We have delivered robust financial results during the first year of transformation, which has led to a year end net debt position of £20.2m

Tim Kowalski

Chief FINANCIAL OFFICER

Financial information¹

2019
Adjusted 3
£m
2019
Adjusting
Item 3
£m
2019
Statutory
£m
2018
Adjusted 3
£m
2018
(restated 2)
Adjusting
Items 3
£m
2018
Statutory
£m
Revenue250.7250.7233.0233.0
Cost of sales(148.9)(148.9)(137.1)(137.1)
Gross profit101.8101.895.995.9
Administration expenses(68.1)(14.2)(82.3)(65.1)(17.3)(82.4)
Operating profit33.7(14.2)19.530.8(17.3)13.5
Net finance costs(1.7)(1.7)(1.5)(0.3)(1.8)
Profit before taxation32.0(14.2)17.829.3(17.6)11.7
Taxation(6.5)2.2(4.3)(6.6)7.10.5
Profit from continuing operations25.5(12.0)13.522.7(10.5)12.2
Loss from discontinued operations, net of tax(5.5)(5.5)
Profit for the year25.5(12.0)13.522.7(16.0)6.7
Earnings per share:
Basic EPS – continuing9.24.98.24.4
Diluted EPS – continuing9.14.88.14.4
Continuing revenue2019
£m
2018
(restated 2)
£m
%
change
Assurance212.7193.99.7%
Escrow38.039.1(2.8%)
Total – continuing operations250.7233.07.6%
2019
£m
2018
(restated 2)
£m
%
change
Operating profit19.513.5v44.4%
Individually significant items3.67.6(52.6%)
Share-based payments1.70.3466.7%
Amortisation of acquired intangibles9.09.4(4.3%)
Profit on disposal of investments(0.1)
Adjusted operating profit333.730.89.4%
Adjusted operating profit 32019
£m
2018
(restated 2)
£m
%
change
Assurance22.616.537.0%
Escrow19.021.9(13.2%)
Central and head office(7.9)(7.6)3.9%
Total – continuing operations33.730.89.4%
Adjusted operating profit % margin³ – continuing operations13.4%13.2%

Throughout this Chief Financial Officer's review, Alternative Performance Measures (APMs) are presented as well as statutory measures and these measures are consistent with prior periods. This presentation is also consistent with the way that financial performance is measured by management, 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 Alternative Performance Measures³ to statutory information is shown below:

2019
Continuing operations
Revenue
£m
Gross profit
£m
EBITDA
£m
Depreciation and amortisation
£m
Operating
profit
£m
Profit
before taxation
£m
Taxation
£m
Profit from continuing operations
£m
Adjusted250.7101.843.7(10.0)33.732.0(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 investments0.10.10.10.1
Statutory250.7101.838.5(19.0)19.517.8(4.3)13.5
2018
Continuing operations
Revenue
£m
Gross
profit
£m
EBITDA
£m
Depreciation and amortisation
£m
Operating
profit
£m
Profit
before taxation
£m
Taxation
£m
Profit from continuing operations
£m
Adjusted233.095.942.9(12.1)30.829.3(6.6)22.7
Individually significant items(7.6)(7.6)(7.6)1.5(6.1)
Share-based payments(0.3)(0.3)(0.3)0.40.1
Amortisation of acquired intangibles(9.4)(9.4)(9.4)3.8(5.6)
Unwind of discount on acquisition consideration(0.3)(0.3)
R&D prior year tax credits1.41.4
Statutory233.095.935.0(21.5)13.511.70.512.2

The Group has adopted a full retrospective approach to IFRS 15 'Revenue from Contracts with Customers' and therefore restated the prior year to reflect the updated accounting policies and present a relevant comparative. More details on the restatement are provided in the notes to the financial statements.

  1. References to the Group's results, unless stated to the contrary, are to continuing operations only and exclude discontinued activities.
  2. See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
  3. See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for 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 costs.

Overview

We have delivered robust financial results during the first year of our transformation.

Group revenue increased by 7.6% to £250.7m. Within this, Assurance revenues increased by 9.7% to £212.7m (2018: £193.9m²). North America Assurance and Europe and ROW growth were particularly encouraging at 23.4% and 12.9% respectively, with UK Assurance (including product sales) declining by 1.1%. Escrow revenue was 2.8% behind last year as the UK fell by 6.5%, although North America saw growth of 10.7% as we continue to grow our presence there.

Gross profit increased by 6.2% to £101.8m (2018: £95.9m²) with margin percentage amounting to 40.6% (2018: 41.2%), with Assurance margin percentage increasing to 34.6% (2018: 34.0%) and Escrow declining to 74.5% (2018: 76.5%).

Administration expenses remained broadly flat at £82.3m, principally as a result of investment in people and annualisation of occupancy costs offset by process improvements through the SGT programme, lower depreciation and amortisation and adjusting items. Adjusting items decreased from £17.3m to £14.2m.

Adjusted operating profit from continuing operations³ increased by 9.4% to £33.7m (2018: £30.8m²) and operating profit increased by 44.4% to £19.5m (2018: £13.5m²). Adjusted depreciation and amortisation amounted to £10.0m (2018: £12.1m) giving rise to Adjusted EBITDA³ of £43.7m (2018 restated: £42.9m²). Adjusted profit before taxation³ increased by 9.2% to £32.0m (2018: £29.3m²). Statutory profit before taxation increased by 52.1% to £17.8m. Adjusted EPS and statutory EPS from continuing operations amounted to 9.2p (2018: 8.2p²) and 4.9p (2018: 4.4p²) respectively.

We have also reduced net debt³ to £20.2m from £27.8m (H1 FY19: £45.1m) after net acquisitions/disposal payments of £9.1m (2018: net proceeds received of £6.1m) with gearing reducing to 8.7% (2018: 11.9%). In addition, we have further strengthened our financial position by obtaining a new multi-currency revolving credit facility post year end for £100m with a five-year term up to June 2024 on similar terms. Committed headroom as at 31 May 2019 amounted to £42.7m (2018: £53.7m).

Divisional performance 

Divisional performance includes the allocation of certain central costs incurred on behalf of the divisions. These increases are due to the factors noted above. Segmental information is disclosed below:

201920182
Continuing operationsAssurance
£m
Escrow
£m
Central
and head
office
£m
Group
£m
Assurance
£m
Escrow
£m
Central
and head
office
£m
Group
£m
Revenue212.738.0250.7193.939.1233.0
Cost of sales(139.2)(9.7)(148.9)(127.9)(9.2)(137.1)
Gross profit73.528.3101.866.029.995.9
Gross margin %34.6%74.5%40.6%34.0%76.5%41.2%
General administrative expenses ²(50.9)(9.3)(7.9)(68.1)(49.5)(8.0)(7.6)(65.1)
Adjusted operating profit ³22.619.0(7.9)33.716.521.9(7.6)30.8
Adjusted operating profit %10.6%50.5%13.4%8.5%56.0%13.2%

Assurance

The Assurance division accounts for 84.8% of continuing Group revenue (2018: 83.2%).

Assurance revenue analysis – by originating country2019
£m
2018
(restated 2)
£m
%
change
UK88.989.9(1.1%)
North America75.561.223.4%
Europe and RoW48.342.812.9%
Total Assurance revenue212.7193.99.7%

As noted above, UK Assurance revenue in the year declined by 1.1% to £88.9m (2018: £89.9m2) following a decline in product sales and a number of changes among the management and sales teams. After taking into account the reduction of £3.6m in UK product sales (which is a consequence of our deliberate move away from low-margin re-selling), UK revenue increased by 3.1%.

In the year, North America has grown by 23.4% to £75.5m (2018: £61.2m2) supported by continued penetration of the technology market. The division continues to push for larger market share with a focus on diversification of markets.

Assurance Europe and ROW grew by 12.9% to £48.3m (2018: £42.8m2) with the business now restructured under new leadership into simpler organisation units.

Assurance revenue analysed by type service/product line:

2019
£m
2018
(restated 2)
£m
%
change
Technical Security Consulting (TSC)134.8118.813.5%
Risk Management Consulting35.332.58.6%
Managed Detection and Response (MDR)36.433.39.3%
Product sales (own and third-party)6.29.3(33.3%)
Total Assurance revenue212.7193.99.7%

Technical Security Consulting, our core professional service, grew by 13.5% to £134.8m (2018: £118.8m2) as a result of strong growth worldwide, mainly driven by a 22.3% increase in North America and a 17.3% increase in Europe and RoW. Performance was supported by increased cross-region global resourcing as our scale allows us to capture share when others face more pressing resource constraints. Higher average order values supported by certain contract wins also underpinned growth.

Risk management consulting, a service that addresses the business risks of cyber, grew by 8.6% to £35.3m supported by rapid growth of 30.1% in North America although the UK decreased by 2.4% due to a softer market, coupled with sales team attrition in H2 further to the introduction of new leadership.

Managed Detection and Response, a service line that provides operational cyber defence, scanning, simulation and SOC services, grew by 9.3% to £36.4m as the business continued to increase cross-region selling and delivery within a growth market. The Group continues to co-ordinate its global assets from legacy acquisitions, underpinned by closer collaboration between our centres of excellence in Europe and the UK having set a single product development roadmap and offering. The Group launched the first managed service in North America during the year.

The reduction of 33.3% in product sales is a result of the conscious decision to de-emphasise the sale of low margin third-party products.

We continue to prioritise the importance of value-based selling within our Assurance services as demonstrated by our increasing average order value and expect this will have a positive impact in the future. UK and North America average order values increased by 23% and 28% respectively.

Assurance gross profit is analysed as follows:

2019
£m
2019
% margin
2018
(restated 2)
£m
2018
% margin
%
change
UK31.034.9%29.833.1%4.0%
North America25.333.5%20.733.8%22.2%
Europe and RoW17.235.6%15.536.2%11.0%
Assurance gross profit and % margin73.534.6%66.034.0%11.4%

The growth in revenue and the improvement in gross profit contributed to the improvement in adjusted operating profit3 (+37.0%) of £6.1m to £22.6m (2018: £16.5m2). In addition, adjusted operating profit3 margin improved to 10.6% (2018: 8.5%).

Escrow

The Escrow division accounts for 15.2% of Group revenues (2018: 16.8%).

Escrow revenue analysis – by originating country2019
£m
2018
(restated 2)
£m
%
change
UK26.027.8(6.5%)
North America8.37.510.7%
Europe and RoW3.73.8(2.6%)
Total Escrow revenue38.039.1(2.8%)

Escrow revenue analysed by service line:

Escrow services revenue2019
£m
2018
(restated 2)
£m
%
change
Escrow contracts26.527.9(5.0%)
Verification and other services11.511.22.7%
Total Escrow revenue38.039.1(2.8%)

Escrow UK revenue was £26.0m (2018: £27.8m2). Escrow UK contract revenues were £18.2m (2018: £19.6m2) while renewals have remained at the same level as prior year with just under 90% of all contracts renewed (2018: 89.6%). Underperformance was caused by a weaker sales team not selling enough contracts. Verification and other services decreased by £0.4m to £7.8m (2018: £8.2m2). We expect the UK to return to modest growth in the medium term due to investments made in our sales capabilities, capitalising on our market position. UK Escrow sales headcount increased by approximately 50% to 44 people in the second half of this financial year, as capability was rebuilt.

Escrow North America revenues increased by 10.7% to £8.3m (2018: £7.5m2). The North American business has benefited from new appointments being made to the sales team, coupled with secondments of experienced UK sales team members. We continue to build our market share in North America underpinned by further initiatives.

Escrow Europe and ROW revenues fell 2.6% to £3.7m (2018: £3.8m2). The European business continues to provide a foothold from which to generate growth. Europe, like the North American business unit in the current year, will have sales headcount investment to drive enhanced market share and growth.

During the year, a review of the satellite office in Dubai was carried out and while we do believe there are customer opportunities in the region, we have decided any customers will be serviced from our UK business going forward.

Escrow gross profit is analysed as follows:

2019
£m
2019
% margin
2018
(restated2)
£m
2018
% margin
%
change
UK19.775.8%21.978.8%(10.0%)
North America5.768.7%5.370.7%7.5%
Europe and RoW2.978.4%2.771.7%7.4%
Escrow gross profit28.374.5%29.976.5%(5.4%)

The decline in gross margin percentage is due to higher direct costs to support North American growth and challenges within the UK. The decline in gross margin contributed to a decline in adjusted operating profit3 (-13.2%) of £2.9m to £19.0m (2018: £21.9m2). The adjusted operating profit3 margin was also impacted by increased investment in support colleagues to professionalise the business resulting in a decline in adjusted operating margin3 to 50.0% (2018: 56.0%).

Adjusting items3

Pre-tax adjusting items are set out below:

2019
£m
2018
£m
Individually Significant Items3.67.6
Share-based payments1.70.3
Amortisation of acquired intangibles9.09.4
Unwinding of discounts on deferred consideration0.3
Profit on disposal of investments(0.1)
Total pre-tax adjusting items – continuing operations14.217.6

Individually Significant Items (ISIs) are set out below: 

2019
£m
2018
£m
Securing Growth Together – legacy systems accelerated amortisation (net of R&D tax credit)3.8
Loss-making contract2.5
Revisions to deferred and contingent consideration(0.8)0.6
Restructuring costs1.6
Onerous leases and other property-related costs0.62.7
Market-related costs0.2
Total ISIs – continuing operations3.67.6

During the year, certain legacy finance and CRM systems amounting to £3.8m have incurred accelerated amortisation, as we implement our comprehensive systems upgrade programme as part of SGT.

Revisions to contingent consideration amounted to £0.8m credit as we agreed our final payment in relation to the historic acquisitions of Payment Software Company Inc. (PSC) and Virtual Security Research LLC (VSR) in North America.

Onerous leases and other property-related costs relate to the rationalisation of our property footprint.

Further details of prior year ISIs are provided within the notes to the consolidated financial statements.

In relation to other adjusting items, share-based payments increased during the year, as new schemes have been issued to employees while in the prior year it was concluded that a number of historic schemes would not meet scheme performance criteria resulting in a reversal of historic charges.

In addition, amortisation of acquired intangibles relating to customer contracts and relationships amounted to £9.0m (2018: £9.4m).

Net finance costs

Statutory finance costs for the year were £1.7m compared to £1.8m in 2018, with interest cost increasing by £0.2m due to an average higher level of gross debt during the year and a rising US base rate that has underpinned a higher cost of debt on US Dollar denominated loans, offset by a reduction in the unwind of discount on acquisition consideration of £0.3m.

Taxation

The Group's adjusted effective tax rate is 20.3% (2018: 22.5%). The movement in the Group's effective tax rate is mainly due to a decrease in the US Federal corporate tax rate in the prior year. The full year effect of US tax reform is now reflected in this year.

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 26% (Federal and State combined) for the year to 31 May 2019.

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 those parameters.

Earnings per share (EPS)

2019
£m
2018
(restated 2)
£m
Statutory earnings – continuing
Basic EPS4.94.4
Diluted EPS4.84.4
Statutory earnings – all operations
Basic EPS4.92.4
Diluted EPS4.82.4
Adjusted earnings – continuing3
Basic EPS9.28.2
Diluted EPS9.18.1

Basic adjusted EPS3 from continuing operations was 9.2p (2018: 8.2p2) and on a statutory basis it was 4.9p (2018: 4.4p2). The year-on-year increase in EPS reflects the increase in the Group's profitability during the year.

Cash flow and net debt3

The table below summarises the Group's cash flow and net debt3:

2019
£m
2018
(restated 2)
£m
Operating cash inflow before movements in working capital41.339.8
Changes in working capital6.6(0.3)
Cash generated from operating activities before interest and taxation 47.939.5
Interest paid(1.7)(1.8)
Taxation paid(6.4)(4.7)
Net cash generated from operating activities39.833.0
Net capital expenditure(9.1)(12.7)
Acquisitions(10.9)(3.1)
Net proceeds from business disposals (including cash disposed)1.89.2
Dividends paid(12.9)(12.8)
Share issues0.31.5
Net movement9.015.1
Opening net debt³(27.8)(43.7)
Foreign exchange(1.4)0.8
Closing net debt³(20.2)(27.8)

Net debt3 can be reconciled as follows:

2019
£m
2018
£m
Cash and cash equivalents34.921.2
Borrowings(55.1)(49.0)
Net debt3(20.2)(27.8)

The Group generated £47.9m of cash from operating activities before interest and taxation (2018: £39.5m), an increase of 21.3%. The Group measures how effectively adjusted EBITDA3 is converted into actual cash flows using the cash conversion ratio3. The calculation of the cash conversion ratio3 is set out below:

Continuing and discontinued2019
£m
2018
(restated 2)
£m
Net operating cash flow before interest and taxation (A)47.939.5
Adjusted EBITDA3 (B)43.743.8
Cash conversion ratio3(%) (A)/(B)109.6%90.2%

The full year figures show a much improved picture on cash performance compared to the half year, reflecting the effort put into improving our processes in the second half across both payables and receivables. Cash conversion3 for FY20 is expected to normalise and is targeted at broadly 85%.

The increase in tax paid is mainly due to utilisation of North American tax losses in the prior year.

Net capital expenditure was £9.1m (2018: £12.7m), and includes tangible expenditure of £3.0m (2018: £7.7m, largely relating to the new Manchester head office) and capitalised software and development costs of £6.1m (2018: £5.0m), which have increased due to the implementation costs of new systems as part of the SGT programme.

Acquisition expenditure relates to the final payment of deferred cash consideration in respect of Fox-IT of £9.9m (2018: £1.1m) and contingent consideration of £1.0m (2018: £2.0m) in respect of historic acquisitions of PSC and VSR. Net proceeds from business disposals mainly related to deferred consideration receivable from 2017 disposals. In the prior year, the Group received £9.2m mainly in relation to the sale of Web Performance and Software Testing.

Dividend

Dividends of £12.9m paid in the year (2018: £12.8m) comprised the final dividend for 2018 of 3.15p and the interim dividend for 2019 of 1.50p.

The Board is recommending an unchanged final dividend of 3.15p per ordinary share (2018: 3.15p), making a total for the year of 4.65p (2018: 4.65p). This represents a dividend equal to that paid in the prior year as the Board is conscious of the need to invest in the SGT programme and other initiatives to support longer term growth. The dividend policy will therefore continue to remain under review.

The final dividend will be paid on 4 October 2019, subject to approval at the AGM on 25 September 2019, to shareholders on the register at the close of business on 6 September 2019. The ex dividend date is 5 September 2019.

Financing facilities

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

Prior to and during the year ended 31 May 2019, the Group funded its strategic acquisitions and met its day-to-day working capital requirements via a multi-currency revolving credit facility of £80.0m, a £20.0m multi-currency term loan that amortised by £2.5m every six months and an additional overdraft of £5m. As at 31 May 2019, the Group had committed bank facilities of £97.8m (2018: £102.7m), of which £55.1m (2018: £49.0m) had been drawn under these facilities, leaving £42.7m (2018: £53.7m) of undrawn facilities. These existing arrangements were agreed in November 2015 and were due for renewal in November 2020.

On 10 June 2019, the Group renegotiated its existing term loan and multi-currency revolving credit facilities into a new fully revolving credit facility of £100m with a new five-year term up to June 2024 on similar terms (pricing and covenants).

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 £75m (previously £50m). In addition, the Group has retained its existing overdraft of £5m. Arrangement fees incurred will be amortised over the term accordingly. Historic arrangements fees have been fully amortised.

On our banking covenants, leverage 4 as at 31 May 2019 amounted to 0.5x (2018: 0.9x) and net interest cover4 amounted to 24.6x (2018: 28.3x). The Group was in compliance with the terms of all its facilities, including the financial covenants, at 31 May 2019 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 includes unpaid deferred consideration. These are commercially confidential documents and hence further details of any immaterial differences are not disclosed.

Going concern

The Directors have acknowledged the 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting', published in September 2014.

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

The Directors have reviewed the trading, cash flow forecasts and forecast covenants of the Group as part of their going concern assessment and have taken into account reasonable downside sensitivities (including a no-deal Brexit scenario) which reflect uncertainties in the current operating environment. The possible changes in trading performance show that the Group is able to operate within the level of the banking facilities and, as a consequence, the Directors believe that the Group is well placed to manage its business risks successfully. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for a period of at least 12 months. Accordingly, they continue to adopt the going concern basis of accounting in preparing the financial statements.

BREXIT

We continue to plan for Brexit and we have a Brexit Steering Group that meets regularly. As our operations around the world include business entities based in continental Europe we believe NCC Group is structurally resilient to any disruption caused by Brexit. The main risks to our business 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.

Tim Kowalski

Chief FINANCIAL OFFICER

24 July 2019