TIDMNCC

RNS Number : 8785X

NCC Group PLC

03 September 2020

3 September 2020

NCC Group plc

Preliminary results for the year ended 31 May 2020

Resilience through uncertainty

NCC Group plc (LSE: NCC, "NCC Group" or "the Group"), an independent global cyber security and resilience adviser, reports its full year results for the 12 months to 31 May 2020 ("the full year", "FY", "FY20", "the year").

Highlights (1)

 
                                                                 Like-for-like 
                                               2020        2019       % change             2020 
                                          (Pre-IFRS   (Pre-IFRS      (Pre-IFRS        (IFRS 16) 
                                         16) (2, 3)      16)(2)        16) (2)              (2) 
                                       ------------  ----------  ------------- 
Revenue (GBPm)                                263.7       250.7           5.2%            263.7 
Gross profit (GBPm)                           104.4       101.8           2.6%            104.4 
Gross margin (%)                              39.6%       40.6%     (1.0)% pts            39.6% 
Adjusted (3) EBITDA (GBPm)                     41.2        43.7         (5.7)%             45.4 
Adjusted (3) EBITDA (%)                       15.6%       17.4%     (1.8)% pts            17.2% 
Operating profit (GBPm)                        20.9        19.5           7.2%             19.1 
Adjusted (3) operating profit (GBPm)           31.1        33.7         (7.7)%             29.3 
Adjusted (3) operating profit (%)             11.8%       13.4%     (1.6)% pts            11.1% 
Profit before taxation (GBPm)                  19.1        17.8           7.3%             16.1 
Adjusted (3) profit before taxation 
 (GBPm)                                        29.3        32.0         (8.4)%             26.3 
Basic EPS (pence)                              5.1p        4.9p           4.1%             4.2p 
Adjusted basic EPS (pence)                     8.1p        9.2p        (12.0)%             7.2p 
Net debt (3) (GBPm)                           (4.2)      (20.2)          79.2%           (42.4) 
Cash conversion ratio                        117.0%      109.6%       7.4% pts           120.5% 
Dividend (pence)                               3.15        3.15              -             3.15 
-------------------------------------  ------------  ----------  -------------      ----------- 
 
   --      The long-term prospects for the cyber resilience market are excellent 

-- The global cyber security services market was growing at c. 8-9% before the advent of Covid-19

-- The impact of the pandemic has accelerated the adoption of cloud services by many firms and driven a significant increase in home working, all of which introduces further cyber risk into the operations of our customers and target market

-- Global online security breaches continue to rise at more than 20% per annum with reputational losses and financial losses becoming more significant

-- Covid-19 has impacted demand but we foresee a strong growth opportunity as the economy normalises

-- Our stability is underpinned by recurring high-margin revenues and cash generation from our Software Resilience (Escrow) division and, increasingly, from our Cyber Managed Detection & Response (up 13.7% from GBP36.4m to GBP41.4m)

-- Our Cyber Professional Services are further protected by the quality of our customer base ( 65 of the Fortune 500 (2019: 52) and 89 of FTSE 350 (2019: 82)), although some of our customers are experiencing financial or logistical issues that impacted our FY20 sales order delivery by an estimated GBP15 million. We believe that the choice to delay cyber work is building up a compliance debt that will need to be addressed in the future and should drive demand as the economy returns to normal

   --      Our transformation continues and we are successfully navigating Covid-19 disruption 

-- Our Mission, Vision and Values remain current and our Securing Growth Together programme continues to transform our business in order to fulfil our ambition to be the leading cyber security resilience provider globally

-- We began an active response to Covid-19 in January 2020 when we first saw operations in the Asia-Pacific region being affected. Our two objectives through the pandemic were (a) to maintain a strong balance sheet to position ourselves to capitalise on opportunities in the future and (b) to preserve our technical capability and capacity so that we can meet future growth demands

-- Our full year performance demonstrates our resilience and presents a strong platform for future growth:

   --        Trading 

-- Group revenue increased 5.2% to GBP263.7m (2019: GBP250.7m)

-- Assurance revenue was up 6.3% to GBP226.2m (2019: GBP212.7m), driven by a strong Managed Detection & Response (MDR) performance (+13.7%) and good growth from the largest revenue contributor, Technical Security Consulting (TSC) (+8.0%)

-- Software Resilience (Escrow) revenue decreased 1.3% to GBP37.5m (2019: GBP38.0m) although momentum is building as H2 revenues were flat on H2 of the previous year and up compared to H1

-- Our customer base remains robust and we support 65 Fortune 500 (2019: 52) and 89 FTSE 350 (2019: 82) customers; notable business in the period was secured from customers including Zoom, Google and Facebook

-- Gross margin was down slightly at 39.6% (2019: 40.6%) as a consequence of our decision to maintain the sales and technical capacity in which we have invested this year despite the impact of Covid-19

-- Adjusted operating profit (3) was down 7.7% to GBP31.1m (2019: GBP33.7m)

   --        Covid-19 

-- The Group was on course to meet expectations for FY20 until the outbreak of Covid-19

-- We experienced an estimated GBP15m impact on FY20 sales order delivery; we expect further impact on demand through 2021

-- We have not made any Covid-19 redundancies or furloughed any colleagues

   --        Cash 

-- Strong cash discipline was maintained with c.117.0% cash conversion (2, 3) (2019: 109.6%), including c. GBP3.4m benefit of government tax deferral schemes

-- Net debt on a like-for-like basis (3) fell to GBP4.2m (2019: GBP20.2m), including cash balances of GBP95.0m (2019: GBP34.9m) following the full draw down of our revolving credit facility in April 2020 to provide the Group with maximum cash flexibility

   --        Outlook 

-- We have successfully weathered the initial impact of Covid-19 and our experience of doing so gives us confidence that we should be resilient, profitable and cash generative through any likely aftershocks this financial year

-- Parts of our customer base have been impacted by uncertainty, financial pressures or logistical issues. Consequently, we have observed procurement cycles lengthen and become less predictable. In some of the more affected sectors, including Leisure and Entertainment, we expect some customers to postpone work for 12 months or more

-- The long-term growth prospects for the cyber resilience market continue to be excellent as the connected environment and society's dependence on that connected environment continue to grow

Against this backdrop:

-- Our trading to date has been slightly ahead of the same period last year, albeit last year was a soft comparator period and the start of this year has been boosted by some exceptional M&A support engagements

-- The range of outcomes for the full financial year remains unusually broad and depends, in particular, on the speed and timing with which our customers' buying patterns return to normal

-- In the medium-term, our financial objectives remain the same as last year: to achieve double-digit revenue growth with margin improvement in Assurance and to return Software Resilience (Escrow) to sustainable growth

-- Owing to the resilience we have demonstrated as a Group and the confidence we have in our continued profitability and cash generation, we are recommending an unchanged final dividend of 3.15p (2019: 3.15p) per ordinary share

Adam Palser , Chief Executive Officer, commented:

"I am pleased with our trading performance for the year. Thanks to the stunning way in which my NCC Group colleagues have risen to the challenge we have weathered the impact of the Covid-19 pandemic to date and emerged with a stronger balance sheet whilst preserving the technical capability that makes NCC Group so distinctive.

The investment and progress we have made through our Securing Growth Together transformation programme underpinned our recent resilience and the Group is well placed to thrive when the economy recovers.

I would like to thank all my colleagues for their continued resilience and professionalism during these challenging times."

Analyst presentation briefing and Q & A session

A pre-recorded Analyst presentation briefing will be available from the Group's website at 8am on 3 September 2020 via the following link: https://www.nccgroupplc.com/investor-relations/results-media/full-year-results-presentation-for-the-year-ended-31-may-2020/

A Q & A session for Analysts will be held at 9am on 3 September 2020.

 
EnquiriesNCC Group ( www.nccgroup.com )        +44 (0)161 209 5432 
 Adam Palser, CEO/ Tim Kowalski, CFO 
 Maitland AMO                          +44 (0)20 7379 5151 
 Sam Cartwright 
 

About NCC Group plc

NCC Group exists to make the world safer and more secure. As the leading independent global cyber security and resilience advisor, NCC Group is trusted by over 15,000 clients 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 businesses identify, assess, mitigate and respond to the evolving cyber risks they face. To support its mission, NCC Group continually invests in research and innovation, and is passionate about developing the next generation of cyber scientists. With around 2,000 colleagues in 12 countries, NCC Group has a significant market presence in North America, continental Europe and the UK, and a rapidly growing footprint in Asia Pacific with offices in Australia, Japan and Singapore.

Footnotes

1: References to the Group's results are to continuing operations.

2: Following the adoption of IFRS 16 'Leases' with effect from 1 June 2019, the Group has adopted the accounting standard using the modified retrospective approach to transition and has accordingly not restated prior years, the results for the year ended 31 May 2020 are not directly comparable with those reported under the previous applicable accounting standard IAS 17 'Leases'. On this basis, to provide meaningful comparatives, the results for the year ended 31 May 2020 have therefore also been presented under IAS 17 with the like-for like numbers shown on an IAS 17 basis ('Pre-IFRS 16'). This alternative performance measure (APM), will be presented for one year until the comparatives also include the adoption of IFRS 16.

3: See note 2 for an explanation of Alternative Performance Measures ("APMs") and adjusting items, including a reconciliation to statutory information.

4: Leverage is defined as the ratio of total Net Debt Pre-IFRS 16 to Adjusted EBITDA and Interest Cover is defined as the ratio of Adjusted EBITDA to net finance charges (Pre-IFRS 16).

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

We are all Zoom-bies and Teamsters now

The tumult and uncertainty of the Covid-19 pandemic have thrown into sharp relief the importance of the connected, digital world for society. Remote working has become the norm; firms across the world have brought forward their plans to adopt cloud technology by years in the space of a few months, and consequently the associated cyber risks have proliferated.

In the near term, many of our customers are experiencing uncertainty, financial pressures or logistical challenges owing to the impact of the pandemic, which have, unsurprisingly, lowered demand below the run rate we expected coming into this calendar year. However, we believe that the long-term prospects for the cyber resilience market are stronger than ever and, as and when the economy returns to trend growth, we believe that firms like NCC Group will benefit from the need for organisations to "pay down the compliance debt" that has accumulated as connected systems are mobilised in a hurry without the usual care and attention.

As in recent years, the cyber market is a dynamic and busy place. Cyber threats are now so pervasive, complicated and rapidly changing that "silver bullets" no longer exist (if they ever did). Increasingly, it is the role of cyber services firms like NCC Group to help our customers navigate through the complexity of cyber risks. Our ability to quickly and efficiently build skills, tools and capability through research enables us to remain at the forefront of this exciting market without taking significant risks.

Securing Growth Together (SGT): fulfilling our potential

Since my arrival in December 2017, my colleagues in NCC Group have worked relentlessly to transform the business and achieve our ambition to become the leading provider of cyber resilience solutions globally.

It is a pleasing validation of our direction and purpose that, despite the global upheavals that have occurred this year, our destination is still relevant and we have made determined progress towards it:

   -     Our mission is to make the world safer and more secure 

- Our vision is to be the leading cyber security advisor 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 

Our vehicle for transforming the firm and achieving our vision is the Securing Growth Together programme which, at its heart, can be summarised as:

1. Connecting this global firm, creating one global way of working and generating the information we need to run the business in an agile and assertive way; and

2. Creating stronger relationships with our customers by delivering a full suite of services and thus guiding them throughout their journey to cyber resilience

The programme is run through five workstreams which have given rise to the following highlights:

- The investment and progress we have made through the first two years of SGT underpinned our resilience through these uncertain times. In particular, we had the systems, communication and collaboration tools that enabled us to work together as one firm and transition seamlessly to remote working

- The number of large orders secured from clients has increased, driven in particular by the strong increase in demand for Managed Detection & Response services (Sales orders growth of 24.2%), which helps to underpin our forward order book

- Our technical teams are larger, our retention is higher, and we have completed more high-impact research than in previous years

Thus, we begin this new financial year in stronger shape than we have ever been before.

Resilience through uncertainty

We first felt the impact of Covid-19 on our operations in the Asia Pacific region in January, which, in some ways, provided a helpful early warning. In February, and before the World Health Organisation (WHO) declared Covid-19 a global pandemic, we had developed our Covid management strategy and mobilised a crisis management team that met daily (to start with) to steer us through the challenge ahead.

From the outset, our objectives have been to "Survive & Thrive": to maintain a strong Balance Sheet and to preserve our technical capacity and capability so that investors can have confidence in our enduring ability to generate value and to position ourselves for the future upswing of the economy. Our Covid-19 management strategy consisted of five themes:

   -     Anticipate and measure 
   -     Be resilient 
   -     Stay profitable 
   -     Exploit any down time 
   -     Prepare for the bounce back 

The heart of "staying profitable" was, of course, to continue to sell and deliver value to our customers. Inspiring examples of work undertaken by my colleagues include:

- The deployment of our internal "Firebase" appliance, originally developed as part of a UK research programme, across all of our territories, which helped us to operate remotely, even for our largest customers

- Introducing "SOC as a Service" to help customers experiencing resource shortages and office closures which affected their own Security Operations Centres

- Our global "Evolve to Remote" marketing campaign to aggregate and promote those services which could be bought and delivered remotely

I am pleased that this approach has enabled us to manage the impact of the pandemic so far and we have not made any Covid-19 redundancies or furloughed any colleagues.

Our resilience has unquestionably been helped by the strength of our customer base, which, in turn, is a validation of the quality of our services. We now work for 65 of the Fortune 500 (2019: 52) and 89 of FTSE 350 (2019: 82). It should be noted, however, that some of our customers operating in more affected sectors (including, for example, entertainment and leisure) have delayed or cancelled work and are expected to do so for much of the coming financial year.

NCC Group was on course to meet expectations for the year ended 31 May 2020 until the outbreak of Covid-19. The impact on FY20 sales order delivery amounted to an estimated GBP15m as demand decreased due to the financial and logistical challenges that our customers were facing. However, our seamless transition to remote working, facilitated by the investments we have made through our Securing Growth Together transformation programme, enabled us to deliver a resilient performance whilst maintaining a strong balance sheet and preserving our technical capacity and capability to meet future demand.

Whilst the whole firm has moved to remote working, we have now developed detailed specific working practices for a proportion of our colleagues to return to our customers' offices safely when the opportunity arises. Where appropriate we do expect to give our people more opportunity to continue to work remotely and are taking this moment to review our global property footprint and how we employ that space effectively.

At the time of writing, the pandemic is not yet over and there is still significant uncertainty in our customer base and the wider world. However, I am delighted with the way my colleagues have navigated the challenge so far in and have confidence in our ability to continue to do so.

Playing a full part in society

From a social responsibility perspective, we provided unique threat intelligence free of charge in the first few months of the pandemic to national Computer Emergency Response Teams, hospitals and national institutes of public health around the world, to help them build cyber resilience and ensure they could focus on patient care without distraction.

Beyond the advent of Covid-19, another momentous event, which had a profound impact on the firm was the tragic death of George Floyd. The anger and shock that swept across the world - felt not just in our North American teams but throughout NCC Group - inspired us to redouble our efforts to ensure we are an inclusive and diverse organisation. Building on our existing plans we now have global volunteers focused on supporting our four key areas: gender, race and ethnicity, neurodiversity and LGBTQIA+. It is a matter of personal importance to me that anyone can feel welcome in NCC Group and enjoy the same opportunities for career progression.

More broadly, this year has seen the development of our ESG framework and a sustained focus on the wellbeing of all those who work in NCC Group. Our Mental Health First Aid and awareness programme are two of the more structured ways we have sought to underpin our colleagues' wellbeing, above and beyond the plethora of virtual quiz nights, 'meet the pets' sessions and other social interactions that have sprung up over the course of the last twelve months.

FY20 performance overview

Group revenues increased by 5.2%, representing more people, skills, capabilities and customer impact than before. From a divisional perspective, all Assurance regions experienced growth, with the North America and Europe & APAC regions particularly encouraging at 9.1% and 8.3% respectively, with the UK region increasing by 2.9%. Software Resilience (Escrow) revenue decreased 1.3% to GBP37.5m (2019: GBP38.0m) although momentum is building as H2 revenues were flat against H2 of the previous year and up compared to H1. Gross margin reduced slightly to 39.6% (2019: 40.6%) because we built sales and technical capacity through the year but suffered a dip in demand from Covid-19 in the second half of the year. Adjusted EBITDA and operating profit (2) were down 5.7% to GBP41.2m (2019: GBP43.7m) and 7.7% to GBP31.1m (2019: GBP33.7m) respectively, giving rise to an adjusted basic EPS (2, 3) of 8.1p (2019: 9.2p). The Group delivered improved cash flow with cash conversion (3) of 117.0% compared to 109.6% (2) in 2019, resulting in a reduction in the Group's net debt on a like-for-like basis to GBP4.2m (2019: GBP20.2m). On a statutory basis, after IFRS 16, operating profit decreased by 2.1% to GBP19.1m (2019: GBP19.5m (2) ) and profit before taxation decreased 9.6% to GBP16.1m (2019: GBP17.8m (2) ) giving rise to a statutory EPS of 4.2p (2019: 4.9p (2) ).

Summary

Financial:

   --      The group achieved revenue growth during the year despite the Covid-19 disruption 

-- Effective cash management resulted in another excellent year for cash conversion and reduced net debt on a like-for-like basis (3) to GBP 4.2 m from GBP20.2m, after benefitting from certain government tax deferral programmes that amounted to GBP4.6m

Operational:

-- We were resilient through uncertainty whilst maintaining a strong balance sheet and preserving our technical capacity and capability in order to meet future demand

-- Our recurring and long-term revenues from Software Resilience and our Managed Detection and Response services have provided us with some protection

-- Our Securing Growth Together transformation programme has made strong progress with continued deployment of our global systems infrastructure

Outlook:

-- We have successfully weathered the initial impact of Covid-19 and our experience of doing so gives us confidence that we should be resilient, profitable and cash generative through any likely aftershocks this financial year

-- Parts of our customer base have been impacted by uncertainty, financial pressures or logistical issues. Consequently, we have observed procurement cycles lengthen and become less predictable. In some of the more affected sectors, including Leisure and Entertainment, we expect some customers to postpone work for 12 months or more

-- The long-term growth prospects for the cyber resilience market continue to be excellent as the connected environment and society's dependence on that connected environment continue to grow

Against this backdrop:

-- Our trading to date has been slightly ahead of the same period last year, albeit last year was a soft comparator period and the start of this year has been boosted by some exceptional M&A support engagements

-- The range of outcomes for the full financial year remains unusually broad and depends, in particular, on the speed and timing with which our customers' buying patterns return to normal

-- In the medium-term, our financial objectives remain the same as last year: to achieve double-digit revenue growth with margin improvement in Assurance and to return Software Resilience (Escrow) to sustainable growth

-- Owing to the resilience we have demonstrated as a Group and the confidence we have in our continued profitability and cash generation, we are recommending an unchanged final dividend of 3.15p (2019: 3.15p) per ordinary share

Financial review

Overview

We have continued to deliver good financial results despite the impact of Covid-19, demonstrating resilience in our business model. Group revenue increased by 5.2% to GBP263.7m (2019: GBP250.7m) despite Covid-19 resulting in sales order delivery of approximately GBP15m being delayed or cancelled. Within this, Assurance revenues increased by 6.3% to GBP226.2m (2019: GBP212.7m). All Assurance regions experienced growth, with the North America and Europe & APAC regions particularly encouraging at 9.1% and 8.3% respectively, with the UK region increasing by 2.9%. Software Resilience (Escrow) revenue was 1.3% behind prior year as North America and UK fell by 6.0% and 0.4% respectively.

Gross profit increased by 2.6% to GBP104.4m (2019: GBP101.8m) with margin percentage decreasing to 39.6% (2019: 40.6%) due to our continued investment in sales and technical capacity which we have maintained during Covid-19 in order to meet expected strong demand as we get beyond the current disrupted trading environment. Assurance margin percentage decreased to 34.0% (2019: 34.6%) and Software Resilience (Escrow) decreasing to 73.3% (2019: 74.5%).

Administrative expenses (excluding depreciation and amortisation and adjusting items) have increased by GBP0.9m compared to the prior year mainly due to continued investment in people, increased license costs in relation to new systems implemented across the Group and provisions for property costs, partially offset by the net benefit of IFRS 16 (GBP4.2m). This gives rise to a reduction in statutory operating profit of GBP19.1m (2019: GBP19.5m) and a reduction in adjusted (3) operating profit on a like-for-like basis of GBP31.1m (2019: GBP33.7m). Adjusted operating profit (3) after the impact of IFRS 16 (-GBP1.8m) decreased by 13.1% to GBP29.3m (2019: GBP33.7m). Adjusted depreciation and amortisation after the impact of IFRS 16 (+GBP6.0m) amounted to GBP24.9m (2019: GBP19.0m) giving rise to Adjusted EBITDA (3) of GBP45.4m (2019: GBP43.7m). Adjusted profit before taxation (3) decreased by 17.8% to GBP26.3m (2019: GBP32.0m). Statutory profit before taxation decreased by 9.6% to GBP16.1m (2019: GBP17.8m). Adjusted EPS and statutory EPS after the impact of IFRS 16 (-GBP2.4m) amounted to 7.2p (2019: 9.2p) and 4.2p (2019: 4.9p) respectively.

Our balance sheet remains strong; we have continued to demonstrate effective cash management and reduced net debt on a like for like basis (3) to GBP4.2m from prior year levels of GBP20.2m after capital expenditure of GBP13.2m (2019: GBP9.1m). Net debt reduced on a like for like (3) basis to GBP4.2m, including cash balances of GBP95.0m (2019: GBP34.9m) following the full draw down of our revolving credit facility in April 2020 to provide the Group with maximum cash flexibility. As at 31 May 2020, the Group also had a timing benefit of c. GBP4.6m from certain government taxation payment deferral schemes that are repayable in FY21. The Group has a committed revolving credit facility of GBP100m which is due for renewal in June 2024 following our refinancing in June 2019. Leverage remains in line with the prior year at 0.1x, with sufficient headroom forecasted.

Financial summary

Summary Income Statement:

 
GBPm                                                                                      Like-for-like 
                                          2020               2020               2019           % change 
                                  (IFRS 16)(2)   (Pre-IFRS 16)(2)   (Pre-IFRS 16)(2)   (Pre-IFRS 16)(2) 
                                --------------  -----------------  ----------------- 
Revenue                                  263.7              263.7              250.7               5.2% 
Cost of sales                          (159.3)            (159.3)            (148.9)             (7.0)% 
------------------------------  --------------  -----------------  -----------------  ----------------- 
Gross profit                             104.4              104.4              101.8               2.6% 
Other administration 
 expenses                               (59.0)             (63.2)             (58.1)             (8.8)% 
------------------------------  --------------  -----------------  -----------------  ----------------- 
Adjusted (3) EBITDA                       45.4               41.2               43.7             (5.7)% 
Depreciation and amortisation           (16.1)             (10.1)             (10.0)             (1.0)% 
------------------------------  --------------  -----------------  -----------------  ----------------- 
Adjusted (3) operating 
 profit                                   29.3               31.1               33.7             (7.7)% 
Adjusting items                         (10.2)             (10.2)             (14.2)              28.2% 
------------------------------  --------------  -----------------  -----------------  ----------------- 
Statutory operating profit                19.1               20.9               19.5               7.2% 
------------------------------  --------------  -----------------  -----------------  ----------------- 
 
 
GBPm                                                                                   Like-for-like 
                                       2020               2020               2019           % change 
                               (IFRS 16)(2)   (Pre-IFRS 16)(2)   (Pre-IFRS 16)(2)   (Pre-IFRS 16)(2) 
                             --------------  -----------------  ----------------- 
Adjusted (3) profit before 
 taxation                              26.3               29.3               32.0             (8.4)% 
Adjusting items                      (10.2)             (10.2)             (14.2)              28.2% 
---------------------------  --------------  -----------------  -----------------  ----------------- 
Profit before taxation                 16.1               19.1               17.8               7.3% 
---------------------------  --------------  -----------------  -----------------  ----------------- 
 
 
GBPm                                                                                Like-for-like 
                                    2020               2020               2019           % change 
                            (IFRS 16)(2)   (Pre-IFRS 16)(2)   (Pre-IFRS 16)(2)   (Pre-IFRS 16)(2) 
                          --------------  -----------------  ----------------- 
Adjusted (3) profit for 
 the year                           20.0               22.4               25.5            (12.2)% 
Adjusting items after 
 taxation                          (8.3)              (8.3)             (12.0)              30.8% 
------------------------  --------------  -----------------  -----------------  ----------------- 
Profit for the year                 11.7               14.1               13.5               4.4% 
------------------------  --------------  -----------------  -----------------  ----------------- 
 
Basic EPS 
Adjusted                            7.2p               8.1p               9.2p            (12.0)% 
Statutory                           4.2p               5.1p               4.9p               4.1% 
------------------------  --------------  -----------------  -----------------  ----------------- 
 

Revenue summary:

 
GBPm                                                                                     Like-for-like 
                                         2020               2020               2019           % change 
                                 (IFRS 16)(2)   (Pre-IFRS 16)(2)   (Pre-IFRS 16)(2)   (Pre-IFRS 16)(2) 
                               --------------  -----------------  ----------------- 
Assurance                               226.2              226.2              212.7               6.3% 
Software Resilience (Escrow)             37.5               37.5               38.0             (1.3)% 
-----------------------------  --------------  -----------------  -----------------  ----------------- 
Total revenue                           263.7              263.7              250.7               5.2% 
-----------------------------  --------------  -----------------  -----------------  ----------------- 
 

Adjusted operating profit (3) summary:

 
                                                                                        Like-for-like 
                                       2020               2020               2019            % change 
                               (IFRS 16)(2)   (Pre-IFRS 16)(2)   (Pre-IFRS 16)(2)    (Pre-IFRS 16)(2) 
                             --------------  -----------------  ----------------- 
Statutory operating profit             19.1               20.9               19.5                7.2% 
Adjusting items                        10.2               10.2               14.2               28.2% 
Adjusted operating profit 
 (3)                                   29.3               31.1               33.7              (7.7)% 
---------------------------  --------------  -----------------  -----------------  ------------------ 
 
 
                                                                                        Like-for-like 
  Adjusted operating profit 
  (3)                                   2020               2020               2019           % change 
                                (IFRS 16)(2)   (Pre-IFRS 16)(2)   (Pre-IFRS 16)(2)   (Pre-IFRS 16)(2) 
                               -------------  -----------------  ----------------- 
Assurance                               22.3               22.0               22.6             (2.7)% 
Software Resilience (Escrow)            16.9               17.9               19.0             (5.8)% 
Central and head office                (9.9)              (8.8)              (7.9)            (11.4)% 
-----------------------------  -------------  -----------------  -----------------  ----------------- 
Total adjusted operating 
 profit (3)                             29.3               31.1               33.7             (7.7)% 
-----------------------------  -------------  -----------------  -----------------  ----------------- 
 
Adjusted operating profit 
 margin % (3)                          11.1%              11.8%              13.4%         (1.6)% pts 
-----------------------------  -------------  -----------------  -----------------  ----------------- 
 
 

Basis of preparation

IFRS 16

Following the adoption of IFRS 16 'Leases' with effect from 1 June 2019, the Group has adopted the accounting standard using the modified retrospective approach to transition and has accordingly not restated prior years; consequently the results for the year ended 31 May 2020 are not directly comparable with those reported under the previous applicable accounting standard, IAS 17 'Leases'.

On this basis, to provide meaningful comparatives, the results for the year ended 31 May 2020 have therefore also been presented on a like-for-like IAS 17 basis ('Pre-IFRS 16'). This Alternative Performance Measure (APM) will be presented for one year until the comparatives also include the adoption of IFRS 16. The net impact of IFRS 16 is to decrease statutory and adjusted operating profit by GBP1.8m and reduce statutory and adjusted profit before taxation by GBP3.0m.

Alternative Performance Measures (APMs)

Throughout this Financial Review, other APMs are presented as well as statutory measures and these measures are consistent with prior years. This presentation is also consistent with the way that financial performance is measured by management, is reported to the Board, is the basis of financial measures for senior management's compensation schemes and provides supplementary information that assists the user to understand the financial performance, position and trends of the Group.

For completeness, a reconciliation of Income Statement APMs (3) to statutory information is shown below:

 
 
 
                                                                                  Profit                        Profit 
2020 (IFRS 16)                                       Depreciation  Operating      before               from continuing 
Continuing        Revenue  Gross profit  EBITDA  and amortisation     profit    taxation    Taxation        operations 
operations           GBPm          GBPm    GBPm              GBPm       GBPm        GBPm        GBPm              GBPm 
                  -------  ------------  ------  ----------------  ---------  ----------  ---------- 
Adjusted            263.7         104.4    45.4            (16.1)       29.3        26.3       (6.3)              20.0 
Share based 
 payments               -             -   (1.4)                 -      (1.4)       (1.4)       (0.2)             (1.6) 
Amortisation of 
 acquired 
 intangibles            -             -       -             (8.8)      (8.8)       (8.8)         2.1             (6.7) 
Statutory           263.7         104.4    44.0            (24.9)       19.1        16.1       (4.4)              11.7 
----------------  -------  ------------  ------  ----------------  ---------  ----------  ----------  ---------------- 
 
 
 
 
2020 (Pre-IFRS                                                                    Profit                        Profit 
16)                                                  Depreciation  Operating      before               from continuing 
Continuing        Revenue  Gross profit  EBITDA  and amortisation     profit    taxation    Taxation        operations 
operations           GBPm          GBPm    GBPm              GBPm       GBPm        GBPm        GBPm              GBPm 
                  -------  ------------  ------  ----------------  ---------  ----------  ---------- 
Adjusted            263.7         104.4    41.2            (10.1)       31.1        29.3       (6.9)              22.4 
Share based 
 payments               -             -   (1.4)                 -      (1.4)       (1.4)       (0.2)             (1.6) 
Amortisation of 
 acquired 
 intangibles            -             -       -             (8.8)      (8.8)       (8.8)         2.1             (6.7) 
Statutory           263.7         104.4    39.8            (18.9)       20.9        19.1       (5.0)              14.1 
----------------  -------  ------------  ------  ----------------  ---------  ----------  ----------  ---------------- 
 
 
 
 
2019 (Pre-IFRS                                                                      Profit                      Profit 
16)                                                    Depreciation  Operating      before             from continuing 
Continuing         Revenue  Gross profit  EBITDA   and amortisation     profit    taxation  Taxation        operations 
operations            GBPm          GBPm    GBPm               GBPm       GBPm        GBPm      GBPm              GBPm 
                   -------  ------------  ------  -----------------  ---------  ----------  -------- 
Adjusted             250.7         101.8    43.7             (10.0)       33.7        32.0     (6.5)              25.5 
Individually 
 significant 
 items                   -             -   (3.6)                  -      (3.6)       (3.6)       0.5             (3.1) 
Share based 
 payments                -             -   (1.7)                  -      (1.7)       (1.7)     (0.1)             (1.8) 
Amortisation of 
 acquired 
 intangibles             -             -       -              (9.0)      (9.0)       (9.0)       1.8             (7.2) 
Profit on 
 disposal of 
 investments             -             -     0.1                  -        0.1         0.1         -               0.1 
Statutory            250.7         101.8    38.5             (19.0)       19.5        17.8     (4.3)              13.5 
-----------------  -------  ------------  ------  -----------------  ---------  ----------  --------  ---------------- 
 

See Note 1 for a detailed reconciliation of the Pre-IFRS 16 performance and the Glossary of terms for APMs to the equivalent IFRS measures.

During the year, management has reviewed the application of APMs and have considered ongoing FRC and ESMA best practice guidance in this area. Accordingly, management has concluded that for future accounting periods, share based payments and amortisation of acquired intangibles, which are currently presented as adjusting items, should be included within underlying results. The decision to adopt this presentation for future reporting periods rather than in the current reporting period is because the implementation of IFRS 16 in the year (which does not require the restatement of 2019 comparatives) means that the FY20 results are not on a like-for-like basis with 2019, and management considers that it would be very difficult to understand the true, underlying performance of the Group if this presentational change to the Income statement was made in the current reporting period. The impact of this proposal in future reporting periods will be a reduction in adjusted measures. To illustrate this, the income statement for the year ended 31 May 2020 has been shown below under the proposed basis:

 
GBPm 
                                            2020           2020 
                                       (IFRS 16)      (IFRS 16) 
                                  Proposed basis   As currently 
                                                       reported  Variance 
                                ----------------  ------------- 
Revenue                                    263.7          263.7         - 
Cost of sales                            (159.3)        (159.3)         - 
------------------------------  ----------------  -------------  -------- 
Gross profit                               104.4          104.4         - 
Administrative expenses: 
Depreciation and amortisation             (24.9)         (16.1)     (8.8) 
Other administration expenses             (60.4)         (59.0)     (1.4) 
------------------------------  ----------------  -------------  -------- 
Total administrative expenses             (85.3)         (75.1)    (10.2) 
------------------------------  ----------------  -------------  -------- 
Adjusted (3) operating profit               19.1           29.3    (10.2) 
Adjusting items                                -         (10.2)      10.2 
------------------------------  ----------------  -------------  -------- 
Statutory operating profit                  19.1           19.1         - 
------------------------------  ----------------  -------------  -------- 
 

Divisional performance

Divisional performance includes the allocation of certain central costs incurred on behalf of the divisions. Segmental information is disclosed below:

 
 
                              2020 (IFRS 16)                              2019 (Pre-IFRS 16) 
 
                              Software    Central                           Software    Central 
                            Resilience   and head                         Resilience   and head 
                 Assurance    (Escrow)     office    Group  Assurance       (Escrow)     office    Group 
                      GBPm        GBPm       GBPm     GBPm       GBPm           GBPm       GBPm     GBPm 
---------------  ---------  ----------  ---------  -------  ---------  -------------  ---------  ------- 
Revenue              226.2        37.5          -    263.7      212.7           38.0          -    250.7 
Cost of sales      (149.3)      (10.0)          -  (159.3)    (139.2)          (9.7)          -  (148.9) 
---------------  ---------  ----------  ---------  -------  ---------  -------------  ---------  ------- 
Gross profit          76.9        27.5          -    104.4       73.5           28.3          -    101.8 
Gross margin %       34.0%       73.3%          -    39.6%      34.6%          74.5%          -    40.6% 
Administrative 
 expenses 
 (2)                (43.9)      (10.0)      (5.1)   (59.0)     (45.4)          (9.3)      (3.4)   (58.1) 
---------------  ---------  ----------  ---------  -------  ---------  -------------  ---------  ------- 
Adjusted EBITDA 
 (3)                  33.0        17.5      (5.1)     45.4       28.1           19.0      (3.4)     43.7 
Depreciation 
 and 
 amortisation       (10.7)       (0.6)      (4.8)   (16.1)      (5.5)              -      (4.5)   (10.0) 
---------------  ---------  ----------  ---------  -------  ---------  -------------  ---------  ------- 
Adjusted 
 operating 
 profit 
 (3)                  22.3        16.9      (9.9)     29.3       22.6           19.0      (7.9)     33.7 
Adjusted 
 operating 
 profit 
 %                    9.9%       45.1%          -    11.1%      10.6%          50.0%          -    13.4% 
---------------  ---------  ----------  ---------  -------  ---------  -------------  ---------  ------- 
 
 

Assurance

The Assurance division accounts for 85.8% of Group revenue (2019: 84.8%) and 73.7% of Group gross profit (2019: 72.2%).

Assurance revenue analysis - by originating country:

 
                                2020        2019 
                           (IFRS 16)   (Pre-IFRS   Reported 
                                             16)          % 
                                GBPm        GBPm     change 
------------------------  ----------  ----------  --------- 
UK                              91.5        88.9       2.9% 
North America                   82.4        75.5       9.1% 
Europe and APAC                 52.3        48.3       8.3% 
                                                  --------- 
Total Assurance revenue        226.2       212.7       6.3% 
------------------------  ----------  ----------  --------- 
 

As noted above, global Assurance revenue in the year increased by 6.3% to GBP226.2m (2019: GBP212.7m) despite an estimated GBP15m of sales order delivery being cancelled or delayed as a result of Covid-19, without which the division would have achieved double digit sales growth.

In the year, UK revenues increased by 2.9% to GBP91.5m (2019: GBP88.9m) as sales growth flattened in the second half of the year due to Covid-19. North America has continued strong revenue growth of 9.1% to GBP82.4m (2019: GBP75.5m), with double digit growth up to and including Q3 being curtailed by delays and cancellations due to Covid-19.

Assurance Europe and APAC was impacted by a slow first quarter but still achieved growth of 8.3% to GBP52.3m (2019: GBP48.3m).

Value-based selling within our Assurance services remains a priority and this is demonstrated by average order values increasing during the year.

Assurance revenue analysed by type service/product line:

 
                                               2020        2019 
                                          (IFRS 16)   (Pre-IFRS   Reported 
                                                            16)          % 
                                               GBPm        GBPm     change 
-------------------------------------  ------------  ----------  --------- 
Technical Security Consulting (TSC)           145.6       134.8       8.0% 
Risk Management Consulting (RMC)               28.7        35.3    (18.7)% 
Managed Detection and Response (MDR)           41.4        36.4      13.7% 
Product sales (own and third party)            10.5         6.2      69.4% 
                                                                 --------- 
Total Assurance revenue                       226.2       212.7       6.3% 
-------------------------------------  ------------  ----------  --------- 
 

Technical Security Consulting, our core professional service, continued to grow by 8.0% to GBP145.6m (2019: GBP134.8m) as a result of continued strong growth supported by global resourcing with varied timing of Covid-19 felt across geographies. Our global average order value increased by 16.9% compared to 2019.

Risk Management Consulting, a service that addresses the business risks of cyber, declined by 18.7% to GBP28.7m (2019: GBP35.3m), with revenue falling across all regions. Work is underway to clarify our offer and support our sales teams in order to return this service line to growth.

Managed Detection and Response, a service line that provides operational cyber defence and managed security services, grew by a pleasing 13.7% to GBP41.4m (2019: GBP36.4m) with our order book growing to GBP62.0m (2019: GBP49.9m). This service line scales with less people-intensity than our professional services business lines and MDR engagements tend to be contracted for a longer duration which adds stability to our forward order book. Management believes that our global platform is well-placed to help customers navigate an environment of increasing threats and rising technology requirements; we are therefore focused on continuing the rapid growth of this service line.

The increase of 69.4% in product sales is mainly due high assurance products in Europe and APAC.

Assurance gross profit is analysed as follows:

 
                                      2020        2020        2019        2019 
                                 (IFRS 16)   (IFRS 16)   (Pre-IFRS   (Pre-IFRS 
                                                               16)         16)      Reported 
                                      GBPm    % margin        GBPm    % margin   ppts change 
-----------------------  -----------------  ----------  ----------  ----------  ------------ 
UK                                    33.5       36.6%        31.0       34.9%      1.7% pts 
North America                         25.9       31.4%        25.3       33.5%    (2.1)% pts 
Europe & APAC                         17.5       33.5%        17.2       35.6%    (2.1)% pts 
                                                                                ------------ 
Assurance gross profit 
 and % margin                         76.9       34.0%        73.5       34.6%    (0.6)% pts 
-----------------------  -----------------  ----------  ----------  ----------  ------------ 
 

Gross margin declined by 0.6% pts as a result of continued investment in technical and sales colleagues with utilisation reducing to 71.2% (2019: 75.4%) as the Group preserved its technical capacity. The reduction in adjusted operating profit (3) of 1.3% to GBP22.3m (2019: GBP22.6m) was driven by the ongoing investment in sales and technical talent. Accordingly, adjusted operating profit (3) margin decreased to 9.9% (2019: 10.6%).

Software Resilience (Escrow)

The Software Resilience (Escrow) division accounts for 14.2% of Group revenues (2019: 15.2%) and 26.3% of Group gross profit (2019: 27.8%).

Software Resilience (Escrow) revenue analysis - by originating country:

 
                                                   2020        2019 
                                              (IFRS 16)   (Pre-IFRS  Reported 
                                                                16)         % 
                                                   GBPm        GBPm    change 
-------------------------------------------  ----------  ----------  -------- 
UK                                                 25.9        26.0    (0.4)% 
North America                                       7.8         8.3    (6.0)% 
Europe and APAC                                     3.8         3.7      2.7% 
-------------------------------------------  ----------  ----------  -------- 
Total Software Resilience (Escrow) revenue         37.5        38.0    (1.3)% 
-------------------------------------------  ----------  ----------  -------- 
 

Our overall performance gave rise to a flat H2 sales performance demonstrating momentum, with our cloud proposition generating sales orders of c. GBP1.2m and revenue of GBP0.5m (2019: GBP0.2m). Our proposition continues to create opportunities, with increasing demand materialising as clients seek to improve their resilience.

Our UK operations grew in H2 2020 by 2.3%, which is our largest element of our business, underpinning the return to sustainable growth. North America declined by 6.0% due to the impact of Covid-19 and also higher verification project revenues in FY19.

During the year, the Group launched its partner program to the Independent Software Vendor (ISV) segment and co-developed with Azure a digital vault to enable rapid global compliant escrow services of multi-jurisdiction data.

Our global renewal rates declined to 87.0% (2019: 89.6%) although this was within management expectations following the integration of the sales teams under a new Global MD, with the focus now on stabilisation.

Software Resilience (Escrow) revenues analysed by service line:

 
Software Resilience (Escrow) services revenue         2020        2019 
                                                 (IFRS 16)   (Pre-IFRS  Reported 
                                                                   16)         % 
                                                      GBPm        GBPm    change 
----------------------------------------------  ----------  ----------  -------- 
Software Resilience (Escrow) contracts                25.8        26.5    (2.6)% 
Verification services                                 11.7        11.5      1.7% 
Total Software Resilience (Escrow) revenue            37.5        38.0    (1.3)% 
----------------------------------------------  ----------  ----------  -------- 
 

Our contract revenue had negligible impact from Covid-19 with the stabilised base growing by 1.6% from H1 2020 to H2 2020. Verification services grew 1.7% to GBP11.7m despite lower volume in North America. Significant verification revenue is under contract.

Gross margin is analysed as follows:

 
                                            2020        2020        2019        2019 
                                       (IFRS 16)   (IFRS 16)   (Pre-IFRS   (Pre-IFRS      Reported 
                                                                     16)         16)             % 
                                            GBPm    % margin        GBPm    % margin    pts change 
-----------------------------  -----------------  ----------  ----------  ----------  ------------ 
UK                                          19.5       75.3%        19.7       75.8%    (0.5)% pts 
North America                                5.3       67.9%         5.7       68.7%    (0.8)% pts 
Europe and APAC                              2.7       71.1%         2.9       78.4%    (7.3)% pts 
                                                                                      ------------ 
Software Resilience (Escrow) 
 gross profit and % margin                  27.5       73.3%        28.3       74.5%    (1.2)% pts 
-----------------------------  -----------------  ----------  ----------  ----------  ------------ 
 

Software Resilience (Escrow) gross margin decreased by 1.2%pts to 73.3% (2019: 74.5%). Overheads have increased due to the investment in sales and operational management to return the division to growth, the first signs of which are apparent in the H2 performance, and depreciation and amortisation. These factors gave rise to a reduced adjusted operating profit (3) of GBP16.9m (2019: GBP19.0m).

Cash flow and net debt (3)

The table below summarises the Group's cash flow and net debt (3) :

 
                                                                      2020                  2020         2019 
                                                                                       (Pre-IFRS    (Pre-IFRS 
                                                                 (IFRS 16)                   16)          16) 
                                                                      GBPm                  GBPm         GBPm 
----------------------------------------------------  --------------------  --------------------  ----------- 
 Operating cash inflow before movements in 
  working capital                                                     46.7                  40.2         41.3 
 (Increase)/decrease in trade and other receivables                 (11.0)                (11.0)          6.0 
 (Increase)/decrease in inventories                                  (0.2)                 (0.2)          0.1 
 Increase in trade and other payables                                 19.2                  19.2          0.5 
----------------------------------------------------  --------------------  --------------------  ----------- 
 Cash generated from operating activities 
  before interest and taxation                                        54.7                  48.2         47.9 
 Interest element of lease payments                                  (1.2)                     -            - 
 Finance interest paid                                               (1.6)                 (1.6)        (1.7) 
 Taxation paid                                                       (4.8)                 (4.8)        (6.4) 
----------------------------------------------------  --------------------  --------------------  ----------- 
 Net cash generated from operating activities                         47.1                  41.8         39.8 
 Plant and equipment                                                 (2.8)                 (2.8)        (3.0) 
 Software and development                                           (10.4)                (10.4)        (6.1) 
 Acquisitions                                                            -                     -       (10.9) 
 Net proceeds from business disposals (including 
  cash disposed)                                                         -                     -          1.8 
 Dividends paid                                                     (12.9)                (12.9)       (12.9) 
 Principal element of lease payments                                 (5.3)                     -            - 
 Share issues                                                          1.1                   1.1          0.3 
----------------------------------------------------  --------------------  --------------------  ----------- 
 Net movement                                                         16.8                  16.8          9.0 
 Opening net debt (Pre-IFRS 16) (3)                                 (20.2)                (20.2)       (27.8) 
 Non cash movements (release of deferred issue 
  costs)                                                             (0.2)                 (0.2)            - 
 Foreign exchange                                                    (0.6)                 (0.6)        (1.4) 
----------------------------------------------------  --------------------  --------------------  ----------- 
 Closing net debt (Pre-IFRS 16) (3)                                  (4.2)                 (4.2)       (20.2) 
----------------------------------------------------  --------------------  --------------------  ----------- 
 Lease liabilities                                                  (38.2) 
----------------------------------------------------  -------------------- 
 Closing net debt (IFRS 16)                                         (42.4) 
----------------------------------------------------  -------------------- 
 
 Free cashflow (net cash generated from operating 
  activities less capital expenditure)                                33.9                  28.6         30.7 
----------------------------------------------------  --------------------  --------------------  ----------- 
 
 

Net debt (3) can be reconciled as follows:

 
                                                              2020         2019 
                                                         (IFRS 16)    (Pre-IFRS 
                                                                            16) 
                                                              GBPm         GBPm 
-----------------------------------------------------  -----------  ----------- 
 Cash and cash equivalents                                    95.0         34.9 
 Borrowings (net of deferred issue costs of GBP0.8m)        (99.2)       (55.1) 
----------------------------------------------------- 
 Net debt (Pre-IFRS 16)                                      (4.2)       (20.2) 
-----------------------------------------------------  -----------  ----------- 
 Lease liabilities                                          (38.2) 
-----------------------------------------------------  ----------- 
 Net debt (IFRS 16)                                         (42.4) 
-----------------------------------------------------  ----------- 
 

Net debt reduced on a like-for-like basis (3) to GBP4.2m, including cash balances of GBP95.0m (2019: GBP34.9m) following the full draw down of our revolving credit facility in April 2020 to provide the Group with maximum cash flexibility.

On a reported basis, the Group generated GBP54.7m of cash from operating activities before interest and taxation (2019: GBP47.9m), an increase of 14.2% (on a like-for-like basis, an increase of 0.6%). The Group measures how effectively adjusted EBITDA (3) is converted into actual cash flows using the cash conversion ratio (3) .

The calculation of the cash conversion ratio (3) is set out below:

 
                                                2020         2020         2019 
                                                                                     Like-for-like 
                                                        (Pre-IFRS    (Pre-IFRS    change (Pre-IFRS 
                                           (IFRS 16)          16)          16)                 16) 
                                                GBPm         GBPm         GBPm                GBPm 
---------------------------------------  -----------  -----------  -----------  ------------------ 
 Net operating cash flow before 
  interest and taxation (A)                     54.7         48.2         47.9                0.6% 
 Adjusted EBITDA (3) (B)                        45.4         41.2         43.7              (5.7)% 
---------------------------------------  -----------  -----------  -----------  ------------------ 
 Cash conversion ratio (3) (%) (A)/(B)        120.5%       117.0%       109.6%            7.4% pts 
---------------------------------------  -----------  -----------  -----------  ------------------ 
 

As at 31 May 2020, the Group had a timing benefit of GBP4.6m from government payment deferral schemes, of which GBP3.4m related to indirect taxes and GBP1.2m to corporation tax. If the benefit of the GBP3.4m relating to indirect taxes is excluded from the above calculations the cash conversion ratios on an IFRS 16 and pre-IFRS 16 basis would be 113.0% and 108.7% respectively. This timing benefit will reverse in the year ending 31 May 2021.

During the year, the Group has improved its working capital management, in particular trade and other payables is due to effective cash management.

Cash conversion (3) for FY21 is still expected to normalise and is targeted at c.85% over the medium term.

The decrease in tax paid is mainly due to the deferral of GBP1.2m under government tax deferral schemes.

Net capital cash expenditure during the year was GBP13.2m (2019: GBP9.1m) which includes tangible expenditure of GBP2.8m (2019: GBP3.0m) and capitalised software and development costs of GBP10.4m (2019: GBP6.1m), which have increased due to the implementation costs of new systems as part of the SGT programme. Additional cash capital expenditure will be incurred during 2021 as we finish the installation of our new systems.

Adjusting items (3)

Pre-tax adjusting items are set out below:

 
                                             2020        2019 
                                                    (Pre-IFRS 
                                        (IFRS 16)         16) 
                                             GBPm        GBPm 
-------------------------------------  ----------  ---------- 
Individually significant items                  -         3.6 
Share based payments                          1.4         1.7 
Amortisation of acquired intangibles          8.8         9.0 
Profit on disposal of investments               -       (0.1) 
Total pre-tax adjusting items                10.2        14.2 
-------------------------------------  ----------  ---------- 
 

During the year, the Group has incurred no individually significant items (ISIs) (2019: GBP3.6m).

As noted above and in accordance with FRC and ESMA guidance, management have concluded that for future accounting periods, share based payments and amortisation of acquired intangibles will be reclassified under statutory performance, reducing the number of adjusted measures.

Net finance costs

On a like-for-like basis, statutory finance costs for the year were GBP1.8m compared to GBP1.7m in 2019. On an IFRS 16 basis, net finance costs also include lease interest costs of GBP1.2m, giving rise to total statutory finance costs of GBP3.0m (2019: GBP1.7m).

Taxation

The Group's adjusted (2, 3) effective tax rate is 23.5% (2019: 20.3%). On a statutory basis, the effective tax rate is 27.3% (2019: 24.2%).

The effective tax rate remains above the UK standard rate of corporation tax of 19%, reflecting the origin of a reasonable proportion of Group profits in overseas territories with higher rates of tax than the UK. Statutory corporate tax rates within North America equate to approximately 29% (Federal and State combined) for the year to 31 May 2020. During the year the Group has recognised an additional provision of GBP0.8m against a deferred tax asset in relation to US R&D tax credits.

The Group's longer-term strategy for tax and treasury matters remains that of a low-risk appetite and any new strategies will operate inside this framework.

Earnings per share (EPS)

 
                              2020        2020        2019 
                         (IFRS 16)   (Pre-IFRS   (Pre-IFRS 
                                           16)         16) 
                             pence       pence       pence 
----------------------  ----------  ----------  ---------- 
Statutory earnings 
Basic EPS                     4.2p        5.1p        4.9p 
Diluted EPS                   4.2p        5.0p        4.8p 
Adjusted earnings (3) 
Basic EPS                     7.2p        8.1p        9.2p 
Diluted EPS                   7.1p        8.0p        9.1p 
----------------------  ----------  ----------  ---------- 
 

On a like-for-like basis, pre-IFRS 16, basic adjusted EPS (3) was 8.3p (2019: 9.2p) and on a statutory basis it was 5.1p (2019: 4.9p).

Dividends

Dividends of GBP12.9m paid in the year (2019: GBP12.9m) comprised the final dividend for 2019 of 3.15p and the interim dividend for 2020 of 1.50p.

Given the confidence we have in our continued profitability and cash generation we are recommending an unchanged final dividend of 3.15p (2019: 3.15p) per ordinary share making a total for the year of 4.65p ( 2019: 4.65p), with our dividend policy remaining under review.

The final dividend will be paid on 6 November 2020, subject to approval at the AGM on 20 October 2020, to shareholders on the register at the close of business on 9 October 2020. The ex-dividend date is 8 October 2020.

Financing facilities

The Group is financed through a combination of bank facilities, retained profits and equity.

As at 31 May 2020, the Group had committed bank facilities (revolving credit facility) of GBP100.0m (2019: GBP97.8m), of which GBP100.0m (2019: GBP55.1m) had been drawn under these facilities following the full drawn down of our facility in April 2020 to provide the Group with maximum cash flexibility. These arrangements were agreed in June 2019 and are due for renewal in June 2024. Under these arrangements the Group can also request an additional accordion facility to increase the total size of the revolving credit facility by up to GBP75m.

On our banking covenants, leverage (4) as at 31 May 2020 amounted to 0.1x (2019: 0.5x) and net interest cover (4) amounted to 22.7x (2019: 24.6x). The Group was in compliance with the terms of all its facilities, including the financial covenants, at 31 May 2020 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 practice) and are materially similar to GAAP or the Group's alternative performance measures of the same name; the exception is net debt which excludes IFRS 16 lease liabilities.

Going concern

The Group's activities, together with the factors likely to affect its future development, performance and position, are set out in the business review. Our financial position, cash and borrowing facilities are described within this Financial Review.

The Directors have acknowledged "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting", published in September 2014, and also the Covid-19 Thematic Review published by the Financial Reporting Council in July 2020.

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 to the period to the end of September 2021 which indicate that, taking account of reasonably possible downsides and the anticipated impact of Covid-19 on the operations and its financial resources, the Group and Company will have sufficient funds to meet its liabilities as they fall due for that period.

The Group is financed primarily by a GBP100m revolving credit facility, further details of which are disclosed in Note 7 to the Condensed Financial Statements. The Group is required to comply with financial covenants for leverage (net debt to Adjusted EBITDA (3) ) and interest cover (Adjusted EBITDA (3) to interest charge) which are tested bi-annually at 31 May and 30 November each year. In April 2020, the Group drew down the entire available funds of GBP100m under this RCF facility in order to provide maximum cash flexibility during the Covid-19 crisis.

Although the Group has demonstrated resilience to the challenging environment resulting from Covid-19, the Directors acknowledge that the financial performance of the Group was adversely impacted during the last quarter of the year ended 31 May 2020, and for this reason the base case budget for FY21 reflects the assumption of a continued impact from Covid-19 on Group revenues up until November 2020 at a similar level to that experienced in the last quarter of FY20.

The Directors have prepared a number of severe but potentially plausible scenarios, which are based on the financial impact of the Group's principal risks and uncertainties as follows:

-- Loss of revenue from June 2020 resulting from the ineffective execution of the business strategy

-- Loss of revenue from June 2020 arising from the failure of critical systems, failure, leading to inability to provide services to customers

-- A fine of 4% of revenue and additional loss of revenue arising from the failure to maintain control over commercial/customer data

-- A further Covid-19 impact representing a further decline in revenues over and above the impact already reflected in the base case budget

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 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. Should these occur, mitigating actions would be required to ensure that the Group remains liquid and financially viable, which include a reduction of planned capital expenditure, headcount reduction, freezing pay and recruitment and not paying a dividend to shareholders. All mitigating actions are within the Directors' control. These forecasts, including the severe but plausible downsides when the mitigating actions are included, show that the Group is able to operate within the level of the 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.

Having reviewed the current performance, forecasts, debt servicing requirements, total facilities and risks, the Directors are confident that the Company and the Group 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 2020.

Principal risks and uncertainties

The Group is subject to risk factors both internal and external to its business, and has a well-established set of risk management procedures. The following risks and uncertainties are those that the Directors believe could have the most significant impact on the Group's business:

   --      Business strategy 
   --      Management of strategic change 
   --      Global pandemic - Covid-19 
   --      Availability of critical information systems 
   --      Attracting and retaining appropriate staff capacity and capability 
   --      Cyber risk (including data protection) 
   --      Quality of management information systems and internal business processes 
   --      Quality and security management systems 
   --      Brexit (as noted below) 

Brexit

The United Kingdom formally departed the European Union and became a third country on the basis of the ratified Withdrawal Agreement on 31 January 2020. Until the end of the transition period on 31 December 2020, current rules and regulations continue to apply while the UK and the EU negotiate their future relationship.

Until a future UK-EU trade agreement is agreed, there is continuing uncertainty for businesses operating in the UK and across borders. This will likely continue until the end of the transition period on 31 December 2020.

NCC Group and its subsidiaries continue their planning through their Brexit Steering Group, which meets regularly. As the Group's operations around the world include business entities based in continental Europe we believe NCC Group is structurally resilient to any future disruptions caused by the next phase of Brexit. The main risks to the UK business are:

   --      Any reduction in demand from an economic slowdown 

-- Real or perceived differences in data protection standards, and possibly additional rules and regulations, which impact the Group's 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 2020. 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 3 September 2020 by:

 
Adam Palser              Tim Kowalski 
Chief Executive Officer  Chief Financial Officer 
 

Consolidated income statement

For the year ended 31 May 2020

 
                                                     2020 (2)                         2019 (2) 
                                          -------------------------------  ------------------------------ 
                                                                                     Adjusting 
                                          Adjusted   Adjusting             Adjusted      items 
                                               (3)   items (3)  Statutory       (3)        (3)  Statutory 
                                   Notes      GBPm        GBPm       GBPm      GBPm       GBPm       GBPm 
---------------------------------  -----  --------  ----------  ---------  --------  ---------  --------- 
 
Revenue                              3       263.7           -      263.7     250.7          -      250.7 
Cost of sales                        3     (159.3)           -    (159.3)   (148.9)          -    (148.9) 
Gross profit                         3       104.4           -      104.4     101.8          -      101.8 
Administrative expenses 
 (3)                                 3 
Depreciation and amortisation               (16.1)       (8.8)     (24.9)    (10.0)      (9.0)     (19.0) 
Other administrative 
 expenses                                   (59.0)       (1.4)     (60.4)    (58.1)      (5.2)     (63.3) 
---------------------------------  -----  --------  ----------  ---------  --------  ---------  --------- 
Total administrative 
 expenses                                   (75.1)      (10.2)     (85.3)    (68.1)     (14.2)     (82.3) 
---------------------------------  -----  --------  ----------  ---------  --------  ---------  --------- 
Operating profit                     3        29.3      (10.2)       19.1      33.7     (14.2)       19.5 
Net finance costs                            (3.0)           -      (3.0)     (1.7)          -      (1.7) 
---------------------------------  -----  --------  ----------  ---------  --------  ---------  --------- 
Profit before taxation                        26.3      (10.2)       16.1      32.0     (14.2)       17.8 
Taxation                                     (6.3)         1.9      (4.4)     (6.5)        2.2      (4.3) 
---------------------------------  -----  --------  ----------  ---------  --------  ---------  --------- 
Profit for the year attributable 
 to the owners of the 
 Company                                      20.0       (8.3)       11.7      25.5     (12.0)       13.5 
---------------------------------  -----  --------  ----------  ---------  --------  ---------  --------- 
 
Earnings per ordinary 
 share                               5 
Basic EPS                                                            4.2p                            4.9p 
Diluted EPS                                                          4.2p                            4.8p 
---------------------------------  -----  --------  ----------  ---------  --------  ---------  --------- 
 

Consolidated statement of comprehensive income

For the year ended 31 May 2020

 
                                                                    2020 (2)  2019 (2) 
                                                                        GBPm      GBPm 
------------------------------------------------------------------  --------  -------- 
Profit for the year attributable to the owners of the Company           11.7      13.5 
------------------------------------------------------------------  --------  -------- 
Other comprehensive income 
Items that may be reclassified subsequently to profit or 
 loss (net of tax) 
Foreign exchange translation differences                                 4.0       1.5 
------------------------------------------------------------------  --------  -------- 
Total comprehensive income for the year (net of tax) attributable 
 to the owners of the Company                                           15.7      15.0 
------------------------------------------------------------------  --------  -------- 
 
 

Footnotes

1: References to the Group's results are to continuing operations.

2: See note 1 for further details on the application of IFRS 16 and no restatement of comparative information. The adoption of IFRS 16 in the year ended 31 May 2020 resulted in an increase in depreciation and amortisation of GBP6.0m and finance costs of GBP1.2m, with other administration expenses decreasing by GBP4.2m.

3: See note 2 for an explanation of Alternative Performance Measures ("APMs") and adjusting items, including a reconciliation to statutory information.

4: Leverage is defined as the ratio of total Net Debt to Adjusted EBITDA and Interest Cover is defined as the ratio of Adjusted EBITDA to net finance charges (Pre-IFRS 16).

Consolidated balance sheet

For the year ended 31 May 2020

 
                                                     2020 (2)  2019 (2) 
                                              Notes      GBPm      GBPm 
--------------------------------------------  -----  --------  -------- 
Non-current assets 
Goodwill                                                193.1     189.4 
Other intangible assets                                  39.2      41.8 
Property, plant and equipment                            13.9      16.9 
Right-of-use assets                             6        28.7         - 
Investments                                               0.3       0.3 
Deferred tax asset                                        0.5       1.1 
Total non-current assets                                275.7     249.5 
--------------------------------------------  -----  --------  -------- 
Current assets 
Inventories                                               0.9       0.7 
Trade and other receivables                              73.2      61.6 
Current tax receivable                                    0.6       0.6 
Cash and cash equivalents                                95.0      34.9 
Total current assets                                    169.7      97.8 
--------------------------------------------  -----  --------  -------- 
Total assets                                            445.4     347.3 
--------------------------------------------  -----  --------  -------- 
Current liabilities 
Trade and other payables                                 46.4      31.6 
Borrowings                                      7           -       5.0 
Lease liabilities                               6         5.3         - 
Provisions                                                2.0       2.7 
Contract liabilities - deferred revenue                  39.5      36.2 
Total current liabilities                                93.2      75.5 
--------------------------------------------  -----  --------  -------- 
Non-current liabilities 
Borrowings                                      7        99.2      50.1 
Lease liabilities                               6        32.9         - 
Deferred tax liability                                    2.9       5.4 
Provisions                                                1.7       5.5 
Contract liabilities - deferred revenue                   1.4         - 
Total non-current liabilities                           138.1      61.0 
--------------------------------------------  -----  --------  -------- 
Total liabilities                                       231.3     136.5 
--------------------------------------------  -----  --------  -------- 
Net assets                                              214.1     210.8 
--------------------------------------------  -----  --------  -------- 
 
Equity 
Issued capital                                            2.8       2.8 
Share premium                                           150.9     149.8 
Merger reserve                                           42.3      42.3 
Currency translation reserve                             31.9      27.9 
Retained earnings                                      (13.8)    (12.0) 
Total equity attributable to equity holders 
 of the parent                                          214.1     210.8 
--------------------------------------------  -----  --------  -------- 
 

These financial statements were approved by the Board of Directors on 3 September 2020 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 2020

 
                                                             2020 (2)  2019 (2) 
Cashflow from operating activities                    Notes      GBPm      GBPm 
----------------------------------------------------  -----  --------  -------- 
Profit for the year                                              11.7      13.5 
Adjustments for: 
 Depreciation of property, plant and equipment                    5.8       5.6 
 Depreciation of right of use assets                              6.0         - 
 Share-based payments                                             1.4       1.7 
 Amortisation of acquired intangible assets                       8.8       9.0 
 Amortisation of internally developed intangible 
  assets and software                                             4.4       4.4 
 Impairment of right of use assets                                1.1         - 
 Lease financing costs                                            1.2         - 
 Net other financing costs                                        1.8       1.7 
 Foreign exchange                                                   -       0.2 
 Individually Significant Items (non-cash impact)                   -       3.6 
 Profit on disposal of investments                                  -     (0.1) 
 Profit on disposal of right of use assets                      (0.1)         - 
 Loss on sale of plant and equipment                                -       0.2 
 Research and development tax credits                           (0.6)     (0.3) 
 Income tax expense                                               4.4       4.3 
 Decrease in provisions                                           0.8     (2.5) 
Cash inflow for the year before changes in 
 working capital                                                 46.7      41.3 
----------------------------------------------------  -----  --------  -------- 
(Increase)/decrease in trade and other receivables             (11.0)       6.0 
(Increase)/decrease in inventories                              (0.2)       0.1 
Increase in trade and other payables                             19.2       0.5 
----------------------------------------------------  -----  --------  -------- 
Cash generated from operating activities before 
 interest and taxation                                           54.7      47.9 
Interest element of lease payments                              (1.2)         - 
Other interest paid                                             (1.6)     (1.7) 
Taxation paid                                                   (4.8)     (6.4) 
----------------------------------------------------  -----  --------  -------- 
Net cash generated from operating activities                     47.1      39.8 
Cash flows from investing activities 
Purchase of property, plant and equipment                       (2.8)     (3.0) 
Software and development expenditure                           (10.4)     (6.1) 
Acquisition of businesses                                           -    (10.9) 
Net proceeds from sale of subsidiaries and 
 investments                                                        -       1.8 
----------------------------------------------------  -----  --------  -------- 
Net cash used in investing activities                          (13.2)    (18.2) 
Cash flows from financing activities 
Proceeds from the issue of ordinary share capital                 1.1       0.3 
Principal element of lease payments                             (5.3)         - 
Drawdown of borrowings                                           44.3      13.0 
Issue costs related to borrowings                               (1.0)         - 
Repayment of borrowings                                             -     (8.6) 
Equity dividends paid                                   4      (12.9)    (12.9) 
----------------------------------------------------  -----  --------  -------- 
Net cash generated/(used) from financing activities              26.2     (8.2) 
----------------------------------------------------  -----  --------  -------- 
Net increase in cash and cash equivalents                        60.1      13.4 
----------------------------------------------------  -----  --------  -------- 
Cash and cash equivalents at beginning of year                   34.9      21.2 
Effect of foreign currency exchange rate changes                    -       0.3 
Cash and cash equivalents at end of year                         95.0      34.9 
----------------------------------------------------  -----  --------  -------- 
 

Reconciliation of net change in cash and cash equivalents to movement in net debt (2)

 
                                                       2020 (2)  2019 (2) 
                                                Notes      GBPm      GBPm 
----------------------------------------------  -----  --------  -------- 
Net increase in cash and cash equivalents                  60.1      13.4 
Change in net debt resulting from cash flows 
 (net of deferred issue costs)                           (43.3)     (4.4) 
Non-cash movements (release of deferred issue 
 costs)                                                   (0.2)         - 
Effect of foreign currency on cash flows                      -       0.3 
Foreign currency translation differences on 
 borrowings                                               (0.6)     (1.7) 
Change in net debt (2) during the year                     16.0       7.6 
----------------------------------------------  -----  --------  -------- 
Net debt (2) at start of year (Pre IFRS 16)              (20.2)    (27.8) 
----------------------------------------------  -----  --------  -------- 
Net debt (2) at end of year (Pre IFRS 16)                 (4.2)    (20.2) 
----------------------------------------------  -----  --------  -------- 
Lease liabilities                                 6      (38.2) 
----------------------------------------------  -----  -------- 
Net debt (2) at end of year (IFRS 16)                    (42.4) 
----------------------------------------------  -----  -------- 
 

Consolidated statement of changes in equity

For the year ended 31 May 2020

 
                                                                                     Currency 
                                       Share    Share Premium    Merger Reserve   Translation    Retained 
                                     Capital                                          Reserve    Earnings 
                                                                                                             Total 
                                        GBPm             GBPm              GBPm          GBPm        GBPm     GBPm 
---------------------------------  ---------  ---------------  ----------------  ------------  ----------  ------- 
Balance at 1 June 2019                   2.8            149.8              42.3          27.9      (12.0)    210.8 
---------------------------------  ---------  ---------------  ----------------  ------------  ----------  ------- 
Impact of change in accounting 
 policies in respect of IFRS 
 16 (net of tax) (note 1)                  -                -                 -             -       (2.0)    (2.0) 
Adjusted balance at 1 June 
 2020                                    2.8            149.8              42.3          27.9      (14.0)    208.8 
Profit for the year                        -                -                 -             -        11.7     11.7 
Foreign currency 
 translation differences                   -                -                 -           4.0           -      4.0 
---------------------------------  ---------  ---------------  ----------------  ------------  ----------  ------- 
Total comprehensive income 
 for the year                              -                -                 -           4.0        11.7     15.7 
---------------------------------  ---------  ---------------  ----------------  ------------  ----------  ------- 
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                   2.8            150.9              42.3          31.9      (13.8)    214.1 
---------------------------------  ---------  ---------------  ----------------  ------------  ----------  ------- 
 
 
                                                                                     Currency 
                                       Share    Share Premium    Merger Reserve   Translation    Retained 
                                     Capital                                          Reserve    Earnings    Total 
                                        GBPm             GBPm              GBPm          GBPm        GBPm     GBPm 
---------------------------------  ---------  ---------------  ----------------  ------------  ----------  ------- 
Balance at 1 June 2018                   2.8            149.5              42.3          26.4      (14.4)    206.6 
---------------------------------  ---------  ---------------  ----------------  ------------  ----------  ------- 
Profit for the year                        -                -                 -             -        13.5     13.5 
Foreign currency translation 
 differences                               -                -                 -           1.5           -      1.5 
---------------------------------  ---------  ---------------  ----------------  ------------  ----------  ------- 
Total comprehensive income 
 for the year                              -                -                 -           1.5        13.5     15.0 
---------------------------------  ---------  ---------------  ----------------  ------------  ----------  ------- 
Transactions with owners 
 recorded directly in equity 
Dividends to equity shareholders           -                -                 -             -      (12.9)   (12.9) 
Share based payments                       -                -                 -             -         1.7      1.7 
Current and deferred tax 
 on share based payments                   -                -                 -             -         0.1      0.1 
Shares issued                              -              0.3                 -             -           -      0.3 
Total contributions by 
 and distributions to owners               -              0.3                 -             -      (11.1)   (10.8) 
---------------------------------  ---------  ---------------  ----------------  ------------  ----------  ------- 
Balance at 31 May 2019                   2.8            149.8              42.3          27.9      (12.0)    210.8 
---------------------------------  ---------  ---------------  ----------------  ------------  ----------  ------- 
 

Notes to the unaudited condensed interim 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 principal activity of the Group is the provision of independent global cyber security and resilience services.

The financial information is derived from the Group's consolidated financial statements for the year ended 31 May 2020, which have been prepared on the going concern basis in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the European Union, Article 4 of the IAS Regulation and those parts of the Companies Act 2006 (the Act) applicable to companies reporting under IFRS. 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 3 September 2020.

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 May 2020 or 31 May 2019. The financial information for 2019 is derived from the statutory accounts for 2019 which have been delivered to the registrar of companies. The auditor has reported on the 2019 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 2020 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 2019, with the exception of those impacted by the adoption of IFRS 16 which the Group has adopted with effect from 1 June 2019, with comparatives remaining under IAS 17 'Leases'. 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 2019.

Brexit

Management has reviewed the potential impact of Brexit on the financial statements. As the Groups' operations around the world include business entities based in Continental Europe management believe the Group is structurally resilient to any disruption caused by Brexit. The main risks to the Group from Brexit are any reduction in demand from an economic slowdown and real or perceived differences in data protection standards which impact our global ways of working. On this basis, management have 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, the annual impairment review and the Going Concern and viability assessments.

Application of significant new EU endorsed accounting standard - IFRS 16 'Leases'

Background and adoption

During the year, the Group adopted IFRS 16 'Leases'. The date of the initial application of IFRS 16 for the Group is 1 June 2019. The Group has adopted the accounting standard using the modified retrospective approach to transition and has accordingly not restated prior periods. The results for the year ended 31 May 2020 are not directly comparable with those reported under the previous applicable accounting standard IAS 17 'Leases' and IFRIC 4 'Determining Whether an Arrangement Contains a Lease'. On this basis, to provide meaningful comparatives, the results for the year ended 31 May 2020 have therefore also been presented under IAS 17 with the "like-for like" numbers shown on an IAS 17 basis (pre-IFRS 16). This Alternative Performance Measure (APM), will be presented for one year until the comparatives also include the adoption of IFRS 16.

In applying the modified retrospective approach the Group has valued right-of-use assets on a lease by lease basis using the approach that IFRS 16 had always been applied but using the incremental borrowing rate at the date of the application.

Implications of IFRS 16 adoption

The implications of IFRS 16 adoption are noted as follows:

-- A number of lease contracts previously disclosed under IAS 17 within the Financial Statements, which gave rise to recurring expenses within operating expenses, have been recognised on the Balance Sheet as a "right-of-use asset" for the year ended 31 May 2020.

-- A corresponding lease liability (current and non-current) reflecting the Group's commitment to pay consideration to third parties under these contracts has also been recognised, increasing the Group's net debt although the net cash flow profile remains the same for the Group.

-- The Group has depreciated the right-of-use asset through the Income Statement over the shorter of the assets' useful lives and the assessed lease term.

-- The Group has recognised interest on the liability using the Group's incremental borrowing rate. Interest has been charged to finance costs.

-- The profile of the overall expense in profit and loss has now changed, as the interest expense will be more front-loaded compared to a straight-line operating lease rental expense under IAS 17.

Specifically, management had to conclude on whether a contract is or contains a lease at the date of transition, with the following being considered:

-- Whether there is an identified asset that the Group has the right to obtain substantially all the economic benefits from.

   --      Whether the Group has the right to direct how and for what purpose the asset is used. 

-- Whether the Group has the right to operate the asset without the supplier having the right to change those operating instructions.

-- Whether the Group has designed the asset in a way that predetermines how and for what purpose the asset will be used.

In addition, management has also considered other salient factors in the assessment of the standard such as:

-- The length of assessed lease term taking into account the non-cancellable period of the lease including periods covered by an option to extend or an option to terminate if the Group is reasonably certain to exercise either option.

-- The applicability of interest rate implicit in the lease or the Group's incremental borrowing rate.

Following the above assessment, management has concluded that the following items that were previously classified as operating leases under IAS 17 have been recognised in the Financial Statements using the new requirements of IFRS 16:

   --      Certain properties 
   --      Equipment leases 
   --      Motor vehicles 

The Group does not lease any server equipment in relation to the provision of Software resilience services or have embedded leases within Assurance service contracts.

Exemptions and practical expedients applied

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

-- The use of a single discount rate to a portfolio of leases with reasonably similar characteristics

   --      Reliance on previous assessments on whether leases are onerous 

-- The accounting for operating leases with a remaining lease term of less than 12 months as at 1 June 2019 as short-term leases

-- Right-of-use assets and liabilities for leases of low value assets (e.g. IT equipment) have not been recognised

-- The exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application

-- The use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease

Transition elections

The Group has offset the previously recognised onerous leases immediately before transition as opposed to performing an impairment review under IAS 36.

Impact on covenants and cash flows

The Group renegotiated its banking facilities in June 2019. The debt covenants on the Group's borrowing facilities have been unaffected by the application of IFRS 16 as the covenant calculations are based on the accounting principles in place prior to 1 January 2019. The IFRS 16 changes have not impacted the interest paid by the Group for its banking facilities. The overall net cash flow for the Group is also unaffected by IFRS 16, however the cash flows in the Consolidated Cash Flow Statement are now split between a principal portion and a finance portion, which are both presented under financing activities. Previously under IAS 17 the operating lease payments were presented as operating cash flows.

New accounting policies under IFRS 16

At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group assesses whether:

-- The contract involves use of the identified asset; this may be specified explicitly or implicitly and should be physically distinct or represent substantially all of the capacity or a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified.

-- The Group has the right to obtain substantially all of the economic benefits from use of the asset and throughout the period of use.

-- The Group has the right to direct the use of the asset. The Group has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used. In rare cases where all the decisions about how and for what purpose the asset is used are predetermined, the Group has the right to direct the use of the asset if either:

   o   the Group has the right to operate the asset. 

o the Group designed the asset in a way that predetermines how and for what purpose it will be used.

The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property, plant and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. The Group has used its incremental borrowing rate of 3.3% as the discount rate for the calculation of the lease liabilities on the transition to IFRS 16.

The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group's estimate of the amount expected to be payable, or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option.

When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in the Income Statement if the carrying amount of the right-of-use asset has been reduced to zero. As noted above, the Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low value assets, including certain IT equipment. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

This policy is now applied to contracts entered into, or changed, on or after 1 June 2019.

Other judgements

Lease term

The lease term is a key judgement into calculating the lease liability under IFRS 16. Management considers it appropriate to initially set a lease term equal to the contractual term of the lease. The lease term is reassessed only in specific circumstances, for example where management makes the decision to renew a lease or exercise a break clause. Similarly, the group has a number of leases which contain an option to extend the term of these lease, in these circumstances the extension period is only taken into account in assessing the lease term if management considers it highly likely that the option to extend the lease will be exercised.

Summary of financial impact on consolidated Financial Statements

The application of this standard has had a significant impact on the Group's consolidated Financial Statements for the year ended 31 May 2020 as follows:

Consolidated Income Statement financial impact:

 
                                                                       ROU asset 
                                                      2020            impairment                                   2020 
                                                            Rent and        GBPm 
                                                             finance                                          (Pre-IFRS 
                                                 (IFRS 16)     costs               Depreciation   Taxation          16) 
Statutory                               Notes         GBPm      GBPm                       GBPm       GBPm         GBPm 
--------------------------------------  -----  -----------  --------  ----------  -------------  ---------  ----------- 
Revenue                                              263.7         -           -              -          -        263.7 
Cost of sales                                      (159.3)         -           -              -          -      (159.3) 
Gross profit                                         104.4         -           -              -          -        104.4 
Administrative expenses: 
 
    *    Depreciation and amortisation              (24.9)         -           -            6.0          -       (18.9) 
 
    *    Other administrative expenses              (60.4)     (5.3)         1.1              -          -       (64.6) 
--------------------------------------  -----  -----------  --------  ----------  -------------  ---------  ----------- 
Total administrative 
 expenses                                           (85.3)     (5.3)         1.1            6.0          -       (83.5) 
--------------------------------------  -----  -----------  --------  ----------  -------------  ---------  ----------- 
Operating profit                                      19.1     (5.3)         1.1            6.0          -         20.9 
Net finance costs                                    (3.0)       1.2           -              -          -        (1.8) 
--------------------------------------  -----  -----------  --------  ----------  -------------  ---------  ----------- 
Profit before taxation                                16.1     (4.1)         1.1            6.0          -         19.1 
Taxation                                             (4.4)         -           -              -      (0.6)        (5.0) 
--------------------------------------  -----  -----------  --------  ----------  -------------  ---------  ----------- 
Profit for the year 
 attributable to the 
 owners of the Company                                11.7     (4.1)         1.1            6.0      (0.6)         14.1 
--------------------------------------  -----  -----------  --------  ----------  -------------  ---------  ----------- 
 
Earnings per share                      5 
Basic EPS                                             4.2p                                                         5.1p 
Diluted EPS                                           4.2p                                                         5.0p 
--------------------------------------  -----  -----------  --------  ----------  -------------  ---------  ----------- 
 

Consolidated Statement of Comprehensive Income financial impact:

 
                                                     2020                          2020 
                                                                Adjustment 
                                                            on application 
                                                    (IFRS          of IFRS    (Pre-IFRS 
                                                      16)               16          16) 
                                                     GBPm             GBPm         GBPm 
------------------------------------------------  -------  ---------------  ----------- 
Total comprehensive income for the year (net of 
 tax) attributable to the owners of the Company      15.7              2.4         18.1 
------------------------------------------------  -------  ---------------  ----------- 
 

During the year ended 31 May 2020, the following charges arising from lease arrangements were recognised in the Consolidated Income Statement:

 
                                                 2020 
                                                 GBPm 
----------------------------------------------  ----- 
Depreciation of right-of-use assets               6.0 
Finance costs - interest on lease liabilities     1.2 
Profit on disposal of right-of-use assets       (0.1) 
Impairment of right-of-use assets                 1.1 
----------------------------------------------  ----- 
 

Consolidated Balance Sheet on transition

 
 
 
                                              2019                                                         2019 
                                                        Right-of-use            Onerous 
                                                              assets         leases and 
                                         (Pre-IFRS   and liabilities   lease incentives 
                                               16)     on transition             offset   Taxation    (IFRS 16) 
                                              GBPm              GBPm               GBPm       GBPm         GBPm 
--------------------------------  ---  -----------  ----------------  -----------------  ---------  ----------- 
Non-current assets 
Goodwill                                     189.4                 -                  -          -        189.4 
Other intangible assets                       41.8                 -                  -          -         41.8 
Property, plant and equipment                 16.9                 -                  -          -         16.9 
Right-of-use assets                              -              33.2              (6.7)          -         26.5 
Investments                                    0.3                 -                  -          -          0.3 
Deferred tax assets                            1.1                 -                  -        0.5          1.6 
Total non-current assets                     249.5              33.2              (6.7)        0.5        276.5 
-------------------------------------  -----------  ----------------  -----------------  ---------  ----------- 
Current assets 
Inventories                                    0.7                 -                  -          -          0.7 
Trade and other receivables                   61.6                 -                  -          -         61.6 
Current tax receivable                         0.6                 -                  -          -          0.6 
Cash and cash equivalents                     34.9                 -                  -          -         34.9 
Total current assets                          97.8                 -                  -          -         97.8 
-------------------------------------  -----------  ----------------  -----------------  ---------  ----------- 
Total assets                                 347.3              33.2              (6.7)        0.5        374.3 
-------------------------------------  -----------  ----------------  -----------------  ---------  ----------- 
Current liabilities 
Trade and other payables                      31.6                 -                  -          -         31.6 
Borrowings                                     5.0                 -                  -          -          5.0 
Lease liabilities                                -               5.2                  -          -          5.2 
Provisions                                     2.7                 -              (2.5)          -          0.2 
Contract liabilities - deferred 
 revenue                                      36.2                 -                  -          -         36.2 
Total current liabilities                     75.5               5.2              (2.5)          -         78.2 
-------------------------------------  -----------  ----------------  -----------------  ---------  ----------- 
Non-current liabilities 
Borrowings                                    50.1                 -                  -          -         50.1 
Lease liabilities                                -              30.5                  -          -         30.5 
Deferred tax liability                         5.4                 -                  -          -          5.4 
Provisions                                     5.5                 -              (4.2)          -          1.3 
Total non-current liabilities                 61.0              30.5              (4.2)          -         87.3 
-------------------------------------  -----------  ----------------  -----------------  ---------  ----------- 
Total liabilities                            136.5              35.7              (6.7)          -        165.5 
-------------------------------------  -----------  ----------------  -----------------  ---------  ----------- 
Net assets                                   210.8             (2.5)                  -        0.5        208.8 
-------------------------------------  -----------  ----------------  -----------------  ---------  ----------- 
 
 
Equity 
Issued capital                                 2.8                 -                  -          -          2.8 
Share premium                                149.8                 -                  -          -        149.8 
Merger reserve                                42.3                 -                  -          -         42.3 
Currency translation reserve                  27.9                 -                  -          -         27.9 
Retained earnings                           (12.0)             (2.5)                  -        0.5       (14.0) 
Total equity attributable 
 to equity holders of the 
 parent                                      210.8             (2.5)                  -        0.5        208.8 
-------------------------------------  -----------  ----------------  -----------------  ---------  ----------- 
 

At 31 May 2019, the Group had GBP35.6m of non-cancellable operating lease commitments. The difference between the operating lease commitments disclosed in the Group consolidated Financial Statements for the year ended 31 May 2019 and the lease liabilities recognised on the date of transition can be explained as follows:

 
                                                                     2020 
                                                                     GBPm 
------------------------------------------------------------------  ----- 
Undiscounted future minimum lease payments under operating leases 
 at 31 May 2019                                                      35.6 
Short-term leases                                                   (1.4) 
Increase in minimum lease commitments                                 6.1 
Impact of discounting                                               (6.2) 
Other                                                                 1.6 
IFRS 16 lease liability recognised at 1 June 2019                    35.7 
------------------------------------------------------------------  ----- 
 

The increase in minimum lease commitments relates to leases where the minimum lease payments disclosed at 31 May 2019 were calculated by reference to break clauses, but under IFRS 16 have been calculated using the lease termination date.

Of the lease liability of GBP35.7m recognised at 1 June 2019, GBP33.6m related to property leases and GBP2.1m relating to other leases.

2 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 years 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 Consolidated financial statements 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.

See below for a reconciliation of adjusted information to statutory information and refer to the Glossary for comprehensive descriptions of all APMs, including their relevance in providing supplementary information that assists the user to understand better the financial performance, position and trends of the Group. Performance is based on adjusted EBITDA and adjusted operating profit (3.)

Adjusting items during the year and prior year are:

   --       Individually significant items 
   --       Share based payments 
   --       Amortisation of acquisition intangibles 
   --       Profit on disposal of investment 

Reconciliation of adjusted information to statutory information

The following table includes details of adjusting items and reconciles adjusted information to statutory information:

 
                                                                                    Profit                  Profit 
 Year ended                         Gross               Depreciation  Operating     before                 for the 
  31 May 2020 (IFRS      Revenue   profit  EBITDA   and amortisation     profit   taxation    Taxation        year 
  16)                       GBPm     GBPm    GBPm               GBPm       GBPm       GBPm        GBPm        GBPm 
 ----------------------  -------  -------  ------  -----------------  ---------  ---------  ----------  ---------- 
Adjusted                   263.7    104.4    45.4             (16.1)       29.3       26.3       (6.3)      20.0 
Share based payments           -        -   (1.4)                  -      (1.4)      (1.4)       (0.2)     (1.6) 
Amortisation of 
acquired intangibles           -        -       -              (8.8)      (8.8)      (8.8)         2.1     (6.7) 
Statutory                  263.7    104.4    44.0             (24.9)       19.1       16.1       (4.4)      11.7 
-----------------------  -------  -------  ------  -----------------  ---------  ---------  ----------  -------- 
 
 
 
 
 
                                                                                                                Profit 
                                   Gross               Depreciation  Operating    Profit before                    for 
020 (Pre-IFRS 16)       Revenue   profit  EBITDA   and amortisation     profit         taxation    Taxation   the year 
 Continuing operations     GBPm     GBPm    GBPm               GBPm       GBPm             GBPm        GBPm       GBPm 
----------------------  -------  -------  ------  -----------------  ---------  ---------------  ----------  --------- 
Adjusted                  263.7    104.4    41.2             (10.1)       31.1             29.3       (6.9)       22.4 
Share based payments          -        -   (1.4)                  -      (1.4)            (1.4)       (0.2)      (1.6) 
Amortisation of 
 acquired intangibles         -        -       -              (8.8)      (8.8)            (8.8)         2.1      (6.7) 
----------------------  -------  -------  ------  -----------------  ---------  ---------------  ----------  --------- 
Statutory                 263.7    104.4    39.8             (18.9)       20.9             19.1       (5.0)       14.1 
----------------------  -------  -------  ------  -----------------  ---------  ---------------  ----------  --------- 
 
 
Year ended                            Gross                             Operating 
                                                                                      Profit               Profit 
                                                          Depreciation                before              for the 
 31 May 2019               Revenue   profit  EBITDA   and amortisation     profit   taxation   Taxation      year 
 (Pre-IFRS 16)                GBPm     GBPm    GBPm               GBPm       GBPm       GBPm       GBPm      GBPm 
-------------------------  -------  -------  ------  -----------------  ---------  ---------  ---------  -------- 
Adjusted                     250.7    101.8    43.7             (10.0)       33.7       32.0      (6.5)      25.5 
Individually Significant 
 Items                           -        -   (3.6)                  -      (3.6)      (3.6)        0.5     (3.1) 
Share based payments             -        -   (1.7)                  -      (1.7)      (1.7)      (0.1)     (1.8) 
Amortisation of 
 acquired intangibles            -        -       -              (9.0)      (9.0)      (9.0)        1.8     (7.2) 
Profit on disposal 
 of investment                   -        -     0.1                  -        0.1        0.1          -       0.1 
Statutory                    250.7    101.8    38.5             (19.0)       19.5       17.8      (4.3)      13.5 
-------------------------  -------  -------  ------  -----------------  ---------  ---------  ---------  -------- 
 

During the year, management has reviewed the application of APM's and have considered ongoing FRC and ESMA best practice guidance in this area. Accordingly, management has concluded that for future accounting periods, share based payments and amortisation of acquired intangibles, which are currently presented as adjusting items, should be included within underlying results. The decision to adopt this presentation for future reporting periods rather than in the current reporting period is because the implementation of IFRS 16 in the year (which does not require the restatement of 2019 comparatives) means that the FY20 results are not on a like-for-like basis with 2019, and management considers that it would be very difficult to understand the true, underlying performance of the Group if this presentational change to the income statement was made in the current reporting period. The impact of this proposal in future reporting periods will be a reduction in adjusted measures. To illustrate this, the income statement for the year ended 31 May 2020 has been shown below under the proposed basis:

 
GBPm 
                                            2020           2020 
                                       (IFRS 16)      (IFRS 16) 
                                  Proposed basis   As currently 
                                                       reported  Variance 
                                ----------------  ------------- 
Revenue                                    263.7          263.7         - 
Cost of sales                            (159.3)        (159.3)         - 
------------------------------  ----------------  -------------  -------- 
Gross profit                               104.4          104.4         - 
Administrative expenses: 
Depreciation and amortisation             (24.9)         (16.1)     (8.8) 
Other administration expenses             (60.4)         (59.0)     (1.4) 
------------------------------  ----------------  -------------  -------- 
Total administrative expenses             (85.3)         (75.1)    (10.2) 
------------------------------  ----------------  -------------  -------- 
Adjusted (3) operating profit               19.1           29.3    (10.2) 
Adjusting items                                -         (10.2)      10.2 
------------------------------  ----------------  -------------  -------- 
Statutory operating profit                  19.1           19.1         - 
------------------------------  ----------------  -------------  -------- 
 

Net debt

Net debt (3) is set out below:

 
                                                                       2019 
                                                          2020    (Pre-IFRS 
                                                                        16) 
                                                          GBPm         GBPm 
-----------------------------------------------------  -------  ----------- 
 Cash and cash equivalents                                95.0         34.9 
 Borrowings (net of deferred issue costs of GBP0.8m)    (99.2)       (55.1) 
 Net debt (3) (Pre-IFRS 16)                              (4.2)       (20.2) 
-----------------------------------------------------  -------  ----------- 
 Lease liabilities                                      (38.2) 
-----------------------------------------------------  ------- 
 Net debt (3) (IFRS 16)                                 (42.4) 
-----------------------------------------------------  ------- 
 

Cash conversion ratio

The calculation of the cash conversion ratio (3) is set out below:

 
                                                  2020         2020         2019 
                                                 (IFRS    (Pre-IFRS    (Pre-IFRS 
                                                   16)          16)          16) 
                                                  GBPm         GBPm         GBPm 
---------------------------------------------  -------  -----------  ----------- 
 Net operating cash flow before interest and 
  taxation (A)                                    54.7         48.2         47.9 
 Adjusted EBITDA (3) (B)                          45.4         41.2         43.7 
---------------------------------------------  -------  -----------  ----------- 
 Cash conversion ratio (3) (%) (A)/(B)          120.5%       117.0%       109.6% 
---------------------------------------------  -------  -----------  ----------- 
 

As at 31 May 2020, the Group had a timing benefit of GBP4.6m from government payment deferral schemes, of which GBP3.4m related to indirect taxes, and GBP1.2m to corporation tax. If the benefit of the GBP3.4m relating to indirect taxes is excluded from the above calculations the cash conversion ratios on an IFRS 16 and pre-IFRS 16 basis would be 113.0% and 108.7% respectively. This timing benefit will reverse in the year ending 31 May 2021.

3 Segmental information

The Group is organised into the following two (2019: 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 homogenous commercial and strategic market environments. Performance is measured based on reporting segment profit, which comprises adjusted operating profit (3) . Interest and tax are not allocated to business segments and there are no intra-segment sales.

As disclosed in note 2, due to the adoption of IFRS 16 'Leases' during the year, the results for the year ended 31 May 2020 are not directly comparable with the previous year. On this basis, to provide meaningful comparatives, the segmental results below for the year ended 31 May 2020 have therefore also been presented under IAS 17 with the like-for like numbers shown on an IAS 17 basis (Pre-IFRS 16), as this is the basis on which the CODM allocates resources and assesses performance.

Segmental analysis 2020

 
                                                          Software       Central 
                                                        resilience           and 
                                            Assurance     (Escrow)   head office    Group 
                                                 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 administration expenses allocated 
 (2)                                           (43.9)       (10.0)         (5.1)   (59.0) 
------------------------------------------  ---------  -----------  ------------  ------- 
Adjusted EBITDA                                  33.0         17.5         (5.1)     45.4 
Depreciation and amortisation                  (10.7)        (0.6)         (4.8)   (16.1) 
------------------------------------------  ---------  -----------  ------------  ------- 
Adjusted operating profit (3)                    22.3         16.9         (9.9)     29.3 
------------------------------------------  ---------  -----------  ------------  ------- 
Adjusting items (3)                                                                (10.2) 
------------------------------------------  ---------  -----------  ------------  ------- 
Operating profit                                                                     19.1 
------------------------------------------  ---------  -----------  ------------  ------- 
Impact of IFRS 16                                                                     1.8 
------------------------------------------  ---------  -----------  ------------  ------- 
Operating profit (Pre-IFRS 16)                                                       20.9 
------------------------------------------  ---------  -----------  ------------  ------- 
 

Segmental analysis 2019

 
                                                          Software       Central 
                                                        resilience           and 
                                            Assurance     (Escrow)   head office    Group 
(Pre-IFRS 16)                                    GBPm         GBPm          GBPm     GBPm 
------------------------------------------  ---------  -----------  ------------  ------- 
Revenue                                         212.7         38.0             -    250.7 
Cost of sales                                 (139.2)        (9.7)             -  (148.9) 
------------------------------------------  ---------  -----------  ------------  ------- 
Gross profit                                     73.5         28.3             -    101.8 
Gross margin %                                  34.6%        74.5%             -    40.6% 
General administration expenses allocated 
 (2)                                           (45.4)        (9.3)         (3.4)   (58.1) 
------------------------------------------  ---------  -----------  ------------  ------- 
Adjusted EBITDA                                  28.1         19.0         (3.4)     43.7 
Depreciation and amortisation                   (5.5)            -         (4.5)   (10.0) 
------------------------------------------  ---------  -----------  ------------  ------- 
Adjusted operating profit (2)                    22.6         19.0         (7.9)     33.7 
------------------------------------------  ---------  -----------  ------------  ------- 
Adjusting items (2)                                                                (14.2) 
------------------------------------------  ---------  -----------  ------------  ------- 
Operating profit                                                                     19.5 
------------------------------------------  ---------  -----------  ------------  ------- 
 

Revenue is disaggregated by primary geographical market as follows:

 
                              Software                        Software 
                            Resilience    2020              Resilience    2019 
GBPm            Assurance     (Escrow)   Total  Assurance     (Escrow)   Total 
                ---------  -----------  ------  ---------  ----------- 
UK                   91.5         25.9   117.4       88.9         26.0   114.9 
North America        82.4          7.8    90.2       75.5          8.3    83.8 
Europe & APAC        52.3          3.8    56.1       48.3          3.7    52.0 
Statutory           226.2         37.5   263.7      212.7         38.0   250.7 
--------------  ---------  -----------  ------  ---------  -----------  ------ 
 

4 Dividends

 
                                                          2020   2019 
-------------------------------------------------------  -----  ----- 
Dividends paid and recognised in the year (GBPm)          12.9   12.9 
-------------------------------------------------------  -----  ----- 
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 2020 of 3.15p per ordinary share on approximately 277.8m ordinary shares (approximately GBP8.8m) was approved by the Board on 3 September 2020 and will be recommended to shareholders at the AGM on 20 October 2020. The dividend has not been included as a liability as at 31 May 2020. The payment of this dividend will not have any tax consequences for the Group.

5 Earnings per ordinary share (EPS)

Earnings per ordinary share are shown on a statutory and an adjusted (2) basis to assist in the understanding of the performance of the Group.

 
                                                         2020        2020        2019 
                                                                (Pre-IFRS   (Pre-IFRS 
                                                    (IFRS 16)         16)         16) 
                                                         GBPm        GBPm        GBPm 
-------------------------------------------------  ----------  ----------  ---------- 
Statutory earnings                                       11.7        14.1        13.5 
-------------------------------------------------  ----------  ----------  ---------- 
Adjusted (2) earnings (note 2)                           20.0        22.4        25.5 
-------------------------------------------------  ----------  ----------  ---------- 
                                                       Number      Number      Number 
                                                    of shares   of shares   of shares 
                                                            m           m           m 
-------------------------------------------------  ----------  ----------  ---------- 
Basic weighted average number of shares in issue        278.0       278.0       277.8 
-------------------------------------------------  ----------  ----------  ---------- 
Dilutive effect of share options                          2.5         2.5         1.5 
-------------------------------------------------  ----------  ----------  ---------- 
Diluted weighted average shares in issue                280.5       280.5       279.3 
-------------------------------------------------  ----------  ----------  ---------- 
 

For the purposes of calculating the dilutive effect of share options, the average market value is based on quoted market prices for the year during which the options are outstanding.

 
                                              2020        2020         2019 
                                         (IFRS 16)   (Pre-IFRS    (Pre-IFRS 
                                                           16)          16) 
                                             pence       pence        pence 
--------------------------------------  ----------  ----------  ----------- 
Basic earnings per ordinary share 
Statutory                                      4.2         5.1          4.9 
Adjusted (2)                                   7.2         8.1          9.2 
--------------------------------------  ----------  ----------  ----------- 
                                              2020        2020 
                                         (IFRS 16)   (Pre-IFRS 
                                                           16)         2019 
                                             pence       pence        pence 
--------------------------------------  ----------  ----------  ----------- 
 
  Diluted earnings per ordinary share 
Statutory                                      4.2         5.0          4.8 
Adjusted (2)                                   7.1         8.0          9.1 
--------------------------------------  ----------  ----------  ----------- 
 

6 Right-of-use assets and Lease liabilities

The Group's right-of-use asset can be further analysed as follows:

 
                                                             2020 
                                                        (IFRS 16) 
                                                             GBPm 
----------------------------------------------------  ----------- 
As at 1 June 2019                                               - 
Initial recognition on adoption of IFRS 16 (note 1)          26.5 
Additions                                                    12.1 
Disposals                                                   (2.8) 
Impairment of right-of-use assets                           (1.1) 
Depreciation                                                (6.0) 
As at 31 May 2020                                            28.7 
----------------------------------------------------  ----------- 
 

The Group's outstanding lease liabilities can be further analysed as follows:

 
                                                             2020 
                                                        (IFRS 16) 
                                                             GBPm 
----------------------------------------------------  ----------- 
As at 1 June 2019                                               - 
Initial recognition on adoption of IFRS 16 (note 1)          35.7 
Additions                                                    10.7 
Disposals                                                   (2.9) 
Interest expense                                              1.2 
Repayment of lease liabilities                              (6.5) 
As at 31 May 2020                                            38.2 
----------------------------------------------------  ----------- 
 

The ageing of the lease liabilities as at 31 May 2020 are as follows:

 
                                 2020 
                            (IFRS 16) 
                                 GBPm 
------------------------  ----------- 
Less than one year                5.3 
Two to five years                15.7 
Greater than five years          17.2 
Total lease liabilities          38.2 
------------------------  ----------- 
 

7 Borrowings

In June 2019, the Group renegotiated its previous term loan and multi-currency revolving credit facilities into a new fully revolving credit facility of GBP100m with a new five year term up to June 2024, on similar terms (pricing and covenants). The interest payable on drawn down funds ranges from 0.9% to 2.0% above LIBOR subject to the Group's leverage and interest cover ratios (4) . Under the new arrangements, the Group can request an additional accordion facility to increase the total size of the revolving credit facility by up to GBP75m. The Group is required to comply with financial covenants for leverage (net debt to Adjusted (3) EBITDA) and interest cover (Adjusted (3) EBITDA to interest charge) which are tested bi-annually at 31 May and 30 November each year. Arrangement fees incurred of GBP1.0m are being amortised over the term. Since the new facility is on broadly similar pricing terms to the previous facility, the refinancing has been accounted for as a non-substantial modification.

Borrowings (excluding lease liabilities) are analysed as follows:

 
                                                                      2019 
                                                                 (Pre-IFRS 
                                                         2020          16) 
                                                         GBPm         GBPm 
-------------------------------------------------  ---  -----  ----------- 
Current liabilities 
Secured and interest-bearing bank loan                      -          5.0 
Non-current liabilities 
Revolving credit facility (net of deferred issue 
 costs of GBP0.8m)                                       99.2         23.5 
Secured and interest-bearing bank loan                      -         26.6 
Total borrowings (excluding lease liabilities)           99.2         55.1 
------------------------------------------------------  -----  ----------- 
 

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                                     made by the Directors 
                                             measure 
 Income statement measures: 
 Adjusted               Operating           Operating              2                     Represents operating profit 
  operating              profit              profit or                                   before 
  profit (EBIT)          or loss             loss before                                 adjusting items to assist in 
                                             adjusting                                   the 
                                             items                                       understanding of the Group's 
                                             Adjusting                                   performance. 
                                             items represent                             Adjusting items represent 
                                             amortisation                                amortisation 
                                             of acquired                                 of acquired intangibles, 
                                             intangibles,                                profit 
                                             profit on                                   on the disposal of 
                                             the disposal                                investments, 
                                             of investments,                             share based payments and 
                                             share based                                 Individually 
                                             payments                                    Significant Items. 
                                             and Individually                            The Directors consider 
                                             Significant                                 amortisation 
                                             Items                                       of acquired intangibles is a 
                                                                                         non-cash 
                                                                                         accounting charge inherently 
                                                                                         linked 
                                                                                         to losses associated with 
                                                                                         historical 
                                                                                         acquisitions of businesses in 
                                                                                         accordance with the Group's 
                                                                                         adjusting 
                                                                                         items accounting policy. This 
                                                                                         APM's purpose is to allow the 
                                                                                         user to understand the 
                                                                                         Group's 
                                                                                         underlying financial 
                                                                                         performance 
                                                                                         as measured by management, 
                                                                                         reported 
                                                                                         to the Board and used as a 
                                                                                         financial 
                                                                                         measure in senior 
                                                                                         management's 
                                                                                         compensation schemes. An 
                                                                                         alternative 
                                                                                         view could be that the charge 
                                                                                         should be included in 
                                                                                         underlying 
                                                                                         results to reflect the "cost" 
                                                                                         of an acquisition in the 
                                                                                         Income 
                                                                                         Statement. All things 
                                                                                         considered, 
                                                                                         including the similar 
                                                                                         treatment 
                                                                                         by comparator companies, the 
                                                                                         Directors 
                                                                                         have concluded that this item 
                                                                                         is an adjusting item. The 
                                                                                         same 
                                                                                         principles apply to the 
                                                                                         profit 
                                                                                         on the disposal of 
                                                                                         investments. 
                                                                                         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. 
                                                                                         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. 
                                                                                         See note 2 for proposed 
                                                                                         changes 
                                                                                         to adjusting items in 
                                                                                         forthcoming 
                                                                                         reporting periods. 
                       ------------------  ---------------------  --------------------  ------------------------------ 
 APM                    Closest             Adjustments            Note reference        Definition, purpose and 
                         equivalent          to reconcile           for reconciliation   considerations 
                         IFRS measure        to IFRS                                     made by the Directors 
                                             measure 
                       ------------------  ---------------------  --------------------  ------------------------------ 
 Earnings               Operating           Operating              2                     Represents operating profit 
  before interest,       profit              profit or                                   before 
  tax, depreciation      or loss             loss, before                                depreciation and 
  and amortization                           depreciation                                amortisation. 
  (EBITDA)                                   and amortisation,                           EBITDA is disclosed as this 
                                             net finance                                 is 
                                             costs and                                   a measure widely used by 
                                             taxation                                    various 
                                                                                         stakeholders. 
                       ------------------  ---------------------  --------------------  ------------------------------ 
 Adjusted               Operating           Operating              2                     Represents operating profit 
  earnings               profit              profit or                                   before 
  before interest,       or loss             loss before                                 adjusting items, depreciation 
  tax, depreciation                          adjusting                                   and amortisation to assist in 
  and amortisation                           items, depreciation                         the understanding of the 
  (EBITDA)                                   and amortisation,                           Group's 
                                             net finance                                 performance. 
                                             costs and                                   Adjusted EBITDA is disclosed 
                                             taxation                                    as 
                                                                                         this is a measure widely used 
                                                                                         by various stakeholders and 
                                                                                         used 
                                                                                         by the Group to measure the 
                                                                                         cash 
                                                                                         conversion ratio noted below. 
                       ------------------  ---------------------  --------------------  ------------------------------ 
 Adjusted               Profit              Profit before          2                     Represents profit before 
  profit before          before              taxation                                    taxation 
  taxation               taxation            before adjusting                            before adjusting items and 
                                             items                                       provides 
                                                                                         supplementary information on 
                                                                                         the 
                                                                                         Group's profitability before 
                                                                                         taxation. 
                       ------------------  ---------------------  --------------------  ------------------------------ 
 Adjusted               Basic               Basic EPS              5                     Represents basic EPS 
  basic EPS              EPS                 excluding                                   excluding 
                                             adjusting                                   adjusting items and provides 
                                             items                                       supplementary 
                                                                                         information that assists the 
                                                                                         user 
                                                                                         in understanding the 
                                                                                         underlying 
                                                                                         trading results. 
                       ------------------  ---------------------  --------------------  ------------------------------ 
 Balance Sheet measures: 
 Net debt               Total borrowings                           2                     Represents total borrowings 
  (Pre-IFRS              (excluding lease                                                (excluding 
  16) - like-for-like    liabilities) offset                                             lease liabilities) offset by 
  basis                  by cash and cash                                                cash 
                         equivalents                                                     and cash equivalents. It is a 
                                                                                         useful measure of the 
                                                                                         progress 
                                                                                         in generating cash, 
                                                                                         strengthening 
                                                                                         of the Group balance sheet 
                                                                                         position, 
                                                                                         overall net indebtedness and 
                                                                                         gearing 
                                                                                         on a like-for-like basis. 
                                                                                         Net 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 debt               Total borrowings                           2                     Represents total borrowings 
                         (including lease                                                (including 
                         liabilities) offset                                             lease liabilities) offset by 
                         by cash and cash                                                cash 
                         equivalents                                                     and cash equivalents. It is a 
                                                                                         useful measure of the 
                                                                                         progress 
                                                                                         in generating cash, 
                                                                                         strengthening 
                                                                                         of the Group Balance Sheet 
                                                                                         position, 
                                                                                         overall net indebtedness and 
                                                                                         gearing. 
                                                                                         Net 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 flow measure 
 Cash conversion        Ratio             Ratio %                  2                     The cash conversion ratio is 
  ratio (Pre-IFRS        % of net          of net cash                                   a 
  16)                    cash flow         flow from                                     measure of how effectively 
                         from operating    operating                                     adjusted 
                         activities        activities                                    operating profit (as detailed 
                         before            before interest                               above) is converted into cash 
                         interest          and tax                                       and effectively highlights 
                         and tax           divided                                       both 
                         divided           by adjusted                                   non-cash accounting items 
                         by Operating      EBITDA                                        within 
                         profit                                                          operating profit and also 
                                                                                         movements 
                                                                                         in working capital. 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 adjusted 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. 
                       ----------------  -----------------------  --------------------  ------------------------------ 
 
 
 
 Like-for-like measures   During the year, the Group has 
                           adopted IFRS 16 'Leases'. The 
                           date of the initial application 
                           of IFRS 16 for the Group is 1 
                           June 2019. The Group has adopted 
                           the accounting standard using 
                           the modified retrospective approach 
                           to transition and has accordingly 
                           not restated prior years, consequently 
                           the results for the year ended 
                           31 May 2019 are not directly comparable 
                           with those reported under the 
                           previous applicable accounting 
                           standard IAS 17 'Leases' and IFRIC 
                           4 'Determining whether an arrangement 
                           contains a lease'. 
                           On this basis, to provide meaningful 
                           comparatives, the results for 
                           the year ended 31 May 2020 have 
                           therefore also been presented 
                           under IAS 17 with the "like-for-like" 
                           numbers shown on an IAS 17 basis 
                           (Pre-IFRS 16). This alternative 
                           performance measure (APM), will 
                           be presented for one year until 
                           the comparatives also include 
                           the adoption of IFRS 16. 
 

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(END) Dow Jones Newswires

September 03, 2020 02:00 ET (06:00 GMT)