year ended 31 May are set out below:
Adjusted
Operating operating
Revenue profit* profit* PAT
GBPm GBPm GBPm GBPm
------------------------------------- ------- --------- ---------- -----
Existing GAAP (IAS 18 basis) 233.2 13.7 31.0 7.0
Spreading of set-up/initial/up-front
Escrow fees 0.4 0.4 0.4 0.3
Spreading set-up/initial/up-front
fees for Assurance MSS (0.6) (0.6) (0.6) (0.5)
IFRS 15 basis 233.0 13.5 30.8 6.8
------------------------------------- ------- --------- ---------- -----
The impact on the Group's balance sheet would be similarly
negligible.
IFRS 9 Financial Instruments - Recognition and Measurement
Measurement will be effective from the year ending 31 May 2019
onwards. Management is still considering the impact of the new
standard which is not expected to have a significant impact and an
update will be provided in the interim financials which are due to
be published in January 2019.
IFRS 16 Leases
IFRS 16 Leases will be effective from the year ending 31 May
2020 onwards and the impact on the financial statements will be
significant to NCC Group plc. IFRS 16 requires lessees to recognise
a lease liability reflecting future lease payments and a
right-of-use asset for all lease contracts. Therefore, the
substantial majority of the Group's operating lease commitments
(approximately GBP30m on an undiscounted basis) would be brought on
to the balance sheet and amortised and depreciated separately.
There will be no impact on cash flows although the presentation of
the cash flow statement will change significantly. Management is
still considering the impact of this new standard and is as yet
unable to quantify its likely impact.
2 Use of estimates and judgements
The preparation of financial statements requires management to
exercise judgement in applying the Group's accounting policies.
Different judgements would have the potential to change the
reported outcome of an accounting transaction or statement of
financial position. It also requires the use of estimates that
affect the reported amounts of assets, liabilities, income and
expenses. Actual results may differ from these estimates. Estimates
and underlying assumptions are reviewed on an ongoing basis, with
changes recognised in the period in which the estimates are revised
and in any future periods affected. The table below shows those
areas of accounting judgements and estimates that the Directors
consider material and that could reasonably change significantly in
the next year. In some cases, the accounting area requires both an
accounting judgement and an estimate.
Accounting area Accounting Judgement? Accounting Estimate?
Carrying value of intangible assets Yes Yes
Capitalising development costs Yes Yes
Individually Significant Items Yes No
Loss-making contract No Yes
2.1 Estimation uncertainties
Information about estimation uncertainties that have a
significant risk of resulting in a material adjustment to the
carrying values of assets and liabilities within the next financial
year are addressed below.
Carrying values of intangible assets (including goodwill,
acquired intangibles and capitalised software and development
costs)
The Group has significant balances relating to goodwill at 31
May 2018 as a result of acquisitions of businesses. The carrying
value of goodwill at 31 May 2018 is GBP187.1m (2017: GBP198.7m).
Goodwill balances are tested annually for impairment. Tests for
impairment are primarily based on the calculation of a value in use
for each CGU. Acquired intangibles and capitalised development and
software costs are also allocated to CGUs. This involves the
preparation of discounted cash flow projections, which require
significant estimates of both future operating cash flows and an
appropriate risk-adjusted discount rate. The commercial viability
of individually capitalised development project costs is also part
of the overall assessment of carrying values.
Future cash flow estimates are made up of two critical
estimates: the rate of revenue growth, the associated rate of cost
growth (or, in other words, margin improvement or contraction if
costs grow at a different rate from revenue). Given the importance
of Terminal Values (TV) in assessing the recoverability of carrying
amounts, relatively modest annual but compounding changes in
assumptions for revenue growth or margin gains can have a
significant impact on the annual net cash flow used in calculating
the TV. Such estimates are inherently subjective and, while
reference is made where possible to external sources of evidence to
validate estimates, the inherent uncertainty remains. This
uncertainty can have a material impact on the result of the
impairment test.
The calculation of an appropriate discount rate to apply to the
future cash flow estimate is itself an estimate. While some aspects
of discount rate calculations can be more mechanical in nature
(such as using the 30-year gilt yield as a proxy for the risk free
rate) others such as entity or sector specific risk adjustments
rely more on management estimates. The discount rate is also a key
component in assessing the Terminal Value which is often an
important part of any valuation. Sensitivity analysis on what are
regarded as reasonably possible changes is provided in note 10.
Loss-making contract
Some aspects of the Group's revenue derive from relatively
long-term contracts, whilst this is in respect of a very limited
number of contracts, the risk of loss on such long term contracts
could have a significant impact. In such situations project
managers use established methodologies to estimate the percentage
complete of a project and hence the amount of revenue that should
have been recognised to date. One such example occurred in the
current year where we carried out a detailed bottom-up project
assessment and identified that a contract in our business in the
Netherlands was not as complete as previously estimated. This in
turn led to a full life contract review and the recognition of a
provision for the remaining loss on the contract as a whole. In
some cases, long-term contract revenue is signed off by reference
to meeting customer agreed milestones in which case the degree of
estimation can be lower. Furthermore, identifying whether or not an
as yet incomplete contract will be loss-making over its life
includes estimates of future costs to complete. This inevitably
includes estimates and allowances for unknown contingencies and
assumptions about labour rates and future prices.
2.2 Judgements
Information about judgements made in applying accounting
policies that have the most significant effects on the amounts
recognised in the consolidated financial statements are addressed
below.
Carrying value of intangible assets- assessment of CGUs
A CGU is the smallest identifiable group of assets that generate
cash inflows that are largely independent of the cash inflows from
other assets or groups of assets. Identification of a CGU does
involve judgement. The Directors have reviewed the continuing
applicability of the judgements made in the prior year in
determining the CGUs within the Group and in allocating goodwill to
these CGUs. The Directors have concluded that the same CGUs
continue to be applicable in the current year.
Individually Significant Items
The Group categorises certain items as ISIs on the basis of
management judgement. These judgements have regard to the Group's
approach to materiality as set out within the Audit Committee
report in the Annual Report and Accounts. Some items are deemed
material because of scale, some because of their nature or
frequency of occurrence, and others through a combination of both.
These judgements can be significant not only in changing the
Group's Adjusted* results, refer note 3, but can also have a
significant impact on senior management and executive reward which
in some cases are linked to Adjusted* results as opposed to GAAP
results (as set out in note 3).
Capitalisation of development costs
Development activities involve a plan or design for the
production of new or substantially improved products or processes.
Judgement is required in determining whether the project is
technically and commercially feasible; estimation is required in
assessing the future economic benefit. Such judgements are
inherently subjective and can have a material impact on determining
the viability of the project and ultimately whether the costs
should be capitalised.
3 Alternative performance measures
The Board and Executive management use a number of alternative
performance measures (APMs) in their day-to-day management of the
business and in setting employee targets. The Group's primary
financial profitability measure used in guiding external
stakeholders and in internal management reviews is Adjusted
operating profit*. It is management's view that Adjusted operating
profit* is more closely aligned to the underlying performance of
the business. Adjusted* EBITDA is also disclosed as this is used by
some stakeholders and in some other KPIs used in the business (such
as the Cash conversion ratio*).
These APMs are not defined measures in IFRS and therefore these
measures may not be comparable with similar APMs in other
businesses. These APMs are not intended to be a replacement for, or
be superior to, IFRS measures.
The "Adjusted" alternative performance measures are arrived at
by excluding the impact of a number of Adjusting Items that the
Directors consider are not part of underlying business performance
for the reasons referred to below. The various adjusting items are
set out in the table below:
2018 2017
Adjustments GBPm GBPm
----------------------------------------------------- ----- ------
Amortisation of acquired intangible assets (note 10) 9.4 10.3
Individually Significant Items (see note 6) 7.6 57.6
Share-based payments 0.3 0.5
Discount unwind on acquisition consideration 0.3 0.5
----------------------------------------------------- ----- ------
Adjustments to profit/(loss) before taxation 17.6 68.9
----------------------------------------------------- ----- ------
Rationale for adjusting items
At all times the Group aims to ensure that the Annual Report and
Accounts are fully compliant with International Financial Reporting
Standards and that they give a Fair Balanced and Understandable
view of the Group's performance, cash flows and financial position.
IAS 1, Presentation of Financial Statements, requires the separate
presentation of items that are material in nature or scale in order
to allow the user of the accounts to understand underlying business
performance. In management's opinion, the adjusting items below are
material items that require separate disclosure and adjustment to
allow the user of the accounts to understand the underlying
business performance. Adjusting items are reviewed by both the
Audit and the Remuneration Committee's, each time they arise, to
ensure that they are appropriately categorised and disclosed and to
understand their impact on executive and senior management
incentive schemes which use Alternative Performance Measures when
setting and evaluating targets.
The amortisation of acquired intangibles is a non-cash
accounting charge driven by acquisition-based growth as opposed to
Adjusted organic* growth (organic growth is considered below). An
alternative view could be that the charge should be included in
underlying results to reflect the "cost" of an acquisition in the
Income Statement. All things considered, including the similar
treatment by comparator companies, the Directors have concluded
that this item is validly disclosed as an adjusting item. The same
logic applies to the non-cash unwinding of discounts on deferred
and contingent acquisition consideration.
Individually Significant Items are considered separately in note
6. The Directors consider share-based payments to be a valid
adjusting item on the basis that fair values are volatile due to
movements in share price which may not be reflective of the
underlying performance of the Group.
Adjusted EBITDA and Adjusted operating profit
The reconciliation of Adjusted operating profit* and Adjusted*
EBITDA to reported profit or loss before tax is shown below:
2018 2017
GBPm GBPm
----------------------------------------------------- ----- ------
Adjusted EBITDA from continuing operations 42.5 33.0
Depreciation (6.2) (4.9)
Amortisation of software and capitalised development
costs (5.3) (2.6)
----------------------------------------------------- ----- ------
Adjusted operating profit from continuing operations 31.0 25.5
Amortisation of acquired intangible assets (note 10) (9.4) (10.3)
Individually Significant Items (note 6) (7.6) (57.6)
Share-based payments (0.3) (0.5)
Interest expense (1.5) (1.4)
Discount on acquisition consideration (0.3) (0.5)
----------------------------------------------------- ----- ------
Profit before tax from continuing operations 11.9 (44.8)
----------------------------------------------------- ----- ------
The calculation of Adjusted* EPS follows the same logic shown
above in respect of Adjusted* EBITDA and Adjusted operating profit*
but also includes the impact of taxation and any one-off taxation
items. The calculation of Adjusted* EPS is shown in note 9.
Adjusted organic growth
Adjusted organic* growth is used to convey the amount of revenue
growth that has been delivered by management through their
controllable actions in the day to day running of the business. It
therefore excludes growth delivered through the impact of
acquisitions or disposals and also the strategic decision to exit
the sale of third party products as each of these are considered to
be the result of corporate activity rather than day to day
operating activities. Finally, it also excludes the translational
impact of changes in weighted average foreign exchange rates as
these are outside of management control. The foreign exchange
impact is calculated by applying the current year weighted average
foreign exchange rates to the prior year revenues denominated in
foreign currencies and is the difference between that calculation
and the sterling equivalent reported with in the FY2017 Annual
Report and Accounts. The prior year is adjusted for a correction in
the application of revenue recognition in Escrow which were
included in the Annual Report and Accounts in the prior year.
The calculation of Adjusted organic* growth is set out on page
11 for the Group and the two divisions.
Cash conversion ratio
The cash conversion ratio* is a measure of how effectively
Adjusted operating profit* (refer above) is converted into cash and
effectively highlights both non-cash accounting items within
operating profit* and also movements in working capital. It is
calculated as Net cash flow from operating activities before
interest and tax (which is disclosed on the face of the cash flow
statement) divided by Adjusted* EBITDA (which is one of the Group's
APM described above). The cash conversion ratio* is used by many
comparable companies in our sector and hence is disclosed to show
the quality of cash generation and also to allow comparison to
other similar companies.
The calculation of the cash conversion ratio* is set out
below:
Continuing and discontinued 2018 2017
GBPm GBPm
--------------------------------------------- ----- -----
Net operating cash flow before interest
and tax (A) (Consolidated statement of cash
flows) 39.5 31.7
Adjusted* EBITDA (B) (see below) 44.0 36.2
--------------------------------------------- ----- -----
Cash conversion ratio* (%) (A) / (B) 90% 87%
--------------------------------------------- ----- -----
Adjusted EBITDA for continuing operations is GBP42.5m, see
above, and from discontinued operations is GBP1.5m, total GBP44.0m
(2017: GBP33.0m, GBP3.2m, and GBP36.2m respectively
Net debt
Net debt* is defined as total cash and cash equivalents less
interest bearing loans. Both of these amounts are shown in the
Statement of financial position. This APM is used to convey the
overall net indebtedness of the Group and to assess the Group's
overall gearing.
2018 2017
GBPm GBPm
---------------------------------------- ------ ------
Cash and cash equivalents (Consolidated
statement of financial position) 21.2 12.3
Interest-bearing loans (49.0) (56.0)
---------------------------------------- ------ ------
Net Debt (27.8) (43.7)
---------------------------------------- ------ ------
Net debt, when compared to available borrowing facilities, also
gives an indication of available financial resources to fund
potential future investments.
4 Segmental information
The Group is organised into the following two (2017: two)
reportable segments, Escrow and Assurance. The two reporting
segments provide distinct types of service while within each of the
reporting segments, the operating segments provide a homogeneous
group of services. The operating segments are grouped into the
reporting segments on the basis of how they are reported to the
Chief Operating Decision Maker (CODM) for the purposes of IFRS 8:
"Operating Segments", who is considered to be the Board of
Directors of NCC Group. Operating segments are aggregated into the
two reportable segments based on the types and delivery methods of
services they provide, common management structures, and their
relatively homogenous commercial and strategic market environments.
Performance is measured based on reporting segment profit, which
comprises reporting segment operating profit* excluding
amortisation of acquired intangible assets, share-based payment
charges and Individually Significant Items. Interest and tax are
not allocated to business segments and there are no intra-segment
sales.
Segmental analysis 2018
Central
&
Escrow Assurance Head Office Group
GBPm GBPm GBPm GBPm
---------------------------- ------ --------- ------------ -------
Revenue 38.8 194.4 - 233.2
Cost of sales (9.2) (127.9) - (137.1)
---------------------------- ------ --------- ------------ -------
Gross profit 29.6 66.5 - 96.1
Gross profit % 76.3% 34.2% 0.0% 41.2%
G&A* before adjusting items (3.9) (34.6) (26.6) (65.1)
Central cost reallocation (4.1) (14.9) 19.0 -
---------------------------- ------ --------- ------------ -------
Adjusted operating profit* 21.6 17.0 (7.6) 31.0
Adjusting items (note 3) 0.2 (12.5) (5.0) (17.3)
---------------------------- ------ --------- ------------ -------
Operating profit* 21.8 4.5 (12.6) 13.7
---------------------------- ------ --------- ------------ -------
Segmental analysis 2017
Central
Escrow Assurance & Head Office Group
Restated (see note below) GBPm GBPm GBPm GBPm
--------------------------- ------ --------- -------------- -------
Revenue 37.2 178.1 - 215.3
Cost of sales (10.5) (126.6) - (137.1)
--------------------------- ------ --------- -------------- -------
Gross profit 26.7 51.5 - 78.2
Gross profit % 71.8% 28.9% 0.0% 36.3%
G&A before adjusting items (3.7) (30.8) (18.2) (52.7)
Central cost reallocation (2.8) (10.3) 13.1 -
Adjusted operating profit* 20.2 10.4 (5.1) 25.5
Adjusting items (note 3) (1.0) (63.9) (3.5) (68.4)
--------------------------- ------ --------- -------------- -------
Operating profit* 19.2 (53.5) (8.6) (42.9)
--------------------------- ------ --------- -------------- -------
* The segmental figures above for central cost allocations have
been restated to be on the same basis as the current year
allocation to give a more accurate picture of the underlying result
and movement between years. The reallocation rationale is explained
on page 13. Management consider that the revised reallocation
rationale is appropriate to the prior year given that the overall
Group result is unchanged by this. However, the Escrow operating
profit* in last year's accounts was reported as GBP18.1m, Assurance
was a loss of GBP55.6m, Domain Services a loss of GBP4.2m and
Central and head office recorded a loss of GBP11.7m, totalling a
loss of GBP53.4m. This included a loss on Discontinued operations
(including Domain Services) of GBP10.5m.
There are no customer contracts which account for more than 10%
of segment revenue.
2018 2017
GBPm GBPm
----------------------------------------- ----- -----
Revenue by geographical destination
UK 100.3 102.0
US 68.4 60.4
Europe and RoW 64.5 52.9
----------------------------------------- ----- -----
Total revenue from continuing operations 233.2 215.3
Revenue from discontinued operations 21.5 29.2
Total revenue 254.7 244.5
----------------------------------------- ----- -----
2018 2017
GBPm GBPm
---------------------- ----- -----
Revenue by category
Sale of goods 9.8 23.8
Revenue from services 223.4 191.5
Total revenue 233.2 215.3
---------------------- ----- -----
Operating profit and adjusted operating profit is considered
further in note 3.
5 Discontinued operations
In July 2017, the Group also announced its intention to sell Web
Performance and Software Testing, both part of the Assurance
division but not aligned to the core cyber security activities of
the division. The Web Performance business was sold on 28 March
2018. The Software Testing business was sold on 24 May 2018. The
results of these businesses have been classified as discontinued
operations. The comparative consolidated statement of profit or
loss and OCI have been re-presented to show the discontinued
operations separately from continuing operations. In January 2017,
in the prior financial year, the Group sold Open Registry, part of
the Domain Services division and it too has been shown as a
discontinued operation. The tables below provide an analysis of
discontinued operations for revenue, EBITDA and profit before tax
as these are considered to be the most relevant to understanding
underlying business performance.
2018 2017
(Loss)/profit of discontinued operations GBPm GBPm
------------------------------------------------------ ------ ------
Revenue 21.5 29.2
Cost of sales (17.2) (22.9)
------------------------------------------------------ ------ ------
Gross profit 4.3 6.3
General administrative expenses (3.6) (4.3)
Individually Significant Items* - (13.4)
Share-based payments 0.1 (0.3)
------------------------------------------------------ ------ ------
Operating profit*/(loss) 0.8 (11.7)
(Loss)/gain on sale of discontinued operations before
tax (6.4) 1.2
------------------------------------------------------ ------ ------
Loss on discontinued operations before tax (5.6) (10.5)
Taxation 0.1 0.8
------------------------------------------------------ ------ ------
Loss on discontinued operations after tax (5.5) (9.7)
------------------------------------------------------ ------ ------
* Individually Significant Items are shown in note 6.
2018 2017
Effect of discontinued operations on assets and liabilities* GBPm GBPm
------------------------------------------------------------- ----- ------
Intangible assets 6.2 4.7
Plant and equipment 0.5 0.6
Trade and other receivables 4.5 8.6
Cash and cash equivalents 0.7 1.9
Trade and other payables (5.8) (11.5)
Net assets/(liabilities) 6.1 4.3
------------------------------------------------------------- ----- ------
* Comprising Web Performance and Software Testing for FY17 and
FY18 and Open Registry in FY17.
2018 2017
Cash flows from (used in) discontinued operations* GBPm GBPm
--------------------------------------------------- ----- -----
Net cash from/(used) in operating activities 1.1 (1.3)
Net cash from/(used) in investing activities (1.4) 1.2
Consideration received, satisfied in cash 11.3 1.7
Cash and cash equivalents, disposed of (0.7) (1.9)
Net cash used in operating activities - (1.5)
Net cash flows for the year 10.3 (1.8)
--------------------------------------------------- ----- -----
* Comprising Open Registry, Web Performance and Software Testing
for FY17 and FY18.
2018 2017
Summary of gain/(loss) on disposal of subsidiary GBPm GBPm
------------------------------------------------- ------ -----
Consideration received or receivable:
Cash consideration 11.3 1.7
Fair value of contingent consideration - 1.5
Total disposal consideration 11.3 3.2
------------------------------------------------- ------ -----
Carrying amount of net assets disposed of (6.1) 0.2
Elimination of goodwill (10.2) (2.1)
Professional fees and other costs (1.4) (0.1)
------------------------------------------------- ------ -----
(Loss)/gain on disposal before tax (6.4) 1.2
Taxation - -
------------------------------------------------- ------ -----
(Loss)/gain on disposal after tax (6.4) 1.2
------------------------------------------------- ------ -----
6 Individually Significant Items
The Group separately identifies items as Individually
Significant Items. Each of these is considered by the Directors to
be sufficiently unusual in terms of nature or scale so as not to
form part of the underlying performance of the business. They are
therefore separately identified and excluded from adjusted results
(as explained in note 3).
Individually Significant Items (ISIs) 2018 FY 2017
GBPm GBPm
--------------------------------------------------- ----- -------
Loss-making contract (2.5) -
Revisions to deferred and contingent consideration (0.6) (2.9)
Restructuring costs (1.6) (1.3)
Onerous leases and other property-related costs (2.7) (2.2)
Market-related costs (0.2) -
Impairment of goodwill - (48.6)
Impairment of other intangible assets - (4.5)
Acquisition costs - 0.8
Vacation pay catch-up provision - (1.8)
--------------------------------------------------- ----- -------
Total ISIs - continuing operations (7.6) (57.6)
--------------------------------------------------- ----- -------
Impairment of goodwill - (5.7)
Impairment of other intangible assets - (7.7)
Total ISIs - discontinued operations - (13.4)
--------------------------------------------------- ----- -------
Total all ISIs (7.6) (71.0)
--------------------------------------------------- ----- -------
Current period
The onerous contract represents a loss-making contract which was
identified through a review conducted by management in the year,
whereby it was considered that significant additional effort would
be required to satisfy the contractual commitments that led to the
contract being estimated to be loss making over its lifetime. The
Group has a very small number of long-term contracts and hence this
is a very unusual occurrence for the Group. It was therefore
deemed, both in terms of its unusual nature and size that it should
be treated as an ISI.
Adjustments to deferred and contingent consideration were in
respect of FX movements as no adjustments to expected payments were
made in the period. The Group treats any change in deferred or
contingent consideration that is driven by changes in foreign
exchange rates as an ISI because this is unconnected to business
performance. Other changes in deferred and contingent consideration
are treated as an ISI as they relate to acquisition activity which
is not part of the underlying performance of the business.
Restructuring costs are significant and are driven primarily by
the Strategic Review and hence are treated as an ISI given the one
off nature of the Strategic Review and the level of the costs.
Following a review of the UK property portfolio and capacity
requirements, management identified two onerous property leases
which were either unutilised or significantly under-utilised. The
amount provided for represents the forecasted discounted net cash
flows, after allowing for estimated income from subletting. Both
properties were vacant and not in use as at 31 May 2018. In
addition, double running costs of the Manchester head office, prior
to occupancy, are also included here. These costs are treated as an
ISI because they arise in connection with unoccupied properties and
this is not considered to be part of the underlying performance of
the business.
Market-related costs in the period were in respect of the
shareholder circular and exercise to remediate a number of invalid
dividends. This exercise completed successfully at the September
EGM. The correction of invalid dividends being paid in the prior
year by means of a shareholder circular is a highly unusual
(one-off) occurrence and hence while small in scale was deemed not
to form part of the underlying business performance.
Prior period
A goodwill impairment of GBP48.6m was recognised in respect of
the CGUs for Fox-IT Holdings BV and Accumuli plc. The Fox and
former Accumuli businesses (the latter now known as MSS) had
underperformed compared to our original acquisition forecasts and
also encountered integration challenges that have slowed the pace
of commercial leverage of the different new service and product
lines across the rest of the Group. The other Individually
Significant Items are disclosed more fully in the prior year Annual
Report and Accounts.
7 Taxation
Recognised in the income statement
2018 2017
GBPm GBPm
--------------------------------------------------------- ----- -----
Current tax expense
Current year 2.4 3.1
Adjustment to tax expense in respect of prior periods (0.6) -
Impact of prior year US R&D tax credits (0.2) -
Foreign tax 1.8 0.9
--------------------------------------------------------- ----- -----
Total current tax 3.4 4.0
Deferred tax expense
Origination and reversal of temporary differences (2.3) (1.9)
Reduction in tax rate (0.6) (0.4)
Recognition of previously unrecognised tax losses - -
Recognition of previously unrecognised/(de-recognition
of previously recognised) deductible timing differences 1.3 0.4
Impact of prior year US R&D tax credits (2.3) -
--------------------------------------------------------- ----- -----
Total deferred tax (3.9) (1.9)
--------------------------------------------------------- ----- -----
Tax expense/(benefit) on continuing operations (0.5) 2.1
--------------------------------------------------------- ----- -----
Reconciliation of effective tax rate
2018 2017
GBPm GBPm
-------------------------------------------------------- ----- ------
Profit/(loss) before taxation 11.9 (44.8)
-------------------------------------------------------- ----- ------
Current tax using the UK corporation tax rate of 19.00%
(2017: 19.83%) 2.3 (8.9)
Effects of:
Items not taxable for tax purposes (0.5) 10.6
Adjustment to tax charge in respect of prior periods 0.9 (0.2)
Impact of prior year US R&D tax credits (2.5) -
Differences between overseas tax rates 1.4 0.4
Movements in temporary differences not recognised (1.5) 0.6
Effect of rate change (0.6) (0.4)
-------------------------------------------------------- ----- ------
Total tax expense/(benefit) on continuing operations (0.5) 2.1
-------------------------------------------------------- ----- ------
Current and deferred tax recognised directly in equity was a
credit of GBP0.2m (2017: charge of GBP0.2m). The UK Government
enacted Finance Act 2016 in September 2016 including provisions to
reduce the main rate of corporation tax to 17% with effect from 1
April 2020. Accordingly, the UK deferred tax balances have been
revalued in these accounts where relevant.
The United States Tax Cuts and Jobs Act was enacted on 22
December 2017 and included several provisions that impact NCC
Group. Notably a reduction in the US federal rate of corporate
income tax from 35% to 21% (effective 1 January 2018), which has
impacted the FY18 tax charge primarily due to a re-valuation of
deferred tax assets and liabilities relating to US operations. The
Group FY18 tax charge has also been affected by a significant
R&D tax credit claim in the US, which is discussed further in
the Group Performance Review and Audit Committee report.
The net deferred tax liability in the year fell from GBP10.0m to
GBP5.3m, primarily as a result of the cut in the US Federal tax
rate from 35% to 21% in the year.
8 Dividends
2018 2017
GBPm GBPm
------------------------------------------------------- ----- -----
Dividends paid and recognised in the year 12.8 12.8
Dividends proposed but not recognised in the year 8.7 8.7
------------------------------------------------------- ----- -----
Dividends per share paid and recognised in the year 4.65p 4.65p
Dividends per share proposed but not recognised in the
year 3.15p 3.15p
------------------------------------------------------- ----- -----
9 Earnings per share (EPS)
The calculation of Adjusted* EPS for continuing operations only
is based on the following:
2018 2018 2017 2017
GBPm GBPm GBPm GBPm
---------------------------------------------- ----- ----- ----- ------
Profit/(loss) for year for total operations 6.9 (56.6)
Loss for the year for discontinued operations 5.5 9.7
Profit/(loss) for the year for continuing
operations 12.4 (46.9)
---------------------------------------------- ----- ----- ----- ------
Amortisation of acquired intangible assets
(note 10) 9.4 10.3
Individually Significant Items (note 6) 7.6 57.6
Unwinding of discount 0.3 0.5
Share-based payments 0.3 0.5
Tax arising on the above items (5.6) (4.8)
Deferred tax recognised on US R&D tax credits (2.3) -
Impact of US rate changes not accounted
for in ISIs 0.8
10.5 64.1
---------------------------------------------- ----- ----- ----- ------
Adjusted* profit from continuing operations
used for Adjusted* EPS 22.9 17.2
Loss from discontinued operations (5.5) (9.7)
---------------------------------------------- ----- ----- ----- ------
Adjusted* profit from all operations 17.4 7.5
---------------------------------------------- ----- ----- ----- ------
Number Number
of shares of shares
m m
---------------------------------------------- ------------ -------------
Basic weighted average number of shares
in issue 277.0 276.3
Dilutive effect of share options 2.3 -
---------------------------------------------- ----- ----- ----- ------
Diluted weighted average shares in issue 279.3 276.3
---------------------------------------------- ----- ----- ----- ------
For the purposes of calculating the dilutive effect of share
options, the average market value is based on quoted market prices
for the period during which the options are outstanding.
10 Intangible assets
Customer
Development contracts
Software costs and relationships Goodwill Total
GBPm GBPm GBPm GBPm GBPm
------------------------ ------------------ ------------------ ------------------ ------------- -----------------
Cost:
At 1 June 2016 27.0 4.2 76.2 236.2 343.6
Acquisitions through
business combinations - - 7.7 12.1 19.8
Reclassification (11.1) 11.1 - - -
Additions - internally
developed 3.7 3.7 - - 7.4
Disposals of
subsidiaries/disposals - (0.1) (3.4) - (3.5)
Effects of movements in
exchange
rates 0.6 0.4 6.5 16.6 24.1
------------------------ ------------------ ------------------ ------------------ ------------- -----------------
At 31 May 2017 20.2 19.3 87.0 264.9 391.4
------------------------ ------------------ ------------------ ------------------ ------------- -----------------
Additions - internally
developed 2.5 2.5 - - 5.0
Disposal of
subsidiaries/disposals (3.0) (10.9) 0.1 (9.8) (23.6)
Effects of movements in
exchange
rates - - (0.5) (1.7) (2.2)
------------------------ ------------------ ------------------ ------------------ ------------- -----------------
At 31 May 2018 19.7 10.9 86.6 253.4 370.6
------------------------ ------------------ ------------------ ------------------ ------------- -----------------
Accumulated amortisation
and impairment
losses:
At 1 June 2016 9.3 - 25.1 11.9 46.3
Reclassification (2.1) 2.1 - - -
Charge for year 2.0 1.5 10.3 - 13.8
Impairment charge 2.0 5.7 - 54.3 62.0
Effects of movements in
exchange
rates - (0.2) 1.9 - 1.7
------------------------ ------------------ ------------------ ------------------ ------------- -----------------
At 31 May 2017 11.2 9.1 37.3 66.2 123.8
------------------------ ------------------ ------------------ ------------------ ------------- -----------------
Reclassification - - - - -
Charge for year 2.9 2.7 9.4 - 15.0
Impairment charge - - - - -
Disposals of
subsidiaries/disposals (2.1) (6.0) 0.1 - (8.0)
Effects of movements in
exchange
rates - - (0.2) - (0.1)
------------------------ ------------------ ------------------ ------------------ ------------- -----------------
At 31 May 2018 12.0 5.8 46.6 66.2 130.6
------------------------ ------------------ ------------------ ------------------ ------------- -----------------
Net book value:
At 31 May 2018 7.7 5.1 40.0 187.2 240.0
------------------------ ------------------ ------------------ ------------------ ------------- -----------------
At 31 May 2017 9.0 10.2 49.7 198.7 267.6
------------------------ ------------------ ------------------ ------------------ ------------- -----------------
Cash-generating units (CGUs): Goodwill and intangible assets are
allocated to CGUs in order to be assessed for potential impairment.
CGUs are defined by accounting standards as the lowest level of
asset groupings that generate separately identifiable cash inflows
that are not dependent on other CGUs. Following the Strategic
Review, the Directors have reconsidered the CGUs within the Group.
The CGUs and the allocation of goodwill to those CGUs is shown in
the table below. The table also includes the discount rate used to
assess the NPV of the future cash flows of each CGU:
Goodwill Goodwill
2018 2017
Cash-generating units GBPm GBPm
--------------------------------------- -------- --------
Escrow UK 22.9 22.9
Escrow Europe 7.4 8.3
Escrow USA 8.0 7.3
--------------------------------------- -------- --------
Total Escrow 38.3 38.5
Assurance UK: Professional Services 33.0 18.5
Assurance US: Professional Services 27.0 28.1
PSC 9.5 9.8
VSR 2.2 2.3
Assurance Netherlands 63.0 62.7
Assurance UK: MSS 14.1 28.6
Web Performance (disposed of in 2018) - 2.2
Software Testing (disposed of in 2018) - 8.0
--------------------------------------- -------- --------
Total Assurance 148.8 160.2
--------------------------------------- -------- --------
Total Group 187.1 198.7
--------------------------------------- -------- --------
The CGUs are unchanged on the prior year save for the disposal
of Web Performance and Software Testing CGUs during the year. The
assessment of CGUs is a key accounting judgement as set out in note
2.
Discount rates can change relatively quickly for reasons both
inside and outside management control. Those outside management
direct control or influence include changes in the Group's Beta,
changes in risk free rates of return and changes in Equity Risk
Premia. In context, the estimated changes in risk free rates and
the Group's Beta from last year to this have reduced all of the CGU
discount rates by around 0.5%. Matters inside management control
are the delivery of performance in line with plans or budgets and
the production of high or low risk plans. In the current year,
performance has on average been closer to planned performance and
forward plans are considered to have a lower risk profile than
prior years as forecast growth rates in revenue and margins have
been moderated to reflect the need to improve internal systems and
processes before higher growth could again be sustained. These
factors also combine to lower the estimated discount rate for all
CGUs.
When assessing impairment, the recoverable amount of each CGU is
based on value-in-use calculations (VIU). VIU calculations are an
area of material management estimate as set out in note 2. These
calculations require the use of estimates, specifically: pre-tax
cash flow projections; long-term growth rates; and a pre-tax
discount rate. Cash flow projections are based on the Group's
detailed annual operating plan for the forthcoming financial year
which has been approved by the Board.
Assumptions have then been applied for expected revenue and
margin growth forecasts for subsequent four years from the end of
2019 to 2023 (forecasts which have also been approved by the
Board). These assumptions are based on management's experience of
growth and knowledge of the industry sectors, markets and our own
internal opportunities for growth and margin enhancement. The
projections beyond five years use an estimated long-term growth
rate of 2.5% (2017: 2.5%) for EBITDA. This represents management's
best estimate of a long-term annual growth rate aligned to an
assessment of long-term GDP growth rates. A higher sector-specific
growth rate would be a valid alternative estimate. A different set
of assumptions may be more appropriate in future years dependent on
changes in the macroeconomic environment.
The discount rates used are based on management's calculation of
the WACC using the capital asset pricing model to calculate the
cost of equity. Specific rates are used for each CGU in the VIU
calculation and the rates reflect management's assessment on the
level of relative risk in each respective CGU. The pre-tax discount
rates used in the VIU calculations are shown above.
The key assumptions for each CGU are shown in the table
below:
5 year 5 year EBITDA
Revenue Revenue
CAGR% CAGR% EBITDA Pre-tax Pre-tax
2018 2017 Margin% Margin% discount discount
Growth Growth rate rate
Cash-generating units 2018 2017 2018 2017
--------------------------- -------- -------- -------- -------- --------- ---------
Escrow UK 3.1% 3.5% (0.2%) 1.8% 12.1% 11.4%
Escrow Europe 2.7% 3.5% (5.9%) 1.7% 12.3% 11.8%
Escrow USA 4.6% 3.5% 3.5% 1.7% 13.4% 14.9%
Assurance UK: Professional
Services 3.4% 8.6% 6.3% 5.9% 11.9% 12.6%
Assurance US: Professional
Services 9.7% 8.9% 3.3% 7.6% 13.4% 14.6%
PSC 8.6% 19.9% 2.6% 3.1% 13.4% 14.5%
VSR 10.2% 22.7% (6.6%) (6.8%) 13.4% 14.5%
Assurance Netherlands
(Fox-IT) 12.2% 19.1% 12.8% 17.8% 14.3% 17.0%
Assurance UK: MSS 9.5% 11.6% 11.1% 20.8% 14.9% 15.4%
--------------------------- -------- -------- -------- -------- --------- ---------
The Directors have considered a range of sensitivities where
they consider a reasonably possible change in key assumption could
occur as follows:
-- Revenue growth rates: in the type of high growth sector in
which the Group's Assurance division operates, a significant
proportion of the VIU is generated by the assumption that high
growth will continue. If the revenue growth is achieved at
unchanged profit margins each year then it is a very significant
contributor to the terminal value, a key part of the VIU. A
decrease of 10% is considered a reasonably possible change in
revenue growth rates. A more significant decrease is not considered
reasonably possible on the basis of the accuracy of the Group's
previous revenue forecasts as in the great majority of cases,
actual sales were within 10% of the forecasts.
-- EBITDA margin growth: EBITDA (as a proxy for operating cash
flow before changes in working capital) is also a key contributor
to VIU. If revenue itself is unchanged over a period, margins can
still be improved through efficiency gains or losses, which also
has a significant impact on VIU. Revenue growth itself can also
enhance EBITDA margins due to operational leverage achieved when
costs grow at a slower rate than revenue. A change in the EBITDA
growth assumption in excess of that which would be caused by a 10%
fall in revenue growth is not considered by the Directors to be a
reasonably possible change as they consider that cost control
actions can be used to mitigate against changes in revenue.
-- The discount rate for each CGU - as described above, both
factors inside and outside management control impact the discount
rate and 1% is considered a reasonably possible change in
assumption due to changing market conditions.
EBITDA as an absolute measure is the primary cash flow driver
and is directly impacted by the key assumptions relating to revenue
growth and EBITDA margin. The sensitivities and their potential
impacts on those CGU's where a reasonably possible change in a key
assumption would lead to an impairment are shown below:
Fox-IT UK MSS
---------------------------------------- -------- --------
Surplus over carrying value of assets GBP1.4m GBP1.8m
Total VIU GBP87.1m GBP26.7m
Assumptions used in the VIU calculation
Revenue growth CAGR 12.2% 9.5%
Change required to eliminate surplus (0.5%) (0.4%)
Pre-tax discount rate 14.3% 14.9%
Change required to eliminate surplus (0.1%) (0.9%)
The headroom in the other CGU's is significant such that
reasonably possible changes in the key assumptions above would not
lead to an impairment.
Development and software costs are included in the CGU asset
bases and the associated discounted cash flow models. Capitalised
development projects and software intangible assets are considered,
on an asset by asset basis, for impairment where there are
indicators of impairment. During the year, the Directors carried
out a detailed strategic review of the capitalised product
portfolio. This led to some specific projects being fully impaired
as further development activity is not expected to continue,
leading to a total impairment charge of GBP1.5m. For the remaining
development and software assets, the Directors considered that
based on forecast cashflow projections for the respective projects,
the level of headroom is significant and therefore no sensitivity
analysis is presented.
11 Trade and other receivables
Group Group Company Company
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
----------------------------------- ----- ----- ------- -------
Trade receivables 41.7 40.9 - -
Prepayments 7.2 6.6 - -
Other receivables 1.5 1.5 - -
Accrued income 17.1 17.7 -
Amounts owed by Group undertakings - - 153.8 149.6
----------------------------------- ----- ----- ------- -------
67.5 66.7 153.8 149.6
----------------------------------- ----- ----- ------- -------
The ageing of trade receivables at the end of the reporting
period was:
Group
Gross Impairment Gross Impairment
2018 2018 2017 2017
GBPm GBPm GBPm GBPm
--------------------------- ----- ---------- ----- ----------
Not past due 25.9 - 19.8 -
Past due 0-30 days 6.8 - 12.1 -
Past due 31-90 days 8.0 - 7.7 -
Past due more than 90 days 2.3 (1.3) 2.0 (0.7)
--------------------------- ----- ---------- ----- ----------
43.0 (1.3) 41.6 (0.7)
--------------------------- ----- ---------- ----- ----------
The Company had no trade receivables (2017: GBPnil).
12 Provisions
Lease Loss-making Onerous Total
incentives contracts leases
GBPm GBPm GBPm GBPm
------------------------------------ ----------- ----------- ------- -----
Balance as at 1 June 2017 5.0 - - 5.0
Provisions arising in the year 1.7 2.6 2.4 6.7
Provisions utilised during the year (0.8) (1.6) (0.4) (2.8)
Balance as at 31 May 2018 5.9 1.0 2.0 8.9
------------------------------------ ----------- ----------- ------- -----
Non-current 5.5 (1.0) (1.8) 6.3
Current 0.4 2.0 0.2 2.6
------------------------------------ ----------- ----------- ------- -----
Property provisions of GBP5.9m represent capital contributions
of GBP3.5m towards fit-out costs on the new Manchester Head Office
building and a rent-free allowance of GBP2.8m which are being
amortised over the period of the lease.
The loss-making contract represents the estimated remaining net
lifetime loss on a long-term development and supply contract. This
is explained in more detail in note 6. The provision will be
utilised over the remaining period of the contract which is
expected to be completed in 2020. The provision includes an
estimation of hours to complete, which if increased by 10% would
increase the provision by GBP0.3m.
The onerous lease provisions arose due to vacant premises in
Reading (GBP0.4m) and an unused floor in the Manchester head office
building (GBP1.6m). The Reading provision will be utilised over the
next three years and the Manchester provision will be utilised over
the next ten years. In the discounted cash flow model, cash
outflows are discounted at 2.6% and cash inflows at 6.1%. A 1%
change in the discount rate on the cash outflows increases the
provision by GBP0.2m. At present the Directors do not consider that
void or rent free periods could be significantly longer than those
already assumed in calculating the provisions. Hence a material
change in the provision is not considered reasonably likely to
happen.
13 Related party transactions
The Group's key management personnel comprise the Directors of
the Group. The Group and Company's transactions with those
Directors are disclosed in the Directors' Remuneration Report.
There were no related party transactions during the year.
In the prior year, corporate finance fees of GBP0.3m were paid
to Rickitt Mitchell and Partners Ltd. Paul Mitchell held the
positions of Non-Executive Chairman of NCC Group until 31 May 2017
and was also the Non-Executive Chairman of Rickitt Mitchell and
Partners Ltd.
14 Post balance sheet events
Following the balance sheet date, the Group decided to
discontinue the arbitration process it had commenced in respect of
the final tranche of deferred consideration payable in respect of
the acquisition of Fox-IT (EUR11.25m/GBP9.9m as recorded in the
Group's balance sheet as at 31 May 2018). The decision was based on
a desire to focus the Group's efforts on the future growth and
further development of the Fox business. It was felt that a long
running process could have a detrimental effect on local management
(none of whom were present during the original sale process) and on
initiatives to begin to leverage the value within the business. The
full deferred consideration payable was therefore paid on 27 June
2018.
There were no other post balance sheet events.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR UBSVRWKABARR
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