TIDMNCC
RNS Number : 6344L
NCC Group PLC
14 September 2021
14 September 2021
NCC Group plc
Preliminary results for the year ended 31 May 2021
Securing the future
NCC Group plc (LSE : NCC, "NCC Group" or "the Group"), a leading
independent global cyber security and resilience adviser, reports
its full year results for the 12 months to 31 May 2021 ( "the full
year", "FY", "FY21", "the year").
Highlights (1)
2020
2021 (2) (restated) Change
(2,) (3)
Revenue (GBPm) 270.5 263.7 2.6%
Gross profit (GBPm) 110.6 104.4 5.9%
Gross margin (%) 40.9% 39.6% 1.3% pts
Operating profit (3) (GBPm) 17.3 12.6 37.3%
Operating profit margin (3) (%) 6.4% 4.8% 1.6 pts
Adjusted EBITDA (2) (GBPm) 52.5 45.5 15.4%
Adjusted operating profit (2, 3) (GBPm) 39.2 30.7 27.7%
Adjusted operating profit margin (2,
3) (%) 14.5% 11.6% 2.9% pts
Profit before taxation (3) (GBPm) 14.8 9.6 54.2%
Basic EPS (3) (pence) 3.6p 2.3p 56.5%
Adjusted basic EPS (2, 3) (pence) 9.5p 7.6p 25.0%
Net cash/(debt) excluding lease liabilities
(2) (GBPm) 83.3 (4.2) +GBP87.5m
Net cash/(debt) (2) (GBPm) 48.9 (42.4) +GBP91.3m
Cash conversion (2, 3) (%) 88.2% 102.9% (14.7% pts)
Final dividend (pence) 3.15 3.15 -
-------------------------------------------- --------- ----------- -----------
1: References for the Group's results are for continuing
operations.
2: See Note 3 for an explanation of Alternative Performance
Measures (APMs) and adjusting items. Further information is also
contained within the Financial Review and the Glossary of
terms.
3: See Note 13 for an explanation of the prior year restatement
recognised in relation to the adoption of the IFRIC agenda decision
on cloud configuration and customisation costs in April 2021. The
following additional information and reconciliation is noted in
relation to Adjusted operating profit due to the adoption of the
IFRIC agenda decision:
2021 2020
GBPm GBPm Change
----- -----
Adjusted operating profit (as noted above) 39.2 30.7 27.7%
Proforma amortisation charge in respect of certain cloud-based
software arrangements (see explanation below) (3.0) (1.4) (114.3%)
--------------------------------------------------------------- ----- ----- --------
Adjusted operating profit less a proforma amortisation charge
in respect of certain cloud-based software arrangements 36.2 29.3 23.5%
--------------------------------------------------------------- ----- ----- --------
The proforma amortisation adjustment noted above represents an
estimate of the amortisation that would have been recognised had
the Group not changed it's accounting policy in the current year
following additional clarification on the accounting in relation to
the configuration and customisation costs incurred in implementing
Software-as-a-Service (SaaS) arrangements in the IFRIC agenda
decision issued in April 2021. The proforma amortisation charge is
estimated based on Cloud configuration and customisation costs
charged to the income statement in the year of GBP5.1m (2020:
GBP7.9m).
The directors consider that Adjusted operating profit less a
proforma amortisation charge in respect of certain cloud-based
software arrangements is comparable to Adjusted operating profit
previously reported.
Strong trading performance despite the pandemic
-- Revenue grew +2.6%
-- Gross profit increased +5.9% with margins up +1.3% pts
-- Profit before taxation increased +54.2% after the inclusion
of IPM transaction costs of GBP7.6m, the benefit of a temporary
reduction in travel and office usage costs (GBP3m) and after cloud
configuration and customisation costs associated with the Group's
SGT transformation programme of GBP5.1m (2020: restated GBP7.9m (3)
)
Another year of excellent cash management
-- 88.2% cash conversion resulted in free cashflow of GBP34.6m
-- Year-end net cash after lease liabilities (2) of GBP48.9m
(2020: net debt (2) GBP42.4m) includes net placing proceeds of
GBP70.2m in relation to the acquisition of IPM
-- Post IPM completion, net debt excluding lease liabilities (2)
in August 2021 amounts to c.GBP75m
Successful acquisition of strategic and financial importance
-- c.GBP157m acquisition of Intellectual Property Management
("IPM"), the Software Resilience division of Iron Mountain,
completed on 7 June and funded through c.GBP87m debt and c.GBP70m
equity placing
-- Accretive to Adjusted basic EPS and operating profit margin; integration programme on plan
-- The acquisition of IPM transforms our global Software Resilience business in the USA
Exciting development and growth of key service lines for the
future
-- Managed Detection and Response ("MDR") revenues up 14.3% to GBP45.5m
-- Escrow as a Service ("EaaS"), our Cloud Escrow proposition,
generated orders of GBP2.2m, an increase of 83.3% compared to the
same period last year
-- New MDR service based on Microsoft's Azure Sentinel platform
launched at the end of the financial year
-- Newly-launched Remediation service to develop clients'
resilience generated revenues of GBP2.1m in first year of
launch
Our cyber and software resilience markets continue to offer
excellent long-term growth prospects
-- Cyber resilience is no longer optional for any organisation
and has become a board-level issue
o The rapid growth of ransomware attacks presents a clear and
present danger to all organisations
o Hybrid and remote working coupled with digital acceleration
has increased vulnerability and exposure
o The global cyber security services market was growing at
c.8-9% before the advent of Covid-19
-- Pandemic disruption held cyber spend back throughout H1 and
for much of H2 as many territories were subjected to continued
lockdowns or restrictions
-- Customer buying behaviour showed signs of normalising towards the end of the year
Investing for the future
-- Our research-driven, people-centric and capex-light business
model continues to keep us at the leading edge of this dynamic
cyber resilience market
-- We continue to invest systematically in new skills, new capabilities and industry sectors
-- We have a strong flexible balance sheet which will fund
future organic and in-organic growth
Outlook
-- For the current financial year (FY22), the Board expects
higher revenue growth as compared to FY21 partially offset by
increased global costs from inflationary pressures as well as a
resumption in travel and office usage. IPM integration costs are
expected to be c.GBP2.5m.
-- Our medium-term objectives continue to be: double-digit
revenue growth in Assurance and sustainable revenue growth in
Software Resilience
-- Q1 FY22 revenue growth was stronger than prior year in local
currency but we experienced some un-anticipated disruption in
customer buying patterns over the summer period. Q1 orders were
ahead YoY and our orders pipeline is robust. Consequently, the full
year outturn remains in line with management expectations.
-- Board recommending an unchanged final dividend of 3.15p (2020: 3.15p) per ordinary share
Adam Palser , Chief Executive Officer, commented:
"Thanks to the hard work, dedication and skill of my NCC Group
colleagues, FY21 was a year in which we made demonstrable progress
towards our vision to be the leading cyber resilience provider
globally. Revenues grew despite the disruption caused by the
pandemic, and improved profitability and excellent cash generation
flowed from the greater control enabled by our Securing Growth
Together programme.
Cyber resilience has never been more of a priority than it is
today. The connected environment continues to grow thanks to
digital transformation and the rapid adoption of cloud technology -
which was already underway but has been greatly accelerated by the
pandemic - leaving inadequately-secured organisations ever more
vulnerable to disruption, fines and, in extreme cases, failure.
This makes our market a very exciting one, and our investment and
ever-growing capabilities leave NCC Group well positioned to
capture the accelerated market growth we anticipate as business
activity normalises."
Analyst presentation briefing and Q & A session
A pre-recorded Analyst presentation briefing will be available
from the Group's website at 8am on 14 September 2021 via the
following link:
https://www.nccgroupplc.com/investor-relations/results-media/full-year-results-presentation-for-the-year-ended-31-may-2021/
A Q & A session will be held remotely at 9am on 14 September
2021.
EnquiriesNCC Group ( www.nccgroup.com ) +44 (0)161 209 5432
Adam Palser, CEO/ Tim Kowalski, CFO
Maitland AMO +44 (0)20 7379 5151
Emma Burdett, Sam Cartwright
About NCC Group plc
NCC Group exists to make the world safer and more secure.
Our vision is to be the leading cyber resilience provider
globally, trusted to protect and secure our customers' critical
assets and sought-after for our complete people-led,
technology-enabled cyber resilience solutions that enable our
customers to thrive.
Our three values are: Work Together; Be Brilliantly Creative;
and Embrace Difference.
As global experts in cyber security and risk mitigation, NCC
Group is trusted by over 14,000 customers worldwide to protect
their most critical assets from the ever-changing threat landscape.
With the company's knowledge, experience and global footprint, it
is best placed to help organisations assess, develop and manage
their cyber resilience posture. To support its mission, NCC Group
continually invests in research and innovation, and is passionate
about developing the next generation of cyber scientists. With over
2,100 colleagues in 12 countries, NCC Group has a significant
market presence in North America, Europe and the UK, and a rapidly
growing footprint in Asia Pacific with offices in Australia, Japan
and Singapore.
Cautionary note regarding forward-looking statement
This announcement includes statements that are forward-looking
in nature. Forward-looking statements involve known and unknown
risks, assumptions, uncertainties and other factors which may cause
the actual results, performance or achievements of the Group to be
materially different from any future results, performance or
achievements expressed or implied by such forward-looking
statements. Except as required by the Listing Rules, Disclosure and
Transparency Rules and applicable law, the Group undertakes no
obligation to update, revise or change any forward-looking
statements to reflect events or developments occurring on or after
the date such statements are published.
Business review
Which pandemic will you still be worrying more about next
year?
Pandemics start somewhere else and affect other people - until
very suddenly they are on your doorstep and inside your business,
forcing you to re-evaluate how you live and how you work.
Our 2021 financial year was a tale of two pandemics, one
biological and the other digital. The ensuing tug-of-war between
these pandemics defined our markets:
-- Covid-19 rippled across our geographic operating territories
at different speeds and intensities provoking different responses
from governments. We saw demand from customers ebb and flow
depending on whether their industry was opening up or being placed
under more restrictions.
-- Simultaneously, the rapid uptake of remote working drove
increased cyber risk, which was exploited by "bad actors" including
organised crime and state-sponsored groups. Ransomware, in
particular, has now become so prevalent that no organisation can
afford to ignore the risk it presents.
Resilience is the key
Covid-19, supply chain shocks and rampant ransomware attacks
have reminded us all how difficult it is to predict the future and
thus of the importance of resilience against unknown risks. We are
proud of our own resilience through the past 12 months,
demonstrating our ability to deliver great work, to hire more
talent and to grow even through the most extreme of shocks.
Our resilience starts with our people, and I would like to pay
tribute to the remarkable skills and commitment of my colleagues.
They are at the heart of our success.
Last financial year we hired over 200 front-line technical
specialists, increasing our global net headcount by 8.1%. It is
remarkable to think that many of them have not been into an office
or met their colleagues. Happily, the feedback from surveys we have
conducted indicates that the work we have done to onboard
colleagues in the remote environment has been valued.
Overall, the global voluntary attrition rate remained constant
at c. 15% and our technical attrition increased to 17.0% (2020:
14.4%). We identify two particular influences on this attrition
increase. First, the advent of remote working drove significant
labour mobility in the United States as it became possible to work
for the largest and most exciting technology companies without
having to move to the Bay Area. Second, while attrition was much
lower in the UK and Europe through the first half, as the world
began to open up we saw people leave to change lifestyle or gain
variety after being locked down in the same place for an extended
period of time.
However, once again demonstrating our own resilience, the global
operating and resourcing model that we developed mitigated the
impact of this higher attrition, enabling us to deliver revenue in
North America using resources spread elsewhere across the
globe.
Everyone is welcome
There are not enough cyber skills in the world to meet today's
challenges. We see ourselves as playing a significant role in the
attraction and training of new talent, having one of the cyber
industry's most effective training programmes. As we strive to
bring more people into the world of cyber and to make the
population of cyber specialists representative of the societies in
which they live and work, we continue to focus on inclusion and
improving the diversity of our teams. In particular:
-- We are embracing more flexible ways of working - and intend
to continue with that flexibility as we explore new ways of
working.
-- Our four colleague resource groups - Gender, Race and
Ethnicity, LGBTQIA+ and Neurodiversity - have catalysed
conversations on topics as diverse as menopause, systemic racism,
transvestism and autism, as we strive to raise awareness, create
understanding and respect each other to make NCC Group an inclusive
place for everyone.
-- Our teams have worked hard to provide mutual support with a
particular focus on mental health and wellbeing. We have 61 trained
Mental Health First Aiders. Over 100 of our people managers have
received training in mental health awareness, and a full wellbeing
programme for colleagues is supplemented by employee assistance
programmes in our local geographies. All of these efforts continue
to help our teams through these difficult times and will provide a
legacy of ongoing benefit in the future.
Sustainable growth for all of our stakeholders
Every day we work for customers in pursuit of our mission: to
make the world a safer and more secure place. This mission and the
focus on our people are at the heart of our value proposition and
how we do business.
More broadly, our sustainability approach is focused on the
recognised elements of environment, social and governance and our
progress is outlined below:
-- Environment - Building on the new and successful ways of
working created by the pandemic we are engaging in conversation
with our customers to explore how we can work together to reduce
the impact on the environment. In addition, as our office
environments come back to life, we are investing in education
programmes to reduce our physical impact - from flexible working
and preventing unnecessary printing, to recycling. We have also
developed our new working policies and therefore will continue to
review our physical office requirements to ensure we only use what
we need.
-- Social - We continue to foster partnerships that support the
development of future diverse cyber talent and encourage colleagues
to give back to their local communities through schools,
universities and charity partnerships, and the piloting of a giving
back day in the UK. In addition, we continue to invest in
developing not only our mental health first aid network and
resources, but we are now looking to implement our broader
wellbeing strategy, partnering again with This Can Happen. Through
NCC Conversations we continue to encourage engagement from
colleagues and our external stakeholders around our four focus
areas of gender, LGBTQIA+, race and ethnicity and neurodiversity,
adding accessibility in this coming year. These conversations
alongside our performance management programme and career framework
development help drive our performance culture, creating an
environment where everyone is welcome and can be successful.
-- Governance - We continue to strengthen our governance
structures. We assess and consciously decide to work with customers
who align with our own values and Code of Ethics. We are currently
strengthening our Supplier Code of Conduct to ensure that we enter
any supplier or partner relationship with a mutual understanding of
each other's code of ethics and general business policies. In
addition, we remain committed to considering the interests of all
our stakeholders when making decisions on the Group's future
strategy and priorities.
Year-on-year growth led by Assurance
Against this backdrop, Group revenues increased by 2.6% (2020:
5.2%). On a constant currency basis (2) , Group revenues increased
by 3.6%.
In our Assurance business, the North American and EU Assurance
businesses grew by 6.5% and 5.9% respectively on a local currency
basis (2) . Our UK and APAC region increased 3.9%, including a
notable 9.6% in the second half as industries began to look forward
to the easing of restrictions.
In our Software Resilience division, we were delighted by the
83% increase in Escrow-as-a-Service orders which herald great
promise for the future, but disappointed by an overall revenue
decline of 2.4%. Attracting sufficient sales resource, retaining
sales colleagues, delivering on-site work and maintaining sales
momentum have all been more difficult in a fully remote working
environment and we anticipate improvements in all of these factors
in the next 12 months as we work to return Software Resilience to
sustainable growth.
Gross profit increased by 5.9% to GBP110.6m (2020: GBP104.4m)
with gross margin percentage increasing to 40.9% (2020: 39.6%). The
margin increase was significantly driven by the flourishing of our
global resourcing engine where skilled resources from every part of
our Group can now be deployed on high value engagements, smoothing
out peaks and troughs of demand or skill shortages. The gross
margin was, however, offset by a c.GBP2m provision taken in
relation to existing long-term European contracts as a result of
pandemic disruption, cost increases and project management
challenges.
2: See Note 3 for an explanation of Alternative Performance
Measures (APMs) and adjusting items. Further information is also
contained within the Financial Review and the Glossary of
terms.
Operating profit increased by 37.3% to GBP17.3m (2020: restated
GBP12.6m) after the inclusion of transaction costs of GBP7.6m in
relation to the $220m acquisition of Intellectual Property
Management (IPM), the Software Resilience division of Iron Mountain
and cloud configuration and customisation costs associated with the
Group's SGT transformation programme (GBP5.1m, 2020: restated
GBP7.9m (3) ).
The Group manages its performance internally at an Adjusted
operating profit (2) level, with Adjusted operating profit (2, 3)
increasing by 27.7% to GBP39.2m albeit with the benefit of a
temporary reduction in travel and office usage costs of c.GBP3m.
This information is disclosed below and reconciled to statutory
operating profit:
2021 2020 (restated) (3)
Central Central
Software and head Software and head
Assurance Resilience office Group Assurance Resilience office Group
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- --------- ----------- --------- ------- ---------- ----------- --------- -------
Revenue 233.9 36.6 - 270.5 226.2 37.5 - 263.7
Cost of sales (149.5) (10.4) - (159.9) (149.3) (10.0) - (159.3)
--------------- --------- ----------- --------- ------- ---------- ----------- --------- -------
Gross profit 84.4 26.2 - 110.6 76.9 27.5 - 104.4
Gross margin % 36.1% 71.6% - 40.9% 34.0% 73.3% - 39.6%
Administrative
expenses (45.4) (9.5) (3.2) (58.1) (43.9) (10.0) (5.0) (58.9)
--------------- --------- ----------- --------- ------- ---------- ----------- --------- -------
Adjusted EBITDA
(2) 39.0 16.7 (3.2) 52.5 33.0 17.5 (5.0) 45.5
Depreciation
and
amortisation (9.4) (0.7) (3.2) (13.3) (10.7) (0.6) (3.5) (14.8)
Adjusted
operating
profit
(2, 3) 29.6 16.0 (6.4) 39.2 22.3 16.9 (8.5) 30.7
Individually
Significant
Items - - (12.7) (12.7) - - (7.9) (7.9)
Amortisation of
acquired
intangibles - - (6.4) (6.4) - - (8.8) (8.8)
Share-based
payments - - (2.8) (2.8) - - (1.4) (1.4)
--------------- --------- ----------- --------- ------- ---------- ----------- --------- -------
Operating
profit 29.6 16.0 (28.3) 17.3 22.3 16.9 (26.6) 12.6
--------------- --------- ----------- --------- ------- ---------- ----------- --------- -------
2: See Note 3 for an explanation of Alternative Performance
Measures (APMs) and adjusting items. Further information is also
contained within the Financial Review and the Glossary of
terms.
3: See Note 13 for an explanation of the prior year restatement
recognised in relation to the adoption of the IFRIC agenda decision
on cloud configuration and customisation costs in April 2021. The
following additional information and reconciliation is noted in
relation to Adjusted operating profit due to the adoption of the
IFRIC agenda decision:
2021 2020
GBPm GBPm Change
----- -----
Adjusted operating profit (as noted above) 39.2 30.7 27.7%
Proforma amortisation charge in respect of certain cloud-based
software arrangements (see explanation below) (3.0) (1.4) (114.3%)
--------------------------------------------------------------- ----- ----- --------
Adjusted operating profit less a proforma amortisation charge
in respect of certain cloud-based software arrangements 36.2 29.3 23.5%
--------------------------------------------------------------- ----- ----- --------
The proforma amortisation adjustment noted above represents an
estimate of the amortisation that would have been recognised had
the Group not changed it's accounting policy in the current year
following additional clarification on the accounting in relation to
the configuration and customisation costs incurred in implementing
Software-as-a-Service (SaaS) arrangements in the IFRIC agenda
decision issued in April 2021. The proforma amortisation charge is
estimated based on Cloud configuration and customisation costs
charged to the income statement in the year of GBP5.1m (2020:
GBP7.9m). The directors consider that Adjusted operating profit
less a proforma amortisation charge in respect of certain
cloud-based software arrangements is comparable to Adjusted
operating profit previously reported.
During the year, the Group has incurred GBP12.7m of Individually
Significant Items (ISIs) (2020: restated GBP7.9m (3) ). These items
relate to the acquisition of the IPM business (GBP7.6m) and cloud
configuration and customisation costs associated with the Group's
SGT transformation programme (GBP5.1m, 2020: restated GBP7.9m (3)
). For further detail, please refer to the financial review and
Note 13 to the condensed Financial Statements.
Profit before taxation increased 54.2% to GBP14.8m (2020:
restated GBP9.6m (3) ) and profit for the year increased 56.3% to
GBP10.0m (2020: restated GBP6.4m (3) ) giving rise to a basic EPS
of 3.6p (2020: restated 2.3p (3) ). Adjusted basic EPS (2) amounts
to 9.5p (2020: restated 7.6p (3) ).
In 2021, our cash conversion (2) was 88.2% (2020: restated
102.9% (3) ). Net cash/(debt) (including lease liabilities) (2)
amounts to GBP48.9m (2020: net debt GBP42.4m).
Long-term market prospects are excellent
The four secular growth drivers of resilience demands (as we
refer to them) continue to strengthen:
-- The connected environment is growing. Every year, more
devices are connected to the internet to share data or offer up the
possibility of remote access, and the interdependencies between
organisations across geographical boundaries increase in complexity
too.
-- Society's reliance on the connected environment is greater
than ever. The world is undergoing a digital transformation,
accelerated by the pandemic. Our economies and wellbeing have never
been more dependent on the safe and secure flow of data, and the
continued resilience of essential services they rely on in their
daily lives.
-- The threat is growing. Ransomware has now become endemic.
-- Regulatory and legislative requirements are increasing. In
response to all of the above, organisations have to comply with a
growing set of mandated requirements if they wish to enter or
continue operating in their respective markets. This includes
proposed legislation by the UK government for consumer IoT
manufacturers, US President Biden implementing software supply
chain security measures by Executive Order, and global financial
regulators updating their rules and guidance on technology, third
party technology and cloud outsourcing arrangements.
A sustainable business model in a dynamic environment
We are fortunate to work in a sector of growing opportunity.
Naturally, this opportunity attracts significant investment from
many organisations leading to healthy competition for customers and
talent.
In this context, we cherish our research-driven, people-centric
and capex-light business model that enables us to stay at the
leading edge of the dynamic cyber resilience market and create
profitable, cash-generative growth. Every year we enable talented
individuals from our global teams to research the latest
technologies, discover new system vulnerabilities and develop
skills. In turn:
-- The subsequent education of our customers and monetisation of
our knowledge allow NCC Group to maintain its world-leading
position in this ever-evolving market.
-- The opportunity to work with some of the best minds in the
industry and to conduct research is part of our rounded colleague
value proposition for technical specialists.
Although the pandemic has impacted all our colleagues and
customers around the world, our business has demonstrated its
resilience and remains committed to securing the future for
all.
Creating value through the execution of our strategy
Over the past three years - and even through the disruption
caused by Covid-19 - our confidence in the direction of our company
has grown. Our mission, vision and values have remained the same
and we have created value through the relentless execution of our
transformation programme, 'Securing Growth Together'.
Our mission: is to make the world safer and more secure.
Our vision is to be the leading cyber resilience provider
globally, trusted to protect and secure our customers' critical
assets and sought-after for our complete people-led,
technology-enabled cyber resilience solutions that enable our
customers to thrive
Our values are: Work Together; Be Brilliantly Creative; and
Embrace Difference
Our medium-term objectives are :
- For our shareholders
o Medium-term target of double-digit revenue growth and margin
improvement for Assurance
o Return Software Resilience to sustainable growth
o Disciplined cash generation
- For our customers
o Use our unique data, capability and insight to help customers
to meet their cyber resilience needs
- For our people
o A global hub for cyber talent
o An inclusive environment where everyone feels safe to be
authentic and which is representative of the diversity of the world
in which we live
As noted at our interim results, we are now building on the
strong initial foundations of our Securing Growth Together
programme and have moved to the next phase of becoming the complete
provider of global cyber resilience solutions, particularly by:
-- Broadening our portfolio (adding services and solutions across the cyber lifecycle); and
-- Improving how we go to market globally (becoming easier to engage with and buy from).
At our interim results, we announced the investment of GBP3m
into propositions that we consider critical for the future and for
realising our ambition to become a complete provider of cyber
resilience services, acting as a one-stop shop to meet our
customers' demand for evidence-based solutions that offer them
peace of mind. The table below describes these propositions and
highlights our progress in FY21:
Proposition Progress
Escrow as a Service ("EaaS"), our cloud
Escrow proposition * 83.3% increase in EaaS orders to GBP2.2m
* Weighted year end EaaS pipeline at GBP1.1m
* Notable FY21 wins include Sky, Carrefour, Christie's,
Deutsche Bank, Standard Chartered and Barclays
------------------------------------------------------------------
Global Managed Services ("GMS")
* MDR revenue growth of 14.3%
* Sales orders growth of 15.8% to GBP71.8m
------------------------------------------------------------------
New MDR service based on Microsoft's
Azure Sentinel platform * Launched at the end of the financial year
------------------------------------------------------------------
New Remediation service to develop
clients' resilience * Global rollout after successful UK launch (revenues
of GBP2.1m with current pipeline of c.GBP3m)
------------------------------------------------------------------
We will invest further in FY22 and beyond to build on these
successes.
Acquisition of IPM business
The most significant investment of the year was our recent
acquisition of the IPM business, which marked an exciting
culmination of our financial year. We obtained shareholder approval
on 1 June and completed the transaction on 7 June for $220m,
subject to a normalised working capital adjustment during FY22. On
this basis, the results of the IPM business will be consolidated
from 1 June 2021. The acquisition was funded through an equity
placing (GBP70.2m) in May combined with a new three year $70m term
loan, existing cash balances and our revolving credit facility.
The acquisition aligns with the Group's existing strategy and
will:
-- Scale up the Group's core business to create a global
business and platform for further growth
-- Generate revenue synergies through allowing the enlarged
division to offer NCC Group's broader suite of established
verification services as well as the newer Escrow-as-a- Service
(EaaS) cloud offering to the IPM business' existing customer
base
-- Present an exciting new opportunity to sell NCC Group's cyber
security services from its Assurance division into the IPM
business' broad and blue-chip customer base in the medium term
-- Be accretive to earnings per share from completion, even
without factoring in revenue synergies
-- Result in greater strategic strength for the future
Financially and, prior to our ownership, the business generated
revenues of c.GBP23m and operating profit of c.GBP15m for the 12
months ended 31 December 2020, with cash conversion of c.90%. It is
expected that for NCC Group's FY22 financial year, the business
will incur c. GBP2.5m of one-off integration costs.
From an integration perspective, integration is on plan with all
workstreams (People, Customers, Operations, Finance and IT) making
good progress against objectives. The business is also supported by
TSA and MSA arrangements.
From a personal perspective, it has been a pleasure to welcome
our new colleagues from the IPM business. I look forward with
confidence to the future as we transform our Software Resilience
business into a growing, high margin global leader.
Summary
Financial
-- Year-on-year growth in Group Revenue, Gross Profit, Adjusted
operating profit and Profit before taxation
-- Another year of excellent cash management
Operational
-- Successful acquisition of IPM with strategic and financial importance
-- Exciting development and growth of key service lines for the future
-- Market prospects continue to evolve and create opportunities
-- We continue to have a strong and flexible balance sheet that
will allow us to fund future organic and in-organic growth
Our FY22 operational priorities are:
Assurance
-- Broadening our portfolio (adding services and solutions across the cyber lifecycle)
-- Growing recurring global MDR services
-- Effective use of our global resourcing model
Software Resilience
-- Addressing execution challenges and returning Software Resilience to sustainable growth
-- Continuing to broaden the portfolio through innovation and growing our EaaS proposition
-- Embedding the IPM acquisition and minimising integration costs
Outlook
-- For the current financial year (FY22), the Board expects
higher revenue growth as compared to FY21 partially offset by
increased global costs from inflationary pressures as well as a
resumption in travel and office usage. IPM integration costs are
expected to be c.GBP2.5m.
-- Our medium-term objectives continue to be: double-digit
revenue growth in Assurance and sustainable revenue growth in
Software Resilience
-- Q1 FY22 revenue growth was stronger than prior year in local
currency but we experienced some un-anticipated disruption in
customer buying patterns over the summer period. Q1 orders were
ahead YoY and our orders pipeline is robust. Consequently, the full
year outturn remains in line with management expectations.
-- The Board is recommending an unchanged final dividend of
3.15p (2020: 3.15p) per ordinary share
Financial review
Overview (1)
We have delivered another period of good financial results,
demonstrating our resilience during a global pandemic. During 2022,
the Group will continue to strategically invest for the future with
the expectation of higher revenue growth accompanied by increased
global costs from inflationary pressures as well as a resumption in
travel and office usage.
Group revenues increased by 2.6%. On a constant currency basis
(2) , Group revenues increased by 3.6% due to the strengthening of
Sterling against the US Dollar. In Assurance, the North American
and EU Assurance businesses grew by 6.5% and 5.9% respectively, on
a local currency basis (2) . Our UK and APAC region increased 3.9%,
supported by growth in MDR and the launch of the Remediation
service. Disappointingly, Software Resilience declined by 2.4%.
This decline was mainly a result of execution challenges in a
remote environment together with retaining sales colleagues and
attracting sufficient sales resource to enable a return to contract
growth.
Gross profit increased by 5.9% to GBP110.6m (2020: GBP104.4m)
with margin percentage increasing to 40.9% (2020: 39.6%) mainly
owing to higher global resourcing and utilisation offset by a
c.GBP2m provision taken in relation to long-term European contracts
as a result of pandemic disruption, cost increases and project
management challenges. Assurance margin percentage increased to
36.1% (2020: 34.0%) and Software Resilience decreased to 71.6%
(2020: 73.3%) due to execution challenges.
Total administrative expenses (including Individually
Significant Items) have increased by GBP1.5m compared to the
adjusted prior year figure mainly owing to a tighter control of
overheads, a reduction on travel and office costs of c.GBP3m, a
profit arising on disposal of an intangible asset of GBP0.5m and a
reduction in amortisation of intangibles of GBP2.4m, offset by
increased system license costs of GBP1.3m, a foreign exchange
charge of GBP1.5m, an increase in a share-based payment charge of
GBP1.4m and an increase in Individually Significant Items of
GBP4.8m.
Following the adoption of the IFRIC agenda decision on cloud
configuration and customisation costs, capitalised software and
development costs during the year amounted to GBP2.3m (2020:
restated GBP2.3m (3) ), with all cloud configuration and
customisation costs now being expensed as incurred. Further details
on the application of IFRIC agenda decision and prior year
restatement are included later in this review.
Operating profit has increased by 37.3% to GBP17.3m (2020:
restated GBP12.6m (3) ) following the inclusion of Individually
Significant Items of GBP12.7m (2020: restated GBP7.9m (3) ) in
relation to the IPM US Acquisition (GBP7.6m) and cloud
configuration and customisation costs associated with the Group's
SGT transformation programme (GBP5.1m, 2020: restated GBP7.9m (3)
). Operating profit also includes amortisation of acquired
intangible assets of GBP6.4m (2020: GBP8.8m) and share-based
payments of GBP2.8m (2020: GBP1.4m). Adjusted operating profit (2,
3) increased by 27.7% to GBP39.2m (2020: restated GBP30.7m (3) ).
Adjusted EBITDA (2) increased by 15.4% to GBP52.5m (2020:
GBP45.5m). Profit before taxation increased by 54.2% to GBP14.8m
(2020: restated GBP9.6m (3) ) following the inclusion of
Individually Significant Items noted above.
Basis EPS amounted to 3.6p and diluted EPS amounted to 3.5p
(2020: restated basic and diluted 2.3p (3) ). Adjusted basic EPS
(2) amounts to 9.5p (2020: restated 7.6p (3) ).
During the year, we secured the acquisition of the IPM business
and following shareholder approval on 1 June we completed the
transaction for $220m, subject to a normalised working capital
adjustment. On this basis, the results of the IPM business will be
consolidated from 1 June 2021. The acquisition was funded through
an equity placing in May (GBP70.2m) combined with a new three year
$70m term loan, existing cash balances and our revolving credit
facility.
Our Balance Sheet remains strong; we have continued to
demonstrate effective cash management with cash conversion (2) of
88.2% and are now cash positive. Our Balance Sheet strength can
therefore continue to fund organic and inorganic opportunities.
The Board is also declaring an unchanged interim dividend of
3.15p per ordinary share (2020: 3.15p). This represents a dividend
equal to that paid in the prior year as the Board is conscious of
the need to invest in initiatives to support longer-term growth and
service debt profile following the recent acquisition. The dividend
policy will therefore continue to remain under review.
1: References for the Group's results are for continuing
operations.
2: See Note 3 for an explanation of Alternative Performance
Measures (APMs) and adjusting items. Further information is also
contained within the Financial Review and the Glossary of
terms.
3: See Note 13 for an explanation of the prior year restatement
recognised in relation to the adoption of the IFRIC agenda decision
on cloud configuration and customisation costs in April 2021.
Financial summary
Summary Income Statement (1) :
GBPm 2020 (restated) (2,)
2021 (3) % change
------- --------------------
Revenue 270.5 263.7 2.6%
Cost of sales (159.9) (159.3) (0.4%)
--------------------------------- ------- -------------------- --------
Gross profit 110.6 104.4 5.9%
Depreciation and amortisation (13.3) (14.8) 10.1%
Other administration expenses (58.1) (58 . 9) 1.4%
Adjusted operating profit (2,
3) 39.2 30.7 27.7%
Individually significant items (12.7) (7.9) (60.8%)
Acquired intangible amortisation (6.4) (8.8) 27.3%
Share based payments (2.8) (1.4) (100.0%)
Operating profit 17.3 12.6 37.3%
Finance costs (2.5) (3.0) 16.7%
--------------------------------- ------- -------------------- --------
Profit before taxation 14.8 9.6 54.2%
--------------------------------- ------- -------------------- --------
Taxation (4.8) (3.2) (50.0%)
--------------------------------- ------- -------------------- --------
Profit for the year 10.0 6.4 56.3%
--------------------------------- ------- -------------------- --------
EPS
Basic 3.6p 2.3p 56.5%
Diluted 3.5p 2.3p 52.2%
--------------------------------- ------- -------------------- --------
Revenue summary:
GBPm
Revenue 2021 2020 % change
----- -----
Assurance 233.9 226.2 3.4%
Software Resilience 36.6 37.5 (2.4%)
-------------------- ----- ----- --------
Total revenue 270.5 263.7 2.6%
-------------------- ----- ----- --------
Operating profit summary:
GBPm 2020 (restated) (2,)
Operating profit 2021 (3) % change
------ --------------------
Assurance 29.6 22.3 32.7%
Software Resilience 16.0 16.9 (5.3%)
Central and head office (6.4) (8.5) 24.7%
------------------------- ------ -------------------- ----------
Adjusted operating
profit (2, 3) 39.2 30.7 27.7%
Individually significant
items (12.7) (7.9) (60.8%)
Acquired intangible
amortisation (6.4) (8.8) 27.3%
Share based payments (2.8) (1.4) (100%)
------------------------- ------ -------------------- ----------
Operating profit 17.3 12.6 37.3%
------------------------- ------ -------------------- ----------
Operating profit margin
% 6.4% 4.8% 1.6% pts
------------------------- ------ -------------------- ----------
1: References for the Group's results are for continuing
operations.
2: See Note 3 for an explanation of Alternative Performance
Measures (APMs) and adjusting items. Further information is also
contained within the Financial Review and the Glossary of
terms.
3: See Note 13 for an explanation of the prior year restatement
recognised in relation to the adoption of the IFRIC agenda decision
on cloud configuration and customisation costs in April 2021. The
following additional information and reconciliation is noted in
relation to Adjusted operating profit due to the adoption of the
IFRIC agenda decision:
2021 2020
GBPm GBPm Change
----- -----
Adjusted operating profit (as noted above) 39.2 30.7 27.7%
Proforma amortisation charge in respect of certain cloud-based
software arrangements (see explanation below) (3.0) (1.4) (114.3%)
--------------------------------------------------------------- ----- ----- --------
Adjusted operating profit less a proforma amortisation charge
in respect of certain cloud-based software arrangements 36.2 29.3 23.5%
--------------------------------------------------------------- ----- ----- --------
The proforma amortisation adjustment noted above represents an
estimate of the amortisation that would have been recognised had
the Group not changed it's accounting policy in the current year
following additional clarification on the accounting in relation to
the configuration and customisation costs incurred in implementing
Software-as-a-Service (SaaS) arrangements in the IFRIC agenda
decision issued in April 2021. The proforma amortisation charge is
estimated based on Cloud configuration and customisation costs
charged to the income statement in the year of GBP5.1m (2020:
GBP7.9m). The directors consider that Adjusted operating profit
less a proforma amortisation charge in respect of certain
cloud-based software arrangements is comparable to Adjusted
operating profit previously reported.
Alternative Performance Measures (APMs)
Throughout this Financial Review, certain APMs are presented. As
discussed in the FY20 Annual Report and in accordance with FRC
guidelines, the Group no longer presents a Consolidated Income
Statement showing adjusting items separately. In prior periods, the
Group disclosed adjusting items in 2020 of GBP10.2m relating to
amortisation of acquired intangibles (2020: GBP8.8m) and
share-based payments (2020: GBP1.4m) as a separate column on the
face of the Consolidated Income Statement. This is no longer
disclosed in this way to simplify the Group's results. However, as
the Group manages internally its performance at an Adjusted
operating profit level (before Individually Significant Items,
amortisation of acquired intangibles and share-based payments),
which management believes better represents the underlying trading
of the business, this information is still disclosed as an APM.
This APM is reconciled to statutory operating profit, together with
the consequently Adjusted basic EPS (before Individually
Significant Items, amortisation of acquired intangibles,
share-based payments and the tax effect thereon) to statutory basic
EPS.
This change has removed the following adjusted measures from the
Group's narrative reporting and disclosures:
-- Adjusted Profit before taxation
-- Adjusted Taxation
Following this revision to APMs, the Group has the following
APM's/non statutory measures:
-- Adjusted EBITDA (reconciled in note 3)
-- Adjusted Operating profit (reconciled in note 3)
-- Adjusted basic EPS (pence) (reconciled in note 8)
-- Net cash/(debt) excluding lease liabilities (reconciled in note 3)
-- Net cash/(debt) (reconciled in note 3)
-- Cash Conversion (reconciled in note 3)
These measures provide supplementary information that assists
the user to understand the financial performance, position and
trends of the Group. Further detail is included within the glossary
of terms to these Financial Statements that provide supplementary
information that assists the user in understanding these
APMs/non-statutory measures.
The Group also reports certain geographic regions on a constant
currency basis to reflect the underlying performance taking into
account constant foreign exchange rates year on year. This involves
translating comparative numbers to current year rates for
comparability to enable a growth factor to be calculated. In
addition, the Group also reports these regions on a local currency
basis to demonstrate the revenue performance on a local basis. As
these measures are not statutory revenue numbers, management
considers these to be APMs, see Note 3 for further details.
Divisional performance
Divisional performance includes the allocation of certain
central costs incurred on behalf of the divisions. Segmental
information is disclosed below:
2021 2020 (restated) (2, 3)
Central Central
Software and head Software and head
Assurance Resilience office Group Assurance Resilience office Group
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- --------- ----------- --------- ------- ----------- ---------- --------- -------
Revenue 233.9 36.6 - 270.5 226.2 37.5 - 263.7
Cost of sales (149.5) (10.4) - (159.9) (149.3) (10.0) - (159.3)
--------------- --------- ----------- --------- ------- ----------- ---------- --------- -------
Gross profit 84.4 26.2 - 110.6 76.9 27.5 - 104.4
Gross margin % 36.1% 71.6% - 40.9% 34.0% 73.3% - 39.6%
Administrative
expenses (45.4) (9.5) (3.2) (58.1) (43.9) (10.0) (5.0) (58.9)
--------------- --------- ----------- --------- ------- ----------- ---------- --------- -------
Adjusted EBITDA
(2) 39.0 16.7 (3.2) 52.5 33.0 17.5 (5.0) 45.5
Depreciation
and
amortisation (9.4) (0.7) (3.2) (13.3) (10.7) (0.6) (3.5) (14.8)
Adjusted
operating
profit
(2, 3) 29.6 16.0 (6.4) 39.2 22.3 16.9 (8.5) 30.7
Individually
Significant
Items - - (12.7) (12.7) - - (7.9) (7.9)
Acquired
intangible
amortisation - - (6.4) (6.4) - - (8.8) (8.8)
Share-based
payments - - (2.8) (2.8) - - (1.4) (1.4)
--------------- --------- ----------- --------- ------- ----------- ---------- --------- -------
Operating
profit 29.6 16.0 (28.3) 17.3 22.3 16.9 (26.6) 12.6
--------------- --------- ----------- --------- ------- ----------- ---------- --------- -------
2: See Note 3 for an explanation of Alternative Performance
Measures (APMs) and adjusting items. Further information is also
contained within the Financial Review and the Glossary of
terms.
3: See Note 13 for an explanation of the prior year restatement
recognised in relation to the adoption of the IFRIC agenda decision
on cloud configuration and customisation costs in April 2021. The
following additional information and reconciliation is noted in
relation to Adjusted operating profit due to the adoption of the
IFRIC agenda decision:
2021 2020
GBPm GBPm Change
----- -----
Adjusted operating profit (as noted above) 39.2 30.7 27.7%
Proforma amortisation charge in respect of certain cloud-based
software arrangements (see explanation below) (3.0) (1.4) (114.3%)
--------------------------------------------------------------- ----- ----- --------
Adjusted operating profit less a proforma amortisation charge
in respect of certain cloud-based software arrangements 36.2 29.3 23.5%
--------------------------------------------------------------- ----- ----- --------
The proforma amortisation adjustment noted above represents an
estimate of the amortisation that would have been recognised had
the Group not changed it's accounting policy in the current year
following additional clarification on the accounting in relation to
the configuration and customisation costs incurred in implementing
Software-as-a-Service (SaaS) arrangements in the IFRIC agenda
decision issued in April 2021. The proforma amortisation charge is
estimated based on Cloud configuration and customisation costs
charged to the income statement in the year of GBP5.1m (2020:
GBP7.9m). The directors consider that Adjusted operating profit
less a proforma amortisation charge in respect of certain
cloud-based software arrangements is comparable to Adjusted
operating profit previously reported.
Acquired intangible amortisation decreased during the year as
certain historical acquisitions became fully amortised. It is
expected that for FY22, the charge will increase significantly
following the US acquisition of the IPM business. Share-based
payments increased during the year following the introduction of
new share schemes for key management.
Assurance
The Assurance division accounts for 86.5% of Group revenue
(2020: 85.8%) and 76.3% of Group gross profit (2020: 73.7%).
Assurance revenue analysis - by originating country:
2021 2020
GBPm GBPm % change
------------------------ ----- ----- ----------
UK & APAC (*) 102.7 98.8 3.9%
North America 82.7 82.4 0.4%
Europe (*) 48.5 45.0 7.8%
----------
Total Assurance revenue 233.9 226.2 3.4%
------------------------ ----- ----- ----------
-- With the continuing growth and formation of a European
division we have changed geographical segments in line with how
this information is reported to the Board and managed on an ongoing
basis and have restated prior year figures on a like-for-like
basis. The APAC division was previously included within the segment
Europe and APAC. See note 4 to the condensed Financial Statements
for further detail.
Assurance revenue increased by 3.4%, despite lower rechargeable
travel expenses, foreign exchange and the ongoing disruption of a
global pandemic. UK & APAC increased by 3.9% supported by
growth in MDR and the launch of the Remediation service. North
America grew by 6.5% on a local currency basis ($), and Europe
experienced continued growth after benefit from multi-year product
sales in 2020. Our global average order value increased by 2.3%
year on year.
Assurance revenue analysed by type of service/product line:
2021 2020
GBPm GBPm % change
---------------------------------------- ------------ ----- -----------------
Global Professional Services (GPS) (**) 172.2 166.2 3.6%
Global Managed Services (GMS) (**) 56.2 49.6 13.3%
Product Sales (own and third party) 5.5 10.4 (47.1%)
-----------------
Total Assurance revenue 233.9 226.2 3.4%
---------------------------------------- ------------ ----- -----------------
** With the continuing global growth and focus on recurring
revenues we have changed the type of service/product lines in line
with how this information is to be reported to the Board and
managed on an ongoing basis and have restated prior year figures on
a like-for-like basis. Previously Risk Management Consulting was
shown separately and is now included within Global Professional
Services, and certain other activities are now included in Global
Managed Services. Contained within GMS is Managed Detection and
Response (MDR) which is considered the high growth service line due
to the nature of the cyber resilience market. Product sale
categorisation has remained the same.
Global Professional Services grew by 3.6% to GBP172.2m (2020:
GBP166.2m) supported by global resourcing with Covid-19 still felt
across all geographies. During the year, day rates have remained
consistent.
Global Managed Services, a service line that provides
operational cyber defence and managed security services, grew in
total by 13.3% to GBP56.2m (2020: GBP49.6m). Within GMS, our MDR
offering grew by 14.3% to GBP45.5m. Sales orders secured during the
period amounted to GBP71.8m compared to GBP62.0m in 2020, a 15.8%
increase, although slower procurement processes were still
experienced due to the pandemic.
Assurance gross profit is analysed as follows:
2021 2021 2020 2020
GBPm % margin GBPm % margin % pts change
--------------------------- ------------- --------- ----- --------- -------------
UK & APAC (*) 41.0 39.9% 35.0 35.4% 4.5% pts
North America 27.4 33.1% 25.9 31.4% 1.7% pts
Europe (*) 16.0 33.0% 16.0 35.6% (2.6% pts)
-------------
Assurance gross profit and
% margin 84.4 36.1% 76.9 34.0% 2.1% pts
---------------------------- ------------ --------- ----- --------- -------------
* With the continuing growth and formation of a European
division we have changed geographical segments in line with how
this information is reported to the Board and managed on an ongoing
basis and have restated prior year figures on a like-for-like
basis. The APAC division was previously included within the segment
Europe and APAC. See the notes to the Financial Statements for
further detail.
Gross margin improved due to higher global resourcing (increased
from 5,094 days to 10,602 days), lower client travel and billable
utilisation (+7%) through remote delivery, offset by a c.GBP2m
provision taken in relation to long-term European contracts caused
by pandemic disruption, cost increases and project management
challenges.
Software Resilience
The Software Resilience division accounts for 13.5% of Group
revenues (2020: 14.2%) and 23.7% of Group gross profit (2020:
26.3%).
Software Resilience revenue analysis - by originating
country:
2021 2020
GBPm GBPm % change
---------------------------------- ----- ----- ----------
UK 25.2 25.9 (2.7%)
North America 7.3 7.8 (6.4%)
Europe 4.1 3.8 7.9%
---------------------------------- ----- ----- ----------
Total Software Resilience revenue 36.6 37.5 (2.4%)
---------------------------------- ----- ----- ----------
In Software Resilience, we experienced a disappointing overall
revenue decline of 2.4%. This decline was mainly a result of
execution challenges in a remote environment together with
recruiting sufficient sales resource to enable a return to contract
growth.
The UK experienced a decline of 2.7%, exacerbated by recruitment
challenges in a pandemic market. North America declined 6.4%,
albeit 2.9% on a constant currency basis due to a decrease in
on-premise testing. Europe, as a relatively new market, continued
to progress positively during the year mainly due to increased
testing
revenues. Renewal rates improved to 89.2% (2020: 87.0%) and remain within our expected range.
Software Resilience revenues analysed by service line:
Software Resilience services revenue 2021 2020
GBPm GBPm % change
------------------------------------- ----- ----- ----------
Software Resilience contracts 24.0 25.8 (7.0%)
Verification services 12.6 11.7 7.7%
Total Software Resilience revenue 36.6 37.5 (2.4%)
------------------------------------- ----- ----- ----------
Our contract revenue was impacted by the pandemic and sales
recruitment challenges. Our future expectation is that our nascent
channel sales model will contribute to revenue going forward.
Verification services grew 7.7% to GBP12.6m owing to the success of
EaaS (GBP0.8m).
Gross margin is analysed as follows:
2021 2021 2020 2020
GBPm % margin GBPm % margin % pts change
--------------------------------- ------------ --------- ----------- ------------ -------------------
UK 18.4 73.0% 19.5 75.3% (2.3% pts)
North America 4.9 67.1% 5.3 67.9% (0.8% pts)
Europe 2.9 70.7% 2.7 71.1% (0.4% pts)
-------------------
Software Resilience gross profit
and % margin 26.2 71.6% 27.5 73.3% (1.7% pts)
--------------------------------- ------------ --------- ----------- ------------ -------------------
Gross profit has declined due to the challenges noted above and
as we started to make investments in our channel proposition and
cloud infrastructure to underpin sustainable growth.
Individually Significant Items
During the period, the Group has incurred GBP12.7m of
Individually Significant Items (ISIs) (2020: restated GBP7.9m (3)
). These items relate to the acquisition of the IPM business
(GBP7.6m) and cloud configuration and customisation costs
associated with the Group's SGT transformation programme (GBP5.1m).
These costs are considered material and are in accordance with the
Group's policy on identification of certain costs that distort the
underlying performance of the Group. For further detail, please
refer to Note 5 to the condensed Financial Statements.
Finance costs
Finance costs for the period were GBP2.5m compared to GBP3.0m in
2020 due to the reduction in our drawn facilities and LIBOR during
the global pandemic. Net finance costs include lease financing
costs from IFRS 16 of GBP1.2m (2020: GBP1.2m).
Taxation
The Group's effective statutory tax rate is 32.4% (2020:
restated 33.3% (3) ). The Group's adjusted tax rate is 27.8% (2020:
23.5%). The effective rate remains above the UK standard rate of
corporation tax, reflecting the origin of a reasonable proportion
of Group profits in overseas territories with higher tax rates than
the UK and due to a review of US R&D tax credits
recognition.
Earnings per share (EPS)
2020 (restated)
2021 (3)
pence pence
------------- ------- ---------------
Statutory
Basic EPS 3.6p 2.3p
Diluted EPS 3.5p 2.3p
Adjusted (2)
Basic EPS 9.5p 7.6p
------------- ------- ---------------
Cash flow and net debt (2)
The table below summarises the Group's cash flow and net debt
(2) :
2020
(restated)
2021 (3)
GBPm GBPm
-------------------------------------------------------------- ------- -------------
Operating cash inflow before movements in working
capital 47.3 38.8
Decrease/(increase) in trade and other receivables 4.7 (11.0)
Increase in inventories (0.2) (0.2)
(Decrease)/increase in trade and other payables (5.5) 19.2
-------------------------------------------------------------- ------- -------------
Cash generated from operating activities before interest
and taxation 46.3 46.8
Interest element of lease payments (1.2) (1.2)
Finance interest paid (1.1) (1.6)
Taxation paid (5.1) (4.8)
-------------------------------------------------------------- ------- -------------
Net cash generated from operating activities 38.9 39.2
Purchase of property, plant and equipment (2.7) (2.8)
Software and development expenditure (2.1) (2.5)
Proceeds on disposal of intangibles 0.5 -
Equity dividends paid (13.0) (12.9)
Repayment of lease liabilities (6.0) (5.3)
Proceeds from the issue of ordinary share capital 72.6 1.1
-------------------------------------------------------------- ------- -------------
Net movement 88.2 16.8
Opening net debt (4.2) (20.2)
Non cash movements (release of deferred issue costs and
lease financing costs) (0.2) (0.2)
Foreign exchange (0.5) (0.6)
-------------------------------------------------------------- ------- -------------
Closing net cash/(debt) excluding lease liabilities
(2) 83.3 (4.2)
-------------------------------------------------------------- ------- -------------
Lease liabilities (34.4) (38.2)
-------------------------------------------------------------- ------- -------------
Closing net cash/(debt) (2) 48.9 (42.4)
-------------------------------------------------------------- ------- -------------
Free cash flow (net cash generated from operating activities
less net capital expenditure) 34.6 33.9
-------------------------------------------------------------- ------- -------------
Net cash/(debt) (2) can be reconciled as follows:
2021 2020
GBPm GBPm
------------------------------------------------- ------- -------
Cash and cash equivalents 116.5 95.0
Borrowings (net of deferred issue costs) (33.2) (99.2)
-------------------------------------------------
Net cash/(debt) excluding lease liabilities (2) 83.3 (4.2)
------------------------------------------------- ------- -------
Lease liabilities (34.4) (38.2)
------------------------------------------------- ------- -------
Net cash/(debt) (2) 48.9 (42.4)
------------------------------------------------- ------- -------
The calculation of the cash conversion ratio (2) is set out
below:
2020 (restated)
2021 (3)
GBPm GBPm % change
----------------------------------------- ------ ---------------- ------------
Net operating cash flow before interest
and taxation (A) 46.3 46.8 (1.1%)
Adjusted EBITDA (2) (B) 52.5 45.5 15.4%
----------------------------------------- ------ ---------------- ------------
Cash conversion ratio (2) (%) (A)/(B) 88.2% 102.9% (14.7% pts)
----------------------------------------- ------ ---------------- ------------
2: See Note 3 for an explanation of Alternative Performance
Measures (APMs) and adjusting items. Further information is also
contained within the Financial Review and the Glossary of
terms.
3: See Note 13 for an explanation of the prior year restatement
recognised in relation to the adoption of the IFRIC agenda decision
on cloud configuration and customisation costs in April 2021.
Cash conversion remains above our medium target of c.85%, as we
have maintained strong cash management through the global
pandemic.
The increase in tax paid is mainly due to the FY20 deferral of
GBP1.2m under government tax deferral schemes now fully repaid.
Net cash capital expenditure during the year was GBP4.3m (2020:
restated GBP5.3m (3) ) which includes tangible expenditure of
GBP2.7m (2020: GBP2.8m) and capitalised software and development
costs of GBP2.1m (2020: restated GBP2.5m (3) ), which has been
offset by proceeds from the disposal of an intangible asset for
GBP0.5m. Additional cash capital expenditure will be incurred
during 2022 as we finish the installation and improve our new
systems.
Acquisition costs paid prior to the shareholder approval on 1
June 2021 of the US acquisition of IPM amounted to GBP1.2m. During
early FY22, further costs have been paid of GBP6.4m.
Dividends
Dividends of GBP13.0m paid in the year (2020: GBP12.9m)
comprised the final dividend for FY20 of 3.15p and the interim
dividend of 1.5p per ordinary share for FY21 (2020: 1.5p). The
Board is declaring an unchanged final dividend of 3.15p per
ordinary share (2020: 3.15p).
This represents a dividend equal to that paid in the prior year
as the Board is conscious of the need to invest in initiatives to
support longer-term growth and service debt profile following the
recent acquisition. The dividend policy will therefore continue to
remain under review.
The final dividend will be paid on 12 November 2021, to
shareholders on the register at the close of business on 15 October
2021. The ex-dividend date is 14 October 2021.
IPM acquisition and future statutory reporting
As noted within the Business Review, prior to our ownership of
IPM, the business generated revenues of c.GBP23m and operating
profit of c.GBP15m for the 12 months ended 31 December 2020, with
cash conversion of c.90%. It is expected that for NCC Group's FY22
financial year, the business will report proforma numbers on a
similar basis and that we will incur c.GBP2.5m of one-off
integration costs.
However, on a statutory basis, the Group will have to recognise
acquisition fair value adjustments for the first year only in
relation to deferred income, resulting in an expected consequential
reduction to IPM numbers in relation to revenue and operating
profit for the first year only.
Application of IFRIC agenda decisions and prior year
restatement
In April 2021, the IFRS Interpretations Committee (IFRIC)
published an agenda decision on the clarification of accounting in
relation to the configuration and customisation costs incurred in
implementing Software-as-a-Service (SaaS) as follows:
-- Amounts paid to the cloud vendor for configuration and
customisation that are not distinct from access to the cloud
software are expensed over the SaaS contract term.
-- In limited circumstances, other configuration and
customisation costs incurred in implementing SaaS arrangements may
give rise to an identifiable intangible asset, for example, where
code is created that is controlled by the entity.
-- In all other instances, configuration and customisation costs
will be expensed as the customisation and configuration services
are received.
Due to the nature of this agenda decision and the level of spend
incurred in relation to the Group's Securing Growth Together
digital transformation programme, the Group's accounting policy has
been reviewed retrospectively to align with the IFRIC guidance
recently issued in relation to SaaS costs previously capitalised.
This has resulted in a prior year restatement to reflect costs
previously capitalised as an expense when incurred and represents a
non-cash adjustment. See Notes 1, 5, 9 and 13 to the financial
statements for further details.
Financing facilities
The Group is financed through a combination of bank facilities,
retained profits and equity. As at 31 May 2021, the Group had
committed bank facilities (revolving credit facility) of GBP100m
(2020: GBP100m), of which GBP33.8m (2020: GBP100m) was drawn down.
These arrangements were agreed in June 2019 and are due for renewal
in June 2024. Under these arrangements, the Group can also request
(seeking bank approval) an additional accordion facility to
increase the total size of the revolving credit facility by up to
GBP75m.
On 12 May 2021, the Group entered into a new term loan facility
agreement of $70m to fund the US acquisition of the IPM Software
Resilience business in early June 2021. The Term Facility is repaid
in annual instalments of $23.3m on each of 10 June 2022 and 10 June
2023, with a final instalment of $23.4m payable on 10 June 2024.
The Term Facility Agreement also contains financial covenants
consistent with the revolving credit facility.
On our banking covenants, leverage (2) as at 31 May 2021
amounted to (1.8)x as we have become cash positive (2020: 0.1x) and
net interest cover (2) amounted to 35.0x (2020: 22.7x). The Group
was in compliance with the terms of all its facilities, including
the financial covenants, at 31 May 2021 and expects to remain in
compliance with the terms going forward. The terms and ratios are
specifically defined in the Group's banking documents (in line with
normal commercial practise) and are materially similar to GAAP with
the exceptions being net debt excludes IFRS 16 lease liabilities
and Adjusted EBITDA (2) excludes amortisation of acquired
intangibles, share-based payments and Individually Significant
Items.
Going concern
The Directors have acknowledged guidance published in relation
to going concern assessments.
The Group's business activities, together with the factors
likely to affect its future development, performance and position,
are set out in the Business Review and Financial Review. The
Group's financial position, cash and borrowing facilities are also
described within these sections.
The Financial Statements have been prepared on a going concern
basis which the Directors consider to be appropriate for the
following reasons.
The Directors have prepared cash flow and covenant compliance
forecasts for the 12 month period ending September 2022 which
indicate that, taking account of severe but plausible downsides and
the anticipated impact of Covid-19 on the operations of the Group
and its financial resources, the Group and Company will have
sufficient funds to meet their liabilities as they fall due for
that period.
The Group is financed primarily by a GBP100m committed revolving
credit facility that matures in June 2024. The Group is required to
comply with financial covenants for leverage (net debt to Adjusted
EBITDA (2) ) and interest cover (Adjusted EBITDA (2) to interest
charge) that are tested bi-annually at 31 May and 30 November each
year. As at 31 May 2021, the Group had drawn down GBP33.8m for
working capital requirements.
Subsequent to the year end and shareholder approval on 1 June,
the Group acquired on 7 June the IPM business for $220m; the US
acquisition was funded through an equity placing in May of GBP70.2m
(net proceeds) combined with a new three year $70m term loan,
existing cash balances and our existing revolving credit facility.
The impact of the acquisition on the Group's financial performance,
covenants and business model has therefore been considered within
this going concern assessment. As at 2 June 2021, following the
acquisition of the IPM business, the Group had drawn down GBP75.5m
of its revolving credit facility and was due to incur further
transaction costs of GBP6.4m. As at 31 August 2021, cash, net debt
(excluding lease liabilities) (2) and headroom amounted to
GBP43.6m, GBP74.7m and GBP80.5m respectively.
Although the Group has demonstrated resilience to the
challenging environment resulting from Covid-19, the Directors
acknowledge that the financial performance of the Group has been
adversely impacted to a certain degree since the commencement of
the pandemic, and for this reason, the base case forecast for 2021
reflects this assessment. The continuing macro-economic risks and
potential changes in government policies (on the severity of
enforced lockdowns worldwide) could have a continued effect on the
Group's performance. However, trading throughout the pandemic has
demonstrated resilience.
The Directors have prepared a number of severe but plausible
scenarios as follows:
1. The performance of FY22 continues to be similar to that of
2021, including the impact on regional and international operations
of the Group and a potential reduction in growth.
2. An additional impact of Covid-19 during a two month period
from January to February 2022 which coincides with a similar
economic pandemic pattern as 2021.
3. Potential impact of customers' inability to pay during a
specified period.
4. Failure of execution of the strategy, loss of key customers
and a number of acquisition related risks crystallising (for
example: increased customer churn, integration and cash collection
issues).
5. Software Resilience performance does not return to growth and
the Assurance business experiences similar impact of Covid-19 on
its performance as 2021.
These scenarios have been modelled individually and also in
combination in order to assess the Group's ability to withstand
multiple challenges, although the Directors do not believe a
scenario combining all these risks to be plausible. The impact of
these sensitivities has been reviewed against the Group's projected
cash flow position, available bank facilities and compliance with
financial covenants. In the instance that a combination of the
above scenarios arise, mitigating actions would be required to
ensure that the Group remains liquid and financially viable, which
might include a reduction of planned capital expenditure, freezing
pay and recruitment and not paying a dividend to shareholders. All
of the mitigating actions are within the Directors' control. These
forecasts, including the severe but plausible downsides, show that
the Group is able to operate within its available banking
facilities, with no forecasted covenant breaches, and that the
Group will have sufficient funds to meet its liabilities as they
fall due for that period.
From a Company perspective, the Company places reliance on other
Group trading entities for financial support. Having reviewed the
current trading performance, forecasts, other Group trading
entities' financial support, debt servicing requirements, total
facilities and risks, the Directors are confident that the Company
and the Group will have sufficient funds to continue to meet their
liabilities as they fall due for a period of at least 12 months
from the date of approval of these Financial Statements.
Accordingly, they continue to adopt the going concern basis of
accounting in preparing the Group's Financial Statements for the
year ended 31 May 2021.
Brexit
The Group's operations based in Continental Europe have so far
proven structurally resilient to any significant disruption caused
by Brexit. The main risks to the Group from Brexit continue to be
any reduction in demand from an economic slowdown as well as real
or perceived differences in data protection standards which impact
our global ways of working.
Directors' responsibility statement
The responsibility statement below has been prepared in
connection with the Group's full Annual Report for the year ended
31 May 2021. Certain parts thereof are not included within this
announcement.
We confirm that to the best of our knowledge:
-- The financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company and the undertakings included in the consolidation
taken as a whole.
-- The preliminary statement includes a fair review of the
development and performance of the business and the position of the
Company, and the undertakings included in the consolidation taken
as a whole, together with a description of the principal risks and
uncertainties that they face.
-- The Annual Report, taken as a whole, is fair, balanced and
understandable, and provides the necessary information for
shareholders to assess the Group's position, performance, business
model and strategy.
The Annual Report is approved and authorised for issue on behalf
of the Board on 14 September 2021 by:
Adam Palser Tim Kowalski
Chief Executive Officer Chief Financial Officer
Consolidated income statement(1)
For the year ended 31 May 2021
2020 (restated)
2021 (2,3)
Notes GBPm GBPm
----------------------------------------------- ----- ------- ---------------
Revenue 4 270.5 263.7
Cost of sales 4 (159.9) (159.3)
Gross profit 4 110.6 104.4
Administrative expenses 4
Depreciation and amortisation (19.7) (23.6)
Other administrative expenses (60.9) (60.3)
Individually Significant Items (12.7) (7.9)
---------------
Total administrative expenses (93.3) (91.8)
Operating profit 4 17.3 12.6
Finance costs (2.5) (3.0)
----------------------------------------------- ----- ------- ---------------
Profit before taxation 14.8 9.6
Taxation (4.8) (3.2)
----------------------------------------------- ----- ------- ---------------
Profit for the year attributable to the owners
of the Company 10.0 6.4
----------------------------------------------- ----- ------- ---------------
Earnings per ordinary share 8
Basic EPS 3.6p 2.3p
Diluted EPS 3.5p 2.3p
----------------------------------------------- ----- ------- ---------------
Consolidated statement of comprehensive (loss)/income
For the year ended 31 May 2021
2020 (restated)
2021 (2,3)
GBPm GBPm
-------------------------------------------------------------- ------ ---------------
Profit for the year attributable to the owners of the Company 10.0 6.4
-------------------------------------------------------------- ------ ---------------
Other comprehensive (loss)/income
Items that may be reclassified subsequently to profit or
loss (net of tax)
Cash flow hedges - effective portion of changes in fair
value (0.8) -
Foreign exchange translation differences (11.6) 4.0
-------------------------------------------------------------- ------ ---------------
Total other comprehensive (loss)/income (12.4) 4.0
-------------------------------------------------------------- ------ ---------------
Total comprehensive (loss)/ income for the year (net of
tax) attributable to the owners of the Company (2.4) 10.4
-------------------------------------------------------------- ------ ---------------
Footnotes for condensed Consolidated Financial Statements
1: See Note 3 for an explanation of Alternative Performance
Measures (APMs) and adjusting items, including a reconciliation to
statutory information. Further information is also contained within
the Glossary of terms.
2: See Note 13 for an explanation of the prior year restatement
recognised in relation to the adoption of the IFRIC agenda decision
on cloud configuration and customisation costs in April 2021.
3: Results for the year ended 31 May 2020 have been re-presented
to include adjusting items within statutory results.
Consolidated balance sheet
For the year ended 31 May 2021
31 May 2020 1 June 2019
(restated) (restated)
31 May 2021 (2) (2)
Notes GBPm GBPm GBPm
-------------------------------------------- ----- ----------- ------------ -----------
Non-current assets
Goodwill 9 182.9 193.1 189.4
Intangible assets 9 21.0 29.0 38.3
Property, plant and equipment 11.5 13.9 16.9
Right-of-use assets 10 23.8 28.7 26.5
Investments 0.3 0.3 0.3
Deferred tax asset 2.0 2.3 2.2
Total non-current assets 241.5 267.3 273.6
-------------------------------------------- ----- ----------- ------------ -----------
Current assets
Inventories 1.1 0.9 0.7
Trade and other receivables 68.7 73.4 61.6
Current tax receivable 4.5 0.6 0.6
Cash and cash equivalents 116.5 95.0 34.9
-----------
Total current assets 190.8 169.9 97.8
-------------------------------------------- ----- ----------- ------------ -----------
Total assets 432.3 437.2 371.4
-------------------------------------------- ----- ----------- ------------ -----------
Current liabilities
Trade and other payables 45.2 46.4 31.6
Borrowings - - 5.0
Lease liabilities 10 5.1 5.3 5.2
Current tax payable 4.0 - -
Derivative financial instruments 0.8 - -
Provisions 12 2.4 2.0 0.2
Contract liabilities - deferred revenue 43.6 39.5 36.2
-----------
Total current liabilities 101.1 93.2 78.2
-------------------------------------------- ----- ----------- ------------ -----------
Non-current liabilities
Borrowings 11 33.2 99.2 50.1
Lease liabilities 10 29.3 32.9 30.5
Deferred tax liabilities 1.2 2.9 5.4
Provisions 12 0.6 1.7 1.3
Contract liabilities - deferred revenue 0.7 1.4 -
Total non-current liabilities 65.0 138.1 87.3
-------------------------------------------- ----- ----------- ------------ -----------
Total liabilities 166.1 231.3 165.5
-------------------------------------------- ----- ------------ -----------
Net assets 266.2 205.9 205.9
-------------------------------------------- ----- ----------- ------------ -----------
Equity
Share capital 3.1 2.8 2.8
Share premium 223.2 150.9 149.8
Hedging reserve (0.8) - -
Merger reserve 42.3 42.3 42.3
Currency translation reserve 20.3 31.9 27.9
Retained earnings (21.9) (22.0) (16.9)
Total equity attributable to equity holders
of the parent 266.2 205.9 205.9
-------------------------------------------- ----- ----------- ------------ -----------
These financial statements were approved and authorised for
issue by the Board of Directors on 14 September 2021 and were
signed on its behalf by:
Adam Palser Tim Kowalski
Chief Executive Officer Chief Financial Officer
Consolidated cash flow statement
For the year ended 31 May 2021
2020 (restated)
2021 (2)
Cash flow from operating activities Notes GBPm GBPm
------------------------------------------------------ ----- ------ ---------------
Profit for the year 10.0 6.4
Adjustments for:
Depreciation of property, plant and equipment 4.4 5.8
Depreciation of right of use assets 5.9 6.0
Share-based payments 2.8 1.4
Amortisation of customer contracts and relationships 6.4 8.8
Amortisation of software and development costs 3.0 3.0
Impairment of right-of-use assets - 1.1
Lease financing costs 1.2 1.2
Other financing costs 1.3 1.8
Foreign exchange 1.5 -
Acquisition of businesses - transaction costs (1.2) -
Individually significant items (non-cash impact) 7.6 -
Profit on disposal of right-of-use assets (0.2) (0.1)
Profit on disposal of intangibles (0.5) -
Loss on sale of property, plant and equipment 0.2 -
Research and development UK tax credits (0.6) (0.6)
Research and development US tax credits 1.9 0.5
Income tax expense 2.9 2.7
Increase in provisions 0.7 0.8
Cash inflow for the year before changes in working
capital 47.3 38.8
------------------------------------------------------ ----- ------ ---------------
Decrease/(increase) in trade and other receivables 4.7 (11.0)
Increase in inventories (0.2) (0.2)
(Decrease)/increase in trade and other payables (5.5) 19.2
------------------------------------------------------ ----- ------ ---------------
Cash generated from operating activities before
interest and taxation 46.3 46.8
Interest element of lease payments (1.2) (1.2)
Other interest paid (1.1) (1.6)
Taxation paid (5.1) (4.8)
------------------------------------------------------ ----- ------ ---------------
Net cash generated from operating activities 38.9 39.2
Cash flows from investing activities
Purchase of property, plant and equipment (2.7) (2.8)
Software and development expenditure (2.1) (2.5)
Net proceeds from sale of intangibles assets 0.5 -
Net cash used in investing activities (4.3) (5.3)
Cash flows from financing activities
Proceeds from the issue of ordinary share capital 72.6 1.1
Principal element of lease payments (6.0) (5.3)
Drawdown of borrowings (net of deferred issue
costs) - 44.3
Issue costs related to borrowings - (1.0)
Repayment of borrowings (60.4) -
Equity dividends paid 7 (13.0) (12.9)
------------------------------------------------------ ----- ------ ---------------
Net cash (used in)/generated from financing
activities (6.8) 26.2
------------------------------------------------------ ----- ------ ---------------
Net increase in cash and cash equivalents 27.8 60.1
------------------------------------------------------ ----- ------ ---------------
Cash and cash equivalents at beginning of year 95.0 34.9
Effect of foreign currency exchange rate changes (6.3) -
Cash and cash equivalents at end of year 116.5 95.0
------------------------------------------------------ ----- ------ ---------------
Reconciliation of net change in cash and cash equivalents to
movement in net cash/(debt) (1)
2021 2020
Notes GBPm GBPm
---------------------------------------------- ----- ------ ------
Net increase in cash and cash equivalents 27.8 60.1
Change in net debt (1) resulting from cash
flows (net of deferred issue costs) 60.4 (43.3)
Interest incurred on borrowings (1.1) (1.6)
Interest paid on borrowings 1.1 1.6
Non-cash movement (release of deferred issue
costs) (0.2) (0.2)
Effect of foreign currency on cash flows (6.3) -
Foreign currency translation differences on
borrowings 5.8 (0.6)
---------------------------------------------- ----- ------ ------
Change in net cash/(debt) (1) during the year 87.5 16.0
Net debt (1) at start of year excluding lease
liabilities (4.2) (20.2)
---------------------------------------------- ----- ------ ------
Net cash/(debt) (1) at end of year excluding
lease liabilities 83.3 (4.2)
---------------------------------------------- ----- ------ ------
Lease liabilities 10 (34.4) (38.2)
---------------------------------------------- ----- ------ ------
Net cash/(debt) (1) at end of year 48.9 (42.4)
---------------------------------------------- ----- ------ ------
Consolidated statement of changes in equity
For the year ended 31 May 2021
Currency
Share Share Premium Hedging Merger Translation Retained
Capital reserve Reserve Reserve Earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- --------- --------------- --------- --------- ------------ ---------- -------
Balance at 1 June 2019
(as reported) 2.8 149.8 - 42.3 27.9 (14.0) 208.8
--------------------------------- --------- --------------- --------- --------- ------------ ---------- -------
Impact of change in accounting
policy in respect of cloud
configuration and customisation
costs (note 13) - - - - - (2.9) (2.9)
--------------------------------- --------- --------------- --------- --------- ------------ ---------- -------
Balance at 1 June 2019
(as restated) (2) 2.8 149.8 - 42.3 27.9 (16.9) 205.9
--------------------------------- --------- --------------- --------- --------- ------------ ---------- -------
Profit for the year (restated)
(2) (note 13) - - - - - 6.4 6.4
Other comprehensive income
for the year - - - - 4.0 - 4.0
--------------------------------- --------- --------------- --------- --------- ------------ ---------- -------
Total comprehensive income
for the year (restated)
(2) - - - - 4.0 6.4 10.4
--------------------------------- --------- --------------- --------- --------- ------------ ---------- -------
Transactions with owners
recorded directly in equity
Dividends to equity
Shareholders - - - - - (12.9) (12.9)
Share-based payments - - - - - 1.4 1.4
Shares issued - 1.1 - - - - 1.1
Total contributions by
and distributions to owners - 1.1 - - - (11.5) (10.4)
--------------------------------- --------- --------------- --------- --------- ------------ ---------- -------
Balance at 31 May 2020
(restated) (2) 2.8 150.9 - 42.3 31.9 (22.0) 205.9
--------------------------------- --------- --------------- --------- --------- ------------ ---------- -------
Profit for the year - - - - - 10.0 10.0
Other comprehensive income
for the year - - (0.8) - (11.6) - (12.4)
--------------------------------- --------- --------------- --------- --------- ------------ ---------- -------
Total comprehensive income
for the year - - (0.8) - (11.6) 10.0 (2.4)
Transactions with owners
recorded directly in equity
Dividends to equity
Shareholders - - - - - (13.0) (13.0)
Share-based payments - - - - - 2.8 2.8
Tax on share-based payments - - - - - 0.3 0.3
Shares issued 0.3 72.3 - - - - 72.6
--------------------------------- --------- --------------- --------- --------- ------------ ---------- -------
Total contributions by
and distributions to owners 0.3 72.3 - - - (9.9) 62.7
--------------------------------- --------- --------------- --------- --------- ------------ ---------- -------
Balance at 31 May 2021 3.1 223.2 (0.8) 42.3 20.3 (21.9) 266.2
--------------------------------- --------- --------------- --------- --------- ------------ ---------- -------
Notes to the audited condensed Consolidated Financial
Statements
1 Accounting policies
Basis of preparation
NCC Group plc (the Company) is a company incorporated in the UK,
with its registered office at XYZ Building, 2 Hardman Boulevard,
Manchester, M3 3AQ. The Groups' audited condensed financial
statements consolidated those of the Company and its subsidiaries
(together referred to as the Group). The principal activity of the
Group is the provision of independent advice and services to
customers through the supply of cyber assurance and software
resilience services.
The financial information is derived from the Group's
consolidated financial statements for the year ended 31 May 2021,
which have been prepared on the going concern basis in accordance
with International Financial Reporting Standards (IFRSs) adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union and in accordance with international accounting
standards in conformity with the requirements of the Companies Act
2006. The financial statements have been prepared on the historical
cost basis, except for consideration payable on acquisitions that
is measured at fair value. The financial statements are presented
in Sterling (GBPm) because that is the currency of the principal
economic environment in which the Group operates. The consolidated
financial statements were approved by the Directors on 14 September
2021.
The financial information set out above does not constitute the
company's statutory accounts for the years ended 31 May 2021 or 31
May 2020. The financial information for 2020 is derived from the
statutory accounts for 2020 which have been delivered to the
registrar of companies. The auditor has reported on the 2020
accounts; their report was (i) unqualified, (ii) did not include a
reference to any matters to which the auditor drew attention by way
of emphasis without qualifying their report and (iii) did not
contain a statement under section 498 (2) or (3) of the Companies
Act 2006. The statutory accounts for 2021 will be finalised on the
basis of the financial information presented by the directors in
this preliminary announcement and will be delivered to the
registrar of companies in due course.
As required by the Disclosure Guidance and Transparency Rules of
the Financial Services Authority, the financial information
contained in this report has been prepared using the accounting
policies and presentation that were applied in the company's
published consolidated financial statements for the year ended 31
May 2020, with the exception of those impacted by the adoption of
the IFRIC agenda decision on configuration and customisation costs
incurred in implementing Software-as-a-Service (SaaS) (see further
detail below and note 13 for recognition of a prior year
restatement). They do not contain all the information required for
full financial statements and should be read in conjunction with
the annual financial statements for the year ended 31 May 2021. The
financial statements of the Group for the year ended 31 May 2020
are available from the Company's registered office, or from the
website www.nccgroup.com.
Brexit
Management has reviewed the impact of Brexit on the Financial
Statements. The Group has so far proven structurally resilient to
any significant disruption caused by Brexit. The main risks to the
Group from Brexit continue to be any reduction in demand from an
economic slowdown as well as real or perceived differences in data
protection standards which impact our global ways of working. On
this basis, management has concluded that the impact should be
limited; this includes any impact on the IFRS 9 expected credit
loss model. Management also notes no changes to this assessment
from a post-Balance Sheet event perspective.
Covid-19
Management has reviewed the potential impact of Covid-19 on the
Financial Statements. Accordingly, consideration has been given to
the impact on the IFRS 9 expected credit loss model, IFRS 15
collectability assessments, IFRS 16 lease term assessments (no
material impact on lease term assessment), the annual impairment
review and the going concern and viability assessments.
Individually Significant Items
Individually Significant Items are identified as those items
that based on their size and nature and/or incidence are assessed
to warrant separate disclosure to provide supplementary information
to support the understanding of the Group's financial performance.
Individually Significant Items typically comprise
costs/profits/losses on material acquisitions/disposals/business
exits, fundamental reorganisation/ restructuring programmes and
other significant one-off events. Individually Significant Items
are considered to require separate presentation in the notes to the
Financial Statements in order to fairly present the financial
performance of the Group.
Segments
During the year, management has amended its segment disclosure
to reflect the way the performance of the business is reported to
the CODM and managed. The performance of the APAC region was
previously included within Europe and APAC. For the year ended 31
May 2021, the APAC region is now included together with the UK
segment until it becomes such a size it warrants separate reporting
to the CODM. In addition, with the continuing growth and formation
of a European division we have changed geographical segments in
line with how this information is reported to the Board and managed
today and have represented prior year figures on a like-for-like
basis.
New and amended accounting standards
Application of significant new or amended EU-endorsed accounting
standards
The following amended standards and interpretations were also
effective during the year; however, they have not had a material
impact on our consolidated Financial Statements.
-- Amendments to IFRS 3 'Definition of a Business'
-- Amendments to IAS 1 and IAS 8 'Definition of Material'
-- Covid-19-Related Rent Concessions - Amendment to IFRS 16
Application of IFRIC agenda decisions
In April 2021, the IFRS Interpretations Committee (IFRIC)
published an agenda decision on the clarification of accounting in
relation to the configuration and customisation costs incurred in
implementing Software-as-a-Service (SaaS) as follows:
-- Amounts paid to the cloud vendor for configuration and
customisation that are not distinct from access to the cloud
software are expensed over the SaaS contract term.
-- In limited circumstances, other configuration and
customisation costs incurred in implementing SaaS arrangements may
give rise to an identifiable intangible asset, for example, where
code is created that is controlled by the entity.
-- In all other instances, configuration and customisation costs
will be expensed as the customisation and configuration services
are received.
See notes 9 and 13 for further details.
Going concern
The Directors have acknowledged guidance published in relation
to going concern assessments.
The Group's business activities, together with the factors
likely to affect its future development, performance and position,
are set out in the Business Review and Financial Review. The
Group's financial position, cash and borrowing facilities are also
described within these sections.
The Financial Statements have been prepared on a going concern
basis which the Directors consider to be appropriate for the
following reasons.
The Directors have prepared cash flow and covenant compliance
forecasts for the 12 month period ending September 2022 which
indicate that, taking account of severe but plausible downsides and
the anticipated impact of Covid-19 on the operations of the Group
and its financial resources, the Group and Company will have
sufficient funds to meet their liabilities as they fall due for
that period.
The Group is financed primarily by a GBP100m committed revolving
credit facility which matures in June 2024. The Group is required
to comply with financial covenants for leverage (net debt to
Adjusted EBITDA (1) ) and interest cover (Adjusted EBITDA (1) to
interest charge) which are tested bi-annually at 31 May and 30
November each year. As at 31 May 2021, the Group had drawn down
GBP33.8m for working capital requirements.
Subsequent to the year end and shareholder approval on 1 June,
the Group acquired on 7 June the IPM business for $220m; the US
acquisition was funded through an equity placing in May of GBP70.2m
(net proceeds) combined with a new three year $70m term loan,
existing cash balances and our existing revolving credit facility.
The impact of the acquisition on the Group's financial performance,
covenants and business model has therefore been considered within
this going concern assessment. As at 2 June 2021, following the
acquisition of the IPM business, the Group had drawn down GBP75.5m
of its revolving credit facility and was due to incur further
transaction costs of GBP6.4m. As at 31 August 2021, cash, net debt
(excluding lease liabilities) (1) and headroom amounted to
GBP43.6m, GBP74.7m and GBP80.5m respectively.
Although the Group has demonstrated resilience to the
challenging environment resulting from Covid-19, the Directors
acknowledge that the financial performance of the Group has been
adversely impacted to certain degree since the commencement of the
pandemic, and for this reason the base case forecast for 2021
reflects this assessment. The continuing macro-economic risks and
potential changes in government policies (on the severity of
enforced lockdowns worldwide), could have a continued effect on the
Group's performance. However, trading throughout the pandemic has
demonstrated resilience.
The Directors have prepared a number of severe but plausible
scenarios as follows:
1. The performance of FY22 continues to be similar to that of
2021, including the impact on regional and international operations
of the Group and a potential reduction in growth.
2. An additional impact of Covid-19 during a two month period
from January to February 2022 which coincides with a similar
economic pandemic pattern as 2021.
3. Potential impact of customers' inability to pay during a
specified period.
4. Failure of execution of the strategy, loss of key customers
and a number of acquisition related risks crystallising (for
example: increased customer churn, integration and cash collection
issues).
5. Software Resilience performance does not return to growth and
the Assurance business experiences similar impact of Covid-19 on
its performance as 2021.
These scenarios have been modelled individually and also in
combination in order to assess the Group's ability to withstand
multiple challenges, although the Directors do not believe a
scenario combining all these risks to be plausible. The impact of
these sensitivities has been reviewed against the Group's projected
cash flow position, available bank facilities and compliance with
financial covenants. In the instance that a combination of the
above scenarios arise, mitigating actions would be required to
ensure that the Group remains liquid and financially viable, which
might include a reduction of planned capital expenditure, freezing
pay and recruitment and not paying a dividend to shareholders. All
of the mitigating actions are within the Directors' control. These
forecasts, including the severe but plausible downsides, show that
the Group is able to operate within its available banking
facilities, with no forecasted covenant breaches, and that the
Group will have sufficient funds to meets its liabilities as they
fall due for that period.
From a Company perspective, the Company places reliance on other
Group trading entities for financial support. Having reviewed the
current trading performance, forecasts, other Group trading
entities' financial support, debt servicing requirements, total
facilities and risks, the Directors are confident that the Company
and the Group will have sufficient funds to continue to meet their
liabilities as they fall due for a period of at least 12 months
from the date of approval of these Financial Statements.
Accordingly, they continue to adopt the going concern basis of
accounting in preparing the Group's Financial Statements for the
year ended 31 May 2021.
2. Critical accounting judgements, key sources of estimation
uncertainty and other estimates
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 critical accounting judgements and estimates that the
Directors consider material and that could reasonably change
significantly in the next year.
Accounting Accounting
judgement estimate
Accounting area ? ?
-------------------------------------------- ---------- ----------
Carrying value of goodwill No Yes
Control of IPM Software Resilience business Yes No
Recognition of research and development tax No Yes
credits
Intangible assets - cloud-based software and Yes No
development costs
-------------------------------------------- ---------- ----------
2.1 Critical accounting judgements
Information about critical accounting judgements made in
applying accounting policies that have the most significant effects
on the amounts recognised in the consolidated Financial Statements
are as follows.
Control of IPM Software Resilience business
A key judgement in the year ended 31 May 2021 is the acquisition
date for the purchase of the IPM Software Resilience business.
Management considers shareholder approval of the transaction
constitutes a change in control and therefore the date of
shareholder approval is considered to be the acquisition date for
the transaction.
Shareholder approval was granted on 1 June 2021 and the IPM
Software Resilience business will be consolidated into the Group
results from that date.
Intangible assets - cloud-based software and development
costs
When the Group incurs customisation and configuration costs, as
part of a service agreement, judgement is also required in
assessing whether the Group has control over the resources defined
in the arrangement. Management has considered the IFRS
Interpretations Committee (IFRIC) agenda decision in April 2021 on
the clarification of accounting in relation to these costs. The
costs expensed amount to GBP5.1m (2020: GBP7.9m). See further
details in Notes 9 and 13 in relation to a prior year
restatement.
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; judgement is required in
assessing the future economic benefit and viability of the
project.
Such judgements are inherently subjective and can have a
material impact on determining whether such costs should be
capitalised.
2.2 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 is addressed below.
Whilst every effort is made to ensure that such estimates and
assumptions are reasonable, by their nature they are uncertain, and
as such changes in estimates and assumptions may have a material
impact. Estimates and assumptions used in the preparation of the
Financial Statements are continually reviewed and revised as
necessary at each reporting date.
Carrying values of goodwill
The Group has significant balances relating to goodwill at 31
May 2021 as a result of acquisitions of businesses in previous
years. The carrying value of goodwill at 31 May 2021 is GBP182.9m
(2020: GBP193.1m). Goodwill balances are tested annually for
impairment. Tests for impairment are primarily based on the
calculation of a value in use for each CGU.
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 based on two critical estimates:
the rate of revenue growth and the discount rate, particularly in
relation to the Europe Assurance CGU which is the most sensitive to
movements in estimates.
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 9.
Recognition of research and development tax credits
The tax expense reported for the current year and prior year is
affected by certain positions taken by management where there may
be uncertainty. The most significant source of uncertainty arises
from claims for US research and development (R&D) tax credits
relating to historical periods. Uncertainty arises as a result of a
degree of uncertainty concerning the interpretation of US
legislation and because the statute of limitations has not expired.
The basis on which the Group has claimed R&D tax credits
involves a technical assessment of which party bears the economic
risk in any research contracts entered into with third parties.
This assessment is a key estimate. It is considered 'probable' that
the US taxation authority would accept the uncertain tax treatment
in relation to the utilised tax credits recognised.
For the periods ending 31 May 2017 to 31 May 2021, the aggregate
net current tax benefit included in the Income Statement relating
to the R&D US tax credits is GBP2.7m (2020: GBP4.3m). The gross
deferred tax asset relating to the R&D US tax credits is
GBP1.0m (2020: GBP0.8m), although due to the uncertainty we have
made a provision of GBP0.6m (2020: GBP0.8m) against this asset. The
aggregate gross amount of US R&D tax credits recognised amounts
to GBP8.2m (2020: GBP5.1m) and we have made a provision of GBP5.1m
(2020: GBP0.8m) against this gross position.
It is considered reasonably possible that the outcome relating
to historical claims ranges from a potential increase of tax
credits of GBP5.1m to a potential reduction of GBP3.1m.
2.3 Other estimates
Long-term loss-making contracts
Some aspects of the Group's revenue are derived from relatively
long-term fixed price contracts. On this basis, estimation
uncertainty is disclosed in relation to one contract:
-- An onerous provision recognised during the year ended 31 May
2020 of GBP0.2m has increased during the period by a further
GBP1.9m, of which GBP1.7m has been utilised leaving a closing
balance of GBP0.4m of a total provision for loss-making contracts
of GBP1.1m (see Note 12). This additional provision relates to a
European contract and has been caused by Covid-19 disruption and
some project management challenges. Management prepares
projections, which, due to the complexity of the contract, require
estimates and accounting judgement of both revenue and cost
recognition (including the number of performance obligations).
Revenue is recognised based on the input method of IFRS 15 in
relation to total costs and therefore management has to estimate
the number of hours still required to complete the long-term
projects and associated labour cost to complete. Due to the level
of estimation and dependency on hours remaining to complete the
performance obligation, sensitivity analysis on what is regarded a
reasonably possible scenario for this contract is provided
below:
-- A 20% increase in total labour hours to the project would
give rise to a further provision of up to GBP0.2m.
3 Alternative Performance Measures (APMs) and adjusting
items
The consolidated Financial Statements include APMs as well as
statutory measures. These APMs used by the Group are not defined
terms under IFRS and may therefore not be comparable with similarly
titled measures reported by other companies. They are not intended
to be a substitute for, or superior to, Generally Accepted
Accounting Practice (GAAP) measures. All APMs relate to the current
year results and comparative periods where provided.
This presentation is also consistent with the way that financial
performance is measured by management and reported to the Board,
and the basis of financial measures for senior management's
compensation schemes, and provides supplementary information that
assists the user in understanding the financial performance,
position and trends of the Group. At all times, the Group aims to
ensure that the Annual Report and Accounts 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.
As discussed in the prior year Annual Report and in accordance
with FRC guidelines, the Group no longer presents a Consolidated
Income Statement showing adjusting items separately. In the prior
year, the Group disclosed adjusting items of GBP10.2m relating to
amortisation of acquired intangibles (2020: GBP8.8m) and
share-based payments (2020: GBP1.4m) as a separate column on the
face of the Consolidated Income Statement. This is no longer
disclosed in this way to simplify the Group's results. However, as
the Group manages internally its performance at an adjusted
operating profit level (before amortisation of acquired
intangibles, share-based payments and Individually Significant
Items), which management believes better represents the underlying
trading of the business, this information is still disclosed as an
APM within this Annual Report. This APM is reconciled to statutory
operating profit, together with the consequently Adjusted basic EPS
(before amortisation of acquired intangibles, share-based payments
and Individually Significant Items and tax effect thereon) to
statutory basic EPS.
This change has removed the following adjusted measures from the
Group's narrative reporting and disclosures:
-- Adjusted profit before taxation
-- Adjusted taxation
Following this revision to APMs, the Group has the following
APMs/non-statutory measures:
-- Adjusted EBITDA (reconciled below)
-- Adjusted operating profit (reconciled below)
-- Adjusted basic EPS (pence) (reconciled in Note 8)
-- Net cash/(debt) excluding lease liabilities (reconciled below)
-- Net debt (reconciled below)
-- Cash conversion (reconciled below)
-- Constant currency revenue
These measures provide supplementary information that assists
the user to understand the financial performance, position and
trends of the Group. Further detail is included within the glossary
of terms to this Annual Report which provides supplementary
information that assists the user in understanding theses
APMs/non-statutory measures.
The Group reports certain geographic regions on a constant
currency basis to reflect the underlying performance taking into
account constant foreign exchange rates year on year. This involves
translating comparative numbers to current year rates for
comparability to enable a growth factor to be calculated. In
addition, the Group also reports these regions on a local currency
basis to demonstrate the revenue performance on a local basis. As
these measures are not statutory revenue numbers, management
consider these to be APMs.
Adjusted EBITDA and Adjusted operating profit
The calculation of Adjusted EBITDA and Adjusted operating profit
is set out below:
2020 (restated)
2021 (2)
GBPm GBPm
------------------------------------------------------- ------- ----------------
Operating profit 17.3 12.6
Depreciation of property, plant and equipment 4.4 5.8
Depreciation of right of use assets 5.9 6.0
Amortisation of acquired intangibles 6.4 8.8
Amortisation of software and development costs 3.0 3.0
Individually Significant Items (Note 5) 12.7 7.9
Share-based payments charge 2.8 1.4
------------------------------------------------------- ------- ----------------
Adjusted EBITDA 52.5 45.5
------------------------------------------------------- ------- ----------------
Depreciation and amortisation (excluding amortisation
charged on acquired intangibles) (13.3) (14.8)
Adjusted operating profit 39.2 30.7
------------------------------------------------------- ------- ----------------
Net cash/(debt)
The calculation of Net cash/(debt) is set out below:
2021 2020
GBPm GBPm
--------------------------------------------- ------- -------
Cash and cash equivalents 116.5 95.0
Borrowings (net of deferred issue costs) (33.2) (99.2)
Net cash/(debt) excluding lease liabilities 83.3 (4.2)
--------------------------------------------- ------- -------
Lease liabilities (34.4) (38.2)
--------------------------------------------- ------- -------
Net cash/(debt) 48.9 (42.4)
--------------------------------------------- ------- -------
Cash conversion ratio
The calculation of the cash conversion ratio is set out
below:
2020
(restated)
2021 (2)
GBPm GBPm
------------------------------------------------------ ------ ------------
Net operating cash flow before interest and taxation
(A) 46.3 46.8
Adjusted EBITDA (B) 52.5 45.5
------------------------------------------------------ ------ ------------
Cash conversion ratio (%) (A)/(B) 88.2% 102.9%
------------------------------------------------------ ------ ------------
4 Segmental information
The Group is organised into the following two (2020: two)
reportable segments: Assurance and Software Resilience. The two
reporting segments provide distinct types of service. 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', which is considered to be the Board of
Directors of NCC Group
plc. 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
homogeneous commercial and strategic market environments.
Performance is measured based on reporting segment profit, which
comprises Adjusted operating profit (1) and adjusting items are not
allocated to business segments. Interest and tax are also not
allocated to business segments and there are no intra-segment
sales.
Central
Software and
Assurance resilience head office Group
Segmental analysis 2021 GBPm GBPm GBPm GBPm
------------------------------------------ --------- ----------- ------------ -------
Revenue 233.9 36.6 - 270.5
Cost of sales (149.5) (10.4) - (159.9)
------------------------------------------ --------- ----------- ------------ -------
Gross profit 84.4 26.2 - 110.6
Gross margin % 36.1% 71.6% - 40.9%
General administrative expenses allocated (45.4) (9.5) (3.2) (58.1)
------------------------------------------ --------- ----------- ------------ -------
Adjusted EBITDA (1) 39.0 16.7 (3.2) 52.5
Depreciation and amortisation (9.4) (0.7) (3.2) (13.3)
Adjusted operating profit (1) 29.6 16.0 (6.4) 39.2
Individually Significant Items (Note
5) - - (12.7) (12.7)
Amortisation of acquired intangibles - - (6.4) (6.4)
Share-based payments - - (2.8) (2.8)
------------------------------------------ --------- ----------- ------------ -------
Operating profit 29.6 16.0 (28.3) 17.3
------------------------------------------ --------- ----------- ------------ -------
Central
Software and
Segmental analysis 2020 (restated) Assurance resilience head office Group
(2) GBPm GBPm GBPm GBPm
------------------------------------------ --------- ----------- ------------ -------
Revenue 226.2 37.5 - 263.7
Cost of sales (149.3) (10.0) - (159.3)
------------------------------------------ --------- ----------- ------------ -------
Gross profit 76.9 27.5 - 104.4
Gross margin % 34.0% 73.3% - 39.6%
General administrative expenses allocated (43.9) (10.0) (5.0) (58.9)
------------------------------------------ --------- ----------- ------------ -------
Adjusted EBITDA (1) 33.0 17.5 (5.0) 45.5
Depreciation and amortisation (10.7) (0.6) (3.5) (14.8)
Adjusted operating profit (1) 22.3 16.9 (8.5) 30.7
Individually Significant Items (Note
5) - - (7.9) (7.9)
Amortisation of acquired intangibles - - (8.8) (8.8)
Share-based payments - - (1.4) (1.4)
------------------------------------------ --------- ----------- ------------ -------
Operating profit 22.3 16.9 (26.6) 12.6
------------------------------------------ --------- ----------- ------------ -------
During the year, management has amended its segment disclosure
to reflect the way the performance of the business is reported to
the CODM and managed. The performance of the APAC region was
previously included within Europe and APAC. For the year ended 31
May 2021, the APAC region is now included together with the UK
segment until it becomes such a size that warrants separate
reporting to the CODM. In addition, with the continuing growth and
formation of a European division we have changed geographical
segments in line with how this information is reported to the Board
and managed today and have restated prior year figures on a
like-for-like basis.
Revenue is disaggregated by primary geographical market, by
category and timing of revenue recognition as follows:
Software 2021 Software 2020
Revenue by originating country Assurance Resilience Total Assurance Resilience Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- --------- ----------- ------ --------- ----------- ------
UK & APAC 102.7 25.2 127.9 98.8 25.9 124.7
North America 82.7 7.3 90.0 82.4 7.8 90.2
Europe 48.5 4.1 52.6 45.0 3.8 48.8
------------------------------- --------- ----------- ------ --------- ----------- ------
Total revenue 233.9 36.6 270.5 226.2 37.5 263.7
------------------------------- --------- ----------- ------ --------- ----------- ------
Software 2021 Software 2020
Revenue by category Assurance Resilience Total Assurance Resilience Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- --------- ----------- ------ --------- ----------- ------
Services 228.3 36.6 264.9 215.7 37.5 253.2
Products 5.6 - 5.6 10.5 - 10.5
-------------------- --------- ----------- ------ --------- ----------- ------
Total revenue 233.9 36.6 270.5 226.2 37.5 263.7
-------------------- --------- ----------- ------ --------- ----------- ------
Software 2021 Software 2020
Timing of revenue recognition Assurance Resilience Total Assurance Resilience Total
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- --------- ----------- ------ --------- ----------- ------
Services and products transferred
over time 47.9 24.0 71.9 41.4 25.7 67.1
Services and products transferred
at a point in time 186.0 12.6 198.6 184.8 11.8 196.6
Total revenue 233.9 36.6 270.5 226.2 37.5 263.7
---------------------------------- --------- ----------- ------ --------- ----------- ------
5. 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 1).
2020 (restated)
2021 (2)
GBPm GBPm
--------------------------------------------------- ------ ----------------
Cloud configuration and customisation costs 5.1 7.9
Costs directly attributable to the acquisition of 7.6 -
the IPM Software Resilience business
Total ISIs 12.7 7.9
--------------------------------------------------- ------ ----------------
Cloud configuration and customisation costs
These costs relate to the material spend previously capitalised
in relation to the Group's Securing Growth Together digital
transformation programme that have now been expensed following the
adoption of the IFRIC agenda decision. The costs meet the Group's
policy for ISIs. See Note 13 for further details in relation to the
prior year restatement.
Costs directly attributable to the acquisition of the IPM
Software Resilience business
These costs are directly attributable to the material
acquisition of the IPM Software Resilience business (see Note 14)
and are therefore considered to meet the Group's policy for ISIs.
The nature of the costs includes legal, accountancy, due diligence
and other advisory services.
6. Taxation
Reconciliation of effective tax rate
2020 (restated)
2021 (2)
GBPm GBPm
------------------------------------------------------------------------ ------ ----------------
Profit before taxation 14.8 9.6
------------------------------------------------------------------------ ------ ----------------
Current tax using the UK corporation tax rate 19%
(2020: 19%) 2.8 1.8
Effects of:
* Items not (accessible)/deductible for tax purposes (0.5) 0.9
* Adjustment to tax charge in respect of prior periods (0.3) (0.3)
* Impact of prior year US R&D tax credits 1.9 0.5
(0.3) -
* Impact of current year US R&D tax credits
* Differences between overseas tax rates 0.7 0.9
* Movements in temporary differences not recognised 0.1 (0.3)
* Movement in tax rate 0.4 (0.3)
Total tax expense 4.8 3.2
------------------------------------------------------------------------ ------ ----------------
Application of IFRIC agenda decisions
During the year, the Group has reviewed its accounting policy to
align with IFRIC guidance issued in April 2021 in relation to
Software-as-a-Service (SaaS) costs previously capitalised,
following this review certain costs previously capitalised in
relation to cloud-based arrangements have been expensed and
amortisation charged on those assets has been reversed. This had
the impact on the UK tax charge in the prior year of GBP1.2m. See
Note 13 for further details on this prior year restatement.
Tax uncertainties
The tax expense reported for the current year and prior year is
affected by certain positions taken by management where there may
be uncertainty. The most significant source of uncertainty arises
from claims for US R&D tax credits relating to historical
periods. Uncertainty arises as a result of a degree of uncertainty
concerning interpretation of US legislation and because the statute
of limitations has not expired. For the periods ending 31 May 2017
to 31 May 2021, the aggregate net current tax benefit to the Income
Statement relating to the US R&D tax credits is GBP2.7m (2020:
GBP4.3m). The gross deferred tax asset relating to the US R&D
tax credits is GBP1.0m (2020: GBP0.8m), although due to the
uncertainty we have made a partial provision of GBP0.6m (2020:
GBP0.8m) against this asset. The aggregate gross amount of US
R&D tax credits recognised amounts to GBP8.2m (2020: GBP5.1m)
and we have made a provision of GBP5.1m (2020: GBP0.8m) against
this gross position.
7 Dividends
2021 2020
------------------------------------------------------------ ----- -----
Dividends paid and recognised in the year (GBPm) 13.0 12.9
------------------------------------------------------------ ----- -----
Dividends per share paid and recognised in the year (pence) 4.65p 4.65p
------------------------------------------------------------ ----- -----
Dividends per share proposed but not recognised in the
year (pence) 3.15p 3.15p
------------------------------------------------------------ ----- -----
The proposed final dividend for the year ended 31 May 2021 of
3.15p per ordinary share on approximately 309.8m ordinary shares
(approximately GBP10m) was approved by the Board on 14 September
2021 and will be recommended to shareholders at the AGM on 4
November 2021. The dividend has not been included as a liability as
at 31 May 2021. The payment of this dividend will not have any tax
consequences for the Group.
8 Earnings per ordinary share (EPS)
Earnings per ordinary share are shown below:
2020 (restated)
2021 (2)
GBPm GBPm
------------------------------------------------- ---------- ---------------
Statutory earnings (A) 10.0 6.4
-------------------------------------------------- ---------- ---------------
Number Number
of shares of shares
m m
------------------------------------------------- ---------- ---------------
Basic weighted average number of shares in issue
(C) 281.2 278.0
-------------------------------------------------- ---------- ---------------
Dilutive effect of share options 1.5 2.5
-------------------------------------------------- ---------- ---------------
Diluted weighted average shares in issue (D) 282.7 280.5
-------------------------------------------------- ---------- ---------------
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.
2020
(restated)
2021 (2)
pence pence
---------------------------- --- ------ -----------
Earnings per ordinary share
Basic (A/C) 3.6 2.3
Diluted (A/D) 3.5 2.3
--------------------------------- ------ -----------
Adjusted basic EPS (1) is reconciled as follows:
2020
(restated)
2021 (2)
GBPm GBPm
---------------------------------------- --- ----- -----------
Statutory earnings (A) 10.0 6.4
--------------------------------------------- ----- -----------
Amortisation of acquired intangibles 6.4 8.8
Share based payments 2.8 1.4
Individually Significant items (Note 5) 12.7 7.9
Tax effect of above items (5.1) (3.4)
--------------------------------------------- ----- -----------
Adjusted earnings (B) 26.8 21.1
--------------------------------------------- ----- -----------
2020
(restated)
2021 (2)
pence pence
------------------------------------- --- ------ -----------
Adjusted earnings per ordinary share
Basic (B/C) 9.5 7.6
Diluted (B/D) 9.5 7.5
------------------------------------------ ------ -----------
9 Goodwill and intangible assets
Customer 2020 (restated)
Development contracts Intangibles (2)
Goodwill Software costs and relationships subtotal Total
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- -------- -------- ----------- ------------------ ----------- ---------------
Cost:
At 1 June 2019 - restated
(2) 255.6 20.7 12.7 87.1 120.5 376.1
Additions - restated (2) - 1.0 1.3 - 2.3 2.3
Transfers - 0.2 (0.2) - - -
Disposals - (9.1) (2.3) - (11.4) (11.4)
Effects of movements in exchange
rates 3.7 - - 1.1 1.1 4.8
--------------------------------- -------- -------- ----------- ------------------ ----------- ---------------
At 31 May 2020 - restated
(2) 259.3 12.8 11.5 88.2 112.5 371.8
--------------------------------- -------- -------- ----------- ------------------ ----------- ---------------
Additions - 1.7 0.6 - 2.3 2.3
Disposals (10.2) - - (13.0) (13.0) (23.2)
Effects of movements in exchange
rates (10.2) - (0.4) (2.1) (2.5) (12.7)
--------------------------------- -------- -------- ----------- ------------------ ----------- ---------------
At 31 May 2021 238.9 14.5 11.7 73.1 99.3 338.2
--------------------------------- -------- -------- ----------- ------------------ ----------- ---------------
Accumulated amortisation
At 1 June 2019 - restated
(2) (66.2) (18.9) (7.5) (55.8) (82.2) (148.4)
Charge for year - restated
(2) - (1.0) (2.0) (8.8) (11.8) (11.8)
Disposals - 9.1 2.3 - 11.4 11.4
Effects of movement in exchange
rates - - (0.1) (0.8) (0.9) (0.9)
--------------------------------- -------- -------- ----------- ------------------ ----------- ---------------
At 31 May 2020 - restated
(2) (66.2) (10.8) (7.3) (65.4) (83.5) (149.7)
--------------------------------- -------- -------- ----------- ------------------ ----------- ---------------
Charge for year - (1.0) (2.0) (6.4) (9.4) (9.4)
Disposals 10.2 - - 13.0 13.0 23.2
Effects of movements in exchange
rates - - 0.3 1.3 1.6 1.6
--------------------------------- -------- -------- ----------- ------------------ ----------- ---------------
At 31 May 2021 (56.0) (11.8) (9.0) (57.5) (78.3) (134.3)
--------------------------------- -------- -------- ----------- ------------------ ----------- ---------------
Net book value:
At 31 May 2021 182.9 2.7 2.7 15.6 21.0 203.9
--------------------------------- -------- -------- ----------- ------------------ ----------- ---------------
At 31 May 2020 - restated
(2) 193.1 2.0 4.2 22.8 29.0 222.1
--------------------------------- -------- -------- ----------- ------------------ ----------- ---------------
Recognition
Development costs are capitalised in accordance with IAS 38
development criteria. For this reason, these are not regarded as
realised losses.
Application of IFRIC agenda decisions
During the year, the Group has reviewed its accounting policy to
align with IFRIC guidance issued in April 2021 in relation to
Software-as-a- Service (SaaS) costs previously capitalised;
following this review of costs previously capitalised for the year
ended 31 May 2020 of GBP7.9m relating to cloud-based arrangements
have now been expensed and amortisation of GBP1.4m charged on those
assets has been reversed. Consequentially, the net impact on
operating profit for the year ended 31 May 2020 is GBP6.5m. In
addition, costs of GBP0.2m have been reclassified to prepayments.
For the year ended 31 May 2019, the Group identified GBP3.6m of
costs previously capitalised under cloud computing arrangements
that should be expensed and GBP0.1m of amortisation was charged,
which is to be reversed. See Note 13 for further details on this
prior year restatement.
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. 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 assessment of CGUs is a key accounting judgement as
set out in Note 2 of the consolidated Financial Statements.
During the year, the Group revised its CGUs as follows:
-- On 1 June 2020, Virtual Security Research LLC (VSR) was
merged into NCC Group Security Services Incorporated, which forms
part of the North America Assurance CGU, and following this merger
VSR no longer exists as a standalone entity. VSR continues to be
included within the North America segment. From this date, the VSR
business no longer generates independent cash flows since its
resources are now pooled with the remainder of the US Assurance
technical delivery teams and its support functions are delivered by
the shared US Assurance functions. Furthermore, VSR is no longer
reported separately from the rest of the US business. On the basis
of the above, management has concluded that the VSR business is no
longer a standalone CGU and has been subsumed into the North
America Assurance CGU.
-- During the year, the Group ceased measuring and forecasting
the performance of the Payment Software Company Inc. business
(PSC), which now forms part of the North America Assurance segment.
On the basis of the above, management has concluded that the PSC
business is no longer a standalone CGU as it is not capable of
generating independent cash flows and has been subsumed into the
North America Assurance CGU.
-- During FY21, the Group has rearranged its operations so that
there is now a European-wide Assurance operation, combining the
Fort business unit previously included within the UK Assurance CGU
and the Fox-IT business unit under a single management and
reporting structure, known as Europe Assurance. As part of the
integration measuring and forecasting of performance is done at the
Europe Assurance level and operations such as the sales and
delivery teams and support functions have been integrated such that
independent cash flows are no longer identifiable below the Europe
Assurance level. On this basis, management has concluded that the
cash flows associated with Fox-IT and Fort should now be combined
to form a single CGU.
The CGUs and the allocation of goodwill to those CGUs are shown
below:
Goodwill Goodwill*
2021 2020
Cash generating units GBPm GBPm
---------------------------------- -------- ------------------
UK Software Resilience 22.9 22.9
North America Software Resilience 7.5 8.7
Europe Software Resilience 7.2 7.5
Total Software Resilience 37.6 39.1
UK and APAC Assurance 44.2 47.3
North America Assurance 36.4 42.4
Europe Assurance 64.7 64.3
------------------------------------ -------- ------------------
Total Assurance 145.3 154.0
------------------------------------ -------- ------------------
Total Group 182.9 193.1
------------------------------------ -------- ------------------
* The prior year comparative figures have been re-presented to
reflect the change in CGUs in the year described above.
Impairment review
Goodwill is tested for impairment annually at the level of the
CGU to which it is allocated. In each of the tests carried out as
at 31 May 2021, the recoverable amount of the CGUs concerned was
measured on a value in use basis (VIU). VIU represents the present
value of the future cash flows that are expected to be generated by
the CGU to which the goodwill is allocated.
Capitalised development and software costs are included in the
CGU asset bases when performing the impairment review. Capitalised
development projects and software intangible assets are also
considered, on an asset-by-asset basis, for impairment where there
are indicators of impairment. During the year, management carried
out a detailed review of the capitalised product portfolio and,
based on cash flow projections for the respective projects,
concluded that no impairment was required.
VIU calculations are an area of material management estimation
as set out in Note 2 to the consolidated Financial Statements.
These calculations require the use of estimates, specifically:
pre-tax cash flow projections; long-term growth rates; and a
pre-tax discount rate. Further detail in relation to these key
assumptions used in the Group's goodwill annual impairment review
is as follows:
Pre-tax cash flow projections
Pre-tax cash flow projections are based on the Group's budget
for the forthcoming financial year and longer-term three year
strategic plans to 2024. The budget and three year strategic plan
are compiled by the business unit management teams using a
detailed, bottom-up process with respect to revenue, margin and
overheads, taking into account factors specific to that business
unit as well as wider economic factors such as industry growth
expectations and the impact of Covid-19.
The Group's revenue forecasts are developed using the most
reliable data available, such as the size of the existing contract
base and details of confirmed orders, as well as assumptions over
key operational inputs to underpin the forecast for each revenue
stream. The combined effect of these individual assumptions on the
overall growth rate assumed for each area of the business is then
compared to management's experience of growth and the industry's
expected growth rate.
For cost forecasts, the majority of which are people related,
headcount changes are forecast for delivery and sales staff in
order that there are sufficient resources to support the forecasted
required revenue delivery capacity as well as to deliver against
sales targets, whilst also factoring in payroll inflation
expectations. Overhead costs are also forecast using a bottom-up
process.
Forecasts go through a detailed review process and are subject
to challenge at each stage of review, including by the Executive
Committee. Ultimately the forecasts are approved by the Board.
Assumptions have then been applied for expected revenue, margin
growth, overheads and Adjusted EBITDA (1) for the subsequent two
years from the end of 2024. Adjusted EBITDA (1) is considered a
proxy for operating cash flow before changes in working capital.
Pre-tax cash flow projections also include assumptions on working
capital and capital expenditure requirements for each CGU.
These assumptions are based on management's experience of growth
and knowledge of the industry sectors, markets and the Group's
internal opportunities for growth and margin enhancement. The
projections beyond five years into perpetuity use an estimated
long-term growth rate. Management has taken into account the impact
of Covid-19 in formulating the above assumptions, and the
underlying uncertainty of Covid-19 has been reflected in the
assumptions underpinning the cash flow forecasts for each CGU
rather than the pre-tax discount rates used in the impairment
test.
Forecast working capital and capital expenditure included within
the pre-tax cash flow projections are based on management's
expectations of future expenditure required to support the Group
and current run rate requirements.
The revenue growth rate is considered a critical estimate by
management. Revenue growth is considered to be the most critical
estimate, rather than Adjusted EBITDA (1) growth which was used in
the prior year, due to the Group's relatively stable overhead base
and high operating leverage. The table below summarises the
cumulative average growth rate (CAGR) assumed for revenue over the
five year forecast period to 2026 for each CGU:
Revenue
CAGR
(%) Revenue
CAGR (%)
2021 2020
---------------------------------- --- --- ------- -------------------
UK Software Resilience 5.8 5.5
North America Software Resilience 12.3 1.2
Europe Software Resilience 11.4 5.1
UK and APAC Assurance 9.0 8.3
North America Assurance 10.4 8.3
Europe Assurance 11.7 13.1
-------------------------------------------- ------- -------------------
The revenue % growth for Europe Assurance is considered by
management to be appropriate for the specific industry to which the
CGU operates. Management has considered available external market
data in determining the revenue growth rates over the five year
forecast period.
Long-term growth rates
To forecast growth beyond the detailed cash flows into
perpetuity, a long-term average growth rate ranging between 1.5 and
1.7% (2020: between 1.9 and 2.5%) has been used based on the
specific geography of the CGU, as shown in the table below. This
range 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 macro-economic
environment. These rates are not greater than the published
International Monetary Fund average growth rates in gross domestic
product for the next five year period in each relevant territory in
which the CGUs operate.
Growth
rate
Growth
(%) rate
2021 (%) 2020
---------------------------------- --- --- ------ -------------------
UK Software Resilience 1.7 1.9
North America Software Resilience 1.6 2.5
Europe Software Resilience 1.5 1.9
UK and APAC Assurance 1.7 1.9
North America Assurance 1.6 2.5
Europe Assurance 1.5 1.9
-------------------------------------------- ------ -------------------
Pre-tax discount rates
Discount rates can change relatively quickly for reasons both
inside and outside of management's control. Those outside
management's direct control or influence include changes in the
Group's Beta, changes in risk free rates of return and changes in
Equity Risk Premia.
The discount rates are determined using a capital asset pricing
model and reflect current market interest rates, relevant equity
and size risk premiums and the risks specific to the CGU concerned.
On this basis, specific discount 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 table below
summarises the pre-tax discount rates used for each CGU:
Pre-tax
discount
rate Pre-tax
discount
(%) rate
2021 (%) 2020
---------------------------------- --- --- --------- ----------------
UK Software Resilience 12.9 15.4
North America Software Resilience 15.3 13.5
Europe Software Resilience 13.6 13.6
UK and APAC Assurance 13.0 11.6
North America 14.2 13.5
Europe Assurance 13.7 12.7
-------------------------------------------- --------- ----------------
Sensitivity analysis
Sensitivity analysis has been performed in respect of certain
scenarios where management considers a reasonably possible change
in key assumptions could occur. The following key assumptions are
considered to carry the greatest level of sensitivity to
forecasts:
-- Revenue is the primary cash flow driver (since due to the
Group's operating leverage, revenue is the key driver of Adjusted
EBITDA (1), considered as a proxy for operating cash flow before
changes in working capital and capital expenditure), and a key
contributor to VIU.
-- The discount rate for each CGU: both factors inside and
outside of management's control impact the discount rate and can
have a significant impact on the VIU calculation.
With the exception of the Europe Assurance CGU, the outcome of
applying sensitivity analysis in respect of the above inputs
indicated that there is no reasonably possible scenario in which
the carrying value of goodwill would be considered impaired. With
respect to the Europe Assurance CGU, management has considered the
impact of Covid-19 on the challenging growth targets for this CGU
and believes a reasonably possible change in the key assumptions of
a 1.7% pts reduction in the revenue CAGR or a 1% pts increase in
the discount rate would significantly reduce the headroom or give
rise to an impairment. The impact of these changes in assumptions
is illustrated in the table below, together with the change in each
assumption that would result in the VIU falling below the carrying
amount.
It is noted that, whilst a 1.7% pts reduction in the revenue
CAGR would give rise to a potential impairment of goodwill, it is
expected that any such deterioration in expected growth rates would
also lead to a reduction in expected future costs. This expected
future cost reduction has not been factored into the calculations
illustrated below.
Europe Assurance
------------------------
Sensitivity analysis GBPm 31 May 2021 31 May 2020
------------------------------------------------------- ----------- -----------
Carrying value of assets (goodwill, development
and software costs, right-of-use assets) 76.9 72.9
Total VIU 95.1 92.3
Surplus over carrying values of assets 18.2 19.4
Assumptions used in VIU calculation:
Five year CAGR 11.7% 13.1%
Impact of reduction of 1.7% pts to five year revenue (43.4) n/a
CAGR on VIU
Change required in five year revenue CAGR % for
VIU to fall below carrying value 0.7% 0.7%
Pre-tax discount rate 13.7% 12.7%
Impact of 1% pts increase in pre-tax discount rate
on VIU (7.9) (8.1)
Change required in pre-tax discount rate for VIU
to fall below carrying value 2.6% 2.5%
Impact of both 1.7% pts reduction to revenue CAGR (47.6) n/a
and 1% pts increase in pre-tax discount rate on
VIU
------------------------------------------------------- ----------- -----------
10 Right-of-use assets and lease liabilities
The Group's right-of-use assets can be further analysed as
follows:
2021
GBPm
--------------------------------- -----
At 1 June 2020 28.7
--------------------------------- -----
Additions 3.1
Reclassification from provisions (1.4)
Disposals (0.7)
Depreciation (5.9)
At 31 May 2021 23.8
--------------------------------- -----
The Group's outstanding lease liabilities can be further
analysed as follows:
2021
GBPm
----------------- -----
At 1 June 2020 38.2
----------------- -----
Additions 3.1
Disposals (0.9)
Lease payments (7.2)
Interest expense 1.2
At 31 May 2021 34.4
----------------- -----
The ageing of the lease liabilities at 31 May 2021 are as
follows:
2021
GBPm
------------------------ -----
Less than one year 5.1
Two to five years 15.8
Greater than five years 13.5
Total lease liabilities 34.4
------------------------ -----
11 Borrowings
Borrowings (excluding lease liabilities) are analysed as
follows:
2021 2020
GBPm GBPm
------------------------------------------------- ----- -----
Non-current liabilities
Revolving credit facility (net of deferred issue
costs) 33.2 99.2
Total borrowings (excluding lease liabilities) 33.2 99.2
-------------------------------------------------- ----- -----
The RCF is drawn in short to medium-term tranches of debt that
are repayable within 12 months of draw-down. These tranches of debt
can be rolled over provided certain conditions are met, including
compliance with all loan terms. The Group considers that it is
highly unlikely it would not be in compliance and therefore be
unable to exercise its right to roll-over the debt. The Directors
therefore believe that the Group has the ability and the intent to
roll-over the drawn RCF amounts when due and consequently has
presented the RCF as a non-current liability.
12 Provisions
Provisions are analysed as follows:
Onerous
Loss-making property Other provisions
contract costs GBPm Total
GBPm GBPm GBPm
---------------------------------------- ------------------ --------- -------------------- -------
Balance at 1 June 2020 0.2 2.9 0.6 3.7
Reclassification to Right-of-use-assets - (1.4) - (1.4)
Reclassification 1.7 - - 1.7
Provisions arising in the year 1.9 1.0 - 2.9
Utilised in the year (2.7) (0.8) (0.4) (3.9)
Balance at 31 May 2021 1.1 1.7 0.2 3.0
----------------------------------------- ------------------ --------- -------------------- -------
2021 2020
GBPm GBPm
------------------------ ----- -----
Current liabilities 2.4 2.0
Non-current liabilities 0.6 1.7
Total 3.0 3.7
------------------------- ----- -----
The loss-making contracts provision represents the estimated
remaining net lifetime loss on long-term development and supply
contracts and is expected to be completed in 2022. During the year,
revenue has been recognised in relation to this long-term contract
of GBP1.8m.
The onerous property costs provision relates to vacant premises
in Reading and unused floors in the Manchester head office
building. In the prior year on the implementation of IFRS 16, the
opening provision of GBP2.6m relating to the onerous rent costs has
been transferred and offset against the associated right-of-use
asset. The provision of GBP1.7m (2020: GBP2.9m) at 31 May 2021
includes GBP1.2m (2020: GBP2.5m) of non-rent costs relating to the
onerous properties including service charges and insurance and also
the estimated costs of disposing or terminating these leases which
includes rent incentives, renovation costs and letting fees. The
provision at 31 May 2021 also includes estimated dilapidations
liabilities of GBP0.5m (2020: GBP0.4m) relating to the Group's
leased premises. Both of these provisions are expected to unwind
over the period of the relevant leases (2021-2034).
Other provisions of GBP0.2m (2020: GBP0.6m) include
reorganisation costs to which the Group was committed at the
Balance Sheet date and are expected to be incurred within the next
financial year.
13 Prior year restatement
In April 2021, the IFRS Interpretations Committee (IFRIC)
published an agenda decision on the clarification of accounting in
relation to the configuration and customisation costs incurred in
implementing Software-as-a-Service (SaaS) as follows:
-- Amounts paid to the cloud vendor for configuration and
customisation that are not distinct from access to the cloud
software are expensed over the SaaS contract term.
-- In limited circumstances, other configuration and
customisation costs incurred in implementing SaaS arrangements may
give rise to an identifiable intangible asset, for example, where
code is created that is controlled by the entity.
-- In all other instances, configuration and customisation costs
will be expensed as the customisation and configuration services
are received.
Due to the nature of this agenda decision and the level of spend
incurred in relation to the Groups' Securing Growth Together
digital transformation programme, the Group's accounting policy in
relation to such customisation and configuration costs has been
reviewed and changed to align with the IFRIC guidance issued in
relation to Software-as-a-service (SaaS) costs previously
capitalised. The restatement represents a non-cash adjustment.
The revision to the accounting policy has been accounted for
retrospectively resulting in a prior year restatement.
The Group identified GBP17.8m additions made in the years ending
31 May 2019 and 31 May 2020 in relation to software and development
costs. GBP7.9m of these costs capitalised for the year ended 31 May
2020 related to cloud computing arrangements that should be
expensed after the consideration of the IFRIC guidance and a
further GBP3.6m for the year ended 31 May 2019. In relation to the
year ended 31 May 2020 assets, GBP1.4m of amortisation was charged,
which is to be reversed. A further GBP0.2m of costs capitalised are
to be reclassified to prepayments.
These costs give rise to a reduction in the tax charge for the
year ended 31 May 2020 of GBP1.2m and a corresponding increase in
the Group's deferred tax asset.
The affected financial statement line items are as follows:
31 May 2020
(previously 31 May 2020
reported) Restatement (restated)
GBPm GBPm GBPm
-------------------------------------------------- ------------ ----------- -----------
Income Statement impact
Depreciation and amortisation (25.0) 1.4 (23.6)
Individually Significant Items - expense cloud
configuration and customisation costs previously
capitalised - (7.9) (7.9)
Operating profit 19.1 (6.5) 12.6
Profit before taxation 16.1 (6.5) 9.6
Taxation (4.4) 1.2 (3.2)
Profit for the year 11.7 (5.3) 6.4
Basic EPS 4.2p (1.9p) 2.3p
Diluted EPS 4.2p (1.9p) 2.3p
Balance Sheet impact
Expense cloud configuration and customisation
costs previously capitalised - (11.5) (11.5)
Amounts reclassified to prepayments in relations
to cloud computing arrangements (restated) - (0.2) (0.2)
Reversal of amortisation on cloud configuration
and customisation costs previously capitalised - 1.5 1.5
Other intangible assets 39.2 (10.2) 29.0
Deferred tax assets 0.5 1.8 2.3
Total non-current assets 275.7 (8.4) 267.3
Trade and other receivables 73.2 0.2 73.4
Current assets 169.7 0.2 169.9
Net assets 214.1 (8.2) 205.9
Retained earnings (13.8) (8.2) (22.0)
Total equity 214.1 (8.2) 205.9
Cash Flow Statement impact
Profit for the year 11.7 (5.3) 6.4
Amortisation of software and development costs 4.4 (1.4) 3.0
Income tax expense 4.4 (1.2) 3.2
Net cash generated from operating activities 47.1 (7.9) 39.2
Software and development expenditure (10.4) 7.9 (2.5)
Net cash used in investing activities (13.2) 7.9 (5.3)
Net increase in cash and cash equivalents 60.1 - 60.1
-------------------------------------------------- ------------ ----------- -----------
A third Balance Sheet has been presented in accordance with IAS
1 to illustrate the impact in the opening Balance Sheet for the
prior financial year. The Group identified that GBP3.6m of costs
previously capitalised under cloud computing arrangements that
should be expensed and GBP0.1m of amortisation was charged, which
is to be reversed.
These additional costs give rise to a reduction in the tax
charge for the year of GBP0.6m and a corresponding increase in the
deferred tax asset.
The opening Balance Sheet of the prior year has accordingly been
restated to correct for these, as shown below. Balances at 1 June
2019 are those disclosed after the application of IFRS16 which was
adjusted prospectively on inception. The affected financial
statement line items are as follows:
1 June 2019
(previously 1 June 2019
reported) Restatement (restated)
GBPm GBPm GBPm
------------------------- ------------ ----------- -----------
Balance Sheet impact
Other intangible assets 41.8 (3.5) 38.3
Deferred tax assets 1.6 0.6 2.2
Total non-current assets 276.5 (2.9) 273.6
Net assets 208.8 (2.9) 205.9
Retained earnings (14.0) (2.9) (16.9)
Total equity 208.8 (2.9) 205.9
------------------------- ------------ ----------- -----------
14 Post Balance sheet event
Acquisition of IPM business
On 1 June 2021, shareholder approval was passed for the
acquisition of the IPM business of Iron Mountain, comprising
substantially all of the assets of Iron Mountain Intellectual
Property Management, Inc. together with certain other assets of
affiliates of Iron Mountain exclusively related to the IPM
business. The primary reasons for the business combination are
to:
-- Scale-up the Group's core business to create a global
business and platform for further growth
-- Generate revenue synergies through allowing the enlarged
division to offer NCC's broader suite of established verification
services as well as the newer Escrow-as-a-Service (EaaS) cloud
offering to the IPM business's existing customer base
-- Present an exciting new opportunity to sell NCC's cyber
security services from its Assurance division into the IPM
business's broad and blue-chip customer base in the medium term
-- Be accretive to earnings per share from completion, even
without factoring in revenue synergies
-- Result in greater strategic strength for the future
Management consider shareholder approval of the transaction
constitutes a change in control and therefore the date of
shareholder approval is considered to be the acquisition date for
the transaction. Shareholder approval was granted on 1 June 2021
and the IPM Software Resilience business will be consolidated into
the Group results from that date (Note 2).
Details of assets acquired that are subject to provisional fair
value adjustments will be reported for the year ended 31 May 2022.
The acquisition for a total consideration of $220m was funded
through an equity gross placing of GBP72.6m on 17 May 2021 combined
with a new three year $70m Term loan and the remaining $98.2m
funded via existing cash balances and our revolving credit
facility. The term loan was entered into on 12 May 2021 but not
drawn down until 2 June 2021.
Costs directly attributable to the acquisition of the IPM
business totalling GBP7.6m have been expensed during the year (see
Note 5). Issue costs of GBP2.4m were incurred as part of the equity
placing and have been credited to the share premium account.
Glossary of terms - Alternative Performance Measures (APMs)
APMs are the way that financial performance is measured by
management and reported to the Board, and the basis of financial
measures for senior management's compensation schemes, and provide
supplementary information that assists the user in understanding
the underlying trading results.
APM Closest Adjustments Note reference Definition, purpose and
equivalent to reconcile for reconciliation considerations
IFRS measure to IFRS measure made by the Directors
Adjusted operating Operating Operating 3 Represents operating profit
profit profit profit or before
or loss loss before amortisation of acquired
amortisation intangibles,
of acquired share-based payments and
intangibles, Individually
share based Significant Items
payments This measure is to allow the
and Individually user to understand the
Significant Group's
Items underlying financial
performance
as measured by management,
reported
to the Board and used as a
financial
measure in senior
management's
compensation schemes.
The Directors consider
amortisation
of acquired intangibles is a
non-cash accounting charge
inherently
linked to losses associated
with
historical acquisitions of
businesses.
The Directors consider
share-based
payments to be an 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.
Individually Significant
Items
are items that are considered
unusual by nature or scale,
and
are of such significance that
separate disclosure is
relevant
to understanding the Group's
financial performance and
therefore
requires separate
presentation
in the Financial Statements
in
order to fairly present the
financial
performance of the Group.
-------------------- --------------------- -------------------- ------------------------------
Adjusted earnings Operating Operating 3 Represents operating profit
before interest, profit profit or before
tax, depreciation or loss loss, before adjusting items, depreciation
and amortisation adjusting and amortisation to assist in
(Adjusted items, depreciation the understanding of the
EBITDA) and amortisation, Group's
finance costs performance.
and taxation Adjusted EBITDA is disclosed
as this is a measure widely
used
by various stakeholders and
used
by the Group to measure the
cash
conversion ratio.
-------------------- --------------------- -------------------- ------------------------------
Adjusted basic Statutory Statutory 8 Represents basic EPS before
EPS basic EPS basic EPS amortisation
before amortisation of acquired intangibles,
of acquired share
intangibles, based payments and
share based Individually
payments, Significant Items
Individually This measure is to allow the
Significant user to understand the
Items and Group's
the tax effect underlying financial
thereon performance
as measured by management,
reported
to the Board and used as a
financial
measure in senior
management's
compensation schemes.
See further details above in
relation to amortisation of
acquired
intangibles and share based
payments.
-------------------- --------------------- -------------------- ------------------------------
Net cash/(debt) Total borrowings 3 Represents total borrowings
excluding (excluding (excluding
lease liabilities lease liabilities) lease liabilities) offset by
offset cash and cash equivalents. It
by cash is a useful measure of the
and cash progress
equivalents in generating cash,
strengthening
of the Group Balance Sheet
position,
overall net indebtedness and
gearing on a like-for-like
basis.
Net cash/(debt), when
compared
to available borrowing
facilities,
also gives an indication of
available
financial resources to fund
potential
future business investment
decisions
and/or potential
acquisitions.
-------------------- --------------------- -------------------- ------------------------------
Net cash/(debt) Total borrowings 3 Represents total borrowings
(including (including
lease liabilities) lease liabilities) offset by
offset cash and cash equivalents. It
by cash is a useful measure of the
and cash progress
equivalents in generating cash,
strengthening
of the Group Balance Sheet
position,
overall net indebtedness and
gearing including lease
liabilities.
Net cash/(debt), when
compared
to available borrowing
facilities,
also gives an indication of
available
financial resources to fund
potential
future business investment
decisions
and/or potential
acquisitions.
-------------------- --------------------- -------------------- ------------------------------
Cash conversion Ratio % Ratio % of 3 The cash conversion ratio is
ratio of net net cash a measure of how effectively
cash flow flow from operating profit is converted
from operating operating into cash and effectively
activities activities highlights
before before interest both non-cash accounting
interest and tax divided items
and tax by EBITDA within operating profit and
divided also
by operating movements in working capital.
profit It is calculated as net cash
flow from operating
activities
before interest and taxation
(as disclosed on the face of
the Cash Flow Statement)
divided
by EBITDA for continued and
discontinued
activities.
The cash conversion ratio is
a measure widely used by
various
stakeholders and hence is
disclosed
to show the quality of cash
generation
and also to allow comparison
to other similar companies.
-------------------- --------------------- -------------------- ------------------------------
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END
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